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

                                    FORM 10-K

  (MARK ONE)

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

                   FOR THE FISCAL YEAR ENDED - March 31, 2007

                                       OR

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

                 FOR THE TRANSITION PERIOD FROM ______ TO ______

                        Commission File Number: 333-45241

                           ELITE PHARMACEUTICALS, INC.
             (Exact name of registrant as specified in its charter)

               DELAWARE                                      22-3542636
               --------                                      ----------
     (State or other jurisdiction                           (IRS Employer
           of incorporation)                             Identification No.)

                 165 LUDLOW AVENUE, NORTHVALE, NEW JERSEY 07647
                 ----------------------------------------------
                    (Address of principal executive offices)

                                 (201) 750-2646
                                 --------------
              (Registrant's telephone number, including area code)

Securities registered pursuant to                Common Stock - $.01 par value
Section 12(b) of the Act:                      The Common Stock is listed on The
                                                    American Stock Exchange

Securities registered pursuant to                            None
Section 12(g) of the Act:

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. Yes |_| No |X|

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or 15(d) of the Act. Yes |_| ] No |X|

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K. |_|

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
file and larger accelerated filer" in Rule 12b-2 of the Exchange Act.

 Large accelerated filer |_|  Accelerated filer |_|  Non-accelerated filer |X|

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|

The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of June 26, 2007 was approximately  $45,864,702 based upon the
closing price of the  registrant's  Common Stock on the American Stock Exchange,
as of September  29,  2006.  (For  purposes of  determining  this  amount,  only
directors,  executive  officers,  and, based on Schedule 13(d) filings as of May
15, 2007 10% or greater  stockholders and their respective  affiliates have been
deemed affiliates).

Registrant  had  20,820,048  shares of common stock,  par value $0.01 per share,
outstanding as of June 26, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K  (e.g.,  Part I, Part II,  etc.)  into  which the  document  is
incorporated:  (1) Any  annual  report  to  security  holders;  (2) Any proxy or
information  statement;  and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the  Securities Act of 1933.  The listed  documents  should be clearly
described for identification  purposes (e.g.,  annual report to security holders
for fiscal year ended December 24, 1980). N/A

                                       ii
<PAGE>

                           FORWARD LOOKING STATEMENTS

THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS  INCORPORATED  HEREIN  CONTAIN
"FORWARD-LOOKING  STATEMENTS"  WITHIN  THE  MEANING  OF THE  PRIVATE  SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN  RISKS,  UNCERTAINTIES  AND OTHER  FACTORS  WHICH  MAY CAUSE THE  ACTUAL
RESULTS,  PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE
MATERIALLY  DIFFERENT  FROM ANY  FUTURE  RESULTS,  PERFORMANCE  OR  ACHIEVEMENTS
EXPRESSED  OR  IMPLIED  BY SUCH  FORWARD-LOOKING  STATEMENTS.  WHEN USED IN THIS
ANNUAL REPORT,  STATEMENTS THAT ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT
MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS.  WITHOUT LIMITING THE FOREGOING,
THE  WORDS  "PLAN",  "INTEND",  "MAY,"  "WILL,"  "EXPECT,"  "BELIEVE",  "COULD,"
"ANTICIPATE,"   "ESTIMATE,"  OR  "CONTINUE"  OR  SIMILAR  EXPRESSIONS  OR  OTHER
VARIATIONS   OR   COMPARABLE   TERMINOLOGY   ARE   INTENDED  TO  IDENTIFY   SUCH
FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. EXCEPT
AS  REQUIRED  BY LAW,  THE  COMPANY  UNDERTAKES  NO  OBLIGATION  TO  UPDATE  ANY
FORWARD-LOOKING  STATEMENTS,  WHETHER  AS A RESULT  OF NEW  INFORMATION,  FUTURE
EVENTS OR OTHERWISE.

ANY REFERENCE TO "ELITE",  THE "COMPANY","  WE", "US", "OUR" OR THE "REGISTRANT"
MEANS ELITE PHARMACEUTICALS INC. AND ITS SUBSIDIARIES.


                                       iii
<PAGE>

                                TABLE OF CONTENTS

                                 Form 10-K Index

                                                                            PAGE

                                     PART I

Item 1.   Business.............................................................1
Item 1A.  Risk Factors........................................................15
Item 1B.  Unresolved Staff Comments...........................................26
Item 2.   Properties..........................................................26
Item 3.   Legal Proceedings...................................................26
Item 4.   Submission of Matters to a Vote of Security Holders.................27

                                     PART II

Item 5.   Market for Registrant's Common Equity Related Stockholder
          Matters and Issuer Purchases of Equity Securities...................28
Item 6.   Selected Financial Data.............................................32
Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operation................................................32
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk..........38
Item 8.   Financial Statements and Supplementary Data.........................38
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure............................................38
Item 9A.  Controls and Procedures.............................................38
Item 9B.  Other Information...................................................38

                                    PART III

Item 10.  Directors, Executive Officers and Corporate Governance..............40
Item 11.  Executive Compensation..............................................46
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management and Related Stockholder Matters..........................58
Item 13.  Certain Relationships and Related Transactions, and
          Director Independence...............................................61
Item 14.  Principal Accounting Fees and Services..............................64

                                     PART IV

Item 15.  Exhibits, Financial Statements and Schedules........................65
          Signatures..........................................................73
          Consolidated Financial Statements..................................F-1


                                      iii
<PAGE>

                                     PART I

ITEM 1. BUSINESS

GENERAL

      Elite Pharmaceuticals,  Inc. ("ELITE PHARMACEUTICALS") was incorporated on
October 1, 1997 under the laws of the State of  Delaware,  and our  wholly-owned
subsidiaries,  Elite Laboratories,  Inc. ("ELITE LABS") and Elite Research, Inc.
("ELITE  RESEARCH") were  incorporated on August 23, 1990 and December 20, 2002,
respectively,  under the laws of the State of Delaware.  Elite  Pharmaceuticals,
Elite Labs, Elite Research and Novel, a variable  interest entity,  are referred
to herein, collectively, as "ELITE", "WE", "US", "OUR" or the "COMPANY".

      On  October  24,  1997,  Elite  Pharmaceuticals  merged  with and into our
predecessor company,  Prologica International,  Inc. ("PROLOGICA"),  an inactive
publicly held Pennsylvania corporation. At the same time, Elite Labs merged with
a  wholly-owned   subsidiary  of  Prologica.   Following  these  mergers,  Elite
Pharmaceuticals  survived as the parent to its  wholly-owned  subsidiary,  Elite
Labs.

      On September  30, 2002, we acquired  from Elan  Corporation,  plc and Elan
International  Services,  Ltd.  (together "ELAN") Elan's 19.9% interest in Elite
Research,  Ltd. ("ERL"),  a joint venture formed between Elite and Elan in which
our initial  interest was 80.1% of the  outstanding  capital  stock (100% of the
outstanding  Common Stock). As a result of the termination of the joint venture,
we owned 100% of ERL's  capital  stock.  On December  31,  2002,  ERL (a Bermuda
Corporation) was merged into Elite Research, our wholly-owned subsidiary.

      The  address of our  principal  executive  offices and our  telephone  and
facsimile numbers at that address are:

      Elite  Pharmaceuticals,  Inc.,  165 Ludlow Avenue,  Northvale,  New Jersey
07647; Phone No.: (201) 750-2646; Facsimile No.: (201) 750-2755.

      We file  registration  statements,  periodic  and current  reports,  proxy
statements and other materials with the Securities and Exchange  Commission (the
"SEC").  You may read and copy any  materials  we file with the SEC at the SEC's
Public  Reference  Room at 100 F Street,  N.W.,  Washington,  DC 20549.  You may
obtain  information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains a web site at www.sec.gov that contains
reports,  proxy  and  information  statements  and other  information  regarding
issuers that file electronically with the SEC, including our filings.

BUSINESS OVERVIEW AND STRATEGY

      We are a  specialty  pharmaceutical  company  principally  engaged  in the
development and manufacture of oral,  controlled  release  products.  We develop
oral,  controlled  release products using proprietary  technology.  Our strategy
includes  improving  off-patent  drug  products  for life cycle  management  and
developing  generic  versions of  controlled  release  drug  products  with high
barriers to entry. Our technology is applicable to develop delayed, sustained or
targeted release pellets, capsules, tablets, granules and powders.

      We have two products,  Lodrane 24(R) and Lodrane  24D(R),  currently being
sold commercially,  and a pipeline of seven drug candidates under development in
the therapeutic areas that include pain

<PAGE>

management,  allergy and infection. Of the products under development,  ELI-216,
an abuse  deterrent  oxycodone  product,  and  ELI-154,  a once daily  oxycodone
product,  are in clinical  trials and we have completed  pilot studies on two of
our generic  product  candidates.  The  addressable  market for the  pipeline of
products  exceeds $6 billion.  Our facility in  Northvale,  New Jersey also is a
Good  Manufacturing  Practice ("GMP") and DEA registered  facility for research,
development and manufacturing.

      At the end of 2006, we entered into a joint  venture with VGS Pharma,  LLC
and  created  Novel  Laboratories,  Inc.  ("NOVEL"),  a  privately-held  company
specializing in pharmaceutical research, development,  manufacturing, licensing,
acquisition and marketing of specialty generic pharmaceuticals. Novel's business
strategy is to focus on its core strength in  identifying  and timely  executing
niche business opportunities in the generic pharmaceutical area.

STRATEGY

      We are focusing our efforts on the following areas: (i) development of our
pain management products, (ii) manufacturing of Lodrane 24(R) and Lodrane 24D(R)
product;  (ii) the development of the other products in our pipeline;  and (iii)
commercial  exploitation of our products either by license and the collection of
royalties, or through the manufacture of our formulations,  and (iv) development
of new  products  and the  expansion  of our  licensing  agreements  with  other
pharmaceutical companies,  including co-development projects, joint ventures and
other collaborations, including Novel.

      We are  focusing on the  development  of various  types of drug  products,
including  branded drug products  (which require new drug  applications  ("NDA")
under Section  505(b)(1) or 505(b)(2) of the Drug Price  Competition  and Patent
Term  Restoration  Act of 1984 (the "DRUG PRICE  ACT")) as well as generic  drug
products (which require abbreviated new drug applications ("ANDA")).

      We intend to continue to  collaborate  in the  development  of  additional
products  with  our  current   partners.   We  also  plan  to  seek   additional
collaborations to develop more drug products.

      We believe  that our  business  strategy  enables us to reduce our risk by
having a diverse  product  portfolio  that  includes  both  branded  and generic
products  in  various  therapeutic   categories  and  build  collaborations  and
establish  licensing  agreements with companies with greater  resources  thereby
allowing us to share costs of development and to improve cash-flow.

RESEARCH AND DEVELOPMENT

      During each of the last three  fiscal  years,  we have focused on research
and development activities.  We spent $6,085,888 for the fiscal year ended March
31, 2007,  $4,343,890 in the fiscal year ended March 31, 2006 and  $2,698,641 in
the fiscal year ended March 31, 2005 on research and development activities. Our
research  and  development  spending  has  increased as we prepare for Phase III
clinical  trials for ELI-216 and  ELI-154  and spend more on  development  costs
including scale up and clinical studies.

      Of our  seven  products  in the  pipeline,  three  are  for  treatment  or
management  of pain (ELI 216 is an abuse  resistant  oxycodone  and ELI 154 is a
once daily  oxycodone and a third is for an analgesic  indication),  two are for
anti-infective indications, and one is for gastrointestinal disorders


                                       2
<PAGE>

      It is our  general  policy not to  disclose  products  in our  development
pipeline or the status of such products until a product  reaches a stage that we
determine,  for competitive  reasons,  in our discretion,  to be appropriate for
disclosure  and because the  disclosure  of such  information  might suggest the
occurrence of future matters or events that may not occur. In this instance,  we
believe that disclosure of the information in the following table is helpful for
the description of the general nature,  orientation and activity of the Company,
and the disclosures are made for such purpose. No inference should be made as to
the occurrence of matters or events not  specifically  described.  We may or may
not disclose such information in the future based on competitive  reasons and/or
contractual  obligations.  We  believe  that the  information  is  helpful  on a
one-time basis for the purpose described above.

      The following table provides information concerning the controlled release
products  that  we are  developing  and to  which  we are  devoting  substantial
resources and attention.  None of these products has been approved by the United
Stated Food and Drug Administration (the "FDA") and all are in development.

<TABLE>
<CAPTION>
            PRODUCT             APPROX. U.S. SALES FOR      NDA/                 PARTNER                   INDICATION
                                 BRAND AND/OR GENERIC     ANDA (B)
                                       PRODUCTS
                                    (2006) $MM(A)
<S>                                     <C>                 <C>        <C>                              <C>
ELI 154                                 N/A(c)              NDA                    None                  Pain Management
Once Daily Oxycodone

ELI 216                                 N/A(c)              NDA                    None                  Pain Management
Once daily oxycodone with
abuse resistant technology
(ART(TM))

Generic                                  $40                ANDA              Pliva US, Inc.                Infection
                                                                            (East Hanover, NJ)

Generic                                  $50                ANDA       Orit Laboratories, Inc. (d)        Anti-Anxiety
                                                                            (East Hanover, NJ)

Generic                                 $3,600              ANDA           IntelliPharmacutics          Gastrointestinal
                                                                             Toronto, Canada)             disorders(e)

Generic                                  $100               ANDA       Tish Technologies, Inc. (d)          Infection
                                                                          (East Hanover, NJ) and
                                                                       Harris Pharmaceuticals (Ft.
                                                                               Meyers, FL)

Generic                                  $30                ANDA          The PharmaNetwork, LLC         Pain Management
                                                                              (Montvale, NJ)
</TABLE>

----------
(a)   Indicates the approximate amount of sales of our competitor's  product and
      any generics (if there are any). It does not represent the sales of any of
      our products.
(b)   "NDA"  represents a new drug  application  which is filed with the FDA for
      new  drug  products  and  "ANDA"   represents  an  abbreviated   new  drug
      application which is filed with the FDA for generic drug products.
(c)   N/A  means not  applicable  because  there is no  branded  product  on the
      market.  There is neither a  once-daily  oxycodone  or an abuse  resistant
      oxycodone on the market.  The market for sustained  release  oxycodone was
      approximately $1.3 billion in 2006.


                                       3
<PAGE>

(d)  Orit Laboratories is an affiliate of Tish Technologies.
(e)  This  includes an agreement  that grants to Elite a percentage  of payments
     paid to its  Canadian  partner  for  commercial  sale of a generic  of this
     product.

      The table below presents  information  with respect to the  development of
our seven products  under  development.  For some of the products,  we intend to
make NDA filings  under  Sections  505(b)(1) or 505(b)(2) of the Drug Price Act.
Accordingly,  we  anticipate,  as to  which  there  is no  assurance,  that  the
development timetable for the products for which such NDA filings are made would
be shorter  and less  expensive.  Completion  of  development  of products by us
depends on a number of  factors,  however,  and there can be no  assurance  that
specific  time  frames  will be met during the  development  process or that the
development of any particular products will be continued.

      In the table,  Pilot Phase I studies for the NDA  products  are  generally
preliminary   studies   done  in   healthy   human   subjects   to  assess   the
tolerance/safety  and pharmacokinetics of the product. The Phase II study listed
below was done in recreational drug users and a visual analog scale for euphoria
was measured in the study.  Additional larger studies in humans will be required
prior to submission of the product to the FDA for review.  Pilot  bioequivalence
studies are initial studies done in humans for generic  products and are used to
assess the likelihood of achieving  bioequivalence for generic products.  Larger
pivotal  bioequivalence  studies  will be required  prior to  submission  of the
product to the FDA for review.

       DEVELOPMENT STAGE          NUMBER OF PRODUCTS             NDA/ANDA
       -----------------          ------------------             --------
          Preclinical                      2                       ANDA
   Pilot bioequivalence study              3                       ANDA
      Pilot Phase I study                  1                        NDA
            Phase II                       1                        NDA

      The above table does not include  generic drug  products  currently  under
development at Novel.

COMMERCIAL PRODUCTS

      Elite  manufactures  two once daily  allergy  products, Lodrane  24(R) and
Lodrane 24D(R),  that were co-developed with our partner,  ECR  Pharmaceuticals.
Elite entered into development agreements on these two products with ECR in June
2001 whereby Elite agreed to  commercially  develop two products in exchange for
development fees,  certain payments,  royalties and  manufacturing  rights.  The
products  are  being  marketed  by ECR  which  also has the  responsibility  for
regulatory  matters.  In addition to receiving revenues for manufacture of these
products, Elite also receives a royalty on in-market sales.

      Lodrane  24(R),  was first  commercially  offered in  November  2004,  and
Elite's  revenues for  manufacturing  the product and a royalty on sales for the
years ended March 31,  2005,  2006 and 2007  aggregated  $150,030,  $550,697 and
$588,620  respectively.   Lodrane  24D(R)  was  first  commercially  offered  in
December,  2006 and Elite's revenues for manufacturing the product and a royalty
on sales for the year ended March 31, 2007 aggregated $555,221.


                                       4
<PAGE>

PRODUCTS UNDER DEVELOPMENT

      ELI-154 AND ELI-216

      For ELI-154,  Elite has developed a once-daily oxycodone formulation using
its proprietary  technology.  An investigational new drug application or IND has
been  filed and Elite has  completed  two  pharmacokinetic  studies  in  healthy
subjects that  compared  blood levels of oxycodone  from dosing  ELI-154 and the
twice-a-day product that is on the market currently.  ELI-154,  when compared to
twice daily  delivery,  demonstrated  an equivalent  onset,  more constant blood
levels  of the  drug  over the 24  hours  and  equivalent  blood  levels  to the
twice-a-day  product at the end of 24 hours.  We are now scaling up that product
using commercial size equipment for manufacture of batches.  Elite has submitted
a proposed  clinical plan to the FDA and is awaiting comments from the FDA. Upon
receiving their  comments,  we intend to request a special  protocol  assessment
("SPA")  for the  ELI-154  Phase  III  protocol  and,  shortly  after  receiving
agreement with the FDA on the SPA, we intend to begin the Phase III trial. Elite
will  conduct  Phase I studies  including,  but not limited  to, a food  effect,
ascending dose and multi-dose studies.  Such Phase I studies are not expected to
affect the timetable of the Phase III trial.

      ELI-216  utilizes our  patent-pending  abuse deterrent  technology that is
based on a pharmacological  intervention approach. ELI-216 is a combination of a
narcotic agonist,  oxycodone  hydrochloride,  in a sustained release formulation
intended  for use in patients  with  moderate  to severe  chronic  pain,  and an
antagonist,  naltrexone  hydrochloride,  formulated  to deter abuse of the drug.
Both of these compounds,  oxycodone hydrochloride and naltrexone  hydrochloride,
have been on the  market  for a number of years and sold  separately  in various
dose  strengths.  Elite  has filed an IND for the  product  and has  tested  the
product in a series of  pharmacokinetic  studies.  In single  dose  studies  for
ELI-216,  it was  demonstrated  that no quantifiable  blood levels of naltrexone
hydrochloride  were released at a limit of quantification  ("LOQ") of 7.5 pg/ml.
When crushed, however, naltrexone hydrochloride was release at levels that would
be expected to eliminate the euphoria from the crushed oxycodone  hydrochloride.
This data is consistent with the premise of Elite's abuse  resistant  technology
or  ART,  that   essentially   no  naltrexone  is  released  and  absorbed  when
administered as intended.

      In further studies,  ELI-216 demonstrated the euphoria-blocking  effect of
ELI-216 when the product is crushed.  This study was  designed to determine  the
optimal ratio of oxycodone  hydrochloride and the opioid antagonist,  naltrexone
hydrochloride,  to significantly  block the euphoric effect of the opioid if the
product is abused by physically  altering it, (i.e.,  crushing).  The study also
helped determine the appropriate levels of naltrexone  hydrochloride required to
reduce or eliminate the euphoria  experienced by subjects who might take crushed
product to achieve a "high".  Elite  intends to complete and submit to the FDA a
second  stage of this study that will be a double  blinded,  cross-over  pivotal
study.

      Elite  met with the FDA in  October  2006 for a Type C  clinical  guidance
meeting   regarding  the  NDA  development   program  for  ELI-216.   Elite  has
incorporated  the FDA's guidance into its  developmental  plan.  Elite has begun
scale up of ELI-216 to commercial size batches and Elite has submitted an SPA to
the FDA for the ELI-216  Phase III  protocol.  Elite  intends to enter Phase III
shortly after  receiving  agreement  with the FDA on the SPA. Elite will conduct
additional Phase I studies including, but not limited to, food effect, ascending
dose and a multi-dose studies.

      Elite has  developed  ELI-154  and ELI-216 and retains the rights to these
products.  Elite has  currently  chosen to  develop  these  products  itself but
expects to license these products at a later date to a third party for sales and
distribution.  The drug delivery  technology  underlying  ELI-154 was originally
developed under a joint venture with Elan which terminated in 2002.


                                       5
<PAGE>

      According to the termination  agreement,  Elite acquired all  proprietary,
development  and  commercial  rights for the worldwide  markets for the products
developed  by  the  joint  venture   including   ELI-154.   Upon   licensing  or
commercialization  of ELI-154,  Elite will pay a royalty to Elan pursuant to the
termination agreement with Elan. If Elite were to sell the product itself, Elite
would pay a 1%  royalty to Elan  based on the  product's  net sales and if Elite
enters into an agreement with another party to sell the product,  Elite will pay
a 9% royalty to Elan based on Elite net revenues  from this  product  (Elite net
product revenues would include license fees,  royalties,  manufacturing  profits
and  milestones).  Elite is allowed to recoup all  development  costs  including
research, process development,  analytical development, clinical development and
regulatory costs before payment of any royalties to Elan.

      MANUFACTURING, CO-DEVELOPMENT AND LICENSE AGREEMENTS

      On March 30, 2005,  Elite entered into a three party  agreement  with Tish
Technologies,   Inc.  and  Harris  Pharmaceuticals,   Inc.  ("HARRIS")  for  the
co-development  and license of a controlled  release generic  product.  Upon its
development  and the securing of the  required  FDA approval by the  formulation
development  company,  Elite is to manufacture the product and Harris is to sell
and distribute the product.  In addition to the transfer price for manufacturing
the product,  Elite is to share the profits,  if any,  realized upon sales.  The
innovator's  reference  product for this generic was  originally a capsule.  The
innovator  has now  received  approval  for an  alternative  dose form (a tablet
rather than  capsule)  and has  discontinued  the  original  dose form.  While a
reference  product remains for the capsule,  the market  opportunity has changed
and this affects how we might commercialize the capsule dosage form. On June 19,
2006, we received  written notice from Harris of Harris' intent to terminate the
agreement in accordance  with Section 9.3 of the agreement.  As the date hereof,
Elite has received $29,700 for this development work.

      On  June  21,  2005,   Elite  entered  into  a  product   development  and
commercialization agreement with IntelliPharmaCeutics Corp. ("IPC"), a privately
held, specialty pharmaceutical Canadian company that develops generic controlled
release drug  products.  It is affiliated  with  IntelliPharmaCeutics,  Ltd. The
agreement provides for the co-development and  commercialization of a controlled
released generic product.  IntelliPharmaCeutics  has taken a formulation for the
product into a pilot bioequivalence  biostudy. Upon commercialization,  Elite is
to share the profits, if any, realized upon sales. A successful pivotal biostudy
and an approved ANDA filing is required to commercialize this product.

      On December 12, 2005,  Elite and IPC amended their  obligations to suspend
their  obligations  under the IPC Agreement with respect to the  development and
commercialization  of the  controlled  release drug  product in Canada.  IPC, in
turn, entered into an agreement with ratiopharm,  inc., a Canadian company,  for
the  development  and  commercialization  for the product in Canada and will pay
Elite a certain  percentage of any payments  received by IPC with respect to the
commercial sale of this product by ratiopharm, inc. in Canada.

      On June 22, 2005,  Elite  entered into a Product  Development  and License
Agreement with PLIVA, Inc. ("PLIVA"),  now a subsidiary of Barr  Pharmaceuticals
Inc.,  providing,  for the  development  and  license of a  controlled  released
generic  product.  Under the  agreement,  PLIVA is to make upfront and milestone
payments in the  aggregate  of $550,000 to Elite.  Elite is to  manufacture  and
PLIVA is to market and sell the product.  The development  costs will be paid by
PLIVA and Elite and the profits will be shared  equally.  As of the date hereof,
Elite has not  received any of the payments  from PLIVA.  Elite has  developed a
formulation that matches the branded product and has


                                       6
<PAGE>

tested it in a pilot study. A successful  pivotal  biostudy and an approved ANDA
filing is required to  commercialize  this product.  On June 28, 2007, Elite and
Pliva terminated the Product  Development and License Agreement and entered into
a  termination  agreement  according  to which it was agreed that Elite owns all
intellectual property rights relating to the controlled released generic product
under  development  and Pliva  agreed  to pay Elite  $100,000  in  discharge  of
outstanding payments under the Product Development and License Agreement.

      On  January  10,  2006,   Elite  entered  into  an  agreement   with  Orit
Laboratories LLC ("ORIT"), an affiliate of Tish Technologies LLC, providing that
Elite and Orit will  co-develop  and  commercialize  an  extended  release  drug
product for treatment of anxiety,  and,  upon  completion  of  development,  may
license it for  manufacture  and sale.  The  parties  intend to develop all dose
strengths of the product.  Orit has been  providing  formulation  and analytical
resources  for  the  development  work.  Elite's  facility  has  been  used  for
manufacture of  development  batches.  Elite is to share in the profits,  if any
from the sales of the drug. A formulation  has been  developed  that matches the
innovator's  product  using IN VITRO testing and next steps will be scale up and
pilot testing.

      On November 10, 2006, Elite entered into a product collaboration agreement
with The  PharmaNetwork,  LLC ("TPN") for the development of the generic product
equivalent of a synthetic  narcotic  analgesic  drug product.  TPN is to perform
development  services  and  prepare and file an ANDA in the name of TPN with the
FDA. Elite is to provide development  support,  including the purchase of active
pharmaceutical  ingredients and materials and supplies to manufacture the batch,
provide adequate facilities to TPN for use in its development work and following
ANDA approval,  Elite will manufacture the drug product  developed.  Elite is to
pay TPN for the  development  services  rendered upon the  attainment of certain
milestones.  The  out-of-pocket  costs are to be shared by TPN and  Elite,  with
TPN's  obligation  to be  payable  from the  royalty  compensation.  Formulation
development work is currently underway.

JOINT VENTURE WITH NOVEL

      In December  2006,  we entered into a joint  venture with VGS Pharma,  LLC
("VGS") and created Novel Laboratories, Inc ("Novel"), a separate privately-held
company  specializing in pharmaceutical  research,  development,  manufacturing,
licensing, acquisition and marketing of specialty generic pharmaceuticals.

      We acquired  49% and VGS  acquired  51% of Novel's  Class A Voting  Common
Stock for $9,800 and $10,200 respectively.  We initially contributed  $2,000,000
to  Novel  and  have  agreed  to  provide  additional   contributions  upon  the
achievement of certain performance  milestones of Novel to be mutually agreed to
by Elite and VGS.

      In March 2007, Dr. Veerappan Subramanian, Novel's CEO, provided Elite with
Novel's  initial  business plan which  identified 22 generic drug products to be
developed by Novel and the proposed  funding  milestones  for Elite's  remaining
contributions  to Novel.  Pursuant  to the agreed upon plan,  Elite  contributed
$2,000,000  on May 15,  2007 and  $3,000,000  on June 15,  2007.  The  remaining
contributions  to be made by Elite  shall be funded in the  amounts and upon the
occurrence of the following  milestones:  (i) $10,000,000 upon the submission to
the FDA of three ANDAs related to three different prospective products developed
by Novel and (ii)  $10,000,000  upon the  submission  to the FDA of three  ANDAs
related to at least three additional different prospective products developed by
Novel;  provided that the aggregate  contributions to be made by Elite shall not
exceed (i) $15,000,000  prior to November 1, 2007 or (ii)  $25,000,000  prior to
May 1, 2008. The remaining contributions of Elite are not monetary


                                       7
<PAGE>

obligations  but  rather  conditions  that  must be met in  order  for  Elite to
maintain its current equity interest in Novel.

      In the event that (i) Elite  defers for more than 90 days the payment of a
contribution  installment  due to  Novel's  failure  to  achieve  a  performance
milestone,  (ii) Elite fails to make a requisite  contribution following Novel's
achieving a performance  milestone or (iii) Novel requires additional  financing
beyond amounts  provided in the business plan or Elite's agreed upon  additional
contributions,  Novel may seek such financing through a subscription offering to
its Class A  Stockholders  and, to the extent not fully  subscribed,  from third
parties.

      As long as each of Elite and VGS owns at least 10% of the  shares of Class
A Voting Common Stock of Novel, each shall designate one of the two directors to
constitute  the  Novel  Board  of  Directors,  with the VGS  designee  to be Dr.
Subramanian, unless otherwise approved by Elite. Novel is prohibited from taking
of certain actions  without  approval of the two designees,  including,  but not
limited to,  amendments  of charter,  by-laws and other  governance  agreements,
spin-offs  or  public   offerings  of  equity   securities,   a  liquidation  or
dissolution,  dividends,  authorization or issuance of additional  securities or
options,  bankruptcy,  a material  change of the  business  or a business  plan,
approval  of a business  plan and the yearly  operating  budget,  creation  of a
security interest, capital expenditures in excess of 110% of the amount provided
in the  business  plan,  investments  in excess of the  amounts  approved in the
Business Plan, an increase or decrease of the Board;  and any investments by Dr.
Subramanian in any competitive company or its affiliate.

      In the event Elite  fails to make its  remaining  contributions  after the
occurrence of the relevant  milestones  event,  VGS has the right to purchase at
the original purchase price from Elite that proportion of its original shares of
Novel Class A Common Stock equal to the  proportion  of the required  additional
contributions not made by Elite.

      In the event of Dr.  Subramanian's  resignation  from Novel for other than
good reason or his  termination by Novel for cause or his death or disability as
defined in the employment agreement between Novel and Dr. Subramanian, Elite has
the corresponding right to acquire up to 75% of VGS's original shares of Class A
Common Stock of Novel at the original  purchase  price;  such  percentage  to be
reduced to 50% and 25% and 0% upon the first,  second and third  anniversary  of
the  Stockholders'  Agreement,  with a pro rata portion of such  reduction to be
effected upon the death or disability of Dr.  Subramanian  during the applicable
period.  Each of Elite and VGS has a right to  acquire  at the then fair  value,
Elite's  or  VGS's  shares  of  Novel  upon  the   bankruptcy,   dissolution  or
liquidation,  a change  of  control  of the  other  or,  if as a  result  of the
purchases at the original  purchase price, the percentage of Novel owned by such
party is less than 10% of Novel.

      On June 5, 2007, the board of directors of Novel agreed to approve a stock
option  plan (the  "NOVEL  PLAN")  for  Novel's  key  employees.  The Novel Plan
reserves  for  granting  under the Novel Plan 26,582  shares of Novel's  Class B
non-voting common stock.

      On  June  5,  2007,  Novel  granted  8,861  options  to  purchase  Class B
non-voting common shares to Veerappan Suramanian,  its CEO, at an exercise price
of $22.50 per share. The options vest and become  exercisable at the rate of (i)
1,266 option shares on the date of each submission to the FDA of an ANDA for the
first six new prospective  products  developed by Novel which is not the subject
of any prior ANDA  submitted to the FDA by Novel and (ii) 1,265 option shares on
the date of approval by the FDA of a drug product that is the subject of an ANDA
related  to a  prospective  product  developed  by  Novel  which  has  not  been
previously approved by the FDA for Novel.


                                       8
<PAGE>

      On June 5, 2007, Novel granted Muthusamy Shanmugam,  its Head of Technical
Operations,  8,861 options to purchase Novel's Class B non-voting  common shares
at an exercise price of $22.50.  The options vest and become  exercisable at the
rate of 2,953 on the first, 2,954 on each of the second and third anniversary of
the grant  date.  Novel  also  entered  into an  employment  agreement  with Mr.
Shanmugam on June 5, 2007 to act as Novel's Head of  Technical  Operations.  The
employment  agreement provides for an initial base salary of $170,000 per annum,
subject to annual increases at the discretion of Novel's Board of Directors. The
initial  term of the  agreement  is three  years.  Novel shall have the right to
terminate  the  agreement  for cause (as  defined) or for  disability.  If Novel
elects  to  terminate  the  agreement  without  cause,  Mr.  Shanmugam  shall be
entitled to receive, in full satisfaction of all remaining  obligations of Novel
under the  agreement,  an  aggregate  amount  equal to the  lesser of (i) twelve
months of salary or (ii) the salary for the remainder of the actual term.

      Novel's business  strategy is to focus on its core strength in identifying
and timely executing niche business  opportunities in the generic pharmaceutical
area. As of June 15, Novel has 30 employees.

      As of June 15, 2007, Novel has identified 22 generic product opportunities
and is actively developing 11 generic products. It is Novel's general policy not
to disclose the specific  products in its development  pipeline or the status of
such products until a product reaches a stage that we determine, for competitive
reasons, in our discretion, to be appropriate for disclosure.



                                       9
<PAGE>

PATENTS

      Since our  incorporation,  we have secured seven United States  patents of
which  two have  been  assigned  for a fee to  another  pharmaceutical  company.
Elite's patents are:

      U.S. patent 5,871,776
      U.S. patent 5,902,632
      U.S. patent 6,620,439
      U.S. patent 5,837,284 (assigned to Celgene Corporation)
      U.S. patent 6,635,284 (assigned to Celgene Corporation)
      U.S. patent 6,926,909
      U.S. patent 6,984,402

      We have pending  applications  for two United States patents.  The pending
patent  applications relate to two different  controlled release  pharmaceutical
products on which we are working. One is a U.S. patent for an opioid agonist and
antagonist  product that we are  developing to be used with  oxycodone and other
opioids to minimize  the abuse  potential  for the  opioids.  A second is a U.S.
patent for formulation of oral sustained release opioids intended to improve the
delivery of the  opioids.  We intend to apply for patents for other  products in
the  future;  however,  there  can be no  assurance  that  any  of  the  pending
applications or other applications which we may file will be granted.

      We have also filed corresponding foreign applications for key patents.

      Prior to the enactment in the United  States of new laws adopting  certain
changes  mandated by the General  Agreement  on Tariffs  and Trade  (GATT),  the
exclusive  rights  afforded  by a U.S.  Patent  were  for a  period  of 17 years
measured from the date of grant. Under GAAT, the term of any U.S. Patent granted
on an application filed subsequent to June 8, 1995, terminates 20 years from the
date on which the patent application was filed in the United States or the first
priority date,  whichever occurs first. Future patents granted on an application
filed before June 8, 1995,  will have a term that  terminates 20 years from such
date, or 17 years from the date of grant, whichever date is later.

      Under the Drug  Price  Act,  a U.S.  Product  patent or use  patent may be
extended for up to five years under  certain  circumstances  to  compensate  the
patent  holder for the time required for FDA  regulatory  review of the product.
The  benefits of this Act are  available  only to the first  approved use of the
active  ingredient in the drug product and may be applied only to one patent per
drug product.  There can be no assurance  that we will be able to take advantage
of this law.

      Also, different countries have different procedures for obtaining patents,
and  patents  issued  by  different   countries  provide  different  degrees  of
protection  against the use of a patented  invention by others.  There can be no
assurance,  therefore,  that  the  issuance  to us in one  country  of a  patent
covering an  invention  will be followed by the  issuance in other  countries of
patents covering the same invention,  or that any judicial interpretation of the
validity,  enforceability,  or scope of the  claims  in a patent  issued  in one
country will be similar to the judicial  interpretation given to a corresponding
patent  issued  in  another  country.  Furthermore,  even  if  our  patents  are
determined  to be  valid,  enforceable,  and  broad in  scope,  there  can be no
assurance  that  competitors  will not be able to design around such patents and
compete with us using the resulting alternative technology.

      We also rely upon unpatented  proprietary and trade secret technology that
we  seek  to  protect,   in  part,  by   confidentiality   agreements  with  our
collaborative    partners,    employees,    consultants,    outside   scientific
collaborators,  sponsored  researchers,  and  other  advisors.  There  can be no
assurance that these


                                       10
<PAGE>

agreements provide meaningful protection or that they will not be breached, that
we will have adequate  remedies for any such breach,  or that our trade secrets,
proprietary know-how, and technological advances will not otherwise become known
to others.  In addition,  there can be no assurance  that,  despite  precautions
taken by us,  others  have not and will not  obtain  access  to our  proprietary
technology.

TRADEMARKS

      We currently plan to license our products to marketing partners and not to
sell  under our brand name and so we do not  currently  intend to  register  any
trademarks related to our products.

GOVERNMENT REGULATION AND APPROVAL

      The design,  development  and marketing of  pharmaceutical  compounds,  on
which our success depends,  are intensely  regulated by governmental  regulatory
agencies, in particular the FDA. Non-compliance with applicable requirements can
result  in fines and  other  judicially  imposed  sanctions,  including  product
seizures,  injunction  actions  and  criminal  prosecution  based on products or
manufacturing  practices  that  violate  statutory  requirements.  In  addition,
administrative remedies can involve voluntary withdrawal of products, as well as
the refusal of the FDA to approve ANDAs and NDAs. The FDA also has the authority
to  withdraw  approval  of  drugs  in  accordance  with  statutory  due  process
procedures.

      Before a drug may be marketed, it must be approved by the FDA either by an
NDA or an ANDA, each of which is discussed below.

      NDAS AND NDAS UNDER SECTION 505(B) OF THE DRUG PRICE ACT

      The FDA approval  procedure  for an NDA is  generally a two-step  process.
During the  Initial  Product  Development  stage,  an  investigational  new drug
application  ("IND")  for each  product is filed with the FDA. A 30-day  waiting
period  after  the  filing  of each  IND is  required  by the FDA  prior  to the
commencement  of initial  clinical  testing.  If the FDA does not  comment on or
question the IND within such 30-day period,  initial clinical studies may begin.
If,  however,  the FDA has comments or  questions,  they must be answered to the
satisfaction  of the FDA before  initial  clinical  testing  can begin.  In some
instances  this process  could result in  substantial  delay and expense.  These
initial clinical studies generally constitute Phase I of the NDA process and are
conducted to demonstrate the product  tolerance/safety  and  pharmacokinetic  in
healthy subjects.

      After Phase I testing,  extensive  efficacy and safety studies in patients
must be conducted.  After completion of the required clinical testing, an NDA is
filed,  and its approval,  which is required for marketing in the United States,
involves an extensive review process by the FDA. The NDA itself is a complicated
and detailed  application and must include the results of extensive clinical and
other  testing,  the cost of  which is  substantial.  However,  the NDA  filings
contemplated  by us,  which on  already  marketed  drugs,  would  be made  under
Sections  505 (b)(1) or 505 (b)(2) of the Drug Price Act,  which do not  require
certain studies that would otherwise be necessary;  accordingly, the development
timetable  should be shorter.  While the FDA is required to review  applications
within a certain  timeframe,  during  the  review  process,  the FDA  frequently
requests that  additional  information be submitted.  The effect of such request
and subsequent  submission can significantly  extend the time for the NDA review
process.  Until an NDA is actually approved,  there can be no assurance that the
information  requested and submitted  will be considered  adequate by the FDA to
justify approval.  The packaging and labeling of our developed products are also
subject to FDA  regulation.  It is impossible  to anticipate  the amount of time
that will be needed to obtain FDA approval to market any product.


                                       11
<PAGE>

      Whether or not FDA approval has been obtained,  approval of the product by
comparable regulatory  authorities in any foreign country must be obtained prior
to the  commencement  of marketing of the product in that country.  We intend to
conduct all marketing in territories  other than the United States through other
pharmaceutical companies based in those countries. The approval procedure varies
from country to country,  can involve additional testing,  and the time required
may  differ  from  that  required  for FDA  approval.  Although  there  are some
procedures for unified filings for certain European  countries,  in general each
country  has  its own  procedures  and  requirements,  many of  which  are  time
consuming and  expensive.  Thus,  there can be  substantial  delays in obtaining
required  approvals from both the FDA and foreign  regulatory  authorities after
the relevant applications are filed. After such approvals are obtained,  further
delays may be encountered before the products become commercially available.

      ANDAS

      The FDA  approval  procedure  for an  ANDA  differs  from  that  from  the
procedure  for a NDA in that  the  FDA  waives  the  requirement  of  conducting
complete clinical studies,  although it normally requires bioavailability and/or
bioequivalence  studies.  "Bioavailability"  indicates  the rate and  extent  of
absorption  and levels of  concentration  of a drug  product in the blood stream
needed  to  produce  a  therapeutic   effect.   "Bioequivalence"   compares  the
bioavailability  of  one  drug  product  with  another,  and  when  established,
indicates that the rate of absorption and levels of  concentration of the active
drug  substance  in the  body  are  equivalent  for  the  generic  drug  and the
previously  approved drug. An ANDA may be submitted for a drug on the basis that
it is the  equivalent  of a  previously  approved  drug or, in the case of a new
dosage form, is suitable for use for the indications specified.

      The  timing of final  FDA  approval  of an ANDA  depends  on a variety  of
factors,  including whether the applicant  challenges any listed patents for the
drug  and  whether  the  brand-name  manufacturer  is  entitled  to one or  more
statutory  exclusivity  periods,  during  which the FDA may be  prohibited  from
accepting   applications  for,  or  approving,   generic  products.  In  certain
circumstances,  a regulatory  exclusivity period can extend beyond the life of a
patent, and thus block ANDAs from being approved on the patent expiration date.

      In May 1992,  Congress  enacted the Generic Drug  Enforcement Act of 1992,
which allows the FDA to impose  debarment and other penalties on individuals and
companies that commit certain illegal acts relating to the generic drug approval
process.  In some situations,  the Generic Drug Enforcement Act requires the FDA
to not  accept  or  review  ANDAs  for a period  of time  from a  company  or an
individual that has committed certain violations. It also provides for temporary
denial  of  approval  of  applications   during  the  investigation  of  certain
violations that could lead to debarment and also, in more limited circumstances,
provides for the  suspension of the marketing of approved  drugs by the affected
company. Lastly, the Generic Drug Enforcement Act allows for civil penalties and
withdrawal  of  previously  approved  applications.  Neither  we nor  any of our
employees have ever been subject to debarment. We do not believe that we receive
any services from any debarred person.


                                       12
<PAGE>

      CONTROLLED SUBSTANCES

      We are  also  subject  to  federal,  state,  and  local  laws  of  general
applicability, such as laws relating to working conditions. We are also licensed
by,  registered  with, and subject to periodic  inspection and regulation by the
Drug Enforcement Agency (DEA) and New Jersey state agencies, pursuant to federal
and state  legislation  relating to drugs and  narcotics.  Certain drugs that we
currently  develop or may  develop  in the future may be subject to  regulations
under the Controlled Substances Act and related statutes. As we manufacture such
products,  we may become subject to the  Prescription  Drug Marketing Act, which
regulates wholesale distributors of prescription drugs.

GMP

      All facilities and  manufacturing  techniques  used for the manufacture of
products for clinical  use or for sale must be operated in  conformity  with GMP
regulations  issued by the FDA. We engage in manufacturing on a commercial basis
for distribution of products, and operates its facilities in accordance with GMP
regulations.  If we hire another company to perform contract  manufacturing  for
us, we must ensure that our contractor's facilities conform to GMP regulations.

COMPLIANCE WITH ENVIRONMENTAL LAWS

      We are subject to  comprehensive  federal,  state and local  environmental
laws and regulations that govern,  among other things, air polluting  emissions,
waste water discharges,  solid and hazardous waste disposal, and the remediation
of  contamination  associated  with  current  or past  generation  handling  and
disposal activities, including the past practices of corporations as to which we
are the successor  legally or in  possession.  We do not expect that  compliance
with  such  environmental  laws  will  have a  material  effect  on our  capital
expenditures,  earnings or competitive position in the foreseeable future. There
can be no  assurance,  however,  that future  changes in  environmental  laws or
regulations,  administrative  actions or  enforcement  actions,  or  remediation
obligations  arising under  environmental  laws will not have a material adverse
effect on our capital expenditures, earnings or competitive position.

COMPETITION

      We have  competition with respect to our two principal areas of operation.
We develop and manufacture products using controlled-release drug technology for
other pharmaceutical  companies, and we develop and market (either on our own or
by license to other  companies)  proprietary  controlled-release  pharmaceutical
products.  In both areas,  our  competition  consists of those  companies  which
develop controlled-release drugs and alternative drug delivery systems.

      In recent years,  an increasing  number of  pharmaceutical  companies have
become  interested  in  the  development  and   commercialization   of  products
incorporating   advanced  or  novel  drug  delivery  systems.   We  expect  that
competition  in the field of drug  delivery will  significantly  increase in the
future  since  smaller  specialized  research  and  development   companies  are
beginning  to  concentrate  on this  aspect of the  business.  Some of the major
pharmaceutical  companies have invested and are continuing to invest significant
resources in the development of their own drug delivery systems and technologies
and some have invested funds in such specialized drug delivery  companies.  Many
of these  companies have greater  financial and other  resources as well as more
experience  than  we  do in  commercializing  pharmaceutical  products.  Certain
companies have a track record of success in developing controlled-release drugs.
Significant among these are Alpharma, Inc., Sandoz (a Novartis company),  Durect
Corporation,   Mylan  Laboratories,   Inc.,  Par  Pharmaceuticals,   Inc.,  Teva
Pharmaceuticals  Industries Ltd., Biovail  Corporation,  Ethypharm S.A., Eurand,
Impax Laboratories, Inc., K-V Pharmaceutical Company and Penwest


                                       13
<PAGE>

Pharmaceuticals  Company.  Each of these  companies has  developed  expertise in
certain types of drug delivery  systems,  although such expertise does not carry
over to developing a controlled-release version of all drugs. Such companies may
develop  new  drug  formulations  and  products  or may  improve  existing  drug
formulations and products more efficiently than we can. In addition,  almost all
of our competitors  have vastly greater  resources than we do. While our product
development  capabilities  and, if obtained,  patent  protection  may help us to
maintain our market  position in the field of advanced drug delivery,  there can
be no  assurance  that others will not be able to develop such  capabilities  or
alternative  technologies outside the scope of our patents, if any, or that even
if  patent  protection  is  obtained,  such  patents  will  not be  successfully
challenged in the future.

      In addition to  competitors  that are  developing  products  based on drug
delivery technologies, there are also companies who have announced that they are
developing  opioid  abuse  deterrent  products  that might  compete  directly or
indirectly  with  Elite's  products.  These  include,  but  are not  limited  to
Alpharma,   Inc.,  Pain   Therapeutics   (who  have  an  agreement  with  Durect
Corporation),   Shire   Pharmaceuticals  Group  plc  (who  purchased  New  River
Pharmaceuticals  Inc.),  Endo  Pharmaceuticals,  Inc.  through an agreement with
Collegium  Pharmaceuticals,  Inc., Purdue Pharma LP, and Acura  Pharmaceuticals,
Inc.

      We also face competition in the generic  pharmaceutical  market and expect
this  competition  to  become  more  significant  to us as a result of our joint
venture  with  Novel.   The  principal   competitive   factors  in  the  generic
pharmaceutical   market  include:   (i)   introduction  of  other  generic  drug
manufacturers'   products  in  direct   competition   with  our  products  under
development,   (ii)  introduction  of  authorized  generic  products  in  direct
competition  with any of our products under  development,  particularly  if such
products are approved and sold during exclusivity  periods,  (iii) consolidation
among distribution outlets through mergers and acquisitions and the formation of
buying groups,  (iv) ability of generic  competitors to quickly enter the market
after the expiration of patents or exclusivity  periods,  diminishing the amount
and  duration  of  significant  profits,  (v) the  willingness  of generic  drug
customers,   including   wholesale  and  retail   customers,   to  switch  among
pharmaceutical  manufacturers,  (vi) pricing  pressures and product deletions by
competitors,  (vii) a company's  reputation as a manufacturer and distributor of
quality  products,  (viii) a company's level of service  (including  maintaining
sufficient inventory levels for timely deliveries),  (ix) product appearance and
labeling and (x) a company's breadth of product offerings.

SOURCES AND AVAILABILITY OF RAW MATERIALS; MANUFACTURING

      We manufacture  for commercial sale by our partner,  ECR  Pharmaceuticals,
two  products,  Lodrane  24(R) and Lodrane  24D(R) and for which to date we have
obtained sufficient amounts of the raw materials for its production.  We are not
currently in the  manufacturing  phase for any other  products and do not expect
that significant amounts of raw materials will be required for their production.
We currently obtain the raw materials that we need from over twenty suppliers.

      We have acquired pharmaceutical  manufacturing equipment for manufacturing
our products. We have registered our facilities with the FDA and the DEA.

DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS

      Each year we have had one or a few  customers  that have  accounted  for a
large percentage of our limited revenues therefore the termination of a contract
with a customer may result in the loss of substantially all of our revenues.  We
are  constantly  working to  develop  new  relationships  with  existing  or new
customers,  but  despite  these  efforts we may not, at the time that any of our
current contracts


                                       14
<PAGE>

expire, have other contracts in place generating similar or material revenue. We
have an  agreement  with ECR  Pharmaceuticals  which sells and  distributes  two
products  that we  manufactures:  Lodrane 24(R) and Lodrane  24D(R).  We receive
revenues to  manufacture  these  products and also receives  royalties  based on
in-market sales of the products. These are our only products that are being sold
commercially now and are the primary source of our revenue currently. We receive
development  fees  or  milestone  payments  under  some  of  the  co-development
agreements  with  partners,  but these fees are currently  small compared to the
Lodrane 24(R) and Lodrane 24D(R) revenues.

EMPLOYEES

      As of June  15,  2007,  we had 41  full-time  employees  and no  part-time
employees.  Full-time  employees  are engaged in  administration,  research  and
development.  None of our employees is  represented by a labor union and we have
never  experienced  a work  stoppage.  We  believe  our  relationship  with  our
employees  to be good.  However,  our  ability  to  achieve  our  financial  and
operational  objectives  depends  in large part upon our  continuing  ability to
attract, integrate, retain and motivate highly qualified personnel, and upon the
continued service of our senior management and key personnel.

ITEM 1A. RISK FACTORS

      In  addition  to the  other  information  contained  in this  report,  the
following  risk  factors  should  be  considered   carefully  in  evaluating  an
investment in us and in analyzing our forward-looking statements.

                          RISKS RELATED TO OUR BUSINESS

WE HAVE A  RELATIVELY  LIMITED  OPERATING  HISTORY,  WHICH MAKES IT DIFFICULT TO
EVALUATE OUR FUTURE PROSPECTS.

      Although we have been in operation since 1990, we have a relatively  short
operating  history and limited  financial  data upon which you may  evaluate our
business and prospects. In addition, our business model is likely to continue to
evolve as we attempt to expand our  product  offerings  and our  presence in the
generic   pharmaceutical   market.  As  a  result,   our  potential  for  future
profitability must be considered in light of the risks, uncertainties,  expenses
and difficulties frequently encountered by companies that are attempting to move
into new markets and continuing to innovate with new and unproven  technologies.
Some of these risks relate to our potential inability to:

      o     develop new products;

      o     obtain regulatory approval of our products;

      o     manage  our  growth,  control  expenditures  and  align  costs  with
            revenues;

      o     attract, retain and motivate qualified personnel; and

      o     respond to competitive developments.

      If we do not effectively address the risks we face, our business model may
become   unworkable  and  we  may  not  achieve  or  sustain   profitability  or
successfully develop any products.


                                       15
<PAGE>

WE HAVE NOT BEEN PROFITABLE AND EXPECT FUTURE LOSSES.

      To date, we have not been profitable,  and since our inception in 1990, we
have not generated any significant  revenues.  We may never be profitable or, if
we  become  profitable,  we may be  unable  to  sustain  profitability.  We have
sustained  losses in each year since our  incorporation in 1990. We incurred net
losses of $11,803,512,  $6,883,914,  $5,906,890,  $6,514,217 and $4,061,422, for
the years ended March 31, 2007,  2006,  2005,  2004 and 2003,  respectively.  We
expect to realize  significant  losses for the current year of operation  and to
continue to incur  losses until we are able to generate  sufficient  revenues to
support our operations and offset operating costs.

IF WE ARE UNABLE TO OBTAIN ADDITIONAL  FINANCING NEEDED FOR THE EXPENDITURES FOR
THE DEVELOPMENT AND  COMMERCIALIZATION OF OUR DRUG PRODUCTS, IT WOULD IMPAIR OUR
ABILITY TO CONTINUE TO MEET OUR BUSINESS OBJECTIVES.

      We continue to require additional financing to ensure that we will be able
to  meet  our  expenditures  to  develop  and  commercialize  our  products.  In
particular,  in order to maintain our  investment in our joint venture in Novel,
we  are  required  to  make  a  substantial  investment  of up to an  additional
$20,000,000. If we fail to meet this financing requirement, VGS, our co-venturer
in Novel,  may  exercise a  purchase  right  that  would  result in  significant
dilution of our interest in Novel.

      We do not have committed  external  sources of funding and may not be able
to obtain any  additional  funding,  especially  if volatile  market  conditions
persist for  biotechnology  companies.  We believe our existing cash  resources,
including the $15 million  raised in the private  placement that closed on April
24, 2007, is sufficient to meet our cash requirements for the next 12 months.

      Other possible  sources of the required  financing are income from product
sales  or  sales  of  market  rights,  distributions  from  Novel,  income  from
co-development or partnering  arrangements and the cash exercise of warrants and
options that are currently  outstanding.  No representation  can be made that we
will be able to obtain such  revenue or  additional  financing or if obtained it
will be on  favorable  terms,  or at all.  No  assurance  can be given  that any
offering if undertaken will be  successfully  concluded or that if concluded the
proceeds will be material.  Our inability to obtain  additional  financing  when
needed would impair our ability to continue our business.

      If any future financing  involves the further sale of our securities,  our
then-existing  stockholders' equity could be substantially diluted. On the other
hand,  if we  incurred  debt,  we would be  subject  to  risks  associated  with
indebtedness,  including the risk that interest  rates might  fluctuate and cash
flow would be insufficient to pay principal and interest on such indebtedness.

SUBSTANTIALLY ALL OF OUR PRODUCT CANDIDATES ARE AT AN EARLY STAGE OF DEVELOPMENT
AND ONLY A PORTION OF THESE ARE IN CLINICAL DEVELOPMENT.

      Other than ELI-154  which is in Phase I clinical  development  and ELI-216
which is in Phase II clinical development, our five other product candidates are
still at an early stage of  development.  We do not have any  products  that are
commercially available other than Lodrane 24(R) and Lodrane 24D(R). We will need
to perform additional  development work for all of our product candidates in our
pipeline  before  we can  seek  the  regulatory  approvals  necessary  to  begin
commercial sales.

IF WE ARE  UNABLE  TO  SATISFY  REGULATORY  REQUIREMENTS,  WE MAY NOT BE ABLE TO
COMMERCIALIZE OUR PRODUCT CANDIDATES.


                                       16
<PAGE>

      We need FDA approval  prior to  marketing  our product  candidates  in the
United  States of  America.  If we fail to obtain  FDA  approval  to market  our
product  candidates,  we will be unable to sell our  product  candidates  in the
United  States of America and we will not  generate any revenue from the sale of
such products.

      This regulatory review and approval process,  which includes evaluation of
preclinical  studies and clinical  trials of our product  candidates is lengthy,
expensive  and  uncertain.  To receive  approval,  we must,  among other things,
demonstrate with substantial evidence from well-controlled  clinical trials that
our product  candidates  are both safe and effective for each  indication  where
approval is sought.  Satisfaction of these requirements  typically takes several
years and the time needed to satisfy them may vary  substantially,  based on the
type, complexity and novelty of the pharmaceutical product. We cannot predict if
or when we might submit for  regulatory  approval any of our product  candidates
currently  under  development.  Any approvals we may obtain may not cover all of
the clinical  indications for which we are seeking  approval.  Also, an approval
might  contain  significant  limitations  in the  form  of  narrow  indications,
warnings, precautions, or contra-indications with respect to conditions of use.

      The FDA has substantial  discretion in the approval process and may either
refuse to file our application  for  substantive  review or may form the opinion
after review of our data that our  application is insufficient to allow approval
of our product candidates.  If the FDA does not file or approve our application,
it may require that we conduct additional clinical, preclinical or manufacturing
validation   studies  and  submit  that  data  before  it  will  reconsider  our
application.  Depending on the extent of these or any other studies, approval of
any applications  that we submit may be delayed by several years, or may require
us to expend more  resources  than we have  available.  It is also possible that
additional studies, if performed and completed, may not be considered sufficient
by the FDA to make our applications approvable.  If any of these outcomes occur,
we may be forced to abandon our applications for approval,  which might cause us
to cease operations.

      We will also be subject to a wide variety of foreign regulations governing
the development,  manufacture and marketing of our products.  Whether or not FDA
approval has been obtained,  approval of a product by the comparable  regulatory
authorities of foreign  countries must still be obtained prior to  manufacturing
or marketing the product in those  countries.  The approval  process varies from
country  to  country  and the time  needed to secure  approval  may be longer or
shorter than that required for FDA approval.  We cannot assure you that clinical
trials  conducted  in one country  will be accepted by other  countries  or that
approval in one country will result in approval in any other country.

BEFORE WE CAN  OBTAIN  REGULATORY  APPROVAL,  WE NEED TO  SUCCESSFULLY  COMPLETE
CLINICAL TRIALS, OUTCOMES OF WHICH ARE UNCERTAIN.

      In order to obtain  FDA  approval  to market a new drug  product,  we must
demonstrate  proof  of  safety  and  effectiveness  in  humans.  To  meet  these
requirements,  we must conduct extensive  preclinical  testing and "adequate and
well-controlled"  clinical trials. Conducting clinical trials is a lengthy, time
consuming,  and expensive  process.  Completion of necessary clinical trials may
take several  years or more.  Delays  associated  with products for which we are
directly  conducting  preclinical  or  clinical  trials  may  cause  us to incur
additional  operating  expenses.  The  commencement  and rate of  completion  of
clinical trials may be delayed by many factors, including, for example:

      o     ineffectiveness   of  our  product   candidate  or   perceptions  by
            physicians that the product candidate is not safe or effective for a
            particular indication;


                                       17
<PAGE>

      o     inability  to  manufacture  sufficient  quantities  of  the  product
            candidate for use in clinical trials;

      o     delay  or  failure  in  obtaining  approval  of our  clinical  trial
            protocols from the FDA or institutional review boards;

      o     slower than expected rate of patient recruitment and enrollment;

      o     inability to adequately follow and monitor patients after treatment;

      o     difficulty in managing multiple clinical sites;

      o     unforeseen safety issues;

      o     government or regulatory delays; and

      o     clinical trial costs that are greater than we currently anticipate.

      Even if we achieve  positive  interim  results in clinical  trials,  these
results do not necessarily predict final results,  and positive results in early
trials may not be indicative  of success in later trials.  A number of companies
in the pharmaceutical  industry have suffered  significant  setbacks in advanced
clinical  trials,  even after promising  results in earlier trials.  Negative or
inconclusive  results or adverse  medical  events during a clinical  trial could
cause us to repeat or  terminate  a  clinical  trial or  require  us to  conduct
additional  trials.  We do not know whether our existing or any future  clinical
trials will demonstrate safety and efficacy sufficiently to result in marketable
products.  Our  clinical  trials may be  suspended  at any time for a variety of
reasons,  including if the FDA or we believe the patients  participating  in our
trials are exposed to unacceptable health risks or if the FDA finds deficiencies
in the conduct of these trials.

      Failures or perceived  failures in our clinical trials will directly delay
our product  development and regulatory  approval  process,  damage our business
prospects,  make it difficult for us to establish  collaboration and partnership
relationships,  and negatively affect our reputation and competitive position in
the pharmaceutical community.

      Because of these  risks,  our  research  and  development  efforts may not
result in any commercially viable products. Any delay in, or termination of, our
preclinical  or clinical  trials will delay the filing of our drug  applications
with  the  FDA  and,  ultimately,  our  ability  to  commercialize  our  product
candidates  and generate  product  revenues.  If a significant  portion of these
development  efforts  are  not  successfully   completed,   required  regulatory
approvals  are not  obtained  or any  approved  products  are  not  commercially
successfully,  our business,  financial condition, and results of operations may
be materially harmed.

IF OUR COLLABORATION OR LICENSE ARRANGEMENTS ARE UNSUCCESSFUL,  OUR REVENUES AND
PRODUCT DEVELOPMENT MAY BE LIMITED.

      We have entered into several collaboration and licensing  arrangements for
the development of generic products. However, there can be no assurance that any
of these  agreements  will result in FDA  approvals,  or that we will be able to
market any such  finished  products  at a profit.  Collaboration  and  licensing
arrangements pose the following risks:


                                       18
<PAGE>

      o     collaborations and licensee arrangements may be terminated, in which
            case we will  experience  increased  operating  expenses and capital
            requirements  if we  elect  to  pursue  further  development  of the
            product candidate;

      o     collaborators  and licensees may delay  clinical  trials and prolong
            clinical  development,  under-fund a clinical trial program,  stop a
            clinical trial or abandon a product candidate;

      o     expected revenue might not be generated  because  milestones may not
            be achieved and product candidates may not be developed;

      o     collaborators and licensees could independently  develop, or develop
            with third  parties,  products  that could  compete  with our future
            products;

      o     the terms of our contracts with current or future  collaborators and
            licensees may not be favorable to us in the future;

      o     a collaborator or licensee with marketing and distribution rights to
            one or more of our products may not commit  enough  resources to the
            marketing and  distribution of our products,  limiting our potential
            revenues from the commercialization of a product;

      o     disputes may arise delaying or terminating the research, development
            or  commercialization  of  our  product  candidates,  or  result  in
            significant and costly litigation or arbitration; and

      o     one or more third  party  developers  could  obtain  approval  for a
            similar product prior to the  collaborator or licensee  resulting in
            unforeseen  price  competition  in connection  with the  development
            product.

IF WE ARE UNABLE TO PROTECT OUR  INTELLECTUAL  PROPERTY  RIGHTS AND AVOID CLAIMS
THAT WE INFRINGED ON THE INTELLECTUAL  PROPERTY RIGHTS OF OTHERS, OUR ABILITY TO
CONDUCT BUSINESS MAY BE IMPAIRED.

      Our  success  depends on our  ability to protect  our  current  and future
products and to defend our intellectual  property rights.  If we fail to protect
our  intellectual  property  adequately,  competitors may manufacture and market
products similar to ours.

      We currently hold five patents,  have two patents pending and we intend to
file  further  patent  applications  in the future.  With respect to our pending
patents,  we  cannot be  certain  that  these  applications  will  result in the
issuance  of  patents.  If  patents  are  issued,  third  parties  may sue us to
challenge  such patent  protection,  and  although we know of no reason why they
should prevail, it is possible that they could. It is likewise possible that our
patent rights may not prevent or limit our present and future  competitors  from
developing,  using or commercializing  products that are similar or functionally
equivalent to our products.

      In addition,  we may be required to obtain  licenses to patents,  or other
proprietary rights of third parties,  in connection with the development and use
of our products and technologies as they relate to other persons'  technologies.
At such time as we discover a need to obtain any such  license,  we will need to
establish  whether we will be able to obtain such a license on favorable  terms.
The failure to obtain the necessary  licenses or other rights could preclude the
sale, manufacture or distribution of our products.


                                       19
<PAGE>

      We rely particularly on trade secrets,  unpatented  proprietary  expertise
and  continuing  innovation  that we seek to protect,  in part, by entering into
confidentiality agreements with licensees, suppliers, employees and consultants.
We cannot  provide  assurance  that these  agreements  will not be  breached  or
circumvented.  We also cannot be certain that there will be adequate remedies in
the  event  of  a  breach.  Disputes  may  arise  concerning  the  ownership  of
intellectual  property or the applicability of  confidentiality  agreements.  We
cannot  be sure that our  trade  secrets  and  proprietary  technology  will not
otherwise become known or be  independently  developed by our competitors or, if
patents are not issued with respect to products  arising from research,  that we
will be able to maintain the  confidentiality  of information  relating to these
products. In addition, efforts to ensure our intellectual property rights can be
costly, time-consuming and/or ultimately unsuccessful.

LITIGATION IS COMMON IN OUR INDUSTRY,  PARTICULARLY  THE GENERIC  PHARMACEUTICAL
INDUSTRY,  AND CAN BE PROTRACTED  AND  EXPENSIVE AND COULD DELAY AND/OR  PREVENT
ENTRY OF OUR PRODUCTS  INTO THE MARKET,  WHICH,  IN TURN,  COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.

      Litigation concerning patents and proprietary rights can be protracted and
expensive.  Companies that produce brand pharmaceutical products routinely bring
litigation  against  applicants that seek FDA approval to manufacture and market
generic  forms  of  their  branded  products.   These  companies  allege  patent
infringement or other  violations of  intellectual  property rights as the basis
for filing suit against an applicant.  Likewise,  other patent holders may bring
patent  infringement  suits  against  us  alleging  that our  products,  product
candidates  and  technologies   infringe  upon  intellectual   property  rights.
Litigation  often  involves   significant  expense  and  can  delay  or  prevent
introduction or sale of our products.

      There may also be situations where we use our business judgment and decide
to market and sell products, notwithstanding the fact that allegations of patent
infringement(s)  have not been finally resolved by the courts. The risk involved
in doing so can be substantial  because the remedies available to the owner of a
patent for  infringement  include,  among other things,  damages measured by the
profits lost by the patent owner and not by the profits earned by the infringer.
In the case of a willful  infringement,  the  definition of which is subjective,
such damages may be trebled. Moreover, because of the discount pricing typically
involved with bioequivalent products,  patented brand products generally realize
a substantially  higher profit margin than  bioequivalent  products.  An adverse
decision  in a case such as this or in other  similar  litigation  could  have a
material  adverse  effect on our  business,  financial  position  and results of
operations and could cause the market value of our common stock to decline.

THE  PHARMACEUTICAL  INDUSTRY  IS HIGHLY  COMPETITIVE  AND  SUBJECT TO RAPID AND
SIGNIFICANT  TECHNOLOGICAL  CHANGE,  WHICH COULD IMPAIR OUR ABILITY TO IMPLEMENT
OUR BUSINESS MODEL.

      The pharmaceutical industry is highly competitive, and we may be unable to
compete  effectively.  In  addition,  it is  undergoing  rapid  and  significant
technological  change,  and we expect  competition  to  intensify  as  technical
advances  in each field are made and become  more widely  known.  An  increasing
number of pharmaceutical  companies have been or are becoming  interested in the
development and  commercialization of products  incorporating  advanced or novel
drug delivery systems.  We expect that competition in the field of drug delivery
will  increase  in the  future as other  specialized  research  and  development
companies begin to concentrate on this aspect of the business. Some of the major
pharmaceutical  companies have invested and are continuing to invest significant
resources in the development of their own drug delivery systems and technologies
and some have invested funds in such specialized drug delivery  companies.  Many
of our  competitors  have longer  operating  histories  and  greater  financial,
research and development, marketing and other resources than


                                       20
<PAGE>

we do. Such companies may develop new formulations and products,  or may improve
existing ones, more efficiently than we can. Our success, if any, will depend in
part on our ability to keep pace with the changing  technology  in the fields in
which we operate.

      As we expand our presence in the generic  pharmaceuticals  market  through
our joint venture,  Novel, its product  candidates may face intense  competition
from brand-name companies that have taken aggressive steps to thwart competition
from generic companies. In particular,  brand-name companies continue to sell or
license their products directly or through  licensing  arrangements or strategic
alliances  with  generic   pharmaceutical   companies   (so-called   "authorized
generics").  No significant  regulatory  approvals are required for a brand-name
company to sell  directly or through a third party to the  generic  market,  and
brand-name  companies do not face any other  significant  barriers to entry into
such market.  In addition,  such  companies  continually  seek to delay  generic
introductions and to decrease the impact of generic  competition,  using tactics
which include:

      o     obtaining new patents on drugs whose original  patent  protection is
            about to expire;

      o     filing  patent  applications  that are more  complex  and  costly to
            challenge;

      o     filing  suits  for  patent  infringement  that  automatically  delay
            approval of the FDA;

      o     filing citizens'  petitions with the FDA contesting  approval of the
            generic  versions  of  products  due to  alleged  health  and safety
            issues;

      o     developing  controlled-release or other "next-generation"  products,
            which often  reduce  demand for the generic  version of the existing
            product for which we may be seeking approval;

      o     changing product claims and product labeling;

      o     developing and marketing as over-the-counter  products those branded
            products which are about to face generic competition; and

      o     making  arrangements  with  managed care  companies  and insurers to
            reduce the economic incentives to purchase generic pharmaceuticals.

      These  strategies  may  increase the costs and risks  associated  with our
efforts to introduce our generic  products  under  development  and may delay or
prevent such introduction altogether.

IF OUR PRODUCT  CANDIDATES DO NOT ACHIEVE MARKET  ACCEPTANCE  AMONG  PHYSICIANS,
PATIENTS,  HEALTH  CARE  PAYORS  AND THE  MEDICAL  COMMUNITY,  THEY  WILL NOT BE
COMMERCIALLY SUCCESSFUL AND OUR BUSINESS WILL BE ADVERSELY AFFECTED.

      The degree of market acceptance of any of our approved product  candidates
among  physicians,  patients,  health care payors and the medical community will
depend on a number of factors, including:

      o     acceptable evidence of safety and efficacy;

      o     relative convenience and ease of administration;


                                       21
<PAGE>

      o     the prevalence and severity of any adverse side effects;

      o     availability of alternative treatments;

      o     pricing and cost effectiveness;

      o     effectiveness of sales and marketing strategies; and

      o     ability to obtain sufficient third-party coverage or reimbursement.

      If we are unable to achieve market acceptance for our product  candidates,
then  such  product  candidates  will  not be  commercially  successful  and our
business will be adversely affected.

WE ARE  DEPENDENT ON A SMALL NUMBER OF SUPPLIERS  FOR OUR RAW  MATERIALS AND ANY
DELAY OR  UNAVAILABILITY  OF RAW MATERIALS CAN MATERIALLY  ADVERSELY  AFFECT OUR
ABILITY TO PRODUCE PRODUCTS.

      The FDA requires  identification of raw material suppliers in applications
for  approval  of  drug  products.  If raw  materials  were  unavailable  from a
specified  supplier,  FDA approval of a new supplier could delay the manufacture
of the drug  involved.  In  addition,  some  materials  used in our products are
currently available from only one supplier or a limited number of suppliers.

      Further, a significant  portion of our raw materials may be available only
from foreign  sources.  Foreign  sources can be subject to the special  risks of
doing business abroad, including:

      o     greater   possibility  for  disruption  due  to   transportation  or
            communication problems;

      o     the relative instability of some foreign governments and economies;

      o     interim  price  volatility  based  on  labor  unrest,  materials  or
            equipment shortages,  export duties, restrictions on the transfer of
            funds, or fluctuations in currency exchange rates; and

      o     uncertainty  regarding recourse to a dependable legal system for the
            enforcement of contracts and other rights.

      In   addition,   recent   changes  in  patent  laws  in  certain   foreign
jurisdictions (primarily in Europe) may make it increasingly difficult to obtain
raw  materials  for research and  development  prior to expiration of applicable
United States or foreign patents. Any delay or inability to obtain raw materials
on a timely basis, or any  significant  price increases that cannot be passed on
to customers,  can materially  adversely affect our ability to produce products.
This can materially adversely affect our business and operations.

EVEN AFTER  REGULATORY  APPROVAL,  WE WILL BE  SUBJECT  TO  ONGOING  SIGNIFICANT
REGULATORY OBLIGATIONS AND OVERSIGHT.

      Even  if  regulatory   approval  is  obtained  for  a  particular  product
candidate, the FDA and foreign regulatory authorities may, nevertheless,  impose
significant restrictions on the indicated uses or marketing of such products, or
impose ongoing requirements for post-approval studies.  Following any regulatory
approval of our product candidates,  we will be subject to continuing regulatory
obligations,   such   as   safety   reporting   requirements,   and   additional
post-marketing obligations, including regulatory


                                       22
<PAGE>

oversight of the promotion and marketing of our products.  If we become aware of
previously  unknown problems with any of our product candidates here or overseas
or our  contract  manufacturers'  facilities,  a  regulatory  agency  may impose
restrictions on our products,  our contract  manufacturers  or on us,  including
requiring us to reformulate our products,  conduct  additional  clinical trials,
make changes in the  labeling of our  products,  implement  changes to or obtain
re-approvals of our contract  manufacturers'  facilities or withdraw the product
from the market. In addition,  we may experience a significant drop in the sales
of the affected  products,  our reputation in the  marketplace may suffer and we
may become the target of lawsuits, including class action suits. Moreover, if we
fail to comply with  applicable  regulatory  requirements,  we may be subject to
fines,  suspension  or  withdrawal of  regulatory  approvals,  product  recalls,
seizure of products,  operating  restrictions and criminal  prosecution.  Any of
these  events  could harm or prevent  sales of the  affected  products  or could
substantially  increase the costs and expenses of commercializing  and marketing
these products.

IF KEY  PERSONNEL  WERE TO  LEAVE  US OR IF WE ARE  UNSUCCESSFUL  IN  ATTRACTING
QUALIFIED PERSONNEL, OUR ABILITY TO DEVELOP PRODUCTS COULD BE MATERIALLY HARMED.

      Our  success  depends in large part on our  ability to attract  and retain
highly qualified scientific, technical and business personnel experienced in the
development, manufacture and marketing of oral, controlled release drug delivery
systems and generic  products.  Our  business  and  financial  results  could be
materially harmed by the inability to attract or retain qualified personnel.

IF WE WERE  SUED ON A  PRODUCT  LIABILITY  CLAIM,  AN  AWARD  COULD  EXCEED  OUR
INSURANCE COVERAGE AND COST US SIGNIFICANTLY.

      The  design,  development  and  manufacture  of our  products  involve  an
inherent risk of product  liability  claims.  We have procured product liability
insurance; however, a successful claim against us in excess of the policy limits
could be very expensive to us,  damaging our financial  position.  The amount of
our  insurance  coverage,  which has been  limited due to our limited  financial
resources,  may be materially below the coverage maintained by many of the other
companies  engaged  in  similar  activities.  To the best of our  knowledge,  no
product liability claim has been made against us as of March 31, 2007.

                        RISKS RELATED TO OUR COMMON STOCK

FUTURE  SALES OF OUR COMMON  STOCK  COULD  LOWER THE MARKET  PRICE OF OUR COMMON
STOCK.

      Sales of substantial amounts of our shares in the public market could harm
the market  price of our common  stock,  even if our  business is doing well.  A
significant  number of shares of our common  stock are  eligible for sale in the
public  market  under SEC Rule 144  subject  in some  cases to volume  and other
limitations.  In addition,  we have recently filed a registration  statement for
the resale of  6,465,504  shares of common stock  issuable  upon  conversion  of
outstanding  shares  of our  Series C  Preferred  Stock  issued  in the  private
placement  that  closed  on April 24,  2007,  4,187,643  shares of common  stock
issuable  in   satisfaction   of  certain  Series  C  Preferred  Stock  dividend
obligations  and  2,133,606  shares of common stock  issuable  upon  exercise of
warrants  issued in the private  placement and a registration  statement for the
resale of 957,396  shares of Common  Stock and  478,698  shares of Common  Stock
issuable  upon the  exercise of warrants  issued to VGS Pharma,  an affiliate of
Veerappan Subramanian,  one of our directors and acting Chief Scientific Officer
and  1,750,000  shares of Common  Stock  issuable  upon the  exercise of options
granted to Dr. Subramanian.

      Due to the foregoing  factors  sales of a substantial  number of shares of
our common stock in the


                                       23
<PAGE>

public  market could occur at any time.  These sales,  or the  perception in the
market that the holders of a large number of shares intend to sell shares, could
reduce the market price of our common stock.

OUR STOCK PRICE HAS BEEN VOLATILE AND MAY FLUCTUATE IN THE FUTURE.

      There has been  significant  volatility  in the market prices for publicly
traded shares of pharmaceutical companies, including ours. For the twelve months
ended March 31,  2007,  the closing sale price on the  American  Stock  Exchange
("AMEX") of our common stock  fluctuated from a high of $2.54 per share to a low
of $1.94 per share. The per share price of our common stock may not remain at or
exceed current levels.  The market price for our common stock, and for the stock
of  pharmaceutical  companies  generally,  has been highly volatile.  The market
price of our common stock may be affected by:

      o     Results of our clinical trials;

      o     Approval or disapproval of abbreviated new drug  applications or new
            drug applications;

      o     Announcements  of innovations,  new products or new patents by us or
            by our competitors;

      o     Governmental regulation;

      o     Patent or proprietary rights developments;

      o     Proxy contests or litigation;

      o     News  regarding  the efficacy  of,  safety of or demand for drugs or
            drug technologies;

      o     Economic  and  market  conditions,  generally  and  related  to  the
            pharmaceutical industry;

      o     Healthcare legislation;

      o     Changes in third-party reimbursement policies for drugs; and

      o     Fluctuations in our operating results.

THE FAILURE TO MAINTAIN THE AMERICAN STOCK EXCHANGE  LISTING OF THE COMMON STOCK
WOULD HAVE A MATERIAL  ADVERSE AFFECT ON THE MARKET FOR OUR COMMON STOCK AND OUR
MARKET PRICE.

      On January 4, 2006, we received a letter from the AMEX  notifying us that,
based on our  unaudited  financial  statements as of September 30, 2005, we were
not in  compliance  with the continued  listing  standards set forth in the AMEX
Company  Guide in that under one listing  standard our  shareholders'  equity is
less than  $4,000,000 and we had losses from  continuing  operations  and/or net
losses in three of our four most recent fiscal years and under  another  listing
standard our shareholders' equity is less than $6,000,000 and we had losses from
continuing operations and/or net losses in our five most recent fiscal years. At
the request of AMEX,  we submitted a plan on February 3, 2006  advising  AMEX of
action,  we had taken,  and will take, to bring ourselves in compliance with the
continued  listing standards within a maximum of 18 months from January 4, 2006.
On March 15, 2006,


                                       24
<PAGE>

we completed a private placement of our Series B Preferred Stock and warrants to
purchase  common  stock.  We received  $10,000,000  in gross  proceeds  from the
private placement.  On March 21, 2006, we submitted an update to the plan we had
previously  submitted on February 6, 2006. Upon notice of the March 2006 private
placement and the  acceptance  of the updated plan,  AMEX allowed us to maintain
our AMEX  listing,  subject to periodic  review of the our  progress by the AMEX
staff. If we are not in compliance with the continued  listing  standards,  AMEX
may then initiate delisting proceedings.  The failure to maintain listing of our
common  stock on AMEX will have an  adverse  effect on the market and the market
price for our common stock.

THE ISSUANCE OF  ADDITIONAL  SHARES OF OUR COMMON STOCK OR OUR  PREFERRED  STOCK
COULD MAKE A CHANGE OF CONTROL MORE DIFFICULT TO ACHIEVE.

      The issuance of  additional  shares of our common stock or the issuance of
shares of an additional series of preferred stock could be used to make a change
of control of us more difficult and expensive. Under certain circumstances, such
shares could be used to create  impediments to or frustrate  persons  seeking to
cause  a  takeover  or to gain  control  of us.  Such  shares  could  be sold to
purchasers who might side with the Board of Directors in opposing a takeover bid
that the Board of Directors  determines  not to be in the best  interests of our
stockholders.  It might  also have the  effect of  discouraging  an  attempt  by
another  person or entity  through the  acquisition  of a substantial  number of
shares of our common stock to acquire  control of us with a view to consummating
a merger, sale of all or part of our assets, or a similar transaction, since the
issuance  of new  shares  could be used to dilute  the stock  ownership  of such
person or entity.

IF PENNY  STOCK  REGULATIONS  BECOME  APPLICABLE  TO OUR COMMON  STOCK THEY WILL
IMPOSE  RESTRICTIONS ON THE MARKETABILITY OF OUR COMMON STOCK AND THE ABILITY OF
OUR STOCKHOLDERS TO SELL SHARES OF OUR STOCK COULD BE IMPAIRED.

      The SEC has adopted  regulations  that generally define a "penny stock" to
be an equity security that has a market price of less than $5.00 per share or an
exercise  price of less than  $5.00 per share  subject  to  certain  exceptions.
Exceptions  include  equity  securities  issued  by an  issuer  that has (i) net
tangible  assets of at least  $2,000,000,  if such issuer has been in continuous
operation  for more than three years,  or (ii) net  tangible  assets of at least
$5,000,000,  if such issuer has been in continuous operation for less than three
years, or (iii) average  revenue of at least  $6,000,000 for the preceding three
years.  Unless an exception is available,  the regulations require that prior to
any transaction  involving a penny stock, a risk of disclosure  schedule must be
delivered  to the buyer  explaining  the penny stock  market and its risks.  Our
common  stock is  currently  trading  at under  $5.00  per  share.  Although  we
currently fall under one of the  exceptions,  if at a later time we fail to meet
one of the  exceptions,  our common stock will be  considered a penny stock.  As
such the market liquidity for our common stock will be limited to the ability of
broker-dealers  to sell it in  compliance  with the  above-mentioned  disclosure
requirements.

      You  should be aware  that,  according  to the SEC,  the  market for penny
stocks has  suffered  in recent  years from  patterns  of fraud and abuse.  Such
patterns include:

      o     Control  of  the  market   for  the   security   by  one  or  a  few
            broker-dealers;

      o     "Boiler room" practices involving high-pressure sales tactics;

      o     Manipulation of prices through prearranged matching of purchases and
            sales;


                                       25
<PAGE>

      o     The release of misleading information;

      o     Excessive  and  undisclosed  bid-ask  differentials  and  markups by
            selling broker- dealers; and

      o     Dumping of  securities  by  broker-dealers  after  prices  have been
            manipulated to a desired  level,  which hurts the price of the stock
            and causes investors to suffer loss.

      We are aware of the abuses that have  occurred in the penny stock  market.
Although  we do not expect to be in a position  to dictate  the  behavior of the
market or of broker-dealers who participate in the market, we will strive within
the confines of practical limitations to prevent such abuses with respect to our
common stock.

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW MAY DETER A THIRD PARTY FROM
ACQUIRING US.

      Section 203 of the Delaware  General  Corporation  Law  prohibits a merger
with a 15% shareholder within three years of the date such shareholder  acquired
15%, unless the merger meets one of several exceptions.  The exceptions include,
for example,  approval by the holders of  two-thirds of the  outstanding  shares
(not counting the 15% shareholder),  or approval by the Board of Directors prior
to the 15%  shareholder  acquiring its 15% ownership.  This  provision  makes it
difficult for a potential acquirer to force a merger with or takeover of us, and
could thus limit the price that certain investors might be willing to pay in the
future for shares of our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

      Our facility,  which we own, is located at 165 Ludlow  Avenue,  Northvale,
New Jersey, and contains  approximately  20,000 square feet of floor space. This
real property and the improvements thereon are encumbered by a mortgage in favor
of the New Jersey  Economic  Development  Authority  ("NJEDA") as security for a
loan through  tax-exempt  bonds from the NJEDA to Elite.  The mortgage  contains
certain customary provisions including,  without limitation,  the right of NJEDA
to foreclose upon a default by Elite. See "Note 5. - Long Term Debt".

      On July 15, 2005, we entered into a lease for two years commencing on July
1, 2005 for a portion of a one-story  warehouse  for the storage of finished and
raw material of  pharmaceutical  products and  equipment.  We have  exercised an
option to rent the property through July 1, 2008.

      We are currently  using our  facilities  as a  laboratory,  manufacturing,
storage and office  space.  Properties  used in our  operations  are  considered
suitable  for the  purposes  for  which  they are used  and are  believed  to be
adequate to meet our needs for the reasonably foreseeable future.

ITEM 3. LEGAL PROCEEDINGS.

      In the ordinary  course of business we may be subject to  litigation  from
time to  time.  There is no  past,  pending  or,  to our  knowledge,  threatened
litigation or


                                       26
<PAGE>

administrative  action  (including  litigation or action involving our officers,
directors  or other key  personnel)  which in our  opinion has or is expected to
have, a material adverse effect upon our business, prospects financial condition
or operations.

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

      No matters were  submitted to a vote of security  holders during the three
months ended March 31, 2007.


                                       27
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

      Our Common Stock is quoted on the American Stock Exchange under the symbol
"ELI".  The following table shows, for the periods  indicated,  the high and low
sales  prices per share of our Common  Stock as reported by the  American  Stock
Exchange.

                                  COMMON STOCK
      QUARTER ENDED                                           HIGH          LOW

      FISCAL YEAR ENDING MARCH 31, 2007:
      March 31, 2007..........................................$2.40        $1.94
      December 31, 2006.......................................$2.49        $2.02
      September 30, 2006......................................$2.46        $2.03
      June 30, 2006 ..........................................$2.54        $2.02

      FISCAL YEAR ENDING MARCH 31, 2006:
      March 31, 2006..........................................$2.49        $1.85
      December 31, 2005.......................................$3.02        $1.69
      September 30, 2005......................................$3.05        $2.62
      June 30, 2005 ..........................................$4.42        $2.67

      On June 26, 2007,  the last reported  sale price of our Common  Stock,  as
reported by the American Stock Exchange, was $2.33 per share.

      As of June 26, 2007, there were  approximately  101 holders of record and,
we believe,  approximately  2,081 are beneficial  owners of our Common Stock. We
are informed and believe  that as of June 26, 2007,  Cede & Co. held  18,391,573
shares of our Common Stock as nominee for  Depository  Trust  Company,  55 Water
Street,  New York, New York 10004. It is our  understanding  that Cede & Co. and
Depository Trust Company both disclaim any beneficial ownership therein and that
such shares are held for the account of numerous other persons.

      We have never paid cash  dividends on our common stock.  During the fiscal
year ended March 31, 2007,  we have paid  dividends in the  aggregate  principal
amount of $791,182  payable in cash of $808 and in 372,562  shares of our common
stock, on our Series B Convertible Preferred Stock. We currently anticipate that
we will retain all available funds for use in the operation and expansion of our
business.

      Please see our Quarterly  Reports on Form 10-Q for the three month periods
ending June 30, 2006,  September  30, 2006 and December 31, 2006 and our Current
Reports on Form 8-K dated July 12, 2006 and  December 6, 2006,  for  information
concerning our issuances of unregistered  securities  during the 12 months ended
March 31, 2007.


                                       28
<PAGE>

                      EQUITY COMPENSATION PLAN INFORMATION

      The  following  table sets forth  certain  information  regarding  Elite's
equity compensation plans as of March 31, 2007.

<TABLE>
<CAPTION>
                                                                                                     Number of
                                      Number of                                                 securities remaining
                                      securities                                                available for future
                                  to be issued upon                Weighted-average                issuance under
                                     exercise of                  exercise price per            equity compensation
                                 outstanding options,            share of outstanding             plans (excluding
                                     warrants and                options, warrants and          securities reflected
Plan Category                           rights                          rights                     in column (a))
-------------------------        --------------------            --------------------           --------------------
                                         (a)                              (b)                           (c)
<S>                                  <C>                                 <C>                           <C>
Equity compensation plans
    approved by security
    holders                          3,776,500 (1)                       $2.34                         3,223,500

Equity compensation plans
    not approved by
    security holders                 2,846,000 (2)                       $2.20                                --
                                 --------------------            --------------------           --------------------

Total:                               6,622,500                           $2.28                         3,223,500
                                 ====================            ====================           ====================
</TABLE>

(1) Stock options issued under the 2004 Stock Option Plan
(2) Represents 1,750,000 options granted to Veerappan  Subramanian,  511,000 to
Atul Mehta and 585,000 to directors and outside consultants

      2004 STOCK OPTION PLAN

      If options  granted  under our 2004 Stock  Option Plan (the "STOCK  OPTION
PLAN") lapse without being exercised,  other options may be granted covering the
shares  not  purchased  under such  lapsed  options.  Options  may be granted to
employees,  officers,  Directors of and  consultants to Elite.  The Stock Option
Plan permits us to grant both incentive stock options ("INCENTIVE STOCK OPTIONS"
or "ISOs")  within the  meaning of Section  422 of the Code,  and other  options
which do not qualify as Incentive Stock Options (the "NON-QUALIFIED OPTIONs").

      Unless earlier terminated by the Board of Directors, the Stock Option Plan
(but not  outstanding  options)  terminates  on March 1,  2014,  after  which no
further awards may be granted under the Stock Option Plan. The Stock Option Plan
is administered by the full Board of Directors or, at the Board's discretion, by
a committee of the Board of Direcotrs consisting of at least two persons who are
"disinterested  persons"  defined under Rule  16b-2(c)(ii)  under the Securities
Exchange Act of 1934, as amended (the "COMMITTEE").

      Recipients  of  options  under the Stock  Option  Plan  ("OPTIONEES")  are
selected by the Board of Directors or the  Committee.  The Board of Directors or
Committee  determines the terms of each option grant  including (1) the purchase
price of  shares  subject  to  options,  (2) the dates on which  options  become
exercisable and (3) the expiration date of each option (which may not exceed ten
years from the date of grant).  The minimum per share  purchase price of options
granted  under the Stock  Option Plan for  Incentive  Stock  Options is the fair
market value (as defined in the Stock Option Plan) or for Nonqualified


                                       29
<PAGE>

Options is 85% of Fair Market Value of one share of the Common Stock on the date
the option is granted.

      Optionees  will have no voting,  dividend or other rights as  stockholders
with respect to shares of Common Stock  covered by options prior to becoming the
holders  of record of such  shares.  The  purchase  price upon the  exercise  of
options may be paid in cash, by certified bank or cashier's  check, by tendering
stock held by the Optionee,  as well as by cashless  exercise either through the
surrender of other shares  subject to the option or through a broker.  The total
number of shares of Common Stock  available under the Stock Option Plan, and the
number of shares and per share exercise price under outstanding  options will be
appropriately  adjusted  in the  event of any  stock  dividend,  reorganization,
merger or recapitalization or similar corporate event.

      The Board of Directors may at any time  terminate the Stock Option Plan or
from time to time make such modifications or amendments to the Stock Option Plan
as it may deem  advisable  and the Board of Directors  or Committee  may adjust,
reduce,  cancel  and  regrant an  unexercised  option if the fair  market  value
declines  below the  exercise  price  except as may be required by any  national
stock exchange or national market  association on which the Common Stock is then
listed.  In no event  may the  Board,  of  Directors  without  the  approval  of
stockholders,  amend the Stock  Option  Plan to increase  the maximum  number of
shares of Common Stock for which  options may be granted  under the Stock Option
Plan or change the class of persons  eligible to receive options under the Stock
Option Plan.

      Subject to  limitations  set forth in the Stock Option Plan,  the terms of
option agreements will be determined by the Board of Directors or Committee, and
need not be uniform among Optionees.


                                       30
<PAGE>

COMPARATIVE STOCKHOLDER RETURN

      The table which follows compares the yearly  percentage  change in Elite's
cumulative total stockholder return on its Common Stock for the five year period
ended March 31, 2007 with the  cumulative  total  stockholder  return of (1) all
United States  companies  traded on the American Stock  Exchange  (where Elite's
Common Stock is now traded) and (2) all companies  traded on the American  Stock
Exchange  which  carry the  Standard  Industrial  Classification  (SIC) code 283
(Pharmaceuticals). The table was prepared by the Center for Research in Security
Prices at the University of Chicago Graduate School of Business, Chicago, IL.

      Elite's  Common Stock was traded on the NASDAQ  over-the-counter  bulletin
board from July 23, 1998 until  February 24, 2000.  Elite's Common began trading
on the American Stock Exchange on February 24, 2000. Elite's fiscal year ends on
March 31.


                 Date         Company Index   Market Index   Peer Index

               03/28/2002        100.000        100.000        100.000
               04/30/2002         86.693         97.347         96.087
               05/31/2002         78.811         95.605         86.976
               06/28/2002         67.183         88.383         75.591
               07/31/2002         46.512         81.026         62.297
               08/30/2002         43.411         81.828         60.093
               09/30/2002         36.434         75.663         53.021
               10/31/2002         32.558         79.874         56.438
               11/29/2002         32.300         84.076         65.716
               12/31/2002         24.419         80.060         57.688
               01/31/2003         24.031         78.857         62.242
               02/28/2003         24.419         78.427         57.846
               03/31/2003         19.767         78.951         55.731
               04/30/2003         19.509         84.721         66.126
               05/30/2003         27.132         91.181         83.673
               06/30/2003         36.822         93.029         95.607
               07/31/2003         31.654         94.467         92.797
               08/29/2003         36.047         97.407        100.728
               09/30/2003         37.468         97.005        101.800
               10/31/2003         41.473        101.839        102.890
               11/28/2003         41.344        103.655        101.302
               12/31/2003         38.760        108.359         97.216
               01/30/2004         47.804        111.270        111.627
               02/27/2004         32.300        112.539        107.594
               03/31/2004         38.372        112.543        110.856
               04/30/2004         41.990        108.546        111.142
               05/28/2004         38.760        109.949        102.725
               06/30/2004         29.845        112.815         97.931
               07/30/2004         28.424        109.428         84.188
               08/31/2004         16.925        109.359         81.726
               09/30/2004         15.504        112.389         84.974
               10/29/2004         22.610        114.757         85.243
               11/30/2004         41.990        120.844         90.257
               12/31/2004         47.416        125.203         94.370
               01/31/2005         53.618        122.619         88.354
               02/28/2005         61.886        125.684         85.399
               03/31/2005         56.848        122.277         75.909
               04/29/2005         45.866        119.122         74.968
               05/31/2005         38.760        123.099         70.965
               06/30/2005         39.793        125.726         71.889
               07/29/2005         37.468        131.539         80.278
               08/31/2005         35.530        131.118         79.906
               09/30/2005         38.501        132.917         77.509
               10/31/2005         31.654        128.688         77.854
               11/30/2005         23.385        133.155         79.966
               12/30/2005         23.773        135.492         81.308
               01/31/2006         26.227        142.254         99.788
               02/28/2006         30.103        141.492        104.850
               03/31/2006         32.171        145.067        112.032
               04/28/2006         29.457        147.470        108.789
               05/31/2006         28.424        141.110        100.703
               06/30/2006         29.716        140.732         96.451
               07/31/2006         28.424        140.684         88.769
               08/31/2006         31.008        143.690         93.201
               09/29/2006         30.879        144.108         89.657
               10/31/2006         26.357        149.850         97.365
               11/30/2006         27.519        154.640        101.799
               12/29/2006         28.165        157.186        108.331
               01/31/2007         25.840        159.233        109.553
               02/28/2007         25.969        158.279        107.426
               03/30/2007         30.362        160.585        109.236



     The index level for all series was set to 100.0 on 03/28/2002




                                     Legend

<TABLE>
<CAPTION>
SYMBOL       CRSP TOTAL RETURNS INDEX FOR:               03/2002   03/2003   03/2004   03/2005   03/2006   03/2007
------       -----------------------------               -------   -------   -------   -------   -------   -------
<S>          <C>                                          <C>        <C>      <C>       <C>       <C>       <C>
[CLIP ART]   Elite Pharmaceuticals, Inc.                  100.0      19.8      38.4      56.8      32.2      30.4
[CLIP ART]   AMEX Stock Market (US Companies)             100.0      79.0     ll2.5     122.3     145.1     160.6
[CLIP ART]   AMEX Stocks (SIC 2830-2839 US Companies)     100.0      55.7     l10.9      75.9     l12.0     109.2
             Drugs
</TABLE>

NOTES:

      A     The lines  represent  monthly index levels  derived from  compounded
            daily returns that include all dividends.
      B.    The indexes are reweighted daily, using the market capitalizatian on
            the previous trading day.
      C.    If the  monthly  interval,  based on the fiscal  year-end,  is not a
            trading day, the preceding trading day is used.
      D.    The index level for all series was set to $100.0 on 03/28/2002.

                           [PERFORMANCE CHART OMITTED]

                                       31
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

      The following  consolidated selected financial data, at the end of and for
the last five fiscal years,  should be read in conjunction with our Consolidated
Financial  Statements  and related  Notes  thereto  appearing  elsewhere in this
Annual Report on Form 10-K. The consolidated selected financial data are derived
from our  consolidated  financial  statements  that have been audited by Miller,
Ellin & Company,  LLP, our  independent  auditors,  as indicated in their report
included herein.  The selected  financial data provided below is not necessarily
indicative of our future results of operations or financial performance.

<TABLE>
<CAPTION>
                                    2007             2006             2005             2004             2003
                                    ----             ----             ----             ----             ----
<S>                            <C>              <C>              <C>              <C>              <C>
Net revenues                   $  1,143,841     $    550,697     $    301,480     $    258,250     $    630,310

Net (loss)                     $(11,803,512)    $ (6,883,914)    $ (5,906,890)    $ (6,514,217)    $ (4,061,422)

Net (loss) per common share    $       (.64)    $      (0.49)    $      (0.47)    $      (0.58)    $      (0.40)

Total assets                   $  9,696,329     $ 15,702,241     $  9,245,292     $  7,853,434     $  8,696,222

Long-term obligations          $  3,795,000     $  3,980,000     $  2,367,128     $  2,495,000     $  2,720,000

Weighted average number          19,815,780       18,463,514       12,869,924       11,168,618       10,069,991
of shares outstanding
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATION

GENERAL

      The following  discussion  and analysis  should be read with the financial
statements and accompanying  notes,  included elsewhere in this Annual Report on
Form 10-K. It is intended to assist the reader in  understanding  and evaluating
our financial position.

OVERVIEW

      We are a  specialty  pharmaceutical  company  principally  engaged  in the
development and manufacture of oral,  controlled  release  products.  We develop
oral,  controlled  release  products using  proprietary  technology and licenses
these products.  Our strategy  includes  improving  off-patent drug products for
life cycle management and developing generic versions of controlled release drug
products  with high barriers to entry.  Our  technology is applicable to develop
delayed, sustained or targeted release pellets, capsules,  tablets, granules and
powders.

      We have two  products,  Lodrane  24(R) and Lodrane  24D(R),  for  treating
allergies,  currently  being sold  commercially,  and a  pipeline  of seven drug
candidates  under  development  in  the  therapeutic  areas  that  include  pain
management, infection and gastrointestinal disorder. Of the products under


                                       32
<PAGE>

development,  ELI-216, an abuse deterrent oxycodone product, and ELI-154, a once
daily oxycodone product,  are in clinical trials and we have two generic product
candidates that are undergoing  pivotal studies.  The addressable market for the
pipeline of products exceeds $6 billion.  Our facility in Northvale,  New Jersey
also  is a GMP  and  DEA  registered  facility  for  research,  development  and
manufacturing.

      At the end of 2006, we entered into a joint  venture with VGS Pharma,  LLC
and created Novel Novel, a privately-held company specializing in pharmaceutical
research, development,  manufacturing,  licensing,  acquisition and marketing of
specialty generic pharmaceuticals.

      We intend to continue to  collaborate  in the  development  of  additional
products  with  our  current   partners.   We  also  plan  to  seek   additional
collaborations to develop more drug products.

      We believe  that our  business  strategy  enables us to reduce our risk by
having a diverse  product  portfolio  that  includes  both  branded  and generic
products  in  various  therapeutic   categories  and  build  collaborations  and
establish  licensing  agreements with companies with greater  resources  thereby
allowing us to share costs of development and to improve cash-flow.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      Management's  discussion addresses our consolidated  financial statements,
which have been  prepared in accordance  with  accounting  principles  generally
accepted in the United States of America.  The  preparation  of these  financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities,  the disclosure of contingent assets
and liabilities at the date of financial  statements and the reported amounts of
revenues  and  expenses  during  the  reporting  period.  On an  ongoing  basis,
management evaluates its estimates and judgment,  including those related to bad
debts, intangible assets, income taxes, workers compensation,  and contingencies
and  litigation.  Management  bases its  estimates  and  judgments on historical
experience and on various other factors that are believed to be reasonable under
the  circumstances,  the  results of which  form the basis for making  judgments
about the  carrying  values  of  assets  and  liabilities  that are not  readily
apparent  from other  sources.  Actual  results may differ from these  estimates
under different assumptions or conditions.

      Management  believes the following  critical  accounting  policies,  among
others,  affect  its  more  significant  judgments  and  estimates  used  in the
preparation  of  its  consolidated  financial  statements.   Our  most  critical
accounting  policies  include the  recognition  of revenue  upon  completion  of
certain  phases of projects under research and  development  contracts.  We also
assess a need for an  allowance  to reduce our deferred tax assets to the amount
that  we  believe  is  more  likely  than  not to be  realized.  We  assess  the
recoverability  of long-lived  assets and intangible  assets  whenever events or
changes in  circumstances  indicate that the carrying value of the asset may not
be recoverable. We assess our exposure to current commitments and contingencies.
It should be noted that actual  results may differ  from these  estimates  under
different assumptions or conditions.

      During  the year  ended  March  31,  2003,  we  elected  to  prospectively
recognize  the fair value of stock  options  granted to employees and members of
the Board of Directors,  effective as of the beginning of the fiscal year, which
resulted in our taking charges of $1,008,850, $902,967 and $3,479,070 during the
years ended March 31, 2005, 2006 and 2007, respectively. The fair value of stock
options held by employees and members of the Board of Directors  which have been
granted  subsequent  to March 31,  2003 is  expected  to  continue to affect the
results of  operations  of future  periods,  as we  continue to grant or reprice
stock options to reward our management team.


                                       33
<PAGE>

YEAR ENDED MARCH 31, 2007 VS. YEAR ENDED MARCH 31, 2006

      Our  revenues  for the year  ended  March  31,  2007 were  $1,143,841,  an
increase of $593,144 or  approximately  108%,  over revenues for the  comparable
prior year,  and consisted of $1,038,916 in  manufacturing  fees and $104,925 in
royalty fees. Revenues for the year ended March 31, 2006,  consisted $494,231 in
manufacturing  fees and $56,466 in royalty fees.  The increase in  manufacturing
fees and  royalties  was  primarily  due to the  launch of our  second  product,
Lodrane 24D(R).

      Research and  development  costs for the year ended March 31,  2007,  were
$6,085,888,  an increase of $1,741,998 or  approximately  40% from $4,343,890 of
such costs for the prior year,  primarily  the result of  increased  wages,  raw
materials,  laboratory and manufacturing supplies and consulting fees. Elite now
has 41  employees,  an  increase  of 58% from 26  employees  one year  ago.  The
increase in employees is primarily  for the scale up work for the pain  products
and includes  manufacturing,  analytical and quality assurance people. Elite has
also  increased  its  spending  on raw  materials,  primarily  API, by 100% from
$300,000 to $600,000.  The raw materials are also  primarily for scale up of the
pain products.  Spending on biostudies has increased to $1,000,000 from $100,000
a year ago due to  spending  on the Phase II study  for  ELI-216.  Research  and
development  costs  associated  with Novel's  activities  also contribute to the
increase.  We expect our research and development  costs to continue to increase
in  future  periods  primarily  due to  clinical  costs  for Phase III and other
clinical trials for ELI-216 and ELI-154.

      General  and  administrative  expenses  (G&A) for the year ended March 31,
2007,  were  $2,534,507,  an increase of  $807,881,  or  approximately  47% from
$1,726,626 of G&A for the prior year. The increase was attributable to increases
in salaries and fringe  benefits as a result of  increases in staff,  consulting
fees  associated  with seeking  potential  strategic  transitions in addition to
costs associated with our Novel activities.

      We  are in  the  initial  stages  of  breaking  down  the  specific  costs
associated with the research and development of each product on which we devoted
resources  through the use of detailed  time sheets and general  ledger  account
classifications.  In the past, we have not historically allocated these expenses
to any particular  product. We cannot estimate the additional costs and expenses
that may be incurred in order to  potentially  complete the  development  of any
product,  nor can we estimate  the amount of time that might be involved in such
development  because of the  uncertainties  associated  with the  development of
controlled release drug delivery products as described in this report.

      Depreciation and  amortization  decreased by $46,693 from $486,687 for the
prior year to  $439,994.  The  decrease was the result of our taking in 2006 the
full write-off of financing  costs  associated with the redemption of tax exempt
NJEDA  Bonds,  partially  offset by an increase in  depreciation  in 2007 due to
acquired  new  machinery  and  equipment  and  upgrading  of the  corporate  and
warehouse facilities.

      Other  income   (expenses)   for  the  year  ended  March  31,  2007  were
$(3,064,144),  an increase of $2,187,736, or approximately 250%, from $(876,408)
for the prior year due to an increase of  $2,576,143  in charges  related to the
issuances of stock options and  warrants,  offset by (i) an increase of $158,138
in sale of New Jersey tax losses,  (ii) additional  interest income of $221,836,
due to higher  compensating  balances as a result of the private  placement and,
(iii) a decrease  of $8,433 in  interest  expense  resulting  from a decrease in
NJEDA Bonds outstanding.

      As a result of the  foregoing,  our net loss for the year ended  March 31,
2007 was $11,803,512 compared to $6,883,914 for the year ended March 31, 2006.


                                       34
<PAGE>

YEAR ENDED MARCH 31, 2006 VS. YEAR ENDED MARCH 31, 2005

      Our revenues for the year ended March 31, 2006 were $550,697,  an increase
of $249,217 or  approximately  83%, over revenues for the comparable prior year,
and  consisted of $494,231 in  manufacturing  fees and $56,466 in royalty  fees.
Revenues  for  the  year  ended  March  31,   2005,   consisted  of  a  $150,000
non-refundable payment received from Purdue Pharma L.P. granting us the right to
evaluate  certain  abuse  resistant  drug  formulation  technology,  $125,739 in
manufacturing fees, $24,291 in royalty fees and $1,450 in testing fees.

      Research  and  development  costs for the year ended  March 31,  2006 were
$4,343,890,  an increase of $1,645,249, or approximately 61%, from $2,698,641 of
such costs for the comparable period of the prior year,  primarily the result of
increased  wages,  raw  materials,  laboratory  and  manufacturing  supplies and
consulting  fees.  We expect our research and  development  costs to continue to
increase in future periods as a result of the developing and testing of products
currently in our pipeline.

      General  and  administrative  expenses  (G&A) for the year ended March 31,
2006, were $1,726,626, a decrease of $433,044, or approximately 20% from G&A for
the prior year. The decrease was attributable to a decrease in litigation costs,
bad debt  expense,  auditing  and legal fees,  somewhat  offset by  increases in
salaries and staff.

      For the years ended  March 31, 2006 and 2005,  we were unable to provide a
break-down of the specific costs associated with the research and development of
each product on which we devoted resources because a significant  portion of the
costs are generally associated with salaries,  laboratory  supplies,  laboratory
and  manufacturing  expenses,  utilities  and  similar  expenses.  We  have  not
historically allocated these expenses to any particular product. In addition, we
cannot estimate the additional  costs and expenses that may be incurred in order
to potentially  complete the development of any product, nor can we estimate the
amount  of time  that  might be  involved  in such  development  because  of the
uncertainties  associated  with  the  development  of  controlled  release  drug
delivery products as described in this report.

      Depreciation and amortization  increased by $130,249 from $356,438 for the
prior year to  $486,687.  The increase was the result of writing off the balance
of the prior NJEDA Bond Offering costs as a result of the refinancing.

      Other income (expenses) for the year ended March 31, 2006 were ($876,408),
a decrease of $116,213, or approximately 12%, from ($992,621) for the prior year
due to (i) a reduction by $105,923 in charges  related to the issuances of stock
options  and  warrants,  (ii) an  increase  of $13,329 in sale of New Jersey tax
losses,  and  (iii)  additional  interest  income  of  $50,930,  due  to  higher
compensating balances as a result of the private placement,  partially offset by
an increase of $53,969 in interest  expense  resulting from an increase in NJEDA
Bonds outstanding.

      As a result of the  foregoing,  our net loss for the year ended  March 31,
2006 was $6,883,914 compared to $5,906,890 for the year ended March 31, 2005.

MATERIAL CHANGES IN FINANCIAL CONDITION

      Our working capital (total current assets less total current liabilities),
decreased from  $8,615,287 as of March 31, 2006 to $1,019,631,  primarily due to
the net loss of $7,884,448  from  operations,  exclusive of non-cash  charges of
$3,919,064.


                                       35
<PAGE>

      We experienced negative cash flows from operations of ($8,314,268) for the
year ended March 31,  2007,  primarily  due to our net loss from  operations  of
$11,803,512,  less non-cash charges of $3,919,064,  which included $3,479,070 in
connection  with the  issuance of stock  options and  warrants,  and $439,994 in
depreciation and amortization expenses.

      On November  15, 2004 and on December  18,  2006,  Elite's  partner,  ECR,
launched  Lodrane 24(R) and Lodrane  24D(R),  respectively.  Under its agreement
with ECR, Elite is currently  manufacturing  commercial batches of Lodrane 24(R)
and Lodrane  24D(R) in exchange  for  manufacturing  margins  and  royalties  on
product  revenues.  Royalty  income earned for the year ended March 31, 2007 was
$104,925.  We expect future cash flows from royalties to provide additional cash
to help fund our operations.

      On June 21, 2005, Elite and  IntelliPharmaCeutics  Corp. ("IPC"),  entered
into an agreement  for the  development  and  commercialization  of a controlled
released  generic drug for certain  anti-infective  diseases by the parties.  We
estimate that the product had an addressable market in the U.S. of approximately
$4 billion in 2004.  We are to share in the profits,  if any,  from the sales of
the drug.  On December 12, 2005,  the  agreement was amended with respect to the
development  and  commercialization  of the  controlled  release drug product in
Canada.  Since IPC intended to enter into an agreement  with a Canadian  company
with respect to the  development,  distribution  and sale of the drug product in
Canada, the parties agreed to suspend their obligations under the agreement with
respect to the development and  commercialization of the controlled release drug
product in Canada.  IPC agreed to pay us a certain  percentage  of any  payments
received by IPC with respect to the  commercialization of the controlled release
drug product by such Canadian company.

      On June 22, 2005, Elite and PLIVA,  Inc.  ("PLIVA") entered into a Product
Development and License Agreement providing for the development and license of a
controlled  released  generic  anti-infective  drug  formulated by us. We are to
manufacture and PLIVA will market and sell the product. Under the agreement, the
partner is to make milestone  payments to us and the development costs are to be
paid both by PLIVA and us, and the profits are to be shared equally. On June 28,
2007, Elite and PLIVA terminated the Product  Development and License Agreement,
effective January 31, 2007, and entered into a termination  agreement  according
to which it was agreed that Elite owns all intellectual property rights relating
to the controlled released generic product under development and PLIVA agreed to
pay Elite  $100,000  in  discharge  of  outstanding  payments  under the Product
Development and License Agreement.

      On  January  10,  2006,  Elite  entered  into a  Product  Development  and
Commercialization  Agreement with Orit Laboratories LLC ("ORIT")  providing that
we and Orit will co-develop and  commercialize  an extended release drug product
for  treatment of anxiety,  and upon  completion  of  development,  the possible
licensing of the product for manufacture and sale. The parties intend to develop
all dose strengths of the product.  We are to share in the profits,  if any from
the sales of the drug.  The term of the  agreement  is for the  longer of (i) 15
years from the date the product is first  commercially sold to a third party, or
(ii)  the  life  of  the  applicable   patent(s),   if  any.  The  agreement  is
automatically  renewable for 3-year periods unless terminated by either party by
providing  the other party with twelve (12) months  written  notice prior to any
renewal period.

      In January  2006,  the FDA accepted our IND for  ELI-154,  its  once-a-day
oxycodone  painkiller.  Under  the  new  drug  application,  we will  begin  our
development  program with an early stage study to evaluate  ELI-154's  sustained
release formation. Currently there is no once-daily oxycodone available;


                                       36
<PAGE>

we estimate that the U.S. market for sustained  release,  twice-daily  oxycodone
was about $2 billion as of September, 2005.

      No assurance can be given that we will consummate any of the  transactions
discussed  above  or  that  any  material  revenues  will  be  generated  for us
therefrom.

LIQUIDITY AND CAPITAL RESOURCES

      For the year ended  March 31,  2007,  we recorded  negative  cash flow and
financed our  operations  through  utilization of our existing cash. Our working
capital at March 31, 2007 was $1.0 million compared with working capital of $8.6
million at March 31, 2006.  Cash and cash  equivalents at March 31, 2007 were $2
million, a decrease of $6.9 million from the $8.9 million at March 31, 2006.

      We spent  approximately  $1,548,000  on  improvements  and  machinery  and
equipment during the year ended March 31, 2007.

      On April 24, 2007, we sold in a private  placement  through  Oppenheimer &
Company, Inc., the placement agent (the "PLACEMENT AGENT"), 15,000 shares of our
Series C Preferred Stock, at a price of $1,000 per share, each share convertible
(at $2.32 per share) into 431.0345  shares of Common  Stock,  or an aggregate of
6,465,504  shares of Common  Stock.  The  investors  also  acquired  warrants to
purchase shares of Common Stock,  exercisable on or prior to April 24, 2012. The
warrants  represent  the right to purchase an aggregate  of 1,939,641  shares of
Common Stock at an exercise price of $3.00 per share.  The gross proceeds of the
sale were  $15,000,000  before  payment  of  $1,050,000  in  commissions  to the
Placement  Agent and  selected  dealers.  We also paid  certain  legal  fees and
expenses of counsel to the Placement Agent. We issued to the Placement Agent and
its designees five year warrants to purchase 193,965 shares of Common Stock with
similar terms to the warrants  issued to the Investors with an exercise price of
$3.00 per share. We expect that the approximate $13,900,000 of net proceeds will
contribute  materially  to our efforts to advance our portfolio of pain products
through the clinic as well as accelerate the development of our other controlled
release  products which utilize our proprietary  oral drug delivery  systems and
abuse resistant technology.

      From  time  to  time we will  consider  potential  strategic  transactions
including  acquisitions,  strategic  alliances,  joint  ventures  and  licensing
arrangements  with other  pharmaceutical  companies.  We retained an  investment
banking firm to assist with our efforts. There can be no assurance that any such
transaction will be available or consummated in the future.

      As of March 31, 2007, our principal source of liquidity was  approximately
$2,045,390  of cash and cash  equivalents.  After  the  closing  of the  private
placement in April 2007,  our principal  source of liquidity  was  approximately
$15,750,000 of cash and cash equivalents.  We intend to sell the remaining 5,000
shares of such  Series C Preferred  Stock,  together  with  warrants to purchase
shares of our Common  Stock,  which  should  result in gross  proceeds  of up to
$5,000,000.  Additionally,  we may have access to funds  through the exercise of
outstanding  stock  options  and  warrants  in  addition  to  funds  that may be
generated  from the  potential  sale of New Jersey tax  losses.  There can be no
assurance  that the sale of tax losses or that any proceeds  generated  from any
potential  future  sale of  Series  C  Preferred  Stock  or by the  exercise  of
outstanding warrants or options will be generated or provide sufficient cash.



                                       37
<PAGE>

      The following table depicts our obligations and commitments to make future
payments under existing contracts or contingent commitments.

<TABLE>
<CAPTION>
                                                         Payments Due by Period
                                                         ----------------------

Contractual Obligations       Total       Less than 1 Year     1-3 Years        4-5 Years     After 5 Years
                              -----       ----------------     ---------        ---------     -------------
<S>                         <C>              <C>              <C>              <C>              <C>
NJEDA Bonds payable         $3,980,000       $  185,000       $  635,000       $  505,000       $2,655,000
</TABLE>

OFF-BALANCE SHEET ARRANGEMENTS

      None.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      We do not invest in or own any market risk sensitive  instruments  entered
into for trading purposes or for purposes other than trading purposes. All loans
to us have been made at fixed interest rates and;  accordingly,  the market risk
to us prior to maturity is minimal.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      Attached hereto and filed as a part of this Annual Report on Form 10-K are
our Consolidated Financial Statements, beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

      None.

ITEM 9A. CONTROLS AND PROCEDURES

      Within  the 90  days  prior  to the  date  of  this  report,  based  on an
evaluation  of our  disclosure  controls  and  procedures  (as  defined in Rules
13a-15(e) and 15d-15(e) under the Securities  Exchange Act of 1934, as amended),
our  Chief  Executive  and  Chief  Financial  Officer  have  concluded  that our
disclosure  controls and procedures are effective for ensuring that  information
required  to be  disclosed  by us in  our  Exchange  Act  reports  is  recorded,
processed,  summarized and reported within the applicable time periods specified
by the SEC's rules and forms. We also concluded that information  required to be
disclosed in such reports is accumulated  and  communicated  to our  management,
including  our  principal   executive  and  principal   financial  officer,   as
appropriate to allow timely decisions regarding required  disclosure.  There was
no change in our internal controls over financial reporting that occurred during
the most recent fiscal quarter that materially  affected or is reasonably likely
to  materially  affect our  internal  controls  over  financial  reporting.  Our
management has not yet completed, and is not yet required to have completed, its
assessment of internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION.

      The following disclosure would have otherwise been filed on Form 8-K under
the heading "Item 1.02 - Termination of Material Agreement":

      On  June  28,  2007,   Elite  and  Pliva,   now  a   subsidiary   of  Barr
Pharmaceuticals,  Inc., terminated the Product Development and License Agreement
entered into on June 22, 2005.  The Product  Development  and License  Agreement
provided  for the  development  and  license  of a  controlled  release  generic
product.  According to the termination  agreement between Elite and Pliva, which
is  effective  as of  January  31,  2007,  it was  agreed  that  Elite  owns all
intellectual property rights relating to the controlled released generic product
in


                                       38
<PAGE>

development under the Product Development and License Agreement and Pliva agreed
to pay Elite  $100,000 in discharge of  outstanding  payments  under the Product
Development and License Agreement.

      The following disclosure would have otherwise been filed on Form 8-K under
the heading  "Item 3.01 - Notice of  Delisting or Failure to Satisfy a Continued
Listing Rule or Standard":

      On June 22,  2007,  we received  notice from the American  Stock  Exchange
("AMEX")  stating  that we were not in  compliance  with Section 301 of the Amex
Company  Guide  pertaining  to the  issuance  of  securities  prior to filing an
application  for  the  listing  of  such  additional  securities  and  receiving
notification from AMEX that the securities have been approved for listing.

      Specifically,  on December 6, 2006, we issued 957,396 shares of its common
stock to VGS Pharma,  LLC ("VGS  SHARES") and prior to  submitting an Additional
Listing Application and receiving AMEX approval of such application.

      We submitted  an  Additional  Listing  Application  covering,  among other
things,  the VGS Shares,  as well as the shares underlying the securities issued
in our  April  24,  2007  Series C  financing,  to AMEX on June 6,  2007,  which
application  was  subsequently  amended  and  restated  on June 21,  2007.  Upon
approval of such  application,  we will regain  compliance  with all  applicable
continued listing standards of AMEX.


                                       39
<PAGE>

                                    PART III

ITEM 10. DIRECTORS , EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

DIRECTORS AND EXECUTIVE OFFICERS

      Our current  directors,  executive  officers and key employees,  and their
biographical information are set forth below:

<TABLE>
<CAPTION>
NAME                                      AGE       TITLE
----                                      ---       -----
<S>                                       <C>       <C>
Bernard Berk                              58        Director, Chairman, Chief Executive Officer and President

Barry Dash, Ph. D                         75        Director

Melvin M. Van Woert, M.D.                 76        Director

Veerappan Subramanian, Ph. D.             57        Director, Acting Chief Scientific Officer

Robert J. Levenson                        66        Director*

Edward Neugeboren                                   Former Director**

Mark I. Gittelman                         47        Chief Financial Officer, Secretary and Treasurer

Chris Dick                                52        Executive Vice President of Corporate Development

Charan Behl                               55        Head of Technical Affairs
</TABLE>

      *Robert Levenson became a director on June 26, 2007.
      ** Edward Neugeboren ceased being a director on June 26, 2007.

      The principal  occupations  and  employment of each such person during the
past five years is set forth  below.  In each  instance  in which  dates are not
provided in connection with a nominee's  business  experience,  such nominee has
held the position indicated for at least the past five years.

      MR. BERNARD BERK,  President and Chief Executive  Officer since June 2003,
Chairman  of the  Board  and  Director  since  February  2004 and  Member of the
Nominating  Committee since June 2004.  Prior to joining Elite, Mr. Berk was the
President  and  Chief  Executive  Officer  of  Michael  Andrews  Corporation,  a
pharmaceutical management consultant firm, from 1996 to 2003. Prior to that, Mr.
Berk was from 1994 until 1996,  President  and Chief  Executive  Officer of Nale
Pharmaceutical  Corporation.  From 1989 until 1994, he was Senior Vice President
of Sales,  Marketing and Business Development of Par  Pharmaceuticals,  Inc. Mr.
Berk holds a B.S. from New York University.

      DR. BARRY DASH, Director since April 2005, Member of Audit Committee since
April  2005,  Member of  Nominating  Committee  since  April  2005 and Member of
Compensation  Committee  since June 2007,  has been  since  1995  President  and
Managing Member of Dash  Associates,  L.L.C.,  an independent  consultant to the
pharmaceutical and healthcare  industries.  From 1983 to 1996 he was employed by
American Home Products  Corporation (now known as Wyeth),  its  Whitehall-Robins
Healthcare  Division,  initially as Vice President of Scientific  Affairs,  then
Senior Vice  President of Scientific  Affairs and then Senior Vice  President of
Advanced  Technologies  during which time he personally  supervised six separate
departments:   Medical  and  Clinical  Affairs,  Regulatory  Affairs,  Technical
Affairs, Research and Development, Analytical R&D and Quality Management/Q.C. He
had previously been employed by the Whitehall  Robins  Healthcare  Division from
1960 to 1976, during which


                                       40
<PAGE>

time he served as  Director  of Product  Development  Research,  Assistant  Vice
President of Product Development and Vice President of Scientific  Affairs.  Dr.
Dash had been employed by J.B. Williams Company (Nabisco Brands, Inc.) from 1978
to 1982.  From 1976 to 1978 he was Vice  President,  Director of Laboratories of
the Consumer Products  Division of American Can Company.  He currently serves on
the board of  GeoPharma,  Inc.  (NASDQ:  GORX) Dr.  Dash holds a Ph.D.  from the
University  of Florida and M.S. and B.S.  degrees from  Columbia  University  at
which he was Assistant Professor at the College of Pharmaceutical  Sciences from
1956 to 1960.  He is a member of the American  Pharmaceutical  Association,  The
American  Association for the Advancement of Science and the Society of Cosmetic
Chemist,  American  Association of Pharmaceutical  Scientists,  Drug Information
Association,  American  Foundation for Pharmaceutical  Education,  and Diplomate
American  Board  of  Forensic   Examiners.   He  is  the  author  of  scientific
publications and patents in the pharmaceutical field.

      DR. MELVIN VAN WOERT, Director since April 2005, Member of Audit Committee
since April 2005, Member of Nominating  Committee since April 2005 and Member of
Compensation  Committee  since June 2007,  has been since 1974,  a member of the
staff of  Mount  Sinai  Medical  Center  where  since  1978 he has  also  been a
Professor in the Department of Neurology and  Pharmacology at Mount Sinai School
of Medicine. Dr. Van Woert had been a consultant for  Neuropharmacological  Drug
Products to the United  States Food and Drug  Administration  from 1974 to 1980;
Associate  Editor  for  Journal  of the  Neurological  Sciences;  Member  of the
Editorial Board of Journal of Clinical Neurphamacology;  and Medical Director of
National  Organization  for Rare  Disorders  for which he  received  in 1993 the
Humanitarian  Award.  His other awards  include the U.S.  Public Health  Service
Award  for  Exceptional  Achievement  in  Orphan  Products  Development  and the
National  Myoclonus  Foundation Award. He has authored and co-authored more than
150  articles  appearing  in  pharmacological,  medical  and other  professional
journals or publications.

      DR. VEERAPPAN SUBRAMANIAN,  Acting Chief Scientific Officer since February
2007 and Director  since December  2006.  Since  December 2006, Dr.  Subramanian
serves  as  Chief  Executive   Officer  and  Chairman  of  the  Board  of  Novel
Laboratories,  Inc. Dr.  Subramanian has been a  pharmaceutical  executive since
1981  and  a  pharmaceutical  entrepreneur  since  1997,  when  he  formed  Kali
Laboratories, Inc. ("KALI LABS"). Kali Labs was acquired by Par Pharmaceuticals,
Inc.  in 2004  and Dr.  Subramanian  continued  to  work  as an  executive  vice
president at Par  Pharmaceuticals  after the acquisition.  Dr. Subramanian ended
his relationship with Par  Pharmaceuticals  in January 2006. Prior to organizing
Kali Labs,  Dr.  Subramanian  served for 6 years as vice president of scientific
affairs for Zenith Laboratories, Inc. Prior to working with Zenith Laboratories,
he was (i) the Director of New Product  Development  and Technical  Services for
Kali Pharma,  Inc.,  (ii) a Senior  Scientist,  Commercial  Products  with Vicks
Research  Center,  (iii) a Research  Pharmacist,  Dermatological  with Johnson &
Johnson and (iv) a Research Pharmacist in Product Development with E.R. Squibb &
Sons.  Between  2001 and 2005,  Dr.  Subramanian  served on the board of Generic
Pharmaceutical  Industry  Association.  Dr.  Subramanian has a Ph.D. in Pharmacy
(1981)  from  Rutgers  University,  a M.S.  in  Phamaceutics  (1973)  from Birla
Institute of  Technology & Science,  and a B.S. in Pharmacy  (1971) from Madurai
Medical College.

      ROBERT J.  LEVENSON,  Director  since  June  2007 and  Member of the Audit
Committee and  Compensation  Committee  since June 2007,  is currently  Managing
Member  of the  Lenox  Capital  Group,  L.L.C.  since  2000.  Mr.  Levenson  was
previously an Executive  Vice President of First Data  Corporation  from 1993 to
2000 and a member of its Board of  Directors  from 1992 to 2003.  He was  Senior
Executive Vice President,  Chief Operating Officer,  and Member of the Office of
the President and Director of Medco  Containment  Services,  Inc., a provider of
managed care  prescription  benefits,  from October 1990 to December 1992.  From
1985 until October 1990, he was a Group President and Director of Automatic Data
Processing,  Inc. (ADP-NYSE).  Mr. Levenson has been a director of several other
companies,  public and  private.  Mr.  Levenson is  currently  nominated to be a
director of Ceridian Corporation (NYSE: CEN).


                                       41
<PAGE>

Mr.  Levenson is a trustee of the  Washington  Institute,  the Jewish  Community
Federation, and the Jewish Community Foundation of Metrowest New Jersey.

      MR. EDWARD NEUGEBOREN,  Director from January 2005 to June 2007 and Member
of Audit  Committee from January 2005 to June 2007, has been a Managing  Partner
of Ledgemont  Capital  Group LLC, an  investment  banking firm based in New York
from  January 2005 to May 2007,  Mr.  Neugeboren  was a  consultant  with Indigo
Ventures  LLC, an  investment  banking firm based in New York.  From May 2001 to
January  2004,  Mr.  Neugeboren  was a managing  partner of Third Ridge  Capital
Management,  LLC, a U.S.  equity  hedge fund.  He was from October 2000 to April
2001 the Chief Administrative  Officer of Soceron, a then emerging Silicon Alley
based media  software  company,  and from 1988 to 2000 the Chief  Administrative
Officer and director of Equity Research  Operations at Lehman  Brothers.  He was
from 1996 to 1998 deputy  director of Equity  Research at UBS Warburg,  formerly
Warburg,  Dillon Read, and director of Equity  Research  Operations from 1995 to
1996.  Mr.  Neugeboren  began his career in 1992 as an equity  research  analyst
covering the specialty pharmaceuticals industry,  constituting generic drugs and
drug delivery, at Dillon Read & Co., Kidder, Peabody & Co. and Furman Selz, Inc.
Mr. Neugeboren is a Director of KineMed,  Inc. a platform based drug development
and advanced medical diagnostics company based in San Francisco, California.

      MARK I. GITTELMAN, Chief Financial Officer, Secretary and Treasurer of the
Company,  is the  President  of Gittelman & Co.,  P.C.,  an  accounting  firm in
Clifton,  New Jersey.  Prior to forming Gittelman & Co., P.C. in 1984, he worked
as a certified public accountant with the international  accounting firm of KPMG
Peat  Marwick,  LLP.  Mr.  Gittelman  holds a B.S. in  accounting  from New York
University  and a Masters  of  Science  in  Taxation  from  Fairleigh  Dickinson
University.  He is a Certified Public Accountant  licensed in New Jersey and New
York, and is a member of the American  Institute of Certified Public Accountants
("AICPA"),  and the New Jersey State and New York State Societies of CPAs. Other
than Elite Labs, no company with which Mr.  Gittelman was affiliated in the past
was a parent, subsidiary or other affiliate of the Company.

      CHRIS DICK was appointed Executive Vice President of Corporate Development
in March,  2006. Since November 2002, the Company has engaged Mr. Dick to direct
its licensing and business development  activities.  From 1999 to 2002, Mr. Dick
served  as  Director  of  Business  Development  for Elan  Drug  Delivery,  Inc.
responsible for licensing and business  development of Elan's  portfolio of drug
delivery technologies. From 1997 to 1999, he was Manager of Business Development
and Marketing for EnTec, a drug delivery  business unit within FMC Corporation's
Pharmaceutical  Division.  Prior  thereto he held  various  other  business  and
technical  positions at FMC Corporation,  including Manager of Marketing for its
pharmaceutical  functional  coatings product line. Mr. Dick holds an M.B.A. from
the Stern  School of  Business,  New York  University,  and a B.S.  and M.S.  in
Chemical Engineering from Cornell University.

      DR. CHARAN BEHL was appointed  Head of Technical  Affairs in February 2007
and was previously  Executive Vice President and Chief Scientific Officer of the
Company  from March 2006 to February  2007.  Dr. Behl has  provided  the Company
since June 2003 consulting  technological services as an independent contractor.
He was from January  1995 to July 1998 Vice  President of R&D and from July 1988
to January  2001  Executive  Vice  President  of R&D of  Nastech  Pharmaceutical
Corporation,  Inc.  From April 1981 to November  1994,  Dr. Behl was employed by
Hoffman La Roche, where he held a number of positions, including research leader
of its  Pharmaceutical  R&D Department.  During his tenure at Roche and Nastech,
Dr. Behl created intellectual property in the area of drug delivery.  His patent
portfolio includes over 40 patents issued, pending and in preparation.  Dr. Behl
holds a B.S. in  Pharmaceutical  Sciences from BITS,  Pilani,  India, an M.S. in
Pharmaceutics from Duquesne University,


                                       42
<PAGE>

under the  mentorship of Dr. Alvin M.  Galinsky,  and a Ph.D. in  Pharmaceutical
Sciences from the University of Michigan, under the mentorship of Dr. William I.
Higuchi.  Dr. Behl was an Assistant  Research Scientist from 1978 to 1981 at the
University of Michigan. Dr. Behl is internationally known for his scientific and
professional  activities.  He has coauthored  over 200  publications,  including
research  articles,  book  chapters,  and  abstracts,   and  has  made  numerous
presentations  at national  and  international  conferences  and  workshops.  In
conjunction  with associates from academia and industry and  representatives  of
the FDA, Dr. Behl has co-organized  several  workshops and symposia.  He was the
founding  chair of Nasal  Drug  Delivery  Focus  Group  formed in 1995 under the
auspices of the American Association of Pharmaceutical  Scientists ("AAPS"), and
served as its Chairman from 1995 to 2001. Dr. Behl is a fellow of the AAPS.

      There  is  no  family  relationship  among  our  directors  and  executive
officers.

      Each director holds office  (subject to our By-Laws) until the next annual
meeting of stockholders and until such director's successor has been elected and
qualified. Except for Mr. Berk, Mr. Dick and Dr. Behl, each of which is employed
pursuant to an employment  agreement,  all of our executive officers are serving
until the next annual meeting of directors and until their  successors have been
duly elected and qualified. There are no family relationships between any of our
directors and executive officers.

BOARD MEETINGS

      During the fiscal year ended March 31, 2007, our Board of Directors held 7
meetings.  No  director  who served  during the fiscal year ended March 31, 2007
attended  fewer than 75% of the meetings of the Board of  Directors  during that
year other than Veerappan Subramanian who joined the Board in December 2006.

      We do not have a formal  policy  regarding  attendance  by  members of the
Board of  Directors  at our annual  meeting of  stockholders,  although  it does
encourage attendance by the directors. Historically, more than a majority of the
directors have attended the annual meeting.

COMMITTEES OF THE BOARD

      The Board of Directors has an Audit Committee,  a Nominating Committee and
a Compensation Committee.  For the fiscal year ended March 31, 2007, the members
of the Nominating  Committee were Bernard Berk,  Barry Dash and Melvin Van Woert
and of the Audit  Committee  are  Edward  Neugeboren,  Barry Dash and Melvin Van
Woert.  Robert J. Levenson  replaced Edward  Neugeboren as a member of the audit
committee on June 26, 2007.  On June 26, 2007,  we  constituted  a  Compensation
Committee,  the members of which are Robert J. Levenson,  Barry  Dash and Melvin
Van Woert.

      AUDIT COMMITTEE

      The Audit  Committee  held one meeting  during the fiscal year ended March
31, 2007. A copy of its written charter  (adopted by the Board of Directors) was
included  as an  appendix  to  our  proxy  statement  sent  to  stockholders  in
connection with the annual meeting of stockholders held October 11, 2001.

      We  deem  the  members  of our  Audit  Committee  to be  independent.  Mr.
Neugeboren,  a member of our audit committee  during the fiscal year ended March
31, 2007 qualified as an audit committee  financial  expert.  Mr. Levenson,  who
replaced Mr.  Neugeboren on the audit  committee on June 26, 2007 also qualifies
as an audit committee financial expert.

      The  audit  committee's  primary   responsibilities  are  to  monitor  the
integrity  of our  financial  statements  and  reporting  process and systems of
internal controls regarding finance and accounting and to monitor our compliance
with legal and regulatory  requirements,  including  disclosures and procedures.
The committee also has the responsibility to evaluate our independent  auditor's
qualifications,  independence  and  performance  as  well  as  to  evaluate  the
performance of the internal audit function.

      NOMINATING COMMITTEE

      The  Nominating  Committee  held one meeting  during the fiscal year ended
March 31, 2007. This committee does not have a charter.  This committee  assists
the Board of Directors in identifying and


                                       43
<PAGE>

recommending   qualified  Board  candidates.   The  committee  identifies  Board
candidates through numerous sources,  including  recommendations from Directors,
executive  officers and our stockholders.  The committee seeks to have available
to it  qualified  candidates  from a broad pool of  individuals  with a range of
talents,  experience,  backgrounds  and  perspectives.  The  committee  seeks to
identify  those  individuals  most  qualified  to  serve as  Board  members  and
considers  many  factors  with  regard to each  candidate,  including  judgment,
integrity,  diversity,  prior  experience,  the  interplay  of  the  candidate's
experience  with the experience of other Board members,  the extent to which the
candidate  would be  desirable  as a member  of any  committees  of the Board of
Directors, and the candidate's willingness to devote substantial time and effort
to Board responsibilities. The Nominating Committee makes recommendations to the
Board of Directors with respect to Director nominees.

      COMPENSATION COMMITTEE

      On June 26, 2007, we constituted a Compensation Committee. The role of the
Compensation  Committee  will be to determine  executive  compensation  and make
recommendations   with  respect  to   incentive   compensation   and   executive
compensation.

      Prior to the establishment of the Compensation  Committee,  the full Board
of Directors,  which  includes two  Directors  employed by us,  participated  in
deliberations concerning executive compensation and established the compensation
and  benefit  plans  and  programs  of  Elite.   For  more  information  on  the
compensation  of directors  and officers of the Company,  see the  "Compensation
Discussion and Analysis" and "Compensation" sections below.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      As noted  above,  until June 26,  2007,  the Board of Directors as a whole
performed the functions  normally  associated with the  compensation  committee.
However,  while Bernard Berk,  our  President  and Chief  Executive  Officer and
Veerappan  Subramanian,  our Chief Scientific Officer,  served as members of the
Board of Directors,  at no time did Mr. Berk or Dr.  Subramanian  participate in
deliberations  of  the  Board  of  Directors  concerning  either  of  their  own
compensation.

      The newly  constituted  Compensation  Committee is  currently  composed of
members who are neither  currently  nor ever have been an employee or officer of
the Company and no  executive  officer of the Company  served in the last fiscal
year as a director or member of the compensation committee of another entity one
of whose executive officers served as a member of our Board of Directors.

CODE OF CONDUCT

      At the  first  meeting  of the Board of  Directors  following  the  Annual
Meeting of Stockholders  held on June 22, 2004, the Board of Directors adopted a
Code of Business  Conduct and Ethics for its  officers  and  employees  which it
believes  complies  with the  requirements  for a  company  code of  ethics  for
financial   officers  that  were   promulgated   by  the  SEC  pursuant  to  the
Sarbanes-Oxley Act of 2002 (the "SARBANES-OXLEY ACT") as well as for the members
of our Board of Directors.  The directors  will be surveyed  annually  regarding
their  compliance  with the  policies  as set forth in the Code of  Conduct  for
Directors. A copy of the Code of Business Conduct and Ethics is available on our
website  www.elitepharma.com.  To receive a copy of our Code of Business Conduct
and Ethics,  at no cost,  requests  should be directed to the  Secretary,  Elite
Pharmaceuticals, Inc., 165 Ludlow Avenue, Northvale, New Jersey 07647. We intend
to disclose any amendment to, or waiver of, a provision of the Business


                                       44
<PAGE>

Conduct and Ethics for Directors in a report filed under the Securities Exchange
Act of 1934, as amended, within five business days of the amendment or waiver.

STOCKHOLDER COMMUNICATIONS

      Stockholders  and  other  interested  parties  may  contact  the  Board of
Directors or the  non-management  directors as a group at the following address:
Board of Directors or Outside Directors Elite Pharmaceuticals,  Inc., 165 Ludlow
Avenue,  Northvale,  NJ 07647. All communications  received at the above address
will be  relayed  to the Board of  Directors  or the  non-management  directors,
respectively.  Communications regarding accounting, internal accounting controls
or auditing  matters may also be  reported to the Board of  Directors  using the
above address

      Typically,  we do not  forward to our  directors  communications  from our
stockholders  or other  communications  which  are of a  personal  nature or not
related to the duties and responsibilities of the Board, including:

      o     Junk mail and mass mailings

      o     New product suggestions

      o     Resumes and other forms of job inquiries

      o     Opinion surveys and polls

      o     Business solicitations or advertisements

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

      Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors  and executive  officers and persons who own more than ten percent
of a  registered  class  of  our  equity  securities  (collectively,  "REPORTING
PERSONS")  to file with the SEC  initial  reports of  ownership  and  reports of
changes in ownership of our Common Stock and other equity  securities  of Elite.
Reporting Persons are required by SEC regulation to furnish Elite with copies of
all Section  16(a) forms that they file.  To our  knowledge,  based  solely on a
review of the copies of such  reports  furnished  to us, we believe  that during
fiscal  year  ended  March 31,  2007 all  Reporting  Persons  complied  with all
applicable filing  requirements  other than Dr. Dash and Dr. Subramanian who did
not timely file a Form 4 and Form 3, respectively.


                                       45
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION.

                      COMPENSATION DISCUSSION AND ANALYSIS

SUMMARY

      Our approach to executive compensation, one of the most important and also
most complex  aspects of corporate  governance,  is  influenced by our belief in
rewarding people for consistently  strong execution and performance.  We believe
that the ability to attract and retain  qualified  executive  officers and other
key employees is essential to our long term success.

      Our plan to obtain  and  retain  highly  skilled  employees  is to provide
significant   incentive   compensation   opportunities  and  market  competitive
salaries.  The plan was intended to link  individual  employee  objectives  with
overall company  strategies and results,  and to reward  executive  officers and
significant employees for their individual contributions to those strategies and
results.  We use compensation and performance data from comparable  companies in
the  pharmaceutical  industry to establish market  competitive  compensation and
performance  standards for our  employees.  Furthermore,  we believe that equity
awards  serve  to  align  the  interests  of our  executives  with  those of our
stockholders. As such, equity is a key component of our compensation program.

NAMED EXECUTIVE OFFICERS

      The named  executive  officers  for fiscal  year ended  March 31, 2007 are
Bernard Berk,  President and Chief Executive Officer;  Mark I. Gittelman,  Chief
Financial   Officer;   Chris  Dick,   Executive   Vice  President  of  Corporate
Development;  Charan Behl, Chief Scientific Officer until February 9, 2007, Head
of Technical  Affairs since February 9, 2007; and Veerappan  Subramanian,  Chief
Scientific  Officer since February 9, 2007.  These  individuals  are referred to
collectively  in this  Annual  Report  on  Form  10-K  as the  "NAMED  EXECUTIVE
OFFICERS."

                       OUR EXECUTIVE COMPENSATION PROGRAM

OVERVIEW

      The  primary  elements  of our  executive  compensation  program  are base
salary,  incentive  cash and stock  bonus  opportunities  and equity  incentives
typically in the form of stock option grants. Although we provide other types of
compensation,  these three elements are the principal  means by which we provide
the Named Executive Officers with compensation opportunities.

      The  emphasis  on the annual  bonus  opportunity  and equity  compensation
components of the executive compensation program reflect our belief that a large
portion  of  an  executive's  compensation  should  be  performance-based.  This
compensation is performance-based  because payment is tied to the achievement of
corporate  performance  goals.  To the  extent  that  performance  goals are not
achieved, executives will receive a lesser amount of total compensation. We have
entered into employment  agreements with three of our Named Executive  Officers.
Such  employment  agreements set forth base  salaries,  bonuses and stock option
grants.  Such stock option grants are predicated on our achievement of corporate
performance goals as set forth in such agreements.


                                       46
<PAGE>

                 ELEMENTS OF OUR EXECUTIVE COMPENSATION PROGRAM

BASE SALARY

      We pay a base  salary to  certain  of the  Named  Executive  Officers.  In
general,  base  salaries  for the Named  Executive  Officers are  determined  by
evaluating the  responsibilities  of the executive's  position,  the executive's
experience  and  the  competitive  marketplace.   Base  salary  adjustments  are
considered and take into account  changes in the  executive's  responsibilities,
the  executive's  performance  and changes in the  competitive  marketplace.  We
believe that the base salaries of the Named  Executive  Officers are appropriate
within the context of the compensation  elements  provided to the executives and
because they are at a level which remains competitive in the marketplace.

BONUSES

      The Board of Directors  may  authorize us to give  discretionary  bonuses,
payable in cash or shares of common stock, to the Named  Executive  Officers and
other key employees.  Such bonuses are designed to motivate the Named  Executive
Officers  and other  employees to achieve  specified  corporate,  business  unit
and/or  individual,  strategic,  operational and other  performance  objectives.
During the fiscal year ended March 31,  2007,  the  Company  awarded  bonuses of
$25,000 each to Charan Behl and Chris Dick in accordance with the terms of their
employment agreements.

STOCK OPTIONS

      Stock options constitute performance-based  compensation because they have
value to the recipient  only if the price of our common stock  increases.  Stock
options  for each of the Named  Executive  Officers  generally  vest over  time,
obtainment of a corporate goal or a combination.

      The grant of stock options at Elite is the centerpiece of our compensation
program and is designed to motivate our Named Executive  Officers to achieve our
short term and long term corporate goals.

      As  the  pharmaceutical  industry  is  characterized  by  a  long  product
development cycle, including a lengthy research and product-testing period and a
rigorous  approval phase  involving  human testing and  governmental  regulatory
approval,  many of the  traditional  benchmarking  metrics for vesting,  such as
product  sales,  revenues  and  profits  are  inappropriate  for an  early-stage
pharmaceutical  company  such as Elite.  We consider  when  determining  vesting
benchmarks  the  following  which are aligned  with our short term and long term
corporate goals:

            o     clinical trial progress;

            o     achievement of regulatory milestones; and

            o     establishment of key strategic relationships.

RETIREMENT AND DEFERRED COMPENSATION BENEFITS

      We do not presently  provide the Named  Executive  Officers with a defined
benefit pension plan or any supplemental  executive  retirement plans, nor do we
provide the Named  Executive  Officers  with retiree  health  benefits.  We have
adopted a deferred compensation plan under Code Section 401(k) of the


                                       47
<PAGE>

Internal  Revenue  Service Code. The Stock Option Plan provides for employees to
defer compensation on a pretax basis subject to certain limits,  however,  Elite
does not provide a matching contribution to its participants.

      The retirement and deferred  compensation  benefits  provided to the Named
Executive   Officers  are  not  material  factors  considered  in  making  other
compensation determinations with respect to Named Executive Officers.

PERQUISITES

      As described in more detail below, the perquisites  provided to certain of
the Named  Executive  Officers  consists of car and parking  allowances and life
insurance  premiums.  These perquisites  represent a small fraction of the total
compensation of each such Named Executive Officer.  The value of the perquisites
we provide are taxable to the Named Executive  Officers and the incremental cost
to us of providing  these  perquisites is reflected in the Summary  Compensation
Table.  The  Board of  Directors  believes  that the  perquisites  provided  are
reasonable and appropriate.  For more information on perquisites provided to the
Named Executive  Officers,  please see the All Other Compensation  column of the
Summary Compensation Table and "Agreements with Named Executive Officers" below.

POST-TERMINATION/ CHANGE OF CONTROL COMPENSATION

      In addition to retirement  and deferred  compensation  benefits  described
above, we have  arrangements  with certain of the Named Executive  Officers that
may provide them with compensation  following  termination of employment.  These
arrangements  are  discussed  below  under   "Agreements  with  Named  Executive
Officers".

TAX IMPLICATIONS OF EXECUTIVE COMPENSATION

      Our aggregate deductions for each Named Executive Officer compensation are
potentially limited by Section 162(m) of the Internal Revenue Code to the extent
the aggregate amount paid to an executive officer exceeds $1 million,  unless it
is  paid  under a  predetermined  objective  performance  plan  meeting  certain
requirements,  or satisfies  one of various  other  exceptions  specified in the
Internal Revenue Code. At our 2006 Named Executive Officer  compensation levels,
we did not believe  that Section  162(m) of the  Internal  Revenue Code would be
applicable,  and  accordingly,  we did not  consider  its impact in  determining
compensation levels for our Named Executive Officers in 2006.

AGREEMENTS WITH NAMED EXECUTIVE OFFICERS

MESSRS BERK, DICK AND DR. BEHL

      On November 13, 2006, we entered into (i) the Second  Amended and Restated
Employment  Agreement with Mr. Berk, our President,  Chief Executive Officer and
Chairman of the Board of Directors  (the "BERK  AGREEMENT");  (ii) an employment
agreement with Dr. Behl as Executive Vice President and Chief Scientific Officer
(the "BEHL  AGREEMENT");  and (iii) an  employment  agreement  with Mr.  Dick as
Executive Vice President of Corporate  Development (the "DICK  AGREEMENT").  The
employment  agreement  with Dr. Behl was  subsequently  amended and  restated on
February  9, 2007,  under  which Dr.  Behl's  position  was  changed  from Chief
Scientific Officer to Head of Technical Affairs and he is to report to our Chief
Executive Officer, Chief Scientific Officer and any additional executive officer
designated by the Board of Directors.


                                       48
<PAGE>

      The Berk  Agreement  provides  for a base annual  salary of $330,140  (his
current  salary)  which  may at the  discretion  of the  Board of  Directors  be
increased in light of factors including our existing financial condition and Mr.
Berk's  success in  implementing  our business  plan and achieving our strategic
alternatives. Mr. Berk is to continue to receive an automobile allowance of $800
per month.  The Behl and Dick  Agreements  provide  for an initial  base  annual
salary of $250,000 and  $200,000,  respectively,  a guaranteed  bonus of $25,000
payable on January 1, 2007 and within 30 calendar days of the end of each fiscal
year during the term and a $700 per month automobile allowance.

      Each of the three agreements provides for payment of a discretionary bonus
following  the end of each  fiscal  year  of up to 50% of the  executive's  then
annual base  salary.  The amount,  if any,  of the  discretionary  bonus will be
determined  by the  Compensation  Committee  as to Mr.  Berk and by the Board of
Directors or a  Compensation  Committee as to Dr. Behl and Mr. Dick.  Mr. Berk's
bonus  is  to  be  based  on  any  commercialization  of  products,   merger  or
acquisition,  business  combination  or  collaborations,  growth in revenues and
earnings,  additional  financings or other strategic  business  transaction that
inure to the benefit of our stockholders. The bonus, if any, may be paid in cash
or shares of common  stock,  valued at the closing  price of the common stock on
the immediately preceding trading day. The discretionary bonus which may be paid
to Dr. Behl or Mr.  Dick is to be based on the  achievement  of goals  discussed
with the  executive in good faith and within a  reasonable  time  following  the
commencement of each fiscal year and may be paid in cash or shares of our common
stock  valued at the  average  of the  closing  price per share  during the five
trading days immediately preceding the date of issuance of the shares.

      Each of Dr. Behl's and Mr. Dick's  agreement  provides for the grant under
the Company's  Stock Option Plan to the executive at an exercise  price of $2.25
of options to purchase  250,000 shares.  The Berk, Behl and Dick Agreements each
provide  for the grant to the  executive  of options at the  foregoing  exercise
price to purchase up to 300,000 additional shares (the "OPIOID PRODUCT OPTIONS")
which are to vest in two 150,000 share tranches upon the closing of an exclusive
product license for the United States national market, the entire European Union
Market or the Japan market or a product sale  transaction  of all our  ownership
rights in the  United  States  (only once for each  product)  for our first drug
developed by us for which the FDA approval will be sought under a NDA (including
a 505(b) (2) application) for oxycodone, hydrocone, hydromorphone,  oxymorphone,
or morphine ("NON-GENERIC OPIOID PRODUCT") as to the first tranche and as to our
second Non-Generic Opioid Drug for the second tranche.

      The Berk Agreement provides for the amendment of the vesting of options as
to 400,000  shares which had been granted on September 2, 2005 to Mr. Berk at an
exercise price of $2.69 per share ("BERK'S PREVIOUS MILESTONE  OPTIONS") and the
Behl and Dick Agreements provides for the grant of options at the exercise price
of $2.25 per share for each of Behl and Dick as to 200,000 shares  (collectively
along with Mr. Berk's Previous Milestone Options,  the "MILESTONE OPTIONS") with
the Milestone Options of each of the three executives to vest (A) as to not more
than 125,000 shares and 75,000 shares,  respectively,  upon the  commencement of
the first  Phase III  clinical  trial  relating to the first and then the second
Non-Generic  Opioid Drug  developed by us; (B) 50,000 shares upon the closing of
each product license or product sale  transaction (on a product by product basis
and only once for each product)  other than  Non-Generic  Opioid Drugs for which
options  were  granted  above;  (C) 10,000  shares upon the filing by us (in our
name) with the FDA of either an ANDA or an NDA (including an  application  filed
with the FDA under Section  505(b)(2) of the Federal,  Food,  Drug, and Cosmetic
Act, 21 U.S.C. Section 301 et seq.)  (collectively,  a "NDA"), for a product not
covered by a previous FDA  application;  (D) 40,000  shares upon the approval by
the FDA of any ANDA or NDA  (filed in our name)  for a  product  not  previously
approved by the FDA; (E) 25,000 shares upon the filing of an  application  for a
U.S. patent by us (in our name);  and (F) 25,000 shares upon the granting by the
U.S. Patent and Trademark Office (the "PTO") of a patent to us filed in our name
or an approval of an ANDA or NDA;


                                       49
<PAGE>

provided,   however  the  foregoing   options  terminate  upon  the  executive's
termination  of employment  except that options  under (D) and (F)  nevertheless
vest if the filing was made during the initial term but prior to  termination of
the executive's  employment by us without cause and the approval was made within
540 days of the filing of the ANDA, NDA or patent application.

      We also agreed that in the event that, as to Mr. Berk,  all of the options
to purchase the full 400,000 Mr. Berk's  Previous  Milestone  Options have fully
vested  during the initial term of the  agreement and as to each of Dr. Behl and
Mr. Dick all 200,000 Milestone Options have fully vested during the initial term
of his agreement,  we will grant under the Stock Option Plan to the executive at
the end of the first  current  fiscal year in which the  following  event occurs
fully vested  additional  options to purchase the  following  shares at the fair
market value on the date of grant (the "ADDITIONAL  MILESTONE OPTIONS"):  (a) to
the extent not  previously  vested  with  respect  to his  comparable  Milestone
Options:  (i) up to 125,000 shares upon the  commencement of the first Phase III
clinical trial relating to the first Non-Generic Opioid Drug developed by us and
(ii) up to an additional  125,000 shares as to such trial relating to the second
Non-Generic  Opioid Drug  developed by us, (b) 50,000 shares upon the closing of
each  product  license for the United  States  national  market or product  sale
transaction of all ownership rights (on a product by product basis and only once
for each  product);  (c) 10,000  shares upon the filing by us (in our name) with
the FDA of either an ANDA or NDA for a product  not  covered by a  previous  FDA
application for each drug product of us, other than the Non-Generic Opioid Drugs
for which any Opioid Option was granted under the  Agreement;  (d) 40,000 shares
upon the approval by the FDA of any ANDA, NDA or 505(b)(2)  application filed in
our name for a product not previously  approved by the FDA; (e) 25,000 shares in
the event of the filing of an  application  of an additional  U.S.  patent by us
(filed in our name);  and (f) 25,000  shares in the event of the granting by the
PTO of the foregoing additional patent applications to us (filed in our name).

      The Berk Agreement  acknowledges  that Mr. Berk holds  previously  granted
incentive  stock options to purchase  725,000  shares,  of which 300,000  vested
options  are  exercisable  at  $2.01  per  share,  225,000  vested  options  are
exercisable  at $2.15 per share and 100,000  vested  options are  exercisable at
$2.69 per share, and the remaining  100,000 options,  which vest on September 2,
2007, are exercisable at $2.69 per share.

      Each  employment  agreement  allows us at our  discretion  to grant to the
executive  additional  options  under the Stock  Option Plan and  provides  each
executive the right to register at our expense for reoffering shares issued upon
exercise of the options under the Securities Act of 1933, as amended, in certain
registration  statements  filed by us with respect to offerings of securities by
us.

      Berk's  Agreement  provides that if we terminate his employment due to his
permanent  disability,  without cause or he terminates  his  employment for good
reason,  Mr. Berk shall be entitled to the following  severance:  (i) any earned
but unpaid base salary plus any unpaid reimbursable expenses as of the effective
date of termination of his  employment,  (ii) the  then-current  base salary and
reimbursement of the cost to replace the life and disability insurance coverages
afforded  to Mr.  Berk  under  our  benefit  plans  with  substantially  similar
coverages,  following the effective date of termination of his employment, for a
period equal to the greater of (x) the  remainder of the  then-current  term, or
(y) two years  following the effective date of termination  and (iii) payment by
us of premiums  for health  insurance  for the period  during  which Mr. Berk is
entitled  to   continued   health   insurance   coverage  as  specified  in  the
Comprehensive  Omnibus Budget Reconciliation Act. In the event that we terminate
Mr. Berk's  employment  because of his permanent  disability,  Mr. Berk is to be
entitled to the severance specified above, less any amounts actually received by
him under any disability  insurance coverage provided for and paid by us. In the
event that we terminate Mr. Berk's employment for cause or Mr. Berk terminates


                                       50
<PAGE>

his  employment  with us without good reason,  Mr. Berk shall be entitled to any
earned but unpaid base salary  plus any unpaid  reimbursable  expenses as of the
effective date of termination of his employment.

      Berk's Agreement provides that in the event of a change of control in lieu
of any  severance  that may  otherwise  be payable to him if Mr.  Berk elects to
terminate his employment  for any reason within 90 days thereof,  or we elect to
terminate his employment within 180 days thereof, other than for cause, he is to
be  entitled  to the  following:  (i) any earned but unpaid base salary plus any
unpaid  reimbursable  expenses as of the effective  date of  termination  of his
employment, (ii) $1,000,000,  (iii) the then-current base salary for a period of
12 months following the effective date of termination, (iv) reimbursement of the
cost, for a period of 12 months following the effective date of termination,  of
replacing the life and disability  insurance coverage afforded to Mr. Berk under
our benefit plans with  substantially  similar coverage and (v) payment by us of
premiums for health  insurance  for the period during which Mr. Berk is entitled
to continued health insurance coverage as specified in the Comprehensive Omnibus
Budget Reconciliation Act.

      Each  of  Behl's  and  Dick's  Agreements  provide  that in the  event  we
terminate  his  employment  for  "CAUSE"  as  defined  in the  agreement  or the
executive  terminates  employment  without good reason,  he is to receive salary
through  date of  termination,  reimbursement  for  expenses  incurred  prior to
termination,  all unvested  options will terminate as of the date of termination
and vested  options  will be governed by the terms of the Stock  Option Plan and
the  related  option  agreement.  In the  event of a  termination  due to death,
disability or by us without cause or by Dr. Behl or Mr. Dick for good reason, we
are to pay him or his estate subject to his compliance  with certain  covenants,
including non-competition,  non-solicitation,  confidentiality and assignment of
intellectual  property,  his base  salary for the  longer of the  balance of the
initial term or one year from date of  termination,  continue  health  insurance
coverage  for 12  months  from  termination  and his  vested  options  are to be
exercisable for 90 days from date of termination.  Dr. Behl's amended  agreement
provides  that  the  definition  of  "cause"  has  been  amended  to  include  a
determination  by the  Board  of  Directors,  in its sole  discretion,  that the
employment of Dr. Behl should terminate,  provided that such termination will be
effective  on the  30th  day  after  the  written  notice  to Dr.  Behl  of such
determination.

      In the event the  employment  of Dr. Behl or Mr. Dick is  terminated by us
following a "CHANGE OF  CONTROL" of Elite,  each will be entitled to the amounts
payable as a result of  termination  by us without cause plus a lump sum payment
of $500,000  and all  unvested  options  shall  immediately  vest and along with
unexercised  vested  options  be  exercisable  within  90 days  from the date of
termination.  "Change of control" is defined in each of their  agreements as the
acquisition of Elite pursuant to a merger or consolidation  which results in the
reduction to less than 50% of the shares  outstanding  upon  consummation of the
holders  of  its  outstanding  shares  immediately  prior  thereto  or  sale  of
substantially  all our  assets  or  capital  stock  to  another  person,  or the
acquisition  by a person or a related group in a single  transaction or a series
of related  transaction of more than 50% of the combined voting power of Elite's
outstanding voting securities.

      Berk's Agreement  contains his  non-solicitation  covenant for a period of
one year  from  termination.  Each of Dr.  Behl and Mr.  Dick  has  agreed  to a
one-year following termination non-competition covenant and a two year following
termination non-solicitation covenant.

      The  executives  are to be reimbursed  for expenses  (including  business,
travel  and  entertainment)  reasonably  incurred  in the  performance  of their
duties,  with Dr. Behl's and Mr. Dick's agreements  providing that reimbursement
of  expenses  in excess of $2,000 per month are  subject to the  approval of our
Chief  Executive  Officer.  Each of the executives is entitled to participate in
such employee  benefit and welfare  plans and programs,  which may be offered to
our senior  executives  including life insurance,  health and accident,  medical
plans and programs and profit sharing and retirement plans.


                                       51
<PAGE>

      Each employment agreement is for an initial term ending November 13, 2009,
subject to automatic  one-year renewals unless terminated by the executive or us
upon at least 60 days notice prior to the end of the then  scheduled  expiration
date. We have the right to terminate  Mr. Berk's  employment in the event of his
inability to perform  work due to physical or mental  illness or injury for nine
full calendar months during any eight  consecutive  calendar months. We have the
right to terminate  Dr.  Behl's or Mr.  Dick's  employment  due to disability as
defined in a long-term  disability  insurance policy reasonably  satisfactory to
him or, in the absence of such policy,  due to Dr. Behl's or Mr. Dick's,  as the
case may be,  inability  for 120 days in any 12 month  period  to  substantially
perform his duties as a result of a physical or mental illness.

MR. GITTELMAN

      On February 26, 1998, we entered into an agreement  with  Gittelman & Co.,
P.C.,  whereby fees are paid to Gittelman & Co.,  P.C., a firm  wholly-owned  by
Mark I. Gittelman,  our Chief  Financial  Officer,  Secretary and Treasurer,  in
consideration  for  services  rendered  by the firm as internal  accountant  and
financial and management  consultant.  The firm's services  include the services
rendered by Mr. Gittelman in his capacity as Chief Financial Officer,  Secretary
and  Treasurer.  For the fiscal years ended March 31, 2007,  2006 and 2005,  the
fees paid by us under the agreement were $151,214,  $154,704,  and $111,312. The
services  rendered  by the firm to us  averaged  98, 103 and 84 hours per month,
respectively,  of which an average of 25 hours per month were services  rendered
by him in his capacity as an officer of Elite.

DR. SUBRAMANIAN

      Dr.  Subramanian  entered into an Advisory  Services  Agreement with us on
December  6, 2006,  the terms of which are  summarized  under Item 13. - Certain
Relationships and Related Transactions, and Director Independence."

HEDGING POLICY

      We do not permit the Named  Executive  Officers,  to "hedge"  ownership by
engaging  in short  sales or  trading in any  options  contracts  involving  our
securities.


                                       52
<PAGE>

                       COMPENSATION OF EXECUTIVE OFFICERS

SUMMARY COMPENSATION TABLE

      The table below summarizes the compensation  information in respect of the
Named  Executive  Officers for the fiscal  years ended March 31, 2007,  2006 and
2005.

<TABLE>
<CAPTION>
                                                                                               CHANGE IN
                                                                                             PENSION VALUE
                                                                                                  AND
                                                                                              NONQUALIFIED
                                                                                NON-EQUITY      DEFERRED
       NAME                                              STOCK       OPTION      INCENTIVE    COMPENSATION    ALL OTHER
       AND               YEAR     SALARY       BONUS    AWARDS       AWARDS        PLAN         EARNINGS     COMPENSATION      TOTAL
     PRINCIPAL            (1)                   (2)       (3)          (4)     COMPENSATION
     POSITION                       ($)         ($)       ($)          ($)           ($)           ($)             ($)           ($)
 -----------------     -------    -------     -------   ------       -------   ------------   ------------    ------------     -----
<S>                    <C>        <C>         <C>          <C>    <C>                <C>           <C>         <C>          <C>
Bernard Berk           2006-07    393,203          --       --       574,422         --            --          21,260(7)     988,885
 President and
 Chief Executive       2005-06    344,295     150,000       --       379,439         --            --              --        873,734
 Officer
                       2004-05    200,000      50,000       --       488,782         --            --              --        738,782

Mark. Gittelman        2006-07         --          --       --        83,293         --            --              --         83,293
 Chief
 Financial Officer     2005-06         --          --       --        23,100         --            --              --         23,100

                       2004-05         --          --       --        19,109         --            --              --         19,109

Chris Dick             2006-07    168,750      25,000       --       482,037                       --              --        678,937
 Executive
 Vice President        2005-06    150,000      25,000       --            --         --            --           3,150(8)     175,000
 of Corporate
 Development           2004-05    140,250      25,000       --        76,687         --            --              --        241,937

Charan Behl(5)         2006-07    344,135      25,000       --       482,037                       --              --        851,172
 Head of
 Technical Affairs     2005-06    450,000          --       --            --         --            --              --        450,000

                       2004-05    392,455(6)       --       --            --         --            --              --        392,455

Veerappan              2006-07         --          --       --     1,114,445         --            --              --      1,114,445
 Subramanian
 Chief Scientific      2005-06         --          --       --            --         --            --              --             --
 Officer
                       2004-05         --          --       --            --         --            --              --             --

</TABLE>


                                       53
<PAGE>

----------
1     The information is provided for each fiscal year which begins on April 1
      and ends on March 31.

2     Bonuses paid to Mr. Berk represent discretionary bonuses and bonuses paid
      to Mr. Dick and Dr. Behl represents guaranteed bonuses.

3     No stock awards were granted to the Named Executive Officers in the fiscal
      years ended March 31, 2007, 2006 and 2005.

4     The amounts reflect the compensation expense in accordance with FAS 123(R)
      of these option awards. The assumptions used to determine the fair value
      of the option awards for fiscal years ended March 31, 2007, 2006 and 2005
      are set forth in note 9 of our financial statements for the year ended
      March 31, 2007. Our Named Executive Officers will not realize the value of
      these awards in cash unless and until these awards are exercised and the
      underlying shares subsequently sold.

5     Dr. Behl was Executive Vice President and Chief Scientific Officer from
      March 9, 2006 to February 9, 2007 and has been Head of Technical Affairs
      since February 9, 2007.

6     Includes $229,325 of fees paid by the issuance to Dr. Behl of units, each
      consisting of (i) a share of Series A Preferred Stock convertible into ten
      shares of Common Stock and (ii) ten common stock purchase warrants, at the
      rate of $12.30 per unit.

7     Represents $16,345 for auto and parking allowance and $4,915 for life
      insurance premiums.

8     Represents $3,150 for auto and parking allowance.

                           GRANTS OF PLAN-BASED AWARDS

      The following table sets forth information  regarding grants of plan based
awards to the Named  Executive  Officers  during the fiscal year ended March 31,
2007.

<TABLE>
<CAPTION>
                                                                                            ESTIMATED FUTURE PAYOUTS
                                              ESTIMATED POSSIBLE PAYOUTS                             UNDER
                                              UNDER NON-EQUITY INCENTIVE                     EQUITY INCENTIVE PLAN
                                                      PLAN AWARDS                                    AWARDS
                                         ------------------------------------      -------------------------------------------
                           GRANT         THRESHOLD       TARGET       MAXIMUM      THRESHOLD        TARGET             MAXIMUM
NAME                       DATE             ($)           ($)           ($)           (#)             (#)                7(#)
----                       -----         ---------       ------       -------      ---------        ------             -------
<S>                      <C>                 <C>           <C>           <C>           <C>    <C>                         <C>
Bernard Berk             11.13.06            --            --            --            --       300,000(3)(4)             --
  President and
  Chief Executive
  Officer

Mark. Gittelman           05.3.06            --            --            --            --        70,000(2)                --
  Chief
  Financial
  Officer

Chris Dick               11.13.06            --            --            --            --       750,000(3)(4)(5)(6)       --
  Executive
  Vice
  President of
  Corporate
  Development

Charan Behl              11.13.06            --            --            --            --       750,000(3)(4)(5)(6)       --
  Head of
  Technical Affairs

Veerappan                12.06.06            --            --            --            --     1,750,000(7)                --
Subramanian
  Chief
  Scientific
  Officer

<CAPTION>
                         ALL OTHER    ALL OTHER                       GRANT
                           STOCK        OPTION                      DATE FAIR
                          AWARDS:      AWARDS:      EXERCISE OR      VALUE OF
                         NUMBER OF    NUMBER OF     BASE PRICE      STOCK AND
                         SHARES OF    SECURITIES     OF OPTION        OPTION
                         STOCK OR    UNDERLYING      AWARDS          AWARDS
NAME                     UNITS (#)   OPTIONS (#)      ($/SH)           (1)
----                     ---------   -----------    ----------      ---------
<S>                          <C>           <C>     <C>             <C>
Bernard Berk                 --            --      $   3.00(8)     $  411,000
  President and
  Chief Executive
  Officer

Mark. Gittelman              --            --      $   2.26        $  116,200
  Chief
  Financial
  Officer

Chris Dick                   --            --      $   2.25(9)     $1,027,500
  Executive
  Vice
  President of
  Corporate
  Development

Charan Behl                  --            --      $   2.25(9)     $1,027,500
  Head of
  Technical Affairs

Veerappan                    --            --      $   2.13(10)    $2,380,000
Subramanian
  Chief
  Scientific
  Officer
</TABLE>


                                       54
<PAGE>

1     The amounts reflect the compensation expense in accordance with FAS 123(R)
      of these option awards. The assumptions used to determine the fair value
      of the option awards for fiscal years ended March 31, 2007, 2006 and 2005
      are set forth in note 9 of our financial statements for the year ended
      March 31, 2007. Our Named Executive Officers will not realize the value of
      these awards in cash unless and until these awards are exercised and the
      underlying shares subsequently sold.

2     Represents options that vest in annual increments over a three year period
      on May 3, 2007, May 3, 2008 and May 3, 2009, respectively.

3     The options were granted under our 2004 Stock Option Plan.

4     Represents (i) 150,000 options that vest upon the closing of an exclusive
      product license for the first of the United States national market, the
      entire European Union market or the Japan market or product sale
      transaction of all of our ownership rights in the United States (only once
      for each individual product) for our first Non-Generic Opioid Drug; and
      (ii) 150,000 options that vest upon the closing of an exclusive product
      license for the United States national market, the entire European Union
      market or the Japan market or product sale transaction of all of our
      ownership rights in the United States (only once for each individual
      product) for our second Non-Generic Opioid Drug.

5     Represents 250,000 options that vested on November 13, 2006.

6     Represents 200,000 options that vest as follows: (i) upon the commencement
      of the first Phase III clinical trial relating to the first "Non-Generic
      Opioid Drug" developed by us as to 125,000 options and relating to the
      second "Non-Generic Opioid Drug" developed by the company as to 75,000
      options; (ii) 50,000 shares of Common Stock shall vest and become
      immediately exercisable in full only upon the closing of an exclusive
      product license for the United States national market or product sale
      transaction of all of our ownership rights (on a product by product basis
      and only once for each individual product) for each Company drug product,
      other than the "Non-Generic Opioid Drugs" for which the "Non-Generic
      Opioid Drug" options were granted; (iii) 10,000 options upon the filing by
      us (in our name) with the FDA of either an ANDA or a NDA (including a NDA
      filed with the FDA, for a product not covered by a previous FDA
      application; (iv) 40,000 options upon the approval by the FDA of any ANDA
      or NDA (filed in our name) for a product not previously approved by the
      FDA; (v) 25,000 options upon filing of an application for U.S. patent by
      us (filed in our name); and (vi) 25,000 options upon the granting by U.S.
      Patent and Trademark Office of a patent to us (filed in our name).

7     Represents options that vest as follows: (i) 250,000 on December 6, 2006,
      (ii) 250,000 on May 6, 2007, (iii) 250,000 on December 6, 2007, (iv)
      250,000 on our acceptance of the initial business plan of Novel, (v)
      250,000 on the earliest to occur of the (x) dosing of a human patient in
      the first clinical trial, (y) dosing of a human subject in the first
      bioequivalence study, or (z) in the event that neither a clinical trial
      nor a bioequivalence study is required under applicable law as a condition
      of marketing a Product Candidate (as defined below), the completion of
      stability testing of an exhibit batch of such Product Candidate, in each
      case, with respect to any drug product by us (excluding any drug products
      of Novel), developed under the advisory services to be provided by Dr.
      Subramanian to us under the Strategic Advisory Agreement (the "Advisory
      Services") that occurs on or after the sixtieth (60th) day after December
      6, 2006 (such drug product, a "Product Candidate"), (vi) 250,000 on
      earliest to occur of (x) the completion of the first successful clinical
      trial for such Product Candidate as determined by the clinical research
      organization (the "CRO") performing such trial, (y) the completion of the
      first successful bioequivalence study for such Product Candidate as
      determined by the CRO performing such study that occurs on or after the
      sixtieth (60th) day after the date hereof, or (z) in the event that
      neither a clinical trial nor a bioequivalence study is required under
      applicable law as a condition of marketing such Product Candidate, the
      submission of an ANDA with the FDA, and (vii) 250,000 on earliest to occur
      of the (x) dosing of a human patient in the first clinical trial, (y)
      dosing of a human subject in the first bioequivalence study, (z) in the
      event that neither a clinical trial nor a bioequivalence study is required
      under applicable law as a condition of marketing a Product Candidate, the
      completion of stability testing of an exhibit batch of such Product
      Candidate, in each case, with respect to a second Product Candidate
      developed under the Advisory Services that occurs on or after the sixtieth
      (60th) day after the date hereof.


                                       55
<PAGE>

                  OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END


         The following table sets forth information concerning stock options and
stock awards held by the Named Executive Officers as of March 31, 2007.

<TABLE>
<CAPTION>

                                               OPTION AWARDS                                             STOCK AWARDS
                      ------------------------------------------------------------------    -------------------------------------
                                                                                                                          EQUITY
                                                                                                              EQUITY    INCENTIVE
                                                                                                     MARKET  INCENTIVE     PLAN
                                                                                            NUMBER    VALUE    PLAN       AWARDS:
                                                                                              OF       OF     AWARDS:   MARKET OR
                                                         EQUITY                             SHARES   SHARES   NUMBER      PAYOUT
                                                        INCENTIVE                             OR       OR       OF       VALUE OF
                                                          PLAN                               UNITS    UNITS   UNEARNED   UNEARNED
                                                         AWARDS                               OF       OF     SHARES,    SHARES,
                       NUMBER OF        NUMBER OF       NUMBER OF                            STOCK   STOCK     UNITS      UNITS
                      SECURITIES       SECURITIES      SECURITIES                             HELD    HELD   OR OTHER   OR OTHER
                      UNDERLYING       UNDERLYING      UNDERLYING                             THAT    THAT    RIGHTS     RIGHTS
                      UNEXERCISED      UNEXERCISED     UNEXERCISED    OPTION                  HAVE    HAVE     THAT       THAT
                        OPTIONS          OPTIONS        UNEARNED     EXERCISE   OPTION        NOT     NOT    HAVE NOT   HAVE NOT
                          (#)              (#)           OPTIONS      PRICE   EXPIRATION     VESTED  VESTED   VESTED     VESTED
NAME                  EXERCISABLE     UNEXERCISABLE        (#)          ($)      DATE         (#)      ($)      (#)        ($)
--------------------  -----------     -------------    -----------   -------- ----------    -------  ------  ---------  ---------
<S>                   <C>             <C>               <C>           <C>      <C>          <S>      <C>     <C>        <C>
Bernard Berk            300,000(1)          --              --        $2.01    06/03/13        --      --        --         --
   President and        225,000(2)          --              --        $2.15    07/22/13        --      --        --         --
   Chief Executive       30,000(3)          --              --        $2.34    06/22/14        --      --        --         --
   Officer               10,000(4)          --              --        $2.75    08/30/15        --      --        --         --
                           --            10,000(4)          --        $2.75    08/30/15        --      --        --         --
                           --            10,000(4)          --        $2.75    08/30/15        --      --        --         --
                        100,000(5)          --              --        $2.69    09/02/15        --      --        --         --
                           --           100,000(5)          --        $2.69    09/02/15        --      --        --         --
                           --               --           400,000(6)   $2.69    09/02/15        --      --        --         --
                           --               --           150,000(7)   $3.00    11/13/16        --      --        --         --
                           --               --           150,000(8)   $3.00    11/13/16        --      --        --         --

Mark.
Gittelman
   Chief
   Financial
   Officer               10,000(9)          --              --        $2.34    03/08/14        --      --        --         --
                          6,666(10)         --              --        $2.80    07/14/15        --      --        --         --
                           --             6,667(10)         --        $2.80    07/14/15        --      --        --         --
                           --             6,667(10)         --        $2.80    07/14/15        --      --        --         --
                         23,333(11)         --              --        $2.26    05/03/16        --      --        --         --
                           --            23,333(11)         --        $2.26    05/03/16        --      --        --         --
                           --            23,334(11)         --        $2.26    05/03/16        --      --        --         --

Christopher Dick
   Executive
   Vice
   President of
   Corporate
   Development           10,000(12)         --              --        $2.34    10/31/12        --      --        --         --
                         10,000(12)         --              --        $2.34    10/31/12        --      --        --         --
                         10,000(12)         --              --        $2.34    10/31/12        --      --        --         --
                         10,000(13)         --              --        $2.21    06/13/13        --      --        --         --
                         10,000(13)         --              --        $2.21    06/13/13        --      --        --         --
                         10,000(13)         --              --        $2.21    06/13/13        --      --        --         --
                         40,000(14)         --              --        $2.80    07/14/15        --      --        --         --
                        250,000(15)         --              --        $2.25    11/13/16        --      --        --         --
                           --               --           150,000(7)   $2.25    11/13/16        --      --        --         --
                           --               --           150,000(8)   $2.25    11/13/16        --      --        --         --
                           --               --           200,000(6)   $2.25    11/13/16        --      --        --         --

 Charan Behl
   Head of
   Technical Affairs    250,000(15)         --                 --     $2.25    11/13/16        --      --        --         --
                           --               --           150,000(7)   $2.25    11/13/16        --      --        --         --
                           --               --           150,000(8)   $2.25    11/13/16        --      --        --         --
                           --               --           200,000(6)   $2.25    11/13/16        --      --        --         --

Veerappan
Subramanian
   Chief
   Scientific
   Officer              250,000(16)         --                 --     $2.13    12/16/16        --      --        --         --
                        250,000(16)         --                 --     $2.13    12/16/16        --      --        --         --
                        250,000(16)         --                 --     $2.13    12/16/16        --      --        --         --
                           --               --            250,000(16) $2.13    12/16/16        --      --        --         --
                           --               --            250,000(16) $2.13    12/16/16        --      --        --         --
                           --               --            250,000(16) $2.13    12/16/16        --      --        --         --
                           --               --            250,000(16) $2.13    12/16/16        --      --        --         --
</TABLE>

-----------

1     These options vested as of June 3, 2003.

2     These options vested as of September 2, 2005

3     These options vested on June 22, 2004.

4     These options vest in annual increments over a three year period on August
      30, 2006, August 30, 2007 and August 30, 2008, respectively.

5     These options vest in annual increments over a two year period on
      September 2, 2006 and September 2, 2007, respectively.

6     These options vest as follows: (i) upon the commencement of the first
      Phase III clinical trial relating to the first "Non-Generic Opioid Drug"
      developed by us as to 125,000 options and relating to the second
      "Non-Generic Opioid Drug" developed by the company as to 75,000 options;
      (ii) 50,000 shares of Common Stock shall vest and become immediately
      exercisable in full only upon the closing of an exclusive product license
      for the United States national market or product sale transaction of all
      of our ownership rights (on a product by product basis and only once for
      each individual product) for each Company drug product, other than the
      "Non-Generic Opioid Drugs" for which the "Non-Generic Opioid Drug" options
      were granted; (iii) 10,000 options upon the filing by us (in our name)
      with the FDA of either an ANDA or a NDA (including a NDA filed with the
      FDA, for a product not covered by a previous FDA application; (iv) 40,000
      options upon the approval by the FDA of any ANDA or NDA (filed in our
      name) for a product not previously approved by the FDA; (v) 25,000 options
      upon filing of an application for U.S. patent by us (filed in our name);
      and (vi) 25,000 options upon the granting by U.S. Patent and Trademark
      Office of a patent to us (filed in our name).

7     These options vest upon the closing of an exclusive product license for
      the first of the United States national market, the entire European Union
      market or the Japan market or product sale transaction of all of our
      ownership rights in the United States (only once for each individual
      product) for our first Non-Generic Opioid Drug.

8     These options vest upon the closing of an exclusive product license for
      the United States national market, the entire European Union market or the
      Japan market or product sale transaction of all of our ownership rights in
      the United States (only once for each individual product) for our second
      Non-Generic Opioid Drug.

9     These options vested on June 22, 2004.

10    These options vest in annual increments over a three year period on July
      14, 2006, July 14, 2007 and July 14, 2008, respectively.

11    These options vest in annual increments over a three year period on May 3,
      2007, May 3, 2008 and May 3, 2009, repsectively.

12    These options vested on November 1, 2003, 2004 and 2005, respectively.

13    These options vested on June 13, 2004, 2005 and 2006, respectively.

14    These options vested on July 14, 2005.

15    These options vested on November 13, 2006.

16    These options vest as follows: (i) 250,000 on December 6, 2006, (ii)
      250,000 on May 6, 2007, (iii) 250,000 on December 6, 2007, (iv) 250,000 on
      our acceptance of the initial business plan of Novel Laboratories, Inc.
      ("Novel"), (v) 250,000 on the earliest to occur of the (x) dosing of a
      human patient in the first clinical trial, (y) dosing of a human subject
      in the first bioequivalence study, or (z) in the event that neither a
      clinical trial nor a bioequivalence study is required under applicable law
      as a condition of marketing a Product Candidate (as defined below), the
      completion of stability testing of an exhibit batch of such Product
      Candidate, in each case, with respect to any drug product by us (excluding
      any drug products of Novel), developed under the advisory services to be
      provided by Dr. Subramanian to us under the Strategic Advisory Agreement
      (the "Advisory Services") that occurs on or after the sixtieth (60th) day
      after December 6, 2006 (such drug product, a "Product Candidate"), (vi)
      250,000 on earliest to occur of (x) the completion of the first successful
      clinical trial for such Product Candidate as determined by the clinical
      research organization (the "CRO") performing such trial, (y) the
      completion of the first successful bioequivalence study for such Product
      Candidate as determined by the CRO performing such study that occurs on or
      after the sixtieth (60th) day after the date hereof, or (z) in the event
      that neither a clinical trial nor a bioequivalence study is required under
      applicable law as a condition of marketing such Product Candidate, the
      submission of an ANDA with the FDA, and (vii) 250,000 on earliest to occur
      of the (x) dosing of a human patient in the first clinical trial, (y)
      dosing of a human subject in the first bioequivalence study, (z) in the
      event


                                       56
<PAGE>

      that neither a clinical trial nor a bioequivalence study is required under
      applicable law as a condition of marketing a Product Candidate, the
      completion of stability testing of an exhibit batch of such Product
      Candidate, in each case, with respect to a second Product Candidate
      developed under the Advisory Services that occurs on or after the sixtieth
      (60th) day after the date hereof.

                        OPTION EXERCISES AND STOCK VESTED

      No options have been  exercised  by our Named  Executive  Officers  during
fiscal year ended March 31, 2007.

                                PENSION BENEFITS

      We do not provide pension benefits to the Named Executive Officers.

                       NONQUALIFIED DEFERRED COMPENSATION

      We do not have any defined  contribution  or other plan that  provides for
the deferral of compensation on a basis that is not tax-qualified.

            POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL

      Please see the discussion  under  "Compensation  Discussion and Analysis -
Agreements with Named Executive Officers."

                              DIRECTOR COMPENSATION

      The following  table sets forth director  compensation  for the year ended
March 31, 2007:


<TABLE>
<CAPTION>
                                                                           CHANGE IN
                                                                            PENSION
                                                                            VALUE AND
                         FEES EARNED                                      NON QUALIFIED
                          OR PAID     STOCK    OPTION     NON EQUITY        DEFERRED
                          IN CASH     AWARDS   AWARDS   INCENTIVE PLAN    COMPENSATION       ALL OTHER     TOTAL
NAME                       ($)(1)      ($)       ($)     COMPENSATION       EARNINGS       COMPENSATION     ($)
----                     -----------  ------   ------   --------------    --------------   ------------   -------
<S>                        <C>        <C>      <C>      <C>               <C>              <C>            <C>
Bernard Berk               $6,000      ---       ---          ---              ---              ---       $6,000
Edward Neugeboren          $6,000      ---       ---          ---              ---              ---       $6,000
Barry Dash                 $4,000      ---       ---          ---              ---              ---       $4,000
Melvin Van Woert           $4,000      ---       ---          ---              ---              ---       $4,000
Veerappan Subramanian         ---      ---       ---          ---              ---              ---         ---
</TABLE>

-----------

(1) Consists of a fee of $2000 for each meeting attended by a Director.



EQUITY COMPENSATION

      Members of the Board of  Directors  during the fiscal year ended March 31,
2006 received  30,000 options each in August 2005 and no members of the Board of
Directors  received any options or other equity  compensation  during the fiscal
year ended March 31, 2007 for serving as a director.

OTHER COMPENSATION

      We do not pay or  reimburse  non-employee  Directors  for travel  expenses
incurred in connection with attending Board, committee and shareholder meetings.
Each Director receives $2,000 per each meeting such Director attends.  Except as
described in this section,  non-employee Directors do not receive any additional
compensation for their services on the Board of Directors.


                                       57
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

         The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of May 15, 2007 by (i) by each person who is
known by us to own beneficially more than 5% of the Common Stock, (ii) by each
of our directors and nominees for director, (iii) by each of the Named Executive
Officers (as defined below) and (iv) by all our directors and executive officers
as a group. On such date, we had 20,820,048 shares of Common Stock outstanding
(exclusive of 100,000 treasury shares). (The 9,550 shares of Series B Preferred
Stock outstanding and 15,000 shares of Series C Preferred Stock are nonvoting
and none of the individuals listed below beneficially owns any shares of Series
B Preferred Stock or Series C Preferred Stock other than Barry Dash who owns 20
shares of Series C Preferred Stock. There are currently no shares of Series A
Preferred Stock outstanding).

         As used in the table below and elsewhere in this proxy statement, the
term beneficial ownership with respect to a security consists of sole or shared
voting power, including the power to vote or direct the vote, and/or sole or
shared investment power, including the power to dispose or direct the
disposition, with respect to the security through any contract, arrangement,
understanding, relationship, or otherwise, including a right to acquire such
power(s) during the 60 days immediately following the Record Date. Except as
otherwise indicated, the stockholders listed in the table have sole voting and
investment powers with respect to the shares indicated.

<TABLE>
<CAPTION>
NAME AND ADDRESS                                                                  COMMON STOCK
----------------                                                                  ------------
                                                                           AMOUNT              %
                                                                           ------             ---
<S>                                                                     <C>                   <C>
Bernard Berk, Director, President and Chief Executive Officer*          1,532,300(1)           6.9

Edward Neugeboren, Director*                                              201,063(2)           **

Barry Dash, Director*                                                      28,207(3)           **

Melvin Van Woert, Director*                                                10,000(4)           **

Veerappan Subramanian, Director and Chief Scientific Officer*           2,962,894(5)            13

Dr. Charan Behl(6)*                                                     1,296,000(7)             6

Chris Dick, Executive Vice President of Corporate Development*            885,287(8)           4.1

Mark I. Gittelman, Chief Financial Officer*                                39,999(9)           **

Trellus Management Company
Adam Usdan                                                              3,450,795(10)         14.8
350 Madison Avenue, 9th Floor
New York, New York  10017

Mark Fain                                                               1,204,570(11)          5.8
237 Park Avenue, Suite 900
New York, NY 10017

Chad Comiteau                                                           1,152,712(12)          5.5
237 Park Avenue, Suite 900
New York, NY 10017

Davidson Kempner Healthcare International Ltd.                          3,735,816(13)         15.2
65 East 55th Street, 19th Floor
New York, NY 10022

All Directors and Officers as a group                                   6,955,750(14)         26.6

</TABLE>

------------------------
*   The address is c/o Elite Pharmaceuticals Inc., 165 Ludlow Avenue, Northvale,
NJ 07647.

**  Less than 1%

(1) Includes options to purchase 1,365,000 shares of Common Stock. See "Named
Executive Officers."

(2) Includes options and warrants to purchase an aggregate of 170,571 shares of
Common Stock.

(3) Represents options to purchase 10,000 shares of Common Stock, 20 shares of
Series C Preferred Stock convertible into 8,621 shares of Common Stock and
warrants to purchase 2,586 shares of Common Stock.

                                       58
<PAGE>

(4)  Represents options to purchase shares of Common Stock.

(5) Includes options to purchase 1,500,000 shares of Common Stock which are
owned by Dr. Subramanian and 957,396 shares of Common Stock and warrants to
purchase 478,698 shares of Common Stock which are owned by VGS Pharma, LLC
("VGS"), a wholly-owned subsidiary of Kali Capital, L.P., which is controlled by
Kali Management, LLC ("KALI"), its general partner, and Kali is controlled by
the daughter of Dr. Subramanian, its managing member. Dr. Subramanian disclaims
beneficial ownership of these shares of Common Stock, except to the extent of
his pecuniary interest therein, if any.

(6) Dr. Behl was Executive Vice President and Chief Scientific Officer from
March 9, 2006 to February 9, 2007 and has been Head of Technical Affairs since
February 9, 2007. See "Named Executive Officers."

(7) Includes warrants to purchase 130,000 shares of Common Stock and options to
purchase 750,000 shares of Common Stock. See "Named Executive Officers."

(8) Includes options to purchase 850,000 shares of Common Stock and warrants
held by Mr. Dick and Hedy Rogers as joint tenants to purchase 10,479 shares of
Common Stock.

(9) Represents options to purchase shares of Common Stock.

(10) Based on information provided by Trellus Management Company, LLC ("TMC")
and Adam Usdan in the Schedule 13G filed February 13, 2007 and also based on
information set forth in Form S-3 filed on May 24, 2007. Includes 862,068 shares
of Common Stock issuable upon conversion of Series C Preferred Stock held in the
aggregate by Trellus Partners L.P ("TP"), Trellus Partners II L.P. ("TPI") and
Trellus Offshore Fund Limited ("TPOF"), 888,889 shares of Common Stock issuable
upon conversion of shares of Series B Preferred Stock held by TP and 703,063
shares of Common Stock issuable upon exercise of warrants held in the aggregate
by TP, TPI and TPOF. Adam Usdan is President of TMC. Adam Usdan and TMC share
voting power and dispositive power over the shares. Notwithstanding the
inclusion of the aforementioned beneficial ownership calculation, pursuant to
our Certificate of Designation of Preferences, Rights and Limitations of Series
C 8% Preferred Stock, the Amended Certificate of Designations of the Series B 8%
Convertible Preferred Stock and the Common Stock Purchase Warrant for the
aforementioned warrants, the number of shares of Common Stock into which the
Series C 8% Preferred Stock and Series B 8% Preferred Stock are convertible and
the warrants are exercisable is limited to that number of shares of Common Stock
which would result in the Adam Usdan and TMC affiliated entities having
aggregate beneficial ownership of not more than 9.99% of the total issued and
outstanding shares of Common Stock.

(11) Based on information provided by Mark Fain and Chad Comiteau in their
Schedule 13G/A filed February 6, 2007. Mark Fain beneficially owned 1,204,570
shares of Common Stock, which amount includes (i) 179,967 shares beneficially
owned by Mr. Fain over which he has sole voting power and sole dispositive
power; (ii) 33,333 convertible shares beneficially owned by Mr. Fain over which
he has sole voting power and sole dispositive power; (iii) 33,000 shares
beneficially owned by Stratford Management Money Purchase Pension Plan over
which Mr. Fain has shared voting power and shared dispositive power; (iv)
808,270 shares beneficially owed by Stratford Partners, L.P. of which Mr. Fain
is a Managing Member, and over which Mr. Fain has shared voting power and shared
dispositive power; and (v) 150,000 convertible shares beneficially owed by
Stratford Partners, L.P. over which Mr. Fain has shared voting power and shared
dispositive power.

(12) Based on information provided by Mark Fain and Chad Comiteau in their
Schedule 13G/A filed February 6, 2007. Chad Comiteau beneficially owned
1,152,712 shares of Common Stock which amount includes (i) 187,047 shares
beneficially owned by Mr. Comiteau over which he has sole voting power and sole
dispositive power; (ii) 32,665 convertible shares beneficially owned by Mr.
Comiteau over which he has sole voting power and sole dispositive power; (iii)
33,000 shares beneficially owned by Stratford Management Money Purchase Pension
Plan over which he has shared voting power and shared dispositive power; (iv)
808,270 shares beneficially owed by Stratford Partners, L.P. of which Mr.
Comiteau is a Managing Member,

                                       59
<PAGE>

and over which Mr. Comiteau has shared voting power and shared dispositive
power; and (v) 150,000 convertible shares beneficially owed by Stratford
Partners, L.P. over which Mr. Comiteau has shared voting power and shared
dispositive power.

(13) Davidson Kempner Healthcare International Ltd. ("DKHI") and its affiliates,
Davidson Kempner Partners ("DKP"), Davidson Kempner Institutional Partners, L.P.
("DKIP"), M.H. Davidson & Co. ("CO"), Davidson Kempner International, Ltd.
(DKIL"), Serena Limited ("Serena"), Davidson Kempner Healthcare Fund LP
("DKHF"), MHD Management Co., Davidson Kempner Advisors Inc., Davidson Kempner
International Advisors, L.L.C., DK Group LLC, DK Management Partners LP, DK
Stillwater GP LLC, Thomas L. Kempner, Jr., Marvin H. Davidson, Stephen M.
Dowicz, Scott E. Davidson, Michael J. Leffell, Timothy I. Levart, Robert J.
Brivio, Jr., Anthony A. Yoseloff, Eric P. Epstein and Avram Z. Friedman jointly
filed a Schedule 13G, dated May 11, 2007, reflecting the beneficial ownership,
subject to an ownership limitation, of an aggregate of 6,667 Series C 8%
Preferred Stock convertible into 2,873,707 shares of common stock and 862,109
warrants exercisable into 862,109 shares of Common Stock as a result of their
voting and dispositive power over 6,667 Series C 8% Preferred Stock convertible
into 2,873,707 shares of Common Stock and 862,109 warrants exercisable into
862,109 beneficially owned by DKP, DKIP, DKIL, Serena, CO, DKHF and DKHI.
Notwithstanding, the inclusion of the aforementioned beneficial ownership
calculation, pursuant to our Certificate of Designation of Preferences, Rights
and Limitations of Series C 8% Preferred Stock and the Common Stock Purchase
Warrant for the aforementioned warrants, the number of shares of Common Stock
into which the Series C 8% Preferred Stock are convertible and the warrants are
exercisable is limited to that number of shares of Common Stock which would
result in the Davidson Kempner affiliated entities having aggregate beneficial
ownership of not more than 9.99% of the total issued and outstanding shares of
Common Stock. The above information was obtained from such Schedule 13G.

(14) Includes options and warrants to purchase an aggregate of 5,325,954 shares
of Common Stock.

                                       60
<PAGE>



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
         INDEPENDENCE.

      All related person  transactions are reviewed and, as appropriate,  may be
approved or ratified by the Board of Directors. If a director is involved in the
transaction,  he  or  she  may  not  participate  in  any  review,  approval  or
ratification of such  transaction.  Related person  transactions are approved by
the Board of  Directors  only if,  based on all of the facts and  circumstances,
they are in, or not inconsistent  with, our best interests and our stockholders,
as the Board of Directors determines in good faith. The Board of Directors takes
into account, among other factors it deems appropriate,  whether the transaction
is on terms generally available to an unaffiliated third-party under the same or
similar  circumstances  and the extent of the related  person's  interest in the
transaction.  The Board of Directors may also impose such conditions as it deems
necessary and  appropriate  on us or the related  person in connection  with the
transaction.

      In the case of a  transaction  presented  to the  Board of  Directors  for
ratification,  the Board of Directors  may ratify the  transaction  or determine
whether rescission of the transaction is appropriate.

                       CERTAIN RELATED PERSON TRANSACTIONS

TRANSACTIONS WITH DR. SUBRAMANIAN AND VGS PHARMA LLC

      On December 6, 2006, we entered into a Strategic  Alliance  Agreement with
Dr.  Subramanian  and VGS  Pharma,  LLC, a Delaware  limited  liability  company
("VGS"),  under  which  (i)  Dr.  Subramanian  was  appointed  to our  Board  of
Directors,  (ii) VGS made a  $2,000,000  equity  investment  in Elite,  (iii) we
engaged  Dr.  Subramanian  to serve as our  strategic  advisor on the  research,
development and commercialization of our existing pipeline and (iv) we, together
with VGS formed Novel Laboratories Inc., a Delaware corporation ("NOVEL"),  as a
separate  specialty  pharmaceutical  company  for  the  research,   development,
manufacturing,   licensing,  acquisition  and  marketing  of  specialty  generic
pharmaceuticals.  VGS is wholly-owned subsidiary of Kali Capital, L.P., which is
controlled by Kali Management,  LLC ("KALI"),  its general partner,  and Kali is
controlled  by  Anu  Subramanian,  its  managing  member  and  daughter  of  Dr.
Subramanian.

      The specialty  pharmaceutical product initiative of the strategic alliance
between  Elite and Dr.  Subramanian  is to be  conducted  by Novel,  of which we
acquired 49% and VGS acquired 51% of its Class A Voting  Common Stock for $9,800
and $10,200 respectively.  Pursuant to the Alliance Agreement,  VGS acquired for
$2,000,000:  (i)  957,396  shares of our  Common  Stock (the  "ACQUIRED  COMPANY
SHARES")  at  approximately  $2.089  per share and (ii) a five year  Warrant  to
purchase 478,698 shares of our Common Stock (the "WARRANT SHARES"), for cash, at
an exercise price of $3.00 per share,  subject to adjustment upon the occurrence
of certain events.

      We  initially   contributed   $2,000,000  to  Novel  and  made  additional
contributions of $5,000,000  through June 15, 2007. The remaining  contributions
to be made by Elite shall be funded in the amounts  and upon the  occurrence  of
the following  milestones:  (i)  $10,000,000  upon the  submission to the FDA of
three ANDAs related to three different  prospective  products developed by Novel
and (ii) $10,000,000 upon the submission to the FDA of three ANDAs related to at
least  three  additional  different  prospective  products  developed  by Novel;
provided that the aggregate contributions to be made by Elite shall not


                                       61
<PAGE>

exceed (i) $15,000,000  prior to November 1, 2007 or (ii)  $25,000,000  prior to
May 1, 2008. The remaining  contributions of Elite are not monetary  obligations
but  rather  conditions  that  must be met in order for  Elite to  maintain  its
current equity interest in Novel.

      In the  event  that (i) we defer for more  than 90 days the  payment  of a
contribution  installment  due to  Novel's  failure  to  achieve  a  Performance
Milestone,  (ii)  we fail to make a  requisite  contribution  following  Novel's
achieving a Performance  Milestone or (iii) Novel requires additional  financing
beyond  amounts  provided in the  Business  Plan or our agreed  upon  additional
contributions,  Novel may seek such financing through a subscription offering to
its Class A  Stockholders  and, to the extent not fully  subscribed,  from third
parties.

      We agreed to use our best efforts to elect Dr. Subramanian a member of our
Board of Directors as long as we and our  "permitted  transferees"  own at least
40% of Novel's  outstanding capital stock and Dr. Subramanian is Chairman of the
Board and Chief Executive Officer of Novel.

      Pursuant to an advisory  agreement,  Dr. Subramanian has agreed to provide
advisory  services  to us,  including  but  not  limited  to,  assisting  in the
implementation of current and new drug product development projects of Elite and
assisting  in the  our  recruitment  of  additional  R&D  staff  members.  As an
inducement  to  enter  into  the  agreement,   we  granted  Dr.   Subramanian  a
non-qualified  stock option to purchase up to  1,750,000  shares of Common Stock
(the  "OPTION  SHARES")  at a price of $2.13 per share.  The option  vests as to
250,000 shares  immediately and in subsequent 250,000 share  installments,  with
one  vesting  on May 6,  2007,  another on  December  6, 2007,  a third upon our
acceptance  of the Initial  Business Plan of Novel,  and the other  installments
vesting on the accomplishment of certain milestones with respect to the first or
second drug product  developed by us  (excluding  drug  products of Novel) on or
after the 60th day after December 6, 2006, under the advisory  services provided
to us.  The option  terminates  on  December  6, 2016,  or 90 days  following  a
termination of his advisory services to us or his employment by Novel other than
a termination  without Cause or by Dr.  Subramanian for Good Reason or 48 months
after the termination of his advisory  services under the advisory  agreement or
his employment under the employment  agreement as a result of: (i) a termination
by us of the advisory agreement or by Novel of the employment  agreement without
Cause or by Dr.  Subramanian  without Good Reason or (ii) post-December 6, 2007,
termination  of the term of the advisory  agreement  or of the Novel  employment
agreement.  All unvested options  terminate upon the termination of the advisory
agreement  (other  than a  termination  by the Company  without  cause or by Dr.
Subramanian for Good Reason) or at such time as we and our permitted transferees
own in the aggregate  less than 20% of the  outstanding  capital stock of Novel,
except  to the  extent  we in our  sole  discretion  have  determined  that  Dr.
Subramanian has provided substantial contribution to the development of any drug
product which would otherwise trigger the vesting of options notwithstanding the
failure to satisfy the foregoing 20% threshold.

      The parties also entered into a stockholders agreement which provides that
as long as each of  Company  and VGS owns at least 10% of the  shares of Class A
Voting Common Stock of Novel,  each shall  designate one of the two Directors to
constitute  the  Novel  Board  of  Directors,  with the VGS  designee  to be Dr.
Subramanian,  unless otherwise  approved by Company.  It prohibits the taking of
certain  actions  without  approval  of the two  designees,  including,  but not
limited to,  amendments  of charter,  by-laws and other  governance  agreements,
spin-offs  or  public   offerings  of  equity   securities,   a  liquidation  or
dissolution,  dividends,  authorization or issuance of additional  securities or
options,  bankruptcy,  a material  change of the  business  or a Business  Plan,
approval  of a Business  Plan and the yearly  operating  budget,  creation  of a
security interest, capital expenditures in excess of 110% of the amount provided
in the  Business  Plan,  investments  in excess of the  amounts  approved in the
Business Plan, an increase or decrease of the Board;  and any investments by Dr.
Subramanian  in any  "Competitive  Company" or its affiliate.  The  stockholders
agreement further provides that determination of "Cause" or


                                       62
<PAGE>

the "Disability" of Dr. Subramanian under his employment agreement shall be made
solely in the reasonable discretion of the Company designee.  Except for certain
enumerated  permitted  transfers,  the Stockholders  Agreement  provides that no
transfer  of  Novel  stock  may  be  made  without  the  consent  of  the  other
stockholders.   In  the  event  Company   fails  to  make  required   additional
contributions, VGS has the right to purchase at the original purchase price from
Company that  proportion  of its  original  shares of Novel Class A Common Stock
equal to the  proportion of the required  additional  contributions  not made by
Company.

      In the event of Dr.  Subramanian's  resignation  from Novel for other than
Good Reason or his  termination by Novel for Cause or his death or disability as
defined in the  Employment  Agreement,  Company has the  corresponding  right to
acquire up to 75% of VGS's  original  shares of Class A Common Stock of Novel at
the original purchase price; such percentage to be reduced to 50% and 25% and 0%
upon the first,  second and third  anniversary of the  Stockholders'  Agreement,
with a pro rata  portion  of such  reduction  to be  effected  upon the death or
disability of Dr. Subramanian during the applicable period.  Each of Company and
VGS has a right to acquire at the then fair value,  Company's or VGS's shares of
Novel upon the bankruptcy,  dissolution or  liquidation,  a change of control of
the other or, if as a result of the  purchases at the original  purchase  price,
the percentage of Novel owned by such party is less than 10% of Novel.

      Novel agreed to employ Dr. Subramanian as its Chief Executive Officer at a
salary of $220,000  per annum,  with  bonuses  and  options to purchase  Novel's
Common Stock to be granted at the discretion of Novel's Board of Directors.  Dr.
Subramanian  is to perform  his  duties  three full  business  days a week.  Dr.
Subramanian's  employment may be terminated for "Cause" as defined therein or by
Dr.  Subramanian  for "Good  Reason" as defined.  Either party may terminate the
employment upon 30-business days prior written notice to the other.

      Dr.  Subramanian has agreed to a confidentiality  covenant and also agreed
to a  non-solicitation  covenant  and not to  directly  or  indirectly,  manage,
control,  consult with, or engage (as either an employee or  consultant)  in any
business or  activity  anywhere in the world  involving a drug  product  that is
competitive  as defined with any drug  products  being  developed or marketed by
Novel, or proposed in a Business plan to be developed by Novel or its affiliate,
or any related inventions or other intellectual  property of Novel or any of its
respective subsidiaries or affiliates (collectively,  a "COMPETITIVE ACTIVITY");
and  without  the  prior  unanimous  approval  of the  Novel  Board  to make any
investment  (whether  equity or debt) not  exceeding  an  aggregate of 5% of the
equity,  in any person  engaging,  or  providing  services or  financing  for, a
Competitive  Activity  (a  "COMPETITIVE   COMPANY"),   including  any  follow-on
investments  in  any  entity  that,  subsequent  to  the  time  of  the  initial
investment,  has become a Competitive Company,  except a financing provided to a
subsidiary or affiliate of a Competitive  Company which is not itself engaged in
a Competitive  Activity during his employment and, unless his termination was by
Novel without  "Cause" or by Dr.  Subramanian  for "Good  Reason",  for one year
subsequent   as   to   non-competition   and   two   years   subsequent   as  to
non-solicitation.

TRANSACTIONS WITH MARK GITTELMAN AND GITTELMAN & CO. P.C.

      For a  description  of the  agreement  between  Elite and Gittelman & Co.,
P.C.,  please see  "Compensation  Discussion  Analysis -  Agreements  with Named
Officers".  Mark  Gittelman,  our chief  financial  officer is the  principal of
Gittelman & Co., P.C.


                                       63
<PAGE>

SERIES C PREFERRED STOCK FINANCING

      The  following  related  persons  participated  in  our  recent  Series  C
Preferred  Stock private  placement  that closed on April 24, 2007  according to
which we sold 15,000 shares of our Series C 8% Convertible  Preferred Stock, par
value $0.01, and 1,939,655 warrants for gross proceeds of $15,000,000.

      o     Barry Dash,  one of our  directors,  purchased 20 shares of Series C
            Preferred  Stock and  warrants  to purchase  2,586  shares of Common
            Stock for a purchase price of $20,000. Affiliates of Adam Usdan, one
            of our  stockholders  which  beneficially  owns  more than 5% of our
            outstanding Common

      o     Stock,  purchased an aggregate of 2,000 shares of Series C Preferred
            Stock and warrants to purchase 258,619 shares of Common Stock for an
            aggregate  purchase  price of $2,000,000.  Indigo  Securities LLC of
            whom  Edward  Neugeboren,  a  director  until  June 26,  2007,  is a
            consultant, acted as a selected

      o     dealer in the  placement  of the Series C  Preferred  Financing  and
            received a $194,547 cash  commission and warrants to purchase 36,045
            shares of Common Stock for its services.

INDIGO VENTURES LLC

      On July 12, 2006,  we entered  into a Financial  Advisory  Agreement  with
Indigo Ventures LLC ("INDIGO") whereby, Indigo, on a non-exclusive basis, agreed
to advise, consult with, and assist us in various matters as requested (and only
to the extent  requested)  by us which may  include,  without  limitation  (i) a
review of our business,  operations and financial condition,  including advising
on  capitalization  structures;  (ii) advice relating to general capital raising
matters;  (iii)  recommendations   relating  to  specific  business  operations,
strategic  transactions  and joint  ventures;  (v) advice  regarding  our future
financings involving debt or equity securities or any affiliate of ours; and (v)
assistance with interaction between us and our current and future investors.  We
paid Indigo  $45,000  initially  and then $15,000 per month in  connection  with
Indigo  providing  the  consulting  services.  Additionally,  Indigo  acquired a
warrant to purchase up to 600,000 shares of Common Stock at an exercise price of
$3.00 per  share,  which may be  payable in the form of a  promissory  note.  On
February 13, 2007, the Financial Advisory Agreement was amended.  As a result of
the  amendment,  the warrant was reduced  from  600,000 to 300,000  shares,  the
warrant remains  exercisable as to the remaining  300,000 shares of common stock
(200,000 of which remain  subject to vesting),  the monthly cash fees payable to
Indigo  terminated  as of February  13, 2007 and the  outstanding  amount of the
promissory note was reduced to $75,000. Edward Neugeboren, a director until June
26, 2007 is a consultant of Indigo.

      Previously,  in March 2006, Indigo received $800,000 cash compensation and
placement  agent  warrants  to  purchase  355,555  shares  of  Common  Stock  in
connection  with  acting as  placement  agent for the  offering  of our Series B
Preferred Stock

      See  "Item 10 -  Directors  and  Executive  Officers  of  Registrant"  for
information as to employment or engagement  agreements with Bernard Berk,  Chris
Dick, Charan Behl and an affiliate of Mark I. Gittelman.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

      The following table presents fees, including  reimbursements for expenses,
for  professional  audit  services  rendered  by Miller  Ellin &  Company,  L.P.
("Miller Ellin") for the audits of our annual financial


                                       64
<PAGE>

statements  and interim  reviews of our quarterly  financial  statements for the
years ended March 31, 2007 and March 31, 2007 and fees billed for other services
rendered by Miller Ellin during those periods.

                                                     2007                  2006
                                                     ----                  ----
Audit Fees(1)                                       58,360                69,923
Audit-Related Fees                                    ---                   ---
Tax Fees                                              ---                   ---
All Other Fees                                        ---                   ---

----------
(1)   Audit fees consist of fees billed for professional  services  rendered for
      the audit of the Company's  consolidated  annual financial  statements and
      review  of the  interim  consolidated  financial  statements  included  in
      quarterly reports and services that are normally provided by  Miller Ellin
      in connection with statutory and regulatory filings or engagements.

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES.

(a)   Documents filed as part of this Report

      (1) The financial statements listed in the Index to Consolidated Financial
Statements are filed as part of this report.

      (2) The financial  statements listed in the Index are filed a part of this
report.

      (3) List of Exhibits

      See Index to Exhibits in paragraph (b) below.

      The Exhibits are filed with or incorporated by reference in this report.

(b)   Financial Statement Schedules

      None.

(c)   Exhibits required by Item 601 of Regulation S-K.

EXHIBIT NO.     DESCRIPTION

   3.1(a)       Certificate of incorporation  of the Company,  together with all
                other amendments  thereto,  as filed with the Secretary of State
                of the  State of  Delaware,  incorporated  by  reference  to (a)
                Exhibit 4.1 to the Registration  Statement on Form S-4 (Reg. No.
                333-101686),  filed with the SEC on  December 6, 2002 (the "Form
                S-4") and (b)  Exhibit 4.1 to the  Company's  Report on Form 8-K
                dated July 28, 2004.


                                       65
<PAGE>

   3.1(b)       Certificate of Designations,  Preferences and Rights of Series A
                Preferred  Stock,  as filed with the  Secretary  of the State of
                Delaware,  incorporated  by reference to Exhibit 4.5 to the Form
                8-K dated October 6, 2004, and filed with the SEC on October 12,
                2004.

   3.1(c)       Certificate of Retirement with the Secretary of the State of the
                Delaware  to retire  516,558  shares of the  Series A  Preferred
                Stock,  as filed  with  the  Secretary  of  State  of  Delaware,
                incorporated  by  reference to Exhibit 3.1 to the Form 8-K dated
                March 10, 2006, and filed with the SEC on March 14, 2006.

   3.1(d)       Certificate of Designations,  Preferences and Rights of Series B
                8% Convertible  Preferred  Stock, as filed with the Secretary of
                the State of Delaware,  incorporated by reference to Exhibit 3.1
                to the Form 8-K dated March 15, 2006,  and filed with the SEC on
                March 16, 2006.

   3.1(e)       Amended  Certificate of Designations of Preferences,  Rights and
                Limitations of Series B 8% Convertible Preferred Stock, as filed
                with  the   Secretary   of  State  of  the  State  of  Delaware,
                incorporated  by  reference to Exhibit 3.1 to the Form 8-K dated
                April 24, 2007, and filed with the SEC on April 25, 2007.

   3.1(f)       Certificate of Designations,  Preferences and Rights of Series C
                8% Convertible  Preferred  Stock, as filed with the Secretary of
                the State of Delaware,  incorporated by reference to Exhibit 3.2
                to the Form 8-K dated April 24, 2007,  and filed with the SEC on
                April 25, 2007.

   3.1(g)       Amended  Certificate of Designations,  Preferences and Rights of
                Series C 8%  Convertible  Preferred  Stock,  as  filed  with the
                Secretary of the State of Delaware, incorporated by reference to
                Exhibit 3.1 to the Form 8-K dated April 24, 2007, and filed with
                the SEC on April 25, 2007

   3.2          By-Laws of the Company, as amended, incorporated by reference to
                Exhibit 3.2 to the Company's Registration Statement on Form SB-2
                (Reg.  No.  333-90633)  made effective on February 28, 2000 (the
                "Form SB-2").

   4.1          Form of specimen  certificate  for Common  Stock of the Company,
                incorporated by reference to Exhibit 4.1 to the Form SB-2.

   4.2          Form  of  specimen  certificate  for  Series  A  8%  Convertible
                Preferred  Stock of the  Company,  incorporated  by reference to
                Exhibit 4.5 to the Form 8-K,  dated  October 6, 2004,  and filed
                with the SEC on October 12, 2004.

   4.3          Form  of  specimen  certificate  for  Series  B  8%  Convertible
                Preferred  Stock of the  Company,  incorporated  by reference to
                Exhibit 4.1 to the Form 8-K, dated March 15, 2006 and filed with
                the SEC on March 16, 2006.

   4.4          Form  of  specimen  certificate  for  Series  C  8%  Convertible
                Preferred  Stock of the  Company,  incorporated  by reference to
                Exhibit 4.1 to the Form 8-K, dated April 24, 2007 and filed with
                the SEC on April 25, 2007.

   4.5          Warrant to purchase  100,000 shares of Common Stock issued to DH
                Blair Investment


                                       66
<PAGE>

                Banking Corp.,  incorporated by reference to Exhibit 10.2 to the
                Form 10-Q for the period ended September 30, 2004.

   4.6          Warrant to  purchase  50,000  shares of Common  Stock  issued to
                Jason Lyons  incorporated  by  reference  to Exhibit 10.3 to the
                Form 10-Q for the period ended June 30, 2004.

   4.7          Form of Warrant to  purchase  shares of Common  Stock  issued to
                designees  of lender with  respect to  financing of an equipment
                loan  incorporated by reference to Exhibit 10.2 to the Form 10-Q
                for the period ended June 30, 2004.

   4.8          Form of Short Term  Warrant to purchase  shares of Common  Stock
                issued to purchasers in the private  placement  which  initially
                closed  on   October  6,  2004  (the   "Series  A   Financing"),
                incorporated  by reference to Exhibit 4.6 to the Form 8-K, dated
                October 6, 2004, and filed with the SEC on October 12, 2004.

   4.9          Form of Long Term  Warrant to  purchase  shares of Common  Stock
                issued to purchasers in the Series A Financing,  incorporated by
                reference to Exhibit 4.7 to the Form 8-K, dated October 6, 2004,
                and filed with the SEC on October 12, 2004.

   4.10         Form of Warrant to purchase shares of Common Stock issued to the
                Placement  Agent,  in  connection  with the Series A  Financing,
                incorporated  by reference to Exhibit 4.8 to the Form 8-K, dated
                October 6, 2004, and filed with the SEC on October 12, 2004.

   4.11         Form of Replacement  Warrant to purchase  shares of Common Stock
                in  connection  with the offer to  holders  of  Warrants  in the
                Series A Financing  (the "Warrant  Exchange"),  incorporated  by
                reference  as Exhibit 4.1 to the Form 8-K,  dated  December  14,
                2005, and filed with the SEC on December 20, 2005.

   4.12         Form of  Warrant  to  purchase  shares  of  Common  Stock to the
                Placement  Agent,  in  connection  with  the  Warrant  Exchange,
                incorporated  by reference as Exhibit 4.2 to the Form 8-K, dated
                December 14, 2005, and filed with the SEC on December 20, 2005.

   4.13         Form of Warrant to  purchase  shares of Common  Stock  issued to
                purchasers  in the private  placement  which closed on March 15,
                2006 (the "Series B  Financing"),  incorporated  by reference to
                Exhibit 4.2 to the Form 8-K, dated March 15, 2006 and filed with
                the SEC on March 16, 2006.

   4.14         Form of Warrant to  purchase  shares of Common  Stock  issued to
                purchasers in the Series B Financing,  incorporated by reference
                to Exhibit  4.3 to the Form 8-K,  dated March 15, 2006 and filed
                with the SEC on March 16, 2006.

   4.15         Form of Warrant to purchase shares of Common Stock issued to the
                Placement  Agent,  in  connection  with the Series B  Financing,
                incorporated  by reference to Exhibit 4.4 to the Form 8-K, dated
                March 15, 2006 and filed with the SEC on March 16, 2006.

   4.16         Form of  Warrant  to  purchase  600,000  shares of Common  Stock
                issued to Indigo  Ventures,  LLC,  incorporated  by reference to
                Exhibit 4.1 to the Form 8-K,  dated July 12, 2006 and filed with
                the SEC on July 18, 2006.


                                       67
<PAGE>

   4.17         Form of Warrant to purchase up to 478,698 shares of Common Stock
                issued to VGS PHARMA, LLC,  incorporated by reference as Exhibit
                3(a) to the Form 8-K,  dated December 6, 2006 and filed with the
                SEC on December 12, 2006.

   4.18         Form on  Non-Qualified  Stock  Option  Agreement  for  1,750,000
                shares  of  Common  Stock  granted  to  Veerappan   Subramanian,
                incorporated by reference as Exhibit 3(b) to the Form 8-K, dated
                December 6, 2006 and filed with the SEC on December 12, 2006.

   4.19         Form of Warrant to  purchase  shares of Common  Stock  issued to
                purchasers  in the private  placement  which closed on April 24,
                2007 (the "Series C  Financing"),  incorporated  by reference to
                Exhibit 4.2 to the Form 8-K, dated April 24, 2007 and filed with
                the SEC on April 25, 2007.

   4.20         Form of Warrant to purchase shares of Common Stock issued to the
                placement  agent in the  Series  C  Financing,  incorporated  by
                reference  to Exhibit 4.3 to the Form 8-K,  dated April 24, 2007
                and filed with the SEC on April 25, 2007.

   10.1         2004 Employee Stock Option Plan approved by stockholders on June
                22,  2004,  incorporated  by reference to Exhibit A to the Proxy
                Statement  filed on  Schedule  14A with  respect  to the  Annual
                Meeting of Stockholders held on June 22, 2004.

   10.2         Form of Confidentiality  Agreement (corporate),  incorporated by
                reference to Exhibit 10.7 to the Form SB-2.

   10.3         Form of Confidentiality  Agreement  (employee),  incorporated by
                reference to Exhibit 10.8 to the Form SB-2.

   10.4         Amended and Restated Employment  Agreement dated as of September
                2, 2005 between  Bernard Berk and the Company,  incorporated  by
                reference to Exhibit 10.1 to Form 8-K, dated  September 2, 2005,
                and filed with the SEC on September 9, 2005.

   10.5         Option  Agreement  between Bernard Berk and the Company dated as
                of July 23, 2003  incorporated  by  reference to Exhibit 10.7 to
                the Report on Form 10-Q for three  months  ended  June 30,  2003
                (the "June 30, 2003 10Q Report").

   10.6         Option  Agreement  between Bernard Berk and the Company dated as
                of July 23, 2003,  incorporated  by reference to Exhibit 10.8 to
                the June 30, 2003 10Q Report.

   10.7         Amendment,  dated as of September 2, 2005,  by and between,  the
                Company and Bernard Berk, to the Stock Option  Agreement,  dated
                as of July 23, 2003,  incorporated  by reference to Exhibit 10.2
                to Form 8-K, dated  September 2, 2005, and filed with the SEC on
                September 9, 2005.

   10.8         Stock Option  Agreement,  dated as of September 2, 2005,  by and
                between the Company and Bernard Berk,  incorporated by reference
                to Exhibit 10.3 to Form 8-K, dated  September 2, 2005, and filed
                with the SEC on September 9, 2005.


                                       68
<PAGE>

   10.9         Stock Option  Agreement,  dated as of September 2, 2005,  by and
                between the Company and Bernard Berk,  incorporated by reference
                to Exhibit 10.4 to Form 8-K, dated  September 2, 2005, and filed
                with the SEC on September 9, 2005.

   10.10        Engagement  letter dated February 26, 1998,  between Gittelman &
                Co. P.C.  and the Company  incorporated  by reference to Exhibit
                10.10 to the Form 10-K for the period ended March 31, 2004 filed
                with the SEC on June 29, 2004.

   10.11        Product  Development  Manufacturing and Distribution  Agreement,
                dated as of March 30,  2005,  by and among  Elite  Laboratories,
                Inc., a Delaware corporation and wholly-owned  subsidiary of the
                Company ("Elite Labs"),  Harris  Pharmaceuticals,  Inc. and Tish
                Technologies  LLC,  incorporated by reference as Exhibit 10.1 to
                the Form 8-K,  dated March 30, 2005,  originally  filed with the
                SEC on April 5, 2005, as amended on the Form 8-K/A filed May 10,
                2005, as further  amended by the Form 8-K/A filed June 13, 2005,
                as further  amended by the Form 8-K/A  filed July 20,  2005,  as
                further  amended by the Form 8-K/A  filed  August 23,  2005,  as
                further  amended by the Form 8-K/A filed  September 27, 2005, as
                further  amended  by the  Form  8-K/A  filed  December  7,  2005
                (Confidential  Treatment granted with respect to portions of the
                Agreement).

   10.12        Product Development and Commercialization Agreement, dated as of
                June 21,  2005,  between the  Company and  IntelliPharmaceutics,
                Corp.,  incorporated  by  reference  as Exhibit 10.1 to the Form
                8-K,  dated June 21, 2005 and  originally  filed with the SEC on
                June 27, 2005,  as amended on the Form 8-K/A filed  September 7,
                2005,  as further  amended by the Form 8-K/A  filed  December 7,
                2005 (Confidential Treatment granted with respect to portions of
                the Agreement).

   10.13        Product Development and License Agreement,  dated as of June 22,
                2005,  between  the  Company and Pliva,  Inc.,  incorporated  by
                reference as Exhibit  10.1 to the Form 8-K,  dated June 22, 2005
                and  originally  filed with the SEC on June 28, 2005, as amended
                on the Form 8-K/A filed September 6, 2005, as further amended by
                the Form 8-K/A filed  December 7, 2005  (Confidential  Treatment
                granted with respect to portions of the Agreement).

   10.14        Agreement,  dated  December 12, 2005,  by and among the Company,
                Elite Labs,  and  IntelliPharmaCeutics  Corp.,  incorporated  by
                reference  as Exhibit 10.1 to the Form 8-K,  dated  December 12,
                2005, and originally filed with the SEC on December 16, 2005, as
                amended  by the Form  8-K/A  filed  March 7, 2006  (Confidential
                Treatment granted with respect to portions of the Agreement).

   10.15        Product  Development  and  Commercialization   Agreement,  dated
                January 10, 2006, by and among the Company,  Elite Laboratories,
                Inc., its  wholly-owned  subsidiary and Orit  Laboratories  LLC,
                incorporated by reference as Exhibit 10.1 to the Form 8-K, dated
                January 10,  2006,  and filed with the SEC on January 17,  2006.
                (Confidential  Treatment granted with respect to portions of the
                Agreement).

   10.16        Loan Agreement,  dated as of August 15, 2005, between New Jersey
                Economic  Development   Authority  ("NJEDA")  and  the  Company,
                incorporated by reference to Exhibit 10.1 to the Form 8-K, dated
                August 31, 2005 and filed with the SEC on September 6, 2005.


                                       69
<PAGE>

   10.17        Series A Note in the aggregate principal amount of $3,660,000.00
                payable to the order of the NJEDA,  incorporated by reference to
                Exhibit  10.2 to the Form 8-K,  dated  August 31, 2005 and filed
                with the SEC on September 6, 2005.

   10.18        Series B Note in the aggregate  principal  amount of $495,000.00
                payable to the order of the NJEDA,  incorporated by reference to
                Exhibit  10.3 to the Form 8-K,  dated  August 31, 2005 and filed
                with the SEC on September 6, 2005.

   10.19        Mortgage  from  the  Company  to  the  NJEDA,   incorporated  by
                reference to Exhibit 10.4 to the Form 8-K, dated August 31, 2005
                and filed with the SEC on September 6, 2005.

   10.20        Indenture  between  NJEDA  and the Bank of New York as  Trustee,
                dated as of  August  15,  2005,  incorporated  by  reference  to
                Exhibit  10.5 to the Form 8-K,  dated  August 31, 2005 and filed
                with the SEC on September 6, 2005.

   10.21        Form of Warrant Exercise  Agreement,  between the Registrant and
                the  signatories  thereto,  incorporated by reference to Exhibit
                10.1 to the Form 8-K, dated December 14, 2005 and filed with the
                SEC on December 20, 2005.

   10.22        Form of Registration  Rights  Agreement,  between the Registrant
                and  signatories  thereto,  incorporated by reference to Exhibit
                10.2 to the Form 8-K, dated December 14, 2005 and filed with the
                SEC on December 20, 2005.

   10.23        Form of Securities  Purchase  Agreement,  between the Registrant
                and  the  signatories  thereto,  incorporated  by  reference  to
                Exhibit  10.1 to the Form 8-K,  dated  March 15,  2006 and filed
                with the SEC on March 16, 2006.

   10.24        Form of Registration  Rights  Agreement,  between the Registrant
                and  the  signatories  thereto,  incorporated  by  reference  to
                Exhibit  10.2 to the Form 8-K,  dated  March 15,  2006 and filed
                with the SEC on March 16, 2006.

   10.21        Form of Placement  Agent  Agreement,  between the Registrant and
                Indigo  Securities,  LLC,  incorporated  by reference as Exhibit
                10.3 to the Form 8-K,  dated March 15, 2006,  and filed with the
                SEC on March 16, 2006.

   10.22        Financial  Advisory  Agreement between the Registrant and Indigo
                Ventures LLC,  incorporated  by reference as Exhibit 10.1 to the
                Form 8-K dated July 12,  2006 and filed with the SEC on July 18,
                2006.

   10.23        Seconded Amended and Restated  Employment  Agreement between the
                Registrant  and  Bernard  Berk,  incorporated  by  reference  as
                Exhibit  10.1 to the Form 10-Q for the quarter  ended  September
                30, 2006 and filed with the SEC on November 14, 2006.

   10.24        Employment  Agreement  between the  Registrant  and Charan Behl,
                incorporated  by  reference as Exhibit 10.2 to the Form 10-Q for
                the quarter  ended  September 30, 2006 and filed with the SEC on
                November 14, 2006.


                                       70
<PAGE>

   10.25        Employment  Agreement  between  the  Registrant  and Chris Dick,
                incorporated  by  reference as Exhibit 10.3 to the Form 10-Q for
                the quarter  ended  September 30, 2006 and filed with the SEC on
                November 14, 2006.

   10.26        Product  Collaboration  Agreement  between  the  Registrant  and
                ThePharmaNetwork  LLC, incorporated by reference as Exhibit 10.1
                to the Form 8-K,  dated November 10, 2006 and filed with the SEC
                on November  15,  2006.  (Confidential  Treatment  granted  with
                respect to portions of the Agreement).

   10.27        Strategic  Alliance  Agreement among the Registrant,  VGS Pharma
                ("VGS") and Veerappan S.  Subramanian  ("VS"),  incorporated  by
                reference as Exhibit  10(a) to the Form 8-K,  dated  December 6,
                2006 and filed with the SEC on December 12, 2006.

   10.28        Advisory Agreement,  between the Registrant and VS, incorporated
                by reference as Exhibit 10(b) to the Form 8-K, dated December 6,
                2006 and filed with the SEC on December 12, 2006.

   10.29        Registration  Rights Agreement  between the Registrant,  VGS and
                VS,  incorporated by reference as Exhibit 10(c) to the Form 8-K,
                dated  December 6, 2006 and filed with the SEC on  December  12,
                2006.

   10.30        Employment  Agreement between Novel  Laboratories Inc. ("Novel")
                and VS,  incorporated  by reference as Exhibit 10(d) to the Form
                8-K,  dated  December 6, 2006 and filed with the SEC on December
                12, 2006.

   10.31        Stockholders'  Agreement between Registrant,  VGS, VS and Novel,
                incorporated  by  reference  as  Exhibit  10(e) to the Form 8-K,
                dated  December 6, 2006 and filed with the SEC on  December  12,
                2006.

   10.32        Amended  and   Restated   Employment   Agreement,   between  the
                Registrant and Charan Behl, incorporated by reference as Exhibit
                10.1 to the Form 8-K,  dated February 9, 2007 and filed with the
                SEC on February 14, 2007.

   10.33        Form of Securities  Purchase  Agreement,  between the Registrant
                and  the  signatories  thereto,  incorporated  by  reference  to
                Exhibit  10.1 to the Form 8-K,  dated  April 24,  2007 and filed
                with the SEC on April 25, 2007.

   10.34        Form of Registration  Rights  Agreement,  between the Registrant
                and  the  signatories  thereto,  incorporated  by  reference  to
                Exhibit  10.2 to the Form 8-K,  dated  April 24,  2007 and filed
                with the SEC on April 25, 2007.

   10.35        Form of Placement Agent Agreement, the Company and Oppenheimer &
                Company, Inc.,  incorporated by reference as Exhibit 10.3 to the
                Form 8-K,  dated April 24, 2007, and filed with the SEC on April
                25, 2007.

   21           Subsidiaries of the Company.*


                                       71
<PAGE>

   31.1*        Certification of Chief Executive Officer pursuant to Section 302
                of the Sarbanes-Oxley Act of 2002.*

   31.2*        Certification of Chief Financial Officer pursuant to Section 302
                of the Sarbanes-Oxley Act of 2002.*

   32.1**       Certification of Chief Executive Officer pursuant to Section 906
                of the Sarbanes-Oxley Act of 2002.*

   32.2**       Certification of Chief Financial Officer pursuant to Section 906
                of the Sarbanes-Oxley Act of 2002.*

----------
* Filed herewith

** As contemplated by SEC Release No. 33-8212, these exhibits are furnished with
this Annual Report on Form 10-K and are not deemed filed with the Securities and
Exchange Commission and are not incorporated by reference in any filing of Elite
Pharmaceuticals,  Inc.  under  the  Securities  Act of  1933  or the  Securities
Exchange  Act of 1934,  whether  made  before  or  after  the  date  hereof  and
irrespective of any general incorporation language in any such filings.


                                       72
<PAGE>

                                   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.

                                             ELITE PHARMACEUTICALS, INC.


                                             By: /s/ Bernard Berk
                                                 -------------------------------
                                                 Bernard Berk
                                                 Chief Executive Officer

                                             Dated: June 28, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following  persons on behalf of the registrant and in the
capacities and on the dates indicated.

SIGNATURE                           TITLE                          DATE
---------                           -----                          ----


/s/ Bernard Berk                    Chief Executive Officer        June 28, 2007
---------------------------         (Principal Executive
Bernard Berk                        Officer)


/s/ Mark Gittelman                  Chief Financial Officer        June 28, 2007
--------------------------          and Treasurer (Principal
Mark I. Gittelman                   Financial and Accounting
                                    Officer)

/s/ Barry Dash                      Director                       June 28, 2007
--------------------------
Barry Dash


/s/ Melvin Van Woert                Director                       June 28, 2007
--------------------------
Melvin Van Woert


/s/ Veerappan Subramanian           Director                       June 28, 2007
--------------------------
Veerappan Subramanian


                                       73
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                FOR THE YEARS ENDED MARCH 31, 2007, 2006 AND 2005

                                    CONTENTS

                                                                            PAGE
                                                                            ----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                    F - 2

CONSOLIDATED BALANCE SHEETS                                                F - 3

CONSOLIDATED STATEMENTS OF OPERATIONS                                      F - 5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                            F - 6

CONSOLIDATED STATEMENTS OF CASH FLOWS                                      F - 9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                 F -10

                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Elite Pharmaceuticals, Inc.

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Elite
Pharmaceuticals,  Inc. and Subsidiaries (the "Company") as of March 31, 2007 and
2006,  and the related  consolidated  statements  of  operations,  stockholders'
equity and cash flows for the years ended March 31, 2007,  2006 and 2005.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,   in  all   material   respects,   the   financial   position  of  Elite
Pharmaceuticals,  Inc. and  Subsidiaries  as of March 31, 2007 and 2006, and the
results of their  operations  and their  cash flows for each of the three  years
ended March 31, 2007,  2006 and 2005 in conformity  with  accounting  principles
generally accepted in the United States of America.

                                                /s/ MILLER, ELLIN & COMPANY, LLP
                                                CERTIFIED PUBLIC ACCOUNTANTS

New York, New York
June 7, 2007


                                      F-2
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                             MARCH 31, 2007 AND 2006

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                 2007           2006
                                                                                 ----           ----
<S>                                                                          <C>            <C>
CURRENT ASSETS:
        Cash and cash equivalents                                            $ 2,045,390    $ 8,919,354
        Accounts receivable, net of allowance for doubtful accounts of $0
             and $153,250 as of March 31, 2007 and 2006, respectively            215,837             --
        Current portion of restricted cash - capital project fund                     --      1,173,896
        Prepaid expenses and other current assets                              1,149,185        470,633
                                                                             -----------    -----------

             Total current assets                                              3,410,412     10,563,883

PROPERTY AND EQUIPMENT- net of accumulated
        depreciation and amortization                                          5,454,026      4,308,969

INTANGIBLE ASSETS - net of accumulated amortization                               42,809         59,457

OTHER ASSETS:

        Accrued interest receivable                                                  949             --
        Deposit on equipment                                                      32,880             --
        Security deposit                                                           6,980          6,980
        Restricted cash - debt service                                           414,999        415,500
        EDA bond offering costs, net of accumulated
            amortization of $21,178 and $7,000, respectively                     333,274        347,452
                                                                             -----------    -----------

             Total other assets                                                  789,082        769,932
                                                                             -----------    -----------

             TOTAL ASSETS                                                    $ 9,696,329    $15,702,241
                                                                             ===========    ===========
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                      F-3
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                             MARCH 31, 2007 AND 2006
                                   (CONTINUED)

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                           2007             2006
                                                                                           ----             ----
<S>                                                                                    <C>              <C>
CURRENT LIABILITIES:
        Current portion of EDA bonds                                                   $    185,000     $    175,000
        Accounts payable and accrued expenses                                             2,205,781        1,740,263
        Dividends payable                                                                        --           33,333
                                                                                       ------------     ------------
              Total current liabilities                                                   2,390,781        1,948,596
                                                                                       ------------     ------------

LONG TERM DEBT:
        EDA bonds - net of current portion                                                3,795,000        3,980,000
                                                                                       ------------     ------------
              Total long-term liabilities                                                 3,795,000        3,980,000
                                                                                       ------------     ------------

              Total liabilities                                                           6,185,781        5,928,596
                                                                                       ------------     ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:

        Preferred stock - $.01 par value;
              Authorized - 4,483,442 (originally 5,000,000 shares of which 516,558
              shares of Series A Preferred retired)
              March 31, 2007 and 2006, respectively
              Authorized - 10,000 Convertible Series B Preferred Stock - issued and
              outstanding - 9,695 shares and 10,000 shares, respectively
                                                                                                 97              100
        Common Stock - $.01 par value;
              Authorized - 65,000,000
              Issued and outstanding - 20,799,102 and 19,190,159
              shares in 2007 and 2006, respectively                                         207,991          191,902
        Subscription receivable                                                             (75,000)              --
        Additional paid-in capital                                                       66,495,618       60,105,107
        Accumulated deficit                                                             (62,811,317)     (50,216,623)
                                                                                       ------------     ------------
                                                                                          3,817,389       10,080,486

        Treasury stock, at cost (100,000 shares)                                           (306,841)        (306,841)
                                                                                       ------------     ------------
        Total stockholders' equity                                                        3,510,548        9,773,645
                                                                                       ------------     ------------

              TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $  9,696,329     $ 15,702,241
                                                                                       ============     ============
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                      F-4
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       YEARS ENDED MARCH 31,
                                                                       ---------------------
                                                              2007             2006             2005
                                                              ----             ----             ----
<S>                                                       <C>              <C>              <C>
REVENUES:
        Licensing and test fees                           $         --     $         --     $    151,450
        Manufacturing fees                                   1,038,916          494,231          125,739
        Royalties                                              104,925           56,466           24,291
                                                          ------------     ------------     ------------
                       Total revenues                        1,143,841          550,697          301,480

Cost of Revenues                                               831,250               --               --
                                                          ------------     ------------     ------------
Gross Profit                                                   312,591          550,697          301,480

OPERATING EXPENSES:
        Research and development                             6,085,888        4,343,890        2,698,641
        General and administrative                           2,534,507        1,726,626        2,159,670
        Depreciation and amortization                          439,994          486,687          356,438
                                                          ------------     ------------     ------------
                                                             9,060,389        6,557,203        5,214,749
                                                          ------------     ------------     ------------

LOSS FROM OPERATIONS                                        (8,747,798)      (6,006,506)      (4,913,269)
                                                          ------------     ------------     ------------

OTHER INCOME (EXPENSES):
        Interest income                                        312,698           90,862           39,932
        Sale of New Jersey tax losses                          377,259          219,121          205,792
        Interest expense                                      (275,031)        (283,464)        (229,495)
        Non-cash compensation satisfied by issuance of
           stock options and warrants                       (3,479,070)        (902,927)      (1,008,850)
                                                          ------------     ------------     ------------
                                                            (3,064,144)        (876,408)        (992,621)
                                                          ------------     ------------     ------------

LOSS BEFORE PROVISION FOR INCOME
        TAXES                                              (11,811,942)      (6,882,914)      (5,905,890)

Provision For Income Taxes                                      (1,770)          (1,000)          (1,000)
Minority Interest in Loss of Novel Laboratories, Inc.           10,200               --               --
                                                          ------------     ------------     ------------

NET LOSS                                                   (11,803,512)      (6,883,914)      (5,906,890)

Preferred Stock Dividends                                     (791,181)      (2,155,250)        (165,418)
                                                          ------------     ------------     ------------

NET LOSS ATTRIBUTABLE TO COMMON
        SHAREHOLDERS                                      $(12,594,693)    $ (9,039,164)    $ (6,072,308)
                                                          ============     ============     ============

BASIC AND DILUTED LOSS PER COMMON
        SHARE                                             $       (.64)    $       (.49)    $      (0.47)
                                                          ============     ============     ============

WEIGHTED AVERAGE NUMBER OF
        COMMON SHARES OUTSTANDING                           19,815,780       18,463,514       12,869,924
                                                          ============     ============     ============
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                      F-5
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                       PREFERRED STOCK                   COMMON STOCK              ADDITIONAL
                                                       ---------------                   ------------                PAID-IN
                                                  SHARES            AMOUNT           SHARES          AMOUNT          CAPITAL
                                                  ------            ------           ------          ------          -------
<S>                                                <C>           <C>                <C>           <C>             <C>
BALANCES AT APRIL 1, 2004                                --      $         --       12,204,423    $    122,044    $ 39,338,140

Net proceeds from issuance of Series A 8%
   Convertible Preferred Stock and warrants         516,558             5,166               --              --       5,786,436

Issuance of Common Stock for consulting
   services                                              --                --           26,500             265          58,035

Issuance of Common Stock upon conversion
   of Series A 8% Convertible Preferred
   Stock                                           (516,558)           (5,166)       5,165,580          51,656         (46,490)

Non-cash compensation satisfied by the
   issuance of stock, options and warrants                                                                           1,008,850

Common Stock issued as dividend on Series
   A 8% Convertible Preferred Stock                      --                --           99,936           1,000         164,418

Exercise of stock options and warrants                   --                --          525,744           5,257         579,250

Proceeds - Short  swing profits                          --                --               --              --         117,740

Net loss                                                 --                --               --              --              --
                                               ------------      ------------     ------------    ------------    ------------

BALANCES AT MARCH 31, 2005                               --      $         --       18,022,183         180,222    $ 47,006,379
                                               ============      ============     ============    ============    ============

<CAPTION>
                                                       TREASURY STOCK
                                                       --------------             ACCUMULATED    STOCKHOLDERS'
                                                  SHARES            AMOUNT          DEFICIT           EQUITY
                                                  ------            ------          -------           ------
<S>                                                <C>          <C>              <C>              <C>
BALANCES AT APRIL 1, 2004                          (100,000)    $   (306,841)    $(35,105,151)    $  4,048,192

Net proceeds from issuance of Series A 8%
   Convertible Preferred Stock and warrants              --               --               --        5,791,602

Issuance of Common Stock for consulting
   services                                              --               --               --           58,300

Issuance of Common Stock upon conversion
   of Series A 8% Convertible Preferred
   Stock                                                 --               --               --               --

Non-cash compensation satisfied by the
   issuance of stock, options and warrants                                                           1,008,850

Common Stock issued as dividend on Series
   A 8% Convertible Preferred Stock                      --               --         (165,418)              --

Exercise of stock options and warrants                   --               --               --          584,507

Proceeds - Short  swing profits                          --               --               --          117,740

Net loss                                                 --               --       (5,906,890)      (5,906,890)
                                               ------------     ------------     ------------     ------------

BALANCES AT MARCH 31, 2005                     $   (100,000)    $   (306,841)    $(41,177,459)    $  5,702,301
                                               ============     ============     ============     ============
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                      F-6
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                  PREFERRED STOCK                  COMMON STOCK             ADDITIONAL
                                                  ---------------                  ------------              PAID-IN
                                              SHARES          AMOUNT          SHARES          AMOUNT          CAPITAL
                                              ------          ------          ------          ------          -------
<S>                                                <C>           <C>                <C>           <C>             <C>
BALANCES AT APRIL 1, 2005                            --    $         --      18,022,183    $    180,222    $ 47,006,379

Net proceeds from issuance of Series B
     8% Convertible Preferred Stock and
     warrants                                    10,000    $        100              --              --       8,792,569

Non-cash compensation satisfied by the
     issuance of  stock, options and
     warrants                                        --              --              --              --         902,927

Exercise of stock options                            --              --          20,000             200          39,800

Exercise of stock warrants                           --              --       1,147,976          11,480       1,241,515

Net loss                                             --              --              --              --              --

Dividends                                            --              --              --              --       2,121,917
                                           ------------    ------------    ------------    ------------    ------------

BALANCES AT MARCH 31, 2006                       10,000    $        100      19,190,159    $    191,902    $ 60,105,107
                                           ============    ============    ============    ============    ============

<CAPTION>
                                                   TREASURY STOCK
                                                   --------------             ACCUMULATED     STOCKHOLDERS'
                                              SHARES           AMOUNT           DEFICIT          EQUITY
                                              ------           ------           -------          ------
<S>                                                    <C>          <C>              <C>              <C>
BALANCES AT APRIL 1, 2005                      (100,000)    $   (306,841)    $(41,177,459)    $  5,702,301

Net proceeds from issuance of Series B
     8% Convertible Preferred Stock and
     warrants                                        --               --               --        8,792,669

Non-cash compensation satisfied by the
     issuance of  stock, options and
     warrants                                                                                      902,927

Exercise of stock options                            --               --               --           40,000

Exercise of stock warrants                           --               --               --        1,252,995

Net loss                                             --               --       (6,883,914)      (6,883,914)

Dividends                                            --               --       (2,155,250)         (33,333)
                                           ------------     ------------     ------------     ------------

BALANCES AT MARCH 31, 2006                     (100,000)    $   (306,841)    $(50,216,623)    $  9,773,645
                                           ============     ============     ============     ============
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                      F-7
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                     PREFERRED STOCK                    COMMON STOCK            SUBSCRIPTION
                                                 SHARES           AMOUNT           SHARES          AMOUNT        RECEIVABLE
                                                 ------           ------           ------          ------        ----------
<S>                                                 <C>        <C>                <C>           <C>
BALANCES AT APRIL 1, 2006                           10,000     $        100       19,190,159    $    191,902              --

Equity Investment in Company                            --               --          957,396           9,574              --

Conversion of Preferred to Common                     (305)              (3)         135,555           1,356              --

Conversion of Warrants to Common                        --               --           84,430             844              --

Exercise of Stock Options                               --               --           59,000             590              --

Non-cash  compensation through issuance of
stock options and warrants                              --               --               --              --              --

Sale of Warrants                                        --               --               --              --         (75,000)

Costs associated with Raising Capital                   --               --               --              --              --

Net loss                                                --               --               --              --              --

Dividends                                               --               --          372,562           3,725              --
                                              ------------     ------------     ------------    ------------    ------------

BALANCES AT MARCH 31, 2007                           9,695     $         97       20,799,102    $    207,991    $    (75,000)
                                              ============     ============     ============    ============    ============

<CAPTION>
                                                ADDITION
                                                 PAID-IN             TREASURY STOCK              ACCUMULATED      STOCKHOLDERS'
                                                 CAPITAL          SHARES          AMOUNT           DEFICIT           EQUITY
                                                 -------          ------          ------           -------           ------
<S>                                           <C>                  <C>          <C>              <C>              <C>
BALANCES AT APRIL 1, 2006                     $ 60,105,107         (100,000)    $   (306,841)    $(50,216,623)    $  9,773,645

Equity Investment in Company                     1,990,426               --               --               --        2,000,000

Conversion of Preferred to Common                   (1,353)              --               --               --               --

Conversion of Warrants to Common                      (844)              --               --               --               --

Exercise of Stock Options                           87,910               --               --               --           88,500

Non-cash  compensation through issuance of
stock options and warrants                       3,479,070               --               --               --        3,479,070

Sale of Warrants                                    75,000               --               --               --               --

Costs associated with Raising Capital              (26,347)              --               --               --          (26,347)

Net loss                                                --               --               --      (11,803,512)     (11,803,512)

Dividends                                          786,649               --               --         (791,182)            (808)
                                              ------------     ------------     ------------     ------------     ------------

BALANCES AT MARCH 31, 2007                      66,495,618         (100,000)    $   (306,841)    $(62,811,317)    $ (3,510,548)
                                              ============     ============     ============     ============     ============
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                      F-8
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                             YEARS ENDED MARCH 31,
                                                                                             ---------------------
                                                                                     2007             2006             2005
                                                                                     ----             ----             ----
<S>                                                                             <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net loss                                                                  $(11,803,512)    $ (6,883,914)    $ (5,906,890)
      Adjustments to reconcile net loss to cash
          used in operating activities:
              Provision for doubtful accounts                                             --               --          153,250
              Depreciation and amortization                                          439,994          486,687          356,438
              Non-cash compensation satisfied by issuance of stock,
                    options and warrants                                           3,479,070          902,927        1,067,150
              Changes in assets and liabilities:
                   Accounts receivable                                              (215,837)         142,113         (142,113)
                   Accrued interest receivable                                          (949)              --               --
                   Prepaid expenses and other current assets                        (678,552)        (123,728)        (209,013)
                   Security Deposit                                                       --           (6,980)              --
                   Accounts payable, accrued expenses and other current
                     liabilities                                                     465,518          857,346         (202,325)
                                                                                ------------     ------------     ------------
NET CASH USED IN OPERATING ACTIVITIES                                             (8,314,268)      (4,625,549)      (4,883,503)
                                                                                ------------     ------------     ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchase of patent                                                              (5,470)              --               --
      Deposits to restricted cash                                                         --       (1,175,971)              --
      Release of restricted cash                                                   1,174,397               --          315,570
      Payment of deposit for manufacturing equipment                                 (32,880)              --               --
      Purchases of property and equipment                                         (1,548,755)        (448,280)         (27,843)
                                                                                ------------     ------------     ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES                                 (412,708)      (1,624,251)         287,727
                                                                                ------------     ------------     ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Principal bank note payments                                                        --               --         (225,000)
      Dividends paid                                                                 (34,141)              --               --
      Proceeds from issuance of Common Stock and warrants                          2,000,000               --               --
      Principal repayments of NJEDA bonds                                           (175,000)      (2,345,000)        (150,000)
      Proceeds from issuance of Series A 8% Convertible Preferred
          Stock and warrants                                                              --               --        5,791,602
      Costs associated with raising capital                                          (26,347)              --               --
      Proceeds from equipment loan                                                        --               --          400,000
      Proceeds - NJEDA Tax Exempt Bonds                                                   --        4,155,000               --
      Payment - NJEDA Bond Offering Costs                                                 --         (354,452)              --
      Proceeds from issuance of Series B 8% Convertible Preferred
          Stock and warrants                                                              --        8,792,669               --
      Principal equipment note payments                                                   --         (315,074)         (84,926)
      Prepaid interest                                                                    --           41,013          (41,013)
      Proceeds from exercise of stock options                                         88,500           40,000          100,000
      Proceeds from exercise of stock warrants                                            --        1,252,995          484,507
      Proceeds from short swing profits                                                   --               --          117,740
                                                                                ------------     ------------     ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                          1,853,012       11,267,151        6,392,910
                                                                                ------------     ------------     ------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                           (6,873,964)       5,017,351        1,797,134

CASH AND CASH EQUIVALENTS - beginning of period                                    8,919,354        3,902,003        2,104,869
                                                                                ------------     ------------     ------------

CASH AND CASH EQUIVALENTS - end of period                                       $  2,045,390     $  8,919,354     $  3,902,003
                                                                                ============     ============     ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
      Cash paid for interest                                                    $    275,554     $    275,071     $    230,464
      Cash received for income taxes                                                (375,489)        (218,121)        (204,792)

SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
      Preferred Stock dividends of $791,182 and $120,675 paid by issuance of
          372,562 and 64,033 shares of Common Stock                             $         --     $         --     $    165,418
      Utilization of equipment deposit towards purchase of equipment                      --               --          398,580
      Dividends accrued on preferred stock                                                --           33,333               --
      Beneficial conversion                                                               --        2,121,917               --
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                      F-9
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      PRINCIPLES OF CONSOLIDATION

      The  consolidated  financial  statements  include  the  accounts  of Elite
      Pharmaceuticals, Inc. and its consolidated subsidiaries, (collectively the
      "Company")  including its wholly-owned  subsidiaries,  Elite Laboratories,
      Inc.  ("Elite  Labs") and Elite  Research,  Inc.  ("ERI") and its variable
      interest  entity,   Novel  Laboratories,   Inc.  ("Novel").   Our  Company
      consolidates  all  entities  that we  control by  ownership  of a majority
      voting  interest  as well as  variable  interest  entities  for  which our
      Company is the primary beneficiary.  Our judgment in determining if we are
      the  primary  beneficiary  of  the  variable  interest  entities  includes
      assessing our  Company's  level of  involvement  in setting up the entity,
      determining if the activities of the entity are substantially conducted on
      behalf of our Company,  determining whether the Company provides more than
      half of the subordinated  financial support to the entity, and determining
      if we absorb the majority of the entity's  expected losses or returns.  As
      of March 31, 2007, the financial  statements of all wholly-owned  entities
      and its variable  interest  entity are  consolidated  and all  significant
      intercompany accounts are eliminated upon consolidation.

      NATURE OF BUSINESS

      Elite Pharmaceuticals,  Inc. was incorporated on October 1, 1997 under the
      laws of the  State of  Delaware,  and its  wholly-owned  subsidiary  Elite
      Laboratories,  Inc. was  incorporated on August 23, 1990 under the laws of
      the State of  Delaware.  Elite  Labs  engages  primarily  in  researching,
      developing  and  licensing  proprietary  controlled  release drug delivery
      systems  and  products.  The  Company  is  also  equipped  to  manufacture
      controlled  release  products  on a contract  basis for third  parties and
      itself if and when the  products  are  approved;  however  the Company has
      concentrated  on  developing  orally   administered   controlled   release
      products.  These products include drugs that cover  therapeutic  areas for
      pain,  allergy and  infection.  The Company  also  engages in research and
      development  activities  for  the  purpose  of  obtaining  Food  and  Drug
      Administration approval, and, thereafter,  commercially exploiting generic
      and new  controlled-release  pharmaceutical  products.  The  Company  also
      engages  in  contract   research  and   development  on  behalf  of  other
      pharmaceutical companies.

      CASH AND CASH EQUIVALENTS

      The  Company  considers  all highly  liquid  investments  with an original
      maturity  of three  months or less to be cash  equivalents.  Cash and cash
      equivalents  consist  of cash on  deposit  with  banks  and  money  market
      instruments.  The  Company  places  its  cash and  cash  equivalents  with
      high-quality,   U.S.   financial   institutions  and,  to  date,  has  not
      experienced losses on any of its balances.


                                      F-10
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      LONG-LIVED ASSETS (CONTINUED)

      The Company  periodically  evaluates the fair value of long-lived  assets,
      which include property and equipment and  intangibles,  whenever events or
      changes in  circumstances  indicate  that its carrying  amounts may not be
      recoverable.  Such conditions may include an economic downturn or a change
      in the  assessment  of  future  operations.  A charge  for  impairment  is
      recognized  whenever the carrying amount of a long-lived asset exceeds its
      fair value.  Management  has  determined  that no impairment of long-lived
      assets has occurred.

      Property and equipment are stated at cost. Depreciation is provided on the
      straight-line method based on the estimated useful lives of the respective
      assets which range from five to forty years. Major repairs or improvements
      are capitalized.  Minor  replacements and maintenance and repairs which do
      not improve or extend asset lives are expensed currently.

      Upon  retirement  or other  disposition  of assets,  the cost and  related
      accumulated  depreciation  are removed from the accounts and the resulting
      gain or loss, if any, is recognized in income.

      Costs incurred to acquire intangible assets such as for the application of
      patents and trademarks are capitalized and amortized on the  straight-line
      method, based on their estimated useful lives ranging from five to fifteen
      years,  commencing upon approval of the patent and trademarks.  Such costs
      are charged to expense if the patent or trademark is unsuccessful.

      RESEARCH AND DEVELOPMENT

      Research and development expenditures are charged to expense as incurred.

      CONCENTRATION OF CREDIT RISK

      The Company derives  substantially all of its revenues from manufacturing,
      licensing,  research and development  agreements with other pharmaceutical
      companies.

      The Company  maintains  cash  balances,  which,  at times,  may exceed the
      amounts insured by the Federal Deposit Insurance Corp. Management does not
      believe that there is any significant risk of losses.

      The  Company  in the  normal  course  of  business  extends  credit to its
      customers based on contract terms and performs ongoing credit evaluations.
      An allowance for doubtful accounts due to uncertainty of collectability is
      established based on historical collection experience. Amounts are written
      off when payment is not received after exhaustive collection efforts.


                                      F-11
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      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
      during the  reporting  period.  Actual  results  could  differ  from those
      estimates.  Significant  estimates made by management include, but are not
      limited to, the  recognition  of revenue,  the amount of the allowance for
      doubtful  accounts  receivable and the fair value of intangible assets and
      stock-based awards.

      INCOME TAXES

      The Company uses the liability  method for reporting  income taxes,  under
      which  current and  deferred  tax  liabilities  and assets are recorded in
      accordance with enacted tax laws and rates.  Deferred income taxes reflect
      the net tax effects of temporary  differences between the carrying amounts
      of assets and liabilities for financial reporting purposes and the amounts
      used for income tax purposes.  Under the liability method,  the amounts of
      deferred  tax  liabilities  and  assets  at the  end of  each  period  are
      determined  using the tax rate  expected  to be in effect  when  taxes are
      actually paid or recovered. Further tax benefits are recognized when it is
      more  likely  than not that  such  benefits  will be  realized.  Valuation
      allowances  are  provided  to reduce  deferred  tax  assets to the  amount
      considered likely to be realized.

      EARNINGS PER COMMON SHARE

      Basic  earnings per common share is calculated by dividing net earnings by
      the  weighted  average  number of shares  outstanding  during  each period
      presented.  Diluted earnings per share is calculated by dividing  earnings
      by the weighted average number of shares and common stock equivalents. The
      Company's  common  stock  equivalents,  consist of options,  warrants  and
      convertible securities.

      REVENUE RECOGNITION

      Revenues  derived from providing  research and development  services under
      contracts with other pharmaceutical  companies are recognized when earned.
      These contracts provide for non-refundable upfront and milestone payments.
      Because no discrete  earnings event has occurred when the upfront  payment
      is received,  that amount is deferred  until the  achievement of a defined
      milestone.  Each nonrefundable  milestone payment is recognized as revenue
      when the performance criteria for that milestone have been met. Under each
      contract,  the milestones are defined,  substantive  effort is required to
      achieve the milestone,  the amount of the non-refundable milestone payment
      is reasonable,  commensurate with the effort expended,  and achievement of
      the milestone is reasonably assured.


                                      F-12
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      REVENUE RECOGNITION (CONTINUED)

      Revenues earned by licensing certain pharmaceutical  products developed by
      the Company are  recognized  at the  beginning  of a license term when the
      Company's customer has legal right to the use of the product.  To date, no
      revenues  have  been  earned  by  licensing  products  and  there  are  no
      continuing obligations under any licensing agreements.

      Revenues  derived  from  royalties  to the  extent  that  they  cannot  be
      reasonably estimated are recognized when the payment is received.

      Revenues earned under manufacturing  agreements with other  pharmaceutical
      companies are recognized when product is shipped.

      TREASURY STOCK

      The Company records common shares purchased and held in treasury at cost.

      FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying  amounts of current assets and liabilities  approximate  fair
      value due to the  short-term  nature of these  instruments.  The  carrying
      amounts of noncurrent assets are reasonable estimates of their fair values
      based on  management's  evaluation  of future  cash flows.  The  long-term
      liabilities  are carried at amounts that  approximate  fair value based on
      borrowing  rates  available  to the Company for  obligations  with similar
      terms, degrees of risk and remaining maturities.

      STOCK-BASED COMPENSATION

      Beginning with stock options and warrants granted in 2003, the Company has
      accounted for  stock-based  compensation in accordance with the provisions
      of SFAS No. 123, "Accounting for Stock-Based Compensation," which provided
      guidance for the recognition of compensation  expense as it related to the
      issuance of stock options and warrants.  In addition,  the Company adopted
      the provisions of SFAS No. 148, "Accounting for Stock-Based Compensation -
      Transition  and  Disclosure  - an amendment of SFAS No. 123." SFAS No. 148
      amended SFAS No. 123 to provide  alternative  methods of transition  for a
      voluntary  change  to the  fair  value  based  method  of  accounting  for
      stock-based employee  compensation  provided by SFAS No. 123. As permitted
      by SFAS No. 148, the Company has adopted the fair value method recommended
      by SFAS No. 123 to effect a change in accounting for stock-based  employee
      compensation.  In addition, the Company adopted the provisions of SFAS No.
      123R,  "Share-Based  Payment,"  which  revised SFAS No. 123 to require all
      share-based  payments to  employees,  including  grants of employee  stock
      options, to be recognized based on their fair values.

      RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      FASB  Statement No. 123 (R),  "Share Based  Payment"  ("FASB No. 123 (R)")
      requires all entities to recognize compensation expense in an amount equal
      to the fair value of share based  payments made to employees,  among other
      requirements.  Under the fair value  based  method,  compensation  cost is
      measured  at the grant  date  based on the fair  value of the award and is
      recognized on a  straight-line  basis over the award vesting  period.  The
      Company  previously  adopted  FASB No. 123 (R) during the year ended March
      31, 2003.

      Accordingly,  share  based  payments  issued to  officers,  directors  and
      vendors are  measured  at fair value and  recognized  as expense  over the
      related vesting periods.

      The  compensation  expense  recognized for the years ended March 31, 2007,
      2006 and 2005 was $3,479,070, $902,927 and $1,008,850, respectively.


                                      F-13
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)

      In June 2006, the Financial  Accounting  Standards  Board ("FASB")  issued
      FASB  Interpretation No. 48, "Accounting for Uncertainty in Income Taxes,"
      an  interpretation  of FASB  Statement No. 109 ("FIN 48"),  which provides
      criteria for the recognition,  measurement, presentation and disclosure of
      uncertain tax positions.  A tax benefit from an uncertain  position may be
      recognized  only if it is "more  likely  than  not" that the  position  is
      sustainable  on  its  technical  merits.  The  provisions  of  FIN  48 are
      effective for fiscal years  beginning after December 15, 2006. The Company
      does not  expect FIN 48 will have a  material  effect on its  consolidated
      financial condition, results of operations or cash flows.

      In  September  2006,  the FASB issued FASB  Statement  No. 157 "Fair Value
      Measurements"  ("FASB No.  157") which  relate to the  definition  of fair
      value,   the  methods  used  to  measure  fair  value,  and  the  expanded
      disclosures about fair value measurements.  The provisions of FASB No. 157
      are effective for financial  statements  issued for fiscal years beginning
      after  November  15, 2007.  The Company does not expect this  statement to
      have a material effect on its consolidated financial condition, results of
      operations or cash flows upon adoption.

      In  September  2006,  the  SEC  issued  Staff  Accounting   Bulletin  108,
      "Considering  The  Effects Of Prior Year  Misstatements  When  Quantifying
      Misstatements  In  Current  Year  Financial  Statements",  which  provides
      guidance  regarding  the  process  of  quantifying   financial  statements
      misstatements  for the purpose of materiality  assessment.  The provisions
      are effective for fiscal years ending on or after November 15, 2006.  This
      bulletin  did not have a  material  effect on its  consolidated  financial
      condition, results of operations or cash flows upon adoption.

      In February  2007, the FASB issued FASB Statement No. 159, "The Fair Value
      Option  for  Financial  Assets and  Financial  Liabilities,  including  an
      amendment of FASB  Statement  No.  115,"  ("FASB No.  159") which  permits
      entities to choose to measure many financial instruments and certain other
      items at fair value that are not currently required to be measured at fair
      value.  The  objective  is to improve  financial  reporting  by  providing
      entities with the opportunity to mitigate  volatility in reported earnings
      caused by measuring  related assets and  liabilities  differently  without
      having to apply  complex  hedge  accounting  provisions.  FASB No.  159 is
      expected to expand the use of fair value measurement,  which is consistent
      with the Board's  long-term  measurement  objectives  for  accounting  for
      financial  instruments.  FASB No. 159 also  establishes  presentation  and
      disclosure   requirements  designed  to  facilitate   comparisons  between
      entities that choose different measurement attributes for similar types of
      assets  and  liabilities.  FASB  No.  159  does not  affect  any  existing
      accounting  literature that requires  certain assets and liabilities to be
      carried at fair value.  FASB No. 159 does not establish  requirements  for
      recognizing and measuring  dividend income,  interest income,  or interest
      expense. FASB No. 159 does not eliminate disclosure  requirements included
      in other  accounting  standards,  including  requirements  for disclosures
      about fair value measurements,  included in FASB Statements No. 157, "Fair
      Value Measurements, and No. 107, Disclosures about


                                      F-14
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                         MARCH 31, 2007, 2006 AND 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)

      Fair Value of Financial  Instruments." FASB No. 159 is effective as of the
      beginning of an entity's  first fiscal year that begins after November 15,
      2007.  The Company has not yet completed its assessment of the impact upon
      adoption of FASB No. 159 on its consolidated financial condition,  results
      of operations or cash flows.

      RECLASSIFICATIONS

      Certain  accounts  and amounts in the 2005 and 2006  financial  statements
      have been  reclassified  in order to conform  with the 2007  presentation.
      These reclassifications have no effect on net income.

NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS

      The Company reported net losses of $11,803,512,  $6,883,914 and $5,906,890
      for the fiscal years ended March 31, 2007, 2006 and 2005, respectively. At
      March 31, 2007,  the Company had an accumulated  deficit of  approximately
      $62.8  million,   consolidated   assets  of  approximately  $9.7  million,
      stockholders' equity of approximately $3.5 million, and working capital of
      approximately  $1 million.  The Company has not generated any  significant
      revenue  to date.  During  2006,  the  Company  raised  $8,792,669  of net
      proceeds from the sale of Series B Preferred Stock.

      The Company's strategy is to continue to be engaged in the development and
      manufacturing  of oral  controlled-release  products.  It will continue to
      develop  generic  versions of  controlled  release drug products with high
      barriers  to  entry  and  assist  partner  companies  in  the  life  cycle
      management  of products to improve off patent drug  products.  The Company
      has two products currently being sold commercially and a pipeline of seven
      products under development.

      As of March 31, 2007,  the  Company's  principal  source of liquidity  was
      approximately  $2,045,000  of cash and cash  equivalents.  The Company may
      also receive funds through the exercise of  outstanding  stock options and
      warrants  in addition to funds that may be  generated  from the  potential
      sale of New Jersey tax losses.  There can be no  assurance  that  proceeds
      from  the  sale of the tax  losses  and  from  the  exercise,  if any,  of
      outstanding warrants or options will be material.


                                      F-15
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS (CONTINUED)

      The Company  retained  an  investment  banking  firm in 2006 to assist the
      Company in connection  with potential  acquisitions,  strategic  alliances
      with  other  pharmaceutical  companies,  advice to future  financings  and
      introductions to key parties in capital markets.

      As result, during April 2007, the Company raised approximately $13,900,000
      of net proceeds  from the sale of Series C  Convertible  Preferred  Stock.
      Management  plans to use  these  net  proceeds  over the  next  twelve  to
      fourteen months to fund its research and development activities as well to
      fund its continuing investment in Novel Laboratories, Inc.

      See  "Note  11  -  Subsequent  Events"  for  description  of  Series  C 8%
      Convertible Preferred Stock.

      There  is no  assurance  that  the  Company's  business  strategy  will be
      successfully  implemented,  however with the  Company's  existing  working
      capital  levels,  it will be able to continue  operations at least through
      the end of fiscal 2008.

NOTE 3- PROPERTY AND EQUIPMENT

      Property  and  equipment  at  March  31,  2007 and  2006  consists  of the
      following:

<TABLE>
<CAPTION>
                                                               2007          2006
                                                               ----          ----
      <S>                                                  <C>           <C>
      Laboratory manufacturing, and warehouse equipment    $5,216,272    $3,763,163
      Office equipment                                         88,397        32,981
      Furniture and fixtures                                   51,781        51,781
      Transportation equipment                                  4,500            --
      Land, building and improvements                       2,385,401     2,349,459
      Equipment under capital lease                           168,179       168,179
                                                           ----------    ----------
                                                            7,914,530     6,365,563
      Less: Accumulated depreciation and amortization       2,460,504     2,056,594
                                                           ----------    ----------
                                                           $5,454,026    $4,308,969
                                                           ==========    ==========
</TABLE>

      Depreciation and amortization  expense amounted to $403,698,  $333,748 and
      $300,303 for the years ended March 31, 2007, 2006 and 2005, respectively.


                                      F-16
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 4 - INTANGIBLE ASSETS

      Intangible assets at March 31, 2007 and 2006, consist of the following:

                                                      2007          2006
                                                      ----          ----

      Patents                                       $151,300      $145,830
      Trademarks                                       8,120         8,120
                                                    --------      --------
                                                     159,420       153,950
      Less: Accumulated amortization                 116,611        94,493
                                                    --------      --------
                                                    $ 42,809      $ 59,457
                                                    ========      ========

      Amortization of intangible assets amounted to $22,118, $21,727 and $21,012
      for the years ended March 31, 2007, 2006 and 2005, respectively.

NOTE 5 - LONG TERM DEBT

      On September  2, 1999,  the Company  completed  the issuance of tax exempt
      bonds by the New Jersey  Economic  Development  Authority  ("NJEDA" or the
      "Authority"). The aggregate proceeds from the issuance of the fifteen year
      term  bonds was  $3,000,000.  Interest  on the bonds  accrues at 7.75% per
      annum. A portion of the proceeds were used by the Company to refinance its
      land and building, and the remaining proceeds were intended to be used for
      the purchase of manufacturing equipment and building improvements.

      On August 31, 2005,  the Company  successfully  completed a refinancing of
      the 1999 bond issue  through  the  issuance of new  tax-exempt  bonds (the
      "Bonds").  The refinancing involved borrowing  $4,155,000,  evidenced by a
      6.5%  Series A Note in the  principal  amount of  $3,660,000  maturing  on
      September  1,  2030 and a 9%  Series  B Note in the  principal  amount  of
      $495,000 maturing on September 1, 2012. The net proceeds, after payment of
      issuance costs,  were used (i) to redeem the outstanding  tax-exempt Bonds
      originally  issued by the Authority on September 2, 1999,  (ii)  refinance
      other equipment  financing and (iii) for the purchase of certain equipment
      to be used in the manufacture of pharmaceutical products.

      Interest is payable  semiannually on March 1 and September 1 of each year.
      The Bonds are collateralized by a first lien on the Company's facility and
      equipment acquired with the proceeds of the original and refinanced Bonds.
      The related Indenture  requires the maintenance of a $415,500 Debt Service
      Reserve Fund  consisting of $366,000 from the Series A Notes  proceeds and
      $49,500  from the Series B Notes  proceeds.  The Debt  Service  Reserve is
      maintained  in  restricted  cash  accounts  that are  classified  in Other
      Assets.  $1,274,311  of the  proceeds  had been  deposited in a short-term
      restricted  cash account to fund the purchase of  manufacturing  equipment
      and


                                      F-17
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 5 - LONG TERM DEBT (CONTINUED)

      development of the Company's facility.  As of March 31, 2007, all of these
      proceeds were utilized to upgrade the Company's  manufacturing  facilities
      and for the purchase of manufacturing and laboratory equipment.

      Bond issue  costs of  $354,000  were paid from the bond  proceeds  and are
      being amortized over the life of the bonds. Amortization of bond financing
      costs  amounted  to $14,178  and $7,000 for the years ended March 31, 2007
      and 2006, respectively.

      Bond issue costs of the 1999 bonds were being  amortized  over the term of
      those bonds. Such amortization amounted to $5,500 and $13,190 in the years
      ended  March 31, 2006 and 2005,  respectively.  Upon the  refinancing  the
      remaining unamortized issue costs of $118,712 were charged to expenses.

      As of March 31, 2007, $1,274,311 has been requisitioned and deposited into
      operating  accounts to fund the purchase of  equipment  and to upgrade and
      manufacturing facility.

      Bond financings consisted of the following at March 31:

                                                         2007           2006
                                                         ----           ----

      Refinanced NJEDA Bonds                         $ 3,980,000    $ 4,155,000
                                                     -----------    -----------
                                                       3,980,000      4,155,000
      Current portion                                   (185,000)      (175,000)
                                                     -----------    -----------
      Long term portion, net of current maturities   $ 3,795,000      3,980,000
                                                     ===========    ===========

      Maturities of Bonds for the next five years follow:

                 YEAR ENDING MARCH 31,                       AMOUNT
                 ---------------------                       ------
                         2008                             $   185,000
                         2009                                 200,000
                         2010                                 210,000
                         2011                                 225,000
                         2012                                 245,000
                      Thereafter                            2,915,000
                                                          -----------
                                                          $ 3,980,000
                                                          ===========


                                      F-18
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 5 - LONG TERM DEBT (CONTINUED)

      In 2004,  the  Company  entered  into a loan and  financing  agreement  to
      purchase  machinery  and  equipment.  The $400,000  loan was payable in 36
      monthly installments of $13,671, each, including principal and interest at
      14% annum.  As part of the  agreement,  the Company issued to the lender's
      designees warrants to purchase 50,000 shares of the Company's Common Stock
      at $4.20 per share.  The  warrants  vested  immediately  and their cost of
      $41,252 was charged to expense in the year ended March 31, 2005.  Proceeds
      from the  refinancing  of the Company's EDA Bonds were used to pay off the
      unpaid portion of the loan.

NOTE 6 - INCOME TAXES

      The components of the provision for income taxes are as follows:

                                              YEAR ENDED MARCH 31,
                                         2007          2006          2005
                                         ----          ----          ----
      Federal:
            Current                     $   --        $   --        $   --
            Deferred                        --            --            --
                                        ------        ------        ------
                                            --            --            --
                                        ------        ------        ------
      State:
            Current                      1,770         1,000         1,000
            Deferred                        --            --            --
                                        ------        ------        ------
                                         1,770         1,000         1,000
                                        ------        ------        ------
                                        $1,770        $1,000        $1,000
                                        ======        ======        ======

During  the years  ended  March 31,  2007,  2006 and 2005 the  Company  received
approval for the sale of an additional $4,818,122,  $2,798,478 and $2,628,257 of
New Jersey  net-operating  losses under the Technology Tax Certificate  Transfer
Program sponsored by the New Jersey Economic Development  Authority (NJEDA). The
total tax benefits received during the years ended March 31, 2007, 2006 and 2005
were  $377,259,  $219,121 and $205,792,  respectively  and are recorded as other
income in the statements of operations.


                                      F-19
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 6 - INCOME TAXES (CONTINUED)

      The major components of deferred tax assets at March 31, 2007 and 2006 are
      as follows:

                                                 2007             2006
                                                 ----             ----
      Net operating loss carry forwards     $ 11,733,884     $ 10,785,800
      Valuation allowance                    (11,733,884)     (10,785,800)
                                            ------------     ------------

                                            $         --     $         --
                                            ============     ============

      At March 31, 2007 and 2006, a 100% valuation allowance is provided,  as it
      is uncertain  if the deferred tax assets will provide any future  benefits
      because of the  uncertainty  about the  Company's  ability to generate the
      future   taxable   income   necessary  to  use  the  net  operating   loss
      carryforwards.  The valuation  allowance  increased  during 2007, 2006 and
      2005 by $948,084, $2,363,575 and $1,685,889, respectively.

      At March 31, 2007, for federal income tax purposes, the Company has unused
      net operating loss carryforwards of approximately  $36,816,851 expiring in
      2008 through 2022. For state tax purposes,  the Company has $15,835,173 of
      unused net operating  losses,  which are net of the $19,784,360 of the New
      Jersey net-operating losses sold, as discussed above.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

      EMPLOYMENT AGREEMENTS

      On  September  2, 2005,  the Company  entered into an amended and restated
      employment  agreement  with  Bernard J. Berk,  providing  for Mr.  Berk to
      continue to serve as the Company's Chief Executive  Officer through August
      31, 2009.  The  Employment  Agreement also provides for an annual bonus as
      determined  by the  Compensation  Committee  of  the  Company's  Board  of
      Directors. Pursuant to the agreement:

      -     Mr. Berk waived his rights to 75,000 of 300,000  options  granted to
            him on July 23,  2003.  The Company  determined  that the  remaining
            225,000 options are fully vested.

      -     Mr. Berk's salary was increased to $330,140, effective May 1, 2005.

      -     Mr. Berk was granted  under the  Company's  2004 Stock  Option Plan,
            ten-year  options  to  purchase  600,000  shares of Common  Stock at
            $2.69,  the  fair  market  value of  Common  Stock as of the time of
            grant.

                                      F-20
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

      EMPLOYMENT AGREEMENTS (CONTINUED)

      -     Mr. Berk will be entitled to receive  severance in  accordance  with
            the  employment  agreement  if he is  terminated  without  cause  or
            because of his death or permanent disability or if he terminates his
            employment  for good  reason or as a result of a "change of control"
            (as defined in the employment agreement).

      The Company on November 13, 2006  entered into (i) the Second  Amended and
      Restated  Employment  Agreement with Mr. Bernard Berk ("Berk"),  its Chief
      Executive  Officer  and  Chairman  of the Board of  Directors  (the  "Berk
      Agreement"); (ii) an employment agreement with Dr. Charan Behl ("Behl") as
      Executive  Vice  President  and  Chief  Scientific  Officer;  and (iii) an
      employment  agreement  with Mr.  Chris Dick  ("Dick")  as  Executive  Vice
      President of Corporate Development.

      The  employment  agreement  with Dr.  Behl was  subsequently  amended  and
      restated on February 9, 2007,  under which Dr. Behl's position was changed
      from Chief  Scientific  Officer to Head of Technical  Affairs and he is to
      report to our Chief Executive  Officer,  Chief Scientific  Officer and any
      additional executive officer designated by the Board of Directors.

      The Berk  Agreement  provides  for a base annual  salary of $330,140  (his
      current  salary) which may at the  discretion of the Board of Directors be
      increased in light of factors including the existing  financial  condition
      of the Company and his success in implementing the Company's business plan
      and achieving its strategic alternatives.  He is to continue to receive an
      automobile  allowance  of $800 per  month.  The  Behl and Dick  Agreements
      provide  for an initial  base  annual  salary of  $250,000  and  $200,000,
      respectively, a guaranteed bonus of $25,000 payable on January 1, 2007 and
      within 30 calendar days of the end of each fiscal year during the term and
      a $700 per month automobile allowance.

      Each of the three agreements provides for payment of a discretionary bonus
      following the end of each fiscal year of up to 50% of the executive's then
      annual base salary. The amount, if any, of the discretionary bonus will be
      determined  by the  Compensation  Committee as to Berk and by the Board of
      Directors or a Compensation Committee as to Behl and Dick. Berk's bonus is
      to be based on any  commercialization of products,  merger or acquisition,
      business  combination or collaborations,  growth in revenues and earnings,
      additional  financings or other strategic business  transaction that inure
      to the benefit of the Company's  stockholders.  The bonus,  if any, may be
      paid in cash or shares of Common Stock, valued at the closing price of the
      Common Stock on the immediately  preceding  trading day. The discretionary
      bonus which may be paid to Behl or Dick is to be based on the  achievement
      of  goals  discussed  with  the  executive  in good  faith  and  within  a
      reasonable time following the  commencement of each fiscal year and may be
      paid in cash or shares of the Company's Common Stock valued at the average
      of the closing  price per share during the five  trading days  immediately
      preceding the date of issuance of the shares.


                                      F-21
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

      EMPLOYMENT AGREEMENTS (CONTINUED)

      Each of Behl's and Dick's agreement  provides for the grant under the 2004
      Stock Option Plan (the "2004 Plan") to the executive at an exercise  price
      of $2.25 of options to purchase  250,000  shares.  The Berk, Behl and Dick
      Agreements  each provide for the grant to the  executive of options at the
      foregoing  exercise price to purchase up to 300,000 additional shares (the
      "Opioid Product  Options") which are to vest in two 150,000 share tranches
      upon the closing of an  exclusive  product  license for the United  States
      national market, the entire European Union Market or the Japan market or a
      product sale  transaction  of all the  Company's  ownership  rights in the
      United States (only once for each  product) for the  Company's  first drug
      developed  by the  Company  for  which  the  United  States  Food and Drug
      Administration  (the "FDA") approval will be sought under a NDA (including
      a  505(b)  (2)  application)  for  oxycodone,  hydrocone,   hydromorphone,
      oxymorphone,  or morphine  ("Non-Generic  Opioid Product") as to the first
      tranche and as to the  Company's  second  Non-Generic  Opioid Drug for the
      second  tranche.  The Berk  Agreement  provides  for the  amendment of the
      vesting  of  options  as to  400,000  shares  which  had been  granted  on
      September 2, 2005 to Berk at an exercise price of $2.69 per share ("Berk's
      Previous Milestone Options") and the Behl and Dick Agreements provides for
      the grant of options at the exercise  price of $2.25 per share for each of
      Behl  and  Dick as to  200,000  shares  (collectively  along  with  Berk's
      Previous  Milestone Options,  the "Milestone  Options") with the Milestone
      Options  of each of the three  executives  to vest (A) as to not more than
      125,000 shares and 75,000 shares,  respectively,  upon the commencement of
      the first  Phase III  clinical  trial  relating  to the first and then the
      second Non-Generic Opioid Drug developed by the Company; (B) 50,000 shares
      upon the closing of each product license or product sale transaction (on a
      product  by  product  basis and only  once for each  product)  other  than
      Non-Generic  Opioid Drugs for which options were granted above; (C) 10,000
      shares upon the filing by the Company (in the Company's name) with the FDA
      of either an ANDA or an NDA (including an  application  filed with the FDA
      under Section  505(b)(2) of the Federal,  Food, Drug, and Cosmetic Act, 21
      U.S.C.  Section 301 et seq.)  (collectively,  a "NDA"),  for a product not
      covered by a previous FDA application; (D) 40,000 shares upon the approval
      by the FDA of any ANDA or NDA (filed in the Company's  name) for a product
      not  previously  approved by the FDA; (E) 25,000 shares upon the filing of
      an application for a U.S.  patent by the Company (in the Company's  name);
      and (F) 25,000  shares upon the granting by the U.S.  Patent and Trademark
      Office (the "PTO") of a patent to the Company filed in the Company's  name
      or an approval of an ANDA or NDA; provided,  however the foregoing options
      terminate  upon the  executive's  termination  of  employment  except that
      options under (D) and (F) nevertheless  vest if the filing was made during
      the initial term but prior to termination of the executive's employment by
      the Company without cause and the approval was made within 540 days of the
      filing of the ANDA, NDA or patent application.


                                      F-22
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

      EMPLOYMENT AGREEMENTS (CONTINUED)

      The  Company  also  agreed  that in the  event  that as to Berk all of the
      options to purchase the full 400,000 Berk's Previous Milestone Options has
      fully vested  during the initial term of the  agreement  and as to each of
      Behl and Dick all 200,000  Milestone  Options have fully vested during the
      initial  term of his  agreement,  the Company will grant under the Plan to
      the  executive  at the end of the first  current  fiscal year in which the
      following  event occurs fully  vested  additional  options to purchase the
      following  shares  at the fair  market  value  on the  date of grant  (the
      "Additional  Milestone Options"):  (a) to the extent not previously vested
      with respect to his comparable Milestone Options: (i) up to 125,000 shares
      upon the  commencement  of the first Phase III clinical  trial relating to
      the first Non-Generic  Opioid Drug developed by the Company and (ii) up to
      an  additional  125,000  shares as to such  trial  relating  to the second
      Non-Generic  Opioid Drug developed by the Company,  (b) 50,000 shares upon
      the closing of each product  license for the United States national market
      or  product  sale  transaction  of all  ownership  rights (on a product by
      product basis and only once for each product);  (c) 10,000 shares upon the
      filing by the  Company (in the  Company's  name) with the FDA of either an
      ANDA or NDA for a product not covered by a previous  FDA  application  for
      each drug product of the Company,  other than the Non-Generic Opioid Drugs
      for which any Opioid  Option was granted under the  Agreement;  (d) 40,000
      shares  upon  the  approval  by  the  FDA of any  ANDA,  NDA or  505(b)(2)
      application  filed in the  Company's  name for a  product  not  previously
      approved  by the FDA;  (e) 25,000  shares in the event of the filing of an
      application  of an  additional  U.S.  patent by the Company  (filed in the
      Company's name); and (f) 25,000 shares in the event of the granting by the
      PTO of the foregoing  additional patent applications to the Company (filed
      in the Company's name).

      The Berk Agreement  acknowledges that Berk holds previously  granted fully
      vested  incentive  stock  options to  purchase  725,000  shares,  of which
      300,000 vested options are exercisable at $2.01 per share,  225,000 vested
      options are  exercisable at $2.15 per share and 100,000 vested options are
      exercisable at $2.69 per share, and the remaining  100,000 options,  which
      vest on September 2, 2007, are exercisable at $2.69 per share.

      Each employment agreement allows the Company at its discretion to grant to
      the  executive  additional  options  under the 2004 Plan and provides each
      executive  the right to register at the Company's  expense for  reoffering
      shares  issued upon exercise of the options  under the  Securities  Act of
      1933, as amended, in certain registration  statements filed by the Company
      with respect to offerings of securities by the Company.


                                      F-23
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

      EMPLOYMENT AGREEMENTS (CONTINUED)

      Berk's Agreement,  as did his Amended and Restated  Employment  Agreement,
      provides  that  if  the  Company  terminates  his  employment  due  to his
      permanent  disability,  without cause or he terminates  his employment for
      good reason,  Berk shall be entitled to the following  severance:  (i) any
      earned but unpaid base salary plus any unpaid reimbursable  expenses as of
      the effective date of termination of his employment, (ii) the then-current
      base  salary  and  reimbursement  of the  cost to  replace  the  life  and
      disability  insurance  coverages  afforded  to Berk  under  the  Company's
      benefit  plans  with  substantially   similar  coverages,   following  the
      effective date of termination of his employment, for a period equal to the
      greater of (x) the  remainder of the  then-current  term, or (y) two years
      following  the  effective  date of  termination  and (iii)  payment by the
      Company of premiums for health  insurance for the period during which Berk
      is entitled to  continued  health  insurance  coverage as specified in the
      Comprehensive  Omnibus  Budget  Reconciliation  Act. In the event that the
      Company terminates Berk's employment because of his permanent  disability,
      Berk is to be entitled to the severance  specified above, less any amounts
      actually received by him under any disability  insurance coverage provided
      for and paid by the  Company.  In the event  that the  Company  terminates
      Berk's  employment for cause or Berk  terminates  his employment  with the
      Company  without  good  reason,  Berk shall be  entitled to any earned but
      unpaid  base  salary  plus  any  unpaid  reimbursable  expenses  as of the
      effective date of termination of his employment.

      Berk's Agreement,  as did his prior agreement,  provides that in the event
      of a change of  control in lieu of any  severance  that may  otherwise  be
      payable to him if Berk elects to terminate his  employment  for any reason
      within 90 days thereof,  or the Company elects to terminate his employment
      within 180 days thereof, other than for cause, he is to be entitled to the
      following:  (i)  any  earned  but  unpaid  base  salary  plus  any  unpaid
      reimbursable  expenses  as of the  effective  date of  termination  of his
      employment,  (ii)  $1,000,000,  (iii) the  then-current  base salary for a
      period of 12 months  following the  effective  date of  termination,  (iv)
      reimbursement  of the cost, for a period equal to 12 months  following the
      effective  date of  termination,  of  replacing  the life  and  disability
      insurance coverage afforded to Berk under the Company's benefit plans with
      substantially  similar coverage and (v) payment by the Company of premiums
      for health  insurance  for the period  during  which Berk is  entitled  to
      continued  health  insurance  coverage as specified  in the  Comprehensive
      Omnibus Budget Reconciliation Act.

      Each of Behl's and Dick's Agreements provide that in the event the Company
      terminates  his  employment for "Cause" as defined in the agreement or the
      executive  terminates  employment  without good  reason,  he is to receive
      salary through date of termination,  reimbursement  for expenses  incurred
      prior to termination,  all unvested  options will terminate as of the date
      of  termination  and vested  options  will be governed by the terms of the
      2004 Plan and the related option agreement.  In the event of a termination
      due to death,  disability  or by the Company  without  cause or by Behl or
      Dick for good reason,  the Company is to pay him or his estate  subject to
      his  compliance  with  certain   covenants,   including   non-competition,
      non-solicitation, confidentiality and assignment of intellectual property,
      his base salary for the longer of the  balance of the initial  term or one
      year from date of


                                      F-24
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

      EMPLOYMENT AGREEMENTS (CONTINUED)

      termination,  continue  health  insurance  coverage  for  12  months  from
      termination  and his vested options are to be exercisable for 90 days from
      date of  termination.  Dr.  Behl's  amended  agreement  provides  that the
      definition of "cause" has been amended to include a  determination  by the
      Board of Directors,  in its sole  discretion,  that the  employment of Dr.
      Behl should terminate, provided that such termination will be effective on
      the 30th day after the written notice to Dr. Behl of such determination.

      In the event the  employment  of Behl or Dick is terminated by the Company
      following a "Change of Control" of the Company, he will be entitled to the
      amounts  payable as a result of termination  by the Company  without cause
      plus a lump  sum  payment  of  $500,000  and all  unvested  options  shall
      immediately vest and along with unexercised  vested options be exercisable
      within  90 days  from the date of  termination.  "Change  of  control"  is
      defined in each of their  agreements  as the  acquisition  of the  Company
      pursuant to a merger or  consolidation  which  results in the reduction to
      less than 50% of the shares  outstanding upon  consummation of the holders
      of  its  outstanding   shares   immediately   prior  thereto  or  sale  of
      substantially  all the assets or capital  stock of the  Company to another
      person,  or the  acquisition  by a person or a  related  group in a single
      transaction  or a series of  related  transaction  of more than 50% of the
      combined voting power of the Company's outstanding voting securities.

      Berk's Agreement  contains his  non-solicitation  covenant for a period of
      one year from termination.  Each of Behl and Dick has agreed to a one-year
      following  termination  non-competition  covenant and a two year following
      termination non-solicitation covenant.

      The  executives  are to be reimbursed  for expenses  (including  business,
      travel and  entertainment)  reasonably  incurred in the performance of his
      duties, with Behl's and Dick's agreements  providing that reimbursement of
      expenses in excess of $2,000 per month are subject to the  approval of the
      Company's Chief Executive  Officer.  Each of the executives is entitled to
      participate in such employee benefit and welfare plans and programs, which
      may be  offered  to  senior  executives  of  the  Company  including  life
      insurance,  health and  accident,  medical  plans and  programs and profit
      sharing and retirement plans.

      Each employment agreement is for an initial term ending November 13, 2009,
      subject to automatic  one-year renewals unless terminated by the executive
      or the Company  upon at least 60 days notice  prior to the end of the then
      scheduled  expiration  date. The Company has the right to terminate Berk's
      employment  in the event of his  inability to perform work due to physical
      or mental illness or injury for nine full calendar months during any eight
      consecutive  calendar  months.  It has the  right to  terminate  Behl's or
      Dick's  employment due to disability as defined in a long-term  disability
      insurance policy reasonably satisfactory to him or, in the absence of such
      policy,  due to his  inability  for 120  days in any 12  month  period  to
      substantially  perform  his  duties  as a result of a  physical  or mental
      illness.


                                      F-25
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

      ALLIANCE AGREEMENT

      On  December  6, 2006,  the  Company  entered  into a  Strategic  Alliance
      Agreement (the "ALLIANCE  AGREEMENT")  with Dr.  Veerappan S.  Subramanian
      ("VS") and VGS Pharma,  LLC, a Delaware limited liability company ("VGS"),
      under which (i) VS was appointed to the Company's Board of Directors, (ii)
      VGS made a  $2,000,000  equity  investment  in the  Company,  (iii) VS was
      engaged to serve as strategic  advisor on the  research,  development  and
      commercialization of the Company's existing pipeline, (iv) the Company and
      VGS formed Novel Laboratories Inc., a Delaware corporation ("Novel"), as a
      separate specialty  pharmaceutical company for the research,  development,
      manufacturing,  licensing,  acquisition and marketing of specialty generic
      pharmaceuticals,  and (v) the Company contributed  $2,000,000 to Novel and
      agreed to make additional contributions.

      Pursuant to the  Alliance  Agreement,  Novel  entered  into an  employment
      agreement with VS and the Company  entered into (i) an Advisory  Agreement
      with VS, (ii) a Registration Rights Agreement with VGS and VS, and (iii) a
      Stockholders Agreement with VS, VGS and Novel.

      The specialty  pharmaceutical product initiative of the strategic alliance
      between  the  Company  and VS is to be  conducted  by Novel  of which  the
      Company  acquired 49% and VGS  acquired  51% of its Class A Voting  Common
      Stock for  $9,800  and  $10,200  respectively.  Pursuant  to the  Alliance
      Agreement,  VGS acquired for  $2,000,000:  (i) 957,396 shares of Company's
      Common  Stock (the  "Acquired  Company  Shares")  valued at  approximately
      $2.089 per share (the average closing price of the Common Stock during the
      ten trading  days on the American  Stock  Exchange  immediately  preceding
      December  6,  2006)  and (ii) a five  year  Warrant  to  purchase  478,698
      additional  shares (the "Warrant  Shares"),  for cash, at a price of $3.00
      per share.

      The Company initially contributed  $2,000,000 to Novel and made additional
      contributions   of  $5,000,000   through  June  15,  2007.  The  remaining
      contributions to be made by the Company shall be funded in the amounts and
      upon the occurrence of the following  milestones (i) $10,000,000  upon the
      submission  to  the  FDA  of  three  ANDAs  related  to  three   different
      prospective  products  developed  by Novel and (ii)  $10,000,000  upon the
      submission to the FDA of three ANDAs related to at least three  additional
      different  prospective  products  developed  by Novel;  provided  that the
      aggregate  contributions  to be made by the  Company  shall not exceed (i)
      $15,000,000  prior to November 1, 2007 or (ii) $25,000,000 prior to May 1,
      2008.  The  remaining  contributions  of  the  Company  are  not  monetary
      obligations  but  rather  conditions  that  must be met in  order  for the
      Company to maintain its equity interest in Novel.


                                      F-26
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

      ALLIANCE AGREEMENT (CONTINUED)

      In the event that (i) the Company defers for more than 90 days the payment
      of a  contribution  installment  due  to  Novel's  failure  to  achieve  a
      Performance  Milestone,  (ii)  the  Company  fails  to  make  a  requisite
      contribution  following Novel's achieving a Performance Milestone or (iii)
      Novel  requires  additional  financing  beyond  amounts  provided  in  the
      Business Plan or the  additional  contributions  the Company has agreed to
      provide,  Novel may seek such financing through a subscription offering to
      its Class A  Stockholders  and, to the extent not fully  subscribed,  from
      third parties.

      The  Company  agreed to use its best  efforts  to elect VS a member of its
      Board of Directors as long as the Company and its "permitted  transferees"
      own at least 40% of Novel's  outstanding  capital stock and VS is Chairman
      of the Board and Chief Executive Officer of Novel.

      Pursuant  to an  employment  agreement,  Novel has  agreed to employ VS to
      perform his duties three full business days a week as its Chief  Executive
      Officer at a salary of  $220,000  per annum,  with  bonuses and options to
      purchase  Novel's  Common Stock to be granted at the discretion of Novel's
      Board of Directors.

      VS's  employment may be terminated for "Cause" or by VS for "Good Reason",
      with both such terms defined in the VS employment agreement.  Either party
      may terminate the employment upon 30-business days prior written notice to
      the other.

      The stockholders agreement provides that as long as each owns at least 10%
      of the  shares  of  Class A  Voting  Common  Stock of  Novel,  each  shall
      designate  one of the two  Directors  to  constitute  the  Novel  Board of
      Directors,  with the VGS designee to be VS, unless  otherwise  approved by
      the Company.  It prohibits the taking of certain actions without  approval
      of the  two  designees,  including,  but not  limited  to,  amendments  of
      charter,  by-laws and other  governance  agreements,  spin-offs  or public
      offerings of equity securities,  a liquidation or dissolution,  dividends,
      authorization or issuance of additional securities or options, bankruptcy,
      a material  change of the  business  or a  Business  Plan,  approval  of a
      Business  Plan and the yearly  operating  budget,  creation  of a security
      interest, capital expenditures in excess of 110% of the amount provided in
      the Business Plan,  investments  in excess of the amounts  approved in the
      Business Plan, an increase or decrease of the Board;  and any  investments
      by VS in any "Competitive Company" or its affiliate.

      It further  provides that  determination of "Cause" or the "Disability" of
      VS under his employment  agreement  shall be made solely in the reasonable
      discretion of the Company designee.

      Except  for  certain  enumerated  permitted  transfers,  the  stockholders
      agreement provides that no transfer of Novel stock may be made without the
      consent of the other stockholders.


                                      F-27
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

      ALLIANCE AGREEMENT (CONTINUED)

      In the event the Company fails to make required additional  contributions,
      VGS has the right to purchase  from the Company at its  original  purchase
      price  that  proportion  of the  shares  of  Novel  Class A  Common  Stock
      originally  acquired  by it  equal  to  the  proportion  of  the  required
      additional contributions not made by the Company.

      In the event of VS's  resignation  from Novel for other than Good  Reason,
      his  termination by Novel for Cause, or his death or disability as defined
      in the Employment Agreement, the Company has the right to acquire from VGS
      up to 75% of the  shares  of  Class A Common  Stock  of  Novel  originally
      acquired by it at the  original  purchase  price;  such  percentage  to be
      reduced  to 50% and 25% upon  the  first  and  second  anniversary  of the
      agreement  and no  reduction  on the  third  anniversary,  with a pro rata
      portion of such  reduction to be effected  upon the death or disability of
      VS during the applicable  period.  Each of the Company and VGS has a right
      to acquire from the other at the then fair value, its shares of Novel upon
      the  bankruptcy,  dissolution or  liquidation,  a change of control of the
      other or, if as a result of such purchases at the original purchase price,
      the percentage of Novel owned by such party is less than 10%.

      The agreement subjects VS to a confidentiality covenant, a non-competition
      covenant  terminating  one  year  following  the  end  of the  term  and a
      non-solicitation  covenant  terminating two years following the end of the
      term,  provided his  termination by Novel was not without "Cause" or by VS
      was with "Good Reason".

      ADVISORY AGREEMENT

      The Advisory  Agreement  obligates VS to provide advisory  services to the
      Company,  including but not limited,  to assist in the  implementation  of
      current  and new drug  product  development  projects  of the  Company and
      assisting in the Company's recruitment of additional R&D staff members. As
      an  inducement  to enter  into the  agreement,  the  Company  granted VS a
      non-qualified  stock option to purchase up to  1,750,000  shares of Common
      Stock (the  "Option  Shares")  at a price of $2.13 per  share.  The option
      vests in 250,000 share installments,  the first immediately, the second on
      May 6, 2007,  the third on December 6, 2007, the fourth upon the Company's
      acceptance  of  the  Initial   Business  Plan  of  Novel,  and  the  other
      installments  vesting on the  accomplishment  of certain  milestones  with
      respect  to the first or second  drug  product  developed  by the  Company
      (excluding drug products of Novel) on or after February 4, 2007, under the
      advisory services provided to the Company.


                                      F-28
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

      ADVISORY AGREEMENT (CONTINUED)

      The  option  terminates  on  December  6,  2016,  or 90 days  following  a
      termination  of his advisory  services to the Company or his employment by
      Novel other than a  termination  without Cause or by VS for Good Reason or
      48  months  after  the  termination  of his  advisory  services  under the
      Advisory  Agreement or his employment under the employment  agreement as a
      result of: (i) a termination  by the Company of the Advisory  Agreement or
      by Novel of the employment  agreement  without Cause or by VS without Good
      Reason or (ii) the  post-December 6, 2007,  termination of the term of the
      Advisory Agreement or of the Novel employment agreement.

      All  unvested  options  terminate  upon the  termination  of the  Advisory
      Agreement  (other than a termination by the Company without Cause or by VS
      for  Good  Reason)  or at such  time  as the  Company  and  its  permitted
      transferees own in the aggregate less than 20% of the outstanding  capital
      stock of Novel,  except to the extent the  Company at its sole  discretion
      has  determined  that  VS has  provided  substantial  contribution  to the
      development of any drug product which would otherwise  trigger the vesting
      of  options  notwithstanding  the  failure to satisfy  the  foregoing  20%
      threshold.

      The  Company  has  granted  certain  rights to have the  Acquired  Company
      Shares,  the Option Shares and Warrant  Shares  registered  for reoffering
      under the  Securities  Act of 1933, as amended (the "Act"),  including the
      provision of one Registration  Statement upon the demand of holders of 75%
      of the Acquired  Company Shares,  Warrant Shares and Option Shares and the
      rights to have registered as part of a registration  statement  related to
      an offering of common stock by the Company or other security holders.  The
      Company  is to  bear  all  reasonable  expenses  other  than  underwriting
      discounts  and  commissions  in  connection  with  the   registration  and
      qualification under applicable state securities law.

      CHIEF SCIENTIFIC OFFICER

      On February 9, 2007,  VS, a recently  appointed  director of the  Company,
      agreed to become the acting Chief  Scientific  Officer of the Company and,
      as such, will oversee all scientific activities and employees.

      On the same date,  the Company and Dr.  Behl  entered  into an Amended and
      Restated Employment  Agreement under which Dr. Behl's position was changed
      from Chief  Scientific  Officer to Head of Technical  Affairs and Dr. Behl
      reports to the Chief Executive  Officer,  the Chief Scientific Officer and
      any additional executive officer designated by the Board. In addition, the
      definition of "cause" has been amended to include a  determination  by the
      Board,  in its sole  discretion,  that the  employment  of Dr. Behl should
      terminate,  provided that such  termination  will be effective on the 30th
      day after the written notice to Dr. Behl of such determination.


                                      F-29
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

      CONSULTING AGREEMENTS

      On June 1, 2006, the Company entered into a one year consulting  agreement
      with David  Filer,  whereby  Dr.  Filer is to provide  financial  advisory
      services to the Company.  In  consideration  for his  services,  Dr. Filer
      received  options to purchase  10,000  shares of common stock  exercisable
      from June 1, 2006 to June 1,  2009,  with an  exercise  price of $3.00 per
      share.

      REFERRAL AGREEMENTS

      On January 29, 2002, the Company entered into a Referral  Agreement with a
      Director  whereby the Company will pay referral  fees based upon  payments
      net of direct  costs  received  by the  Company  from  sales of  products,
      development  fees,  licensing  fees and  royalties  generated  as a direct
      result  of  this  Director  identifying  customers  for the  Company.  The
      referral fee each year is roughly based on the  percentages  of from 1% to
      5% applied inversely to the total amount gross margins attributable to the
      referrals. No amounts had been earned through March 31, 2007.


                                      F-30
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

      COLLABORATIVE AGREEMENTS

      On March 30, 2005, the Company  entered into a three party  agreement with
      Tish Technologies,  Inc. and Harris  Pharmaceuticals,  Inc. ("Harris") for
      the  co-development  and license of a controlled  release generic product.
      Upon its  development and the securing of the required FDA approval by the
      formulation development company, the Company is to manufacture the product
      and Harris is to sell and  distribute  the  product.  In  addition  to the
      transfer price for manufacturing the product,  the Company is to share the
      profits,  if any,  realized upon sales. The innovator's  reference product
      for this generic was originally a capsule.  The innovator has now received
      approval for an  alternative  dose form (a tablet rather than capsule) and
      has discontinued the original dose form. While a reference product remains
      for the capsule,  the market  opportunity has changes and this affects how
      we might  commercialize  the capsule  dosage form.  On June 19, 2006,  the
      Company received written notice from Harris of Harris' intent to terminate
      the agreement in accordance with Section 9.3 of the agreement. As the date
      hereof, the Company has received $29,700 for this development work.

      On June 21,  2005,  the Company and  IntelliPharmaCeutics  Corp.  ("IPC"),
      entered into an agreement for the development and  commercialization  of a
      controlled released generic drug for certain gastric diseases. The Company
      is to share in the  profits,  if any,  from the  sales of the  drug.  This
      agreement  was amended on December  12,  2005,  whereby IPC and a Canadian
      company with  marketing  and  distribution  capabilities  in Canada,  have
      agreed to develop and  commercialize  the product for Canada.  The Company
      and IPC will share their  proceeds of  commercialization  in Canada on the
      same terms as in the June 21, 2005 Agreement.

      On June 22, 2005, the Company and PLIVA,  Inc. ("Pliva"), now a subsidiary
      of Barr  Pharmaceuticals,  Inc.,  entered into a Product  Development  and
      License  Agreement,  providing  for  the  development  and  license  of  a
      controlled released generic anti-infective drug formulated by the Company.
      The Company is to manufacture and PLIVA is to market and sell the product.
      The  development  costs  are to be paid by PLIVA and the  Company  and the
      profits are to be shared equally.  PLIVA is to make milestone  payments to
      the Company.

      On January 10, 2006, the Company  entered into a Product  Development  and
      Commercialization  Agreement with Orit Laboratories LLC ("ORIT") providing
      that the Company and Orit will co-develop an extended release drug product
      for  the  treatment  of  anxiety,  and  upon  completion  of  development,
      commercialize the possibility of licensing the product for manufacture and
      sale. The parties intend to develop all dose strengths of the product. The
      Company is to share in the profits, if any from the sales of the drug. The
      initial  term of the  agreement is for the longer of (i) 15 years from the
      date the product is first  commercially sold to a third party, or (ii) the
      life of the  applicable  patent(s),  if any.  After the initial term,  the
      agreement is automatically  renewable for 3-year periods unless terminated
      by either  party by  providing  the other  party with  twelve  (12) months
      written notice prior to any renewal period.


                                      F-31
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

      COLLABORATIVE AGREEMENTS (CONTINUED)

      On November 10,  2006,  the Company  entered into a product  collaboration
      agreement with The  PharmaNetwork,  LLC for the development of the generic
      equivalent  of a synthetic  narcotic  analgesic  drug  product.  TPN is to
      perform  development  services and prepare and file an ANDA in the name of
      TPN with the FDA. The Company is to provide  development support including
      the  purchase  of active  pharmaceutical  ingredients  and  materials  and
      supplies to manufacture the batch,  provide adequate facilities to TPN for
      use in its development work and following ANDA approval,  The Company will
      manufacture the drug product developed.  The Company is to pay TPN for the
      development  services rendered upon the attainment of certain  milestones.
      The  out-of-pocket  costs are to be shared  by TPN and the  Company,  with
      TPN's obligation to be payable from its royalty compensation.  Formulation
      development work is currently underway.

      The aforementioned agreements are in their infancy stages.

      The  Company  is a party to two  separate  and  distinct  development  and
      license  agreements  with ECR  Pharmaceuticals  ("ECR").  Pursuant  to the
      agreements,  the Company  agreed to  commercially  develop  two  products,
      Lodrane 24(R) and Lodrane 24D(R) in exchange for development fees, certain
      payments,  royalties and manufacturing  rights. The products are currently
      being  marketed by ECR which also has the  responsibility  for  regulatory
      matters.  In addition  to  receiving  revenues  for  manufacture  of these
      products, the Company also receives a royalty on in-market sales.


                                      F-32
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 8 - STOCKHOLDERS' EQUITY

      During 2005, the Certificate of Incorporation  was amended to increase the
      number of  authorized  shares of capital stock from  25,000,000  shares of
      Common Stock to 65,000,000  shares of Common Stock and 5,000,000 shares of
      Preferred Stock, each with a par value of $.01 per share.

      LOSS PER COMMON SHARE

      Basic net loss per common  share has been  calculated  by dividing the net
      loss by the  weighted  average  number of shares  outstanding  during  the
      periods presented. Diluted earnings per share is not presented because the
      effect of the Company's common stock equivalents is antidilutive.  For the
      three years ended March 31, the following  potentially dilutive securities
      were not included in the computation of diluted loss per share:

<TABLE>
<CAPTION>
                                   2007                         2006                       2005
                                         WEIGHTED-                   WEIGHTED-                  WEIGHTED-
                                         AVERAGE                     AVERAGE                    AVERAGE
                                         EXERCISE                    EXERCISE                   EXERCISE
                           SHARES         PRICE        SHARES         PRICE        SHARES        PRICE
      <S>                <C>           <C>           <C>           <C>           <C>           <C>
      Stock options       6,622,500    $     2.28     2,971,250    $     2.36     2,777,050    $     2.16
      Convertible
      Preferred Stock     4,308,885    $     2.25     4,444,444    $     2.25
      Warrants            6,640,446    $     2.31     6,079,199    $     2.26     8,035,875    $     2.69
                         ----------                  ----------                  ----------
                         17,571,831                  13,494,893                  10,312,925
                         ==========                  ==========                  ==========
</TABLE>


                                      F-33
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)

      SERIES B 8% CONVERTIBLE PREFERRED STOCK

      On March 15, 2006, the Company sold in a private  placement  10,000 shares
      of Series B 8%  Convertible  Preferred  Stock  (the  "Series  B  Preferred
      Stock"),  for gross proceeds of $10,000,000.  The Series B Preferred Stock
      is convertible at $2.25 per share,  into 4,444,444 shares of Common Stock.
      In  connection  with the  issuance  of the Series B Preferred  Stock,  the
      Company also issued two classes of warrants  which are  exercisable  for a
      period of five years and  represent  the right to purchase an aggregate of
      1,111,111  shares of Common Stock at an exercise  price of $2.75 per share
      and the second  class of  warrants  are  exercisable  for a period of five
      years and represent the right to purchase an aggregate of 1,111,111 shares
      of Common  Stock at an  exercise  price of $3.25 per  share.  Based on the
      relative fair values,  the Company has attributed  $2,033,029 of the total
      proceeds to the  warrants  and has  recorded  the  warrants as  additional
      paid-in capital.  The remaining  portion of the proceeds of $7,966,971 was
      used to determine the value of the 4,444,444  shares of the Company Common
      Stock underlying the Series B Preferred Stock, or $1.7925 per share. Since
      the value was $0.4774  lower than the fair market  value of the  Company's
      Common Stock on March 15, 2006,  the  $2,121,917  instrinsic  value of the
      conversion  option  resulted  in  the  recognition  of a  preferred  stock
      dividend and an increase to additional paid-in capital.

      The Series B Preferred Stock accrues dividends at the rate of 8% per annum
      on their purchase  price of $1,000 per share  (increasing to 15% per annum
      after March 15, 2008) payable  quarterly on January 1, April 1, July 1 and
      October 1,  payable in cash or shares of Common  Stock (each valued at 95%
      of the average of the value  weighted  average  price (VWAP) as defined in
      the  Certificate of  Designations,  Preferences and Rights of the Series B
      Preferred Stock (the "Preferred Certificate").

      Each share of Series B Preferred  Stock is entitled to a preference  equal
      to the per share  purchase price ($1,000  subject to adjustment)  plus any
      accrued  but unpaid  dividends  thereon  and any other fees or  liquidated
      damages owing thereon upon the  liquidation,  dissolution or winding-up of
      the Company,  which preference is senior to any other capital stock ranked
      junior to the Series B Preferred Stock.


                                      F-34
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

      SERIES B 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (CONTINUED)

      The  holders of Series B  Preferred  Stock do not have any voting  rights,
      except  as  specifically  provided  in  the  Preferred  Certificate  or as
      required by law. The Company may not without the prior affirmative vote of
      holders  of at  least  70% of the  then  outstanding  shares  of  Series B
      Preferred Stock: (i) alter or change adversely the powers,  preferences or
      rights  given to the  Series  B  Preferred  Stock  or  alter or amend  the
      Preferred Certificate, (ii) authorize or create any class of stock ranking
      as to dividends,  redemption or  distribution of assets upon a Liquidation
      senior to or otherwise PARI PASSU with the Series B Preferred Stock, (iii)
      amend its certificate of incorporation,  bylaws or other charter documents
      in any manner  that  adversely  affects  any rights of the  holders of the
      Series B Preferred Stock, (iv) increase the authorized number of shares of
      Series B Preferred Stock, (v) enter into any agreement with respect to any
      of the foregoing,  (vi) other than Permitted  Indebtedness  (as defined in
      the Preferred  Certificate)  until March 15, 2009,  incur any indebtedness
      for  borrowed  money of any kind,  (vii)  other than  Permitted  Liens (as
      defined in the  Preferred  Certificate)  until March 15,  2009,  incur any
      liens of any kind,  (viii) repay or  repurchase  other than more than a de
      minimis  number of shares of Common  Stock or  securities  convertible  or
      exchangeable  into Common Stock,  other than as permitted by the Preferred
      Certificate, (ix) pay cash dividends or distributions on any securities of
      the Company  junior to the Series B Preferred  Stock or (x) enter into any
      agreement or  understanding to effect the clauses (iii),  (vi),  (vii), or
      (viii).  Actions  notwithstanding  the above,  the  Company  may issue any
      security issued in connection with a Strategic  Transaction (as defined in
      the  Preferred  Certificate)  that ranks as to  dividends,  redemption  or
      distribution of assets upon a Liquidation PARI PASSU with or junior to the
      Series B Preferred Stock without the prior  affirmative vote of holders of
      at least 70% of the then outstanding shares of Series B Preferred Stock.

      If the Company does not meet its share delivery  requirements with respect
      to  conversion  set forth in the  Preferred  Certificate,  the  holders of
      Preferred Stock are entitled to (i) liquidated  damages,  payable in cash,
      and (ii) cash equal to the amount by which such  holder's  total  purchase
      price for the  shares of  Common  Stock  exceeds  the  product  of (1) the
      aggregate  number of shares of Common  Stock that such holder was entitled
      to receive from the conversion at issue  multiplied by (2) the actual sale
      price at which the sell order giving rise to such purchase  obligation was
      executed.


                                      F-35
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

      SERIES B 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (CONTINUED)

      The Company may force  conversion  of the Series B Preferred  Stock in the
      event it provides  written notice to the holders of the Series B Preferred
      Stock that the VWAP for each 20  consecutive  trading day period  during a
      Threshold Period (as defined in the Preferred Certificate) of Common Stock
      exceeded $5.38 (subject to adjustment) and the volume for each trading day
      during such Threshold Period exceeded 50,000 shares (subject to adjustment
      for forward and reverse stock splits,  recapitalizations,  stock dividends
      and the like).

      Upon the  occurrence  of  certain  Triggering  Events  (as  defined in the
      Preferred  Certificate),  the  Company is required to redeem each share of
      Series B Preferred Stock for cash in an amount equal to 130% of the stated
      value, all accrued but unpaid dividends thereon and all liquidated damages
      and other  costs,  expenses  or  amounts  due in  respect  of the Series B
      Preferred  Stock  (the  "TRIGGERING  REDEMPTION  AMOUNT").   Upon  certain
      Triggering  Events, the Company is required to redeem each share of Series
      B Preferred Stock for shares of Common Stock equal to the number of shares
      of Common Stock equal to the Triggering  Redemption  Amount divided by 85%
      of the average of the VWAP for the 10 consecutive trading days immediately
      prior to the date of the redemption.

      The Company may redeem all of the Series B Preferred Stock outstanding, at
      any time after March 15, 2008 for a redemption price, payable in cash, for
      each  share of Series B  Preferred  Stock  equal to (i) 150% of the stated
      value,  (ii) accrued but unpaid dividends thereon and (iii) all liquidated
      damages and other amounts due in respect of the Series B Preferred Stock.

      SERIES A 8% CONVERTIBLE PREFERRED STOCK TRANSACTION

      In October 2004, the Company  completed a private placement through Indigo
      Securities  LLC, the  Placement  Agent,  for aggregate  gross  proceeds of
      $6,600,000 of 516,558 shares of Series A Preferred  Stock, par value $0.01
      per share ("PREFERRED SHARES") convertible into 5,165,580 shares of Common
      Stock.  The Preferred  Shares were  accompanied by warrants to purchase an
      aggregate of 5,165,580  shares of Common Stock at exercise  prices ranging
      from $1.54 to $1.84 per share.  The Company paid  commissions  aggregating
      $633,510  and issued  five year  warrants to  purchase  494,931  shares of
      Common Stock to the Placement  Agent. The Company also paid legal fees and
      expenses of the Agent's  counsel of $75,000 and legal fees and expenses of
      one counsel for the investors in the private placement of $25,000.

      The holders of the  Preferred  Shares (the  "INVESTORS")  were entitled to
      dividends  at the rate of 8% of the  original  issue  price of $12.30  per
      share payable on December 1 and June 1 of each year in


                                      F-36
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

      SERIES A 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (CONTINUED)

      cash or  shares  of  Common  Stock.  Holders  were  entitled  to elect one
      Director,  were entitled to ten votes per share,  and vote with the Common
      Stockholders  as one class on all other matters.  Each Preferred  Share is
      convertible  into  ten  shares  of  Common  Stock.  The  purchaser  of the
      Preferred  Shares  received for each  Preferred  Share acquired two Common
      Stock Purchase Warrants,  one exercisable on or prior to December 31, 2005
      ("SHORT-TERM  WARRANTS") and the other exercisable on or prior to December
      28, 2009  ("LONG-TERM  WARRANTS").  Each warrant  represents  the right to
      purchase five shares of Common Stock.

      The private  placement was effected in three  tranches.  The first tranche
      involved  the sale on  October 6, 2004 of  379,122  Preferred  Shares at a
      price of $12.30  per share  convertible  into an  aggregate  of  3,791,220
      shares of Common Stock  accompanied  by Short-Term  Warrants and Long-Term
      Warrants to purchase at $1.54 per share an aggregate  of 3,791,220  shares
      of Common Stock.  The second tranche involved the sale on October 12, 2004
      of 119,286  Preferred  Shares at a price of $14.00  per share  convertible
      into  1,192,860  shares of Common  Stock  accompanied  by  Short-Term  and
      Long-Term  Warrants to purchase an aggregate of 1,192,860 shares of Common
      Stock at a price of $1.75 per share.  The third tranche  involved the sale
      on October  26, 2004 of 18,150  Preferred  Shares at a price of $14.70 per
      share  convertible  in to 181, 500 shares of Common Stock  accompanied  by
      Short  Term and Long Term  Warrants  to  purchase  at a price of $1.84 per
      share an aggregate of 181,500 shares of Common Stock

      Pursuant to the  Placement  Agent  Agreement,  the  Company  issued to the
      Placement  Agent and its designees Long Term Warrants to purchase  357,495
      shares of Common Stock at $1.23 per share,  119,286 shares of Common Stock
      at a price of $1.40 per  share,  and  18,150  shares of Common  Stock at a
      price of $1.47 per share, respectively.

      The Company has registered at its expense under the Securities Act of 1933
      (the  "ACT") for  resale by the  Investors  of the shares of Common  Stock
      issuable upon conversion of the Preferred Shares, exercise of the warrants
      (including the Placement  Agent's warrants) and as payment of dividends on
      the Preferred Shares.

      Each  Investor  has  represented  that  the  Investor  is  an  "accredited
      investor"  and has  agreed  that  the  securities  issued  in the  private
      placement  are  to  bear  a  restrictive  legend  against  resale  without
      registration under the Act. The Preferred Shares and warrants were sold by
      Company  pursuant to the exemption from  registration  afforded by Section
      4(2) of the Act and Registration D thereunder.

      Dr. Charan Behl,  the Company's  Chief  Scientific  Advisor,  purchased at
      $12.30 per share 20,000 Preferred Shares and received warrants to purchase
      200,000 shares of Common Stock.  His payment  consisted of $16,675 in cash
      and the  release  of the  Company's  obligation  to pay him  $229,325  for
      consulting fees for services rendered through September 30, 2004.


                                      F-37
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

      COMMON STOCK TRANSACTIONS

      During the year ended  March 31,  2007,  305 shares of Series B  Preferred
      Stock were converted into 135,555 shares of Common Stock.

      Dividends accrued on Series B Stock through  conversion date and March 31,
      2007 were  satisfied by the issuance of 1,318 and 371,244 shares of Common
      Stock, respectively.

      During the year ended March 31, 2007, 3,750 options  expired,  65,500 were
      forfeited and 59,000 options were exercised for gross proceeds of $88,500.

      On December 6, 2006,  the  Company  issued to VGS Pharma,  LLC a five year
      warrant to purchase  478,698 shares of Common Stock for cash at a price of
      $3.00 per share,  subject to  adjustment  upon the  occurrence  of certain
      events.  The per share weighted  value of the warrant to purchase  478,698
      shares of Common Stock at $3.00 per share is $0.77. The warrant was valued
      using the Black-Scholes  option pricing model with the following  weighted
      average  assumptions:  no dividend yield;  expected  volatility of 46.12%;
      risk free interest rate of 5%; and expected life of 5 years.  As a result,
      a charge  of  $366,396  is  reflected  in the  consolidated  statement  of
      operations.

      In  addition,  on  December  6, 2006,  the  Company  granted to  Veerappan
      Subramanian  ("VS") an option to  purchase up to  1,750,000  shares of the
      Common  Stock at $2.13 a share.  The  option  vests as to  250,000  shares
      immediately and in subsequent 250,000 share installments, with one vesting
      on May 6, 2007,  another on December 6, 2007, a third upon  acceptance  of
      the initial business plan of Novel, and the other installments  vesting on
      the  accomplishment  of certain  milestones  with  respect to the first or
      second drug product  developed by the Company  (excluding drug products of
      Novel) on or after the 60th day after December 6, 2006, under the advisory
      services  provided to the  Company.  The per share  weighted-average  fair
      value of the option to purchase  up to  1,750,000  shares of Common  Stock
      granted to VS is $1.36 a share for an actual  charge of  $2,380,000  which
      will be recognized over the vesting period of the  instrument.  The option
      was valued using the Black-Scholes option pricing model with the following
      weighted average  assumptions:  no dividend yield;  expected volatility of
      46.12%; risk free interest rate of 5%; and expected life of 10 years.

      VGS  is a  wholly  owned  subsidiary  of  Kali  Capital,  L.P.,  which  is
      controlled by Kali Management, LLC ("KALI"), its general partner, and Kali
      is controlled by Anu Subramanian,  its managing member and daughter of VS.
      VS was subsequently appointed to the board of directors of the Company and
      became the Company's Chief Scientific Officer.

      On July 12, 2006, the Company sold to Indigo Ventures,  LLC ("Indigo") for
      $150,000 a warrant to  purchase  up to 600,000  shares of Common  Stock at
      $3.00 per share pursuant to the Financial  Advisory  Agreement with Indigo
      (the "Advisory  Agreement"),  of which 100,000 shares of Common Stock have
      vested.  The Advisory  Agreement has been amended and the warrant  reduced
      from 600,000 to 300,000 shares of common stock.


                                      F-38
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

      The following  grants were made under the Company's 2004 Stock Option Plan
      in the year ended March 31, 2007:

      On November 21, 2006, the Company granted options to sixteen  employees to
      purchase an  aggregate  of 66,500  shares of Common Stock with an exercise
      price of $2.26 to vest over a period of three years from grant date.

      On November 13, 2006,  the Company  granted to Bernard Berk, the Company's
      Chief  Executive  Officer,  according  to terms of the Second  Amended and
      Restated Employment  Agreement  additional stock options to purchase up to
      300,000 shares of the Company's  Common Stock at $3.00 a share. See Note 7
      Commitments and Contingencies - Employment Agreements.

      Additionally,  under  employment  agreements with each of Dr. Charan Behl,
      Executive Vice  President and Chief  Scientific  Officer,  and Chris Dick,
      Executive Vice President of Corporate Development,  the Company granted to
      each,  options to purchase up to 750,000 shares of Common Stock at $2.25 a
      share. See Note 7 Commitments and Contingencies - Employment Agreements.

      On June 1, 2006, the Company entered into a one year consulting  agreement
      with David  Filer,  whereby  Dr.  Filer is to provide  financial  advisory
      services  to the  Company,  in  consideration  of the grant of three  year
      options to purchase 10,000 shares of Common Stock, at a price of $3.00 per
      share.

      On May 3, 2006, the Company  granted  options to purchase 70,000 shares of
      Common  Stock at a price of $2.26 per share to Mark  Gittelman,  its Chief
      Financial  Officer.  One-third of the options vest on each of May 3, 2007,
      May 3, 2008 and May 3, 2009.

      Between February and October 2006, the Company granted ten year options to
      twelve employees to purchase an aggregate of 83,000 shares of Common Stock
      with  exercise  prices  ranging from $2.25 to $2.30 per share,  which vest
      over a period of three years from grant date.

      Pursuant to the Certificate of Designation of the Series A Preferred Stock
      of the Corporation,  all outstanding 21,922 shares of Preferred Stock were
      automatically  converted  on March 7, 2005 into  219,200  shares of Common
      Stock,  par value $0.01 upon the  Corporation as a result of the Company's
      written notice to holders of Preferred  Stock  certifying that the Current
      Market  Price of the Common  Stock for 30  consecutive  Trading  Days from
      January 18, 2005 through and including  March 1, 2005 exceeded $3.69 (300%
      of the Initial  Conversion Price of $1.23 per share) and the average daily
      trading  volume of the Common Stock for such 30  consecutive  Trading Days
      equaled or exceeded 50,000 shares per day.


                                      F-39
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

      Accordingly,  the Corporation has issued an aggregate of 5,265,516  shares
      of Common  Stock with  respect to the  issuance of  conversion  shares and
      dividend  shares.  Pursuant to the terms of an Exchange Offer, the Company
      sold on or before the  expiration  date of December 31, 2005, an aggregate
      of 735,674 shares of common stock upon the exercise for cash of Short Term
      Warrants for aggregate  gross  proceeds of $1,172,912 and issued five year
      Replacement  Warrants  to  purchase  at a price  of  $3.00  per  share  an
      aggregate 220,705 shares of the Company's Common Stock. The Exchange Agent
      received cash  commissions  aggregating  $76,418 and  five-year  placement
      warrants to purchase an  aggregate  of 25,473  shares of Common Stock at a
      price of $3.00 per share. The remaining  unexercised  Short Term Warrants,
      issued as part of the  Private  Placement  in  October  2004,  expired  on
      December 31, 2005.

      During the year ended March 31,  2006,  there were  cashless  exercises of
      1,066,612  warrants  resulting in the issuance of 310,678 shares of Common
      Stock.

      On May 18, 2005,  $40,000 were received from the exercise of stock options
      previously  granted to purchase 20,000 shares of Common Stock at $2.00 per
      share.

      On May 24, 2005 $156,503 were received and 101,625  shares of Common Stock
      were issued upon the exercise of 101,625 Long-Term  Warrants granted at an
      exercise  price of $1.54,  as part of the Company's  private  placement in
      October, 2004.

      On July 6, 2004,  the Company  issued 26,500 shares of Common Stock valued
      at  $58,300  and  agreed  to pay  $10,000  per month to a  corporation  in
      consideration  for  its  rendering  for a  six-month  period  of  investor
      relation consulting services,  including the distribution of the Company's
      press  releases,  the  provision  of  related  strategic  advice  and  the
      inclusion of the Company on the consultant's  website.  The Company agreed
      to provide the holder with "piggy-back"  registration  rights with respect
      to the shares.


                                      F-40
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

      WARRANTS

      To date,  the Company has authorized the issuance of Common Stock Purchase
      Warrants,  with terms of five to six years,  to various  corporations  and
      individuals,  in connection  with the sale of securities,  loan agreements
      and consulting  agreements.  Exercise prices range from $2.00 to $4.20 per
      warrant. The warrants expire at various times through March 15, 2011.

      A summary of warrant activity for the fiscal years indicated below were as
      follows:

<TABLE>
<CAPTION>
                                                           2007           2006           2005
                                                           ----           ----           ----
      <S>                                               <C>           <C>             <C>
      Balance at beginning of year:                     6,079,199      8,035,875      2,654,239
      Warrants issued                                     778,698        220,705        200,000
      Warrants issued pursuant to Placement Agent
            Agreements                                         --        381,028        519,931
      Warrants issued pursuant to Private Placement            --      2,222,222      5,165,580
      Placement Agent Warrants Exercised                       --             --         (7,500)
      Warrants exercised or expired                      (217,452)    (4,780,631)      (496,375)
                                                        ---------      ---------      ---------

      Ending balance                                    6,640,445      6,079,199      8,035,875
                                                        =========      =========      =========
</TABLE>


                                      F-41
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

      CLASS B WARRANTS

      The Company's Class B Warrants originally issued in a private placement in
      September  1998  expired on November 30, 2005,  their  amended  expiration
      date.

NOTE 9 - STOCK OPTION PLANS

      STOCK-BASED COMPENSATION

      During the years ended March 31,  2005,  2006 and 2007 the Company  issued
      120,000,  969,200 and 3,779,500,  respectively  options to purchase Common
      Stock to employees and to members of the board of  directors.  The options
      have an exercise  price ranging from $2.25 to $3.00 per share and all vest
      over three years except 120,000 issued for year ended March 31, 2005 which
      vested upon grant date,  75,000  issued for the year ending March 31, 2006
      which vested  pro-rata  over a 6 month period and 750,000  issued for year
      ending March 31, 2007 which vested upon grant date,  250,000 which vest in
      6  months  and  2,000,000  which  vest  based  upon  strategic  events  or
      accomplishments of certain milestones. The options expire between five and
      ten years from the date of grant.  The Company has  recorded  compensation
      expense of  $1,008,850,  $902,927 and $3,479,070 for the years ended March
      31, 2005, 2006 and 2007, respectively,  which represents the fair value of
      the options vested computed using the Black-Scholes  options pricing model
      on each grant date.


                                      F-42
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 9 - STOCK OPTION PLANS (CONTINUED)

      STOCK-BASED COMPENSATION (CONTINUED)

      Under its 2004 Stock Option Plan and prior option  plans,  the Company may
      grant stock options to officers, selected employees, as well as members of
      the board of  directors  and  advisory  board  members.  All options  have
      generally been granted at a price equal to or greater than the fair market
      value of the  Company's  Common  Stock at the  date of  grant.  Generally,
      options are granted with a vesting  period of up to three years and expire
      ten  years  from the date of grant.  Transactions  under the plans for the
      years indicated were as follows:

<TABLE>
<CAPTION>
                                2007                          2006                       2005
                                       AVERAGE                      AVERAGE                      AVERAGE
                                       WEIGHTED                    WEIGHTED                      WEIGHTED
                                       EXERCISE                    EXERCISE                      EXERCISE
                        OPTIONS         PRICE        OPTIONS         PRICE        OPTIONS         PRICE
                        -------         -----        -------         -----        -------         -----
<S>                    <C>           <C>            <C>           <C>            <C>           <C>
Outstanding at
beginning of year      2,971,250     $     2.36     2,277,050     $     2.16     2,417,050     $     3.70
Granted                3,779,500           2.20       969,200           2.74       120,000           2.34
Exercised                (59,000)          1.50       (20,000)          2.00      (100,000)          1.00
Expired                  (69,250)          2.31      (255,000)          2.04      (160,000)          7.13
                      ----------     ----------    ----------     ----------    ----------     ----------
Outstanding at end
of year                6,622,500     $     2.28     2,971,250     $     2.36     2,277,050     $     2.16
                      ==========     ==========    ==========     ==========    ==========     ==========
</TABLE>

      The following table summarizes information about stock options outstanding
      at March 31, 2007:

<TABLE>
<CAPTION>
                                              WEIGHTED AVERAGE      WEIGHTED-                       WEIGHTED
                                                  REMAINING          AVERAGE                         AVERAGE
         RANGE OF              OPTIONS           CONTRACTUAL        EXERCISE         OPTIONS       EXERCISABLE
      EXERCISE PRICE         OUTSTANDING         LIFE (YEARS)         PRICE        EXERCISABLE        PRICE
      --------------         -----------         ------------         -----        -----------        -----
      <S>                      <C>                     <C>             <C>           <C>              <C>
       $1.00 - $2.00             141,000                .75            $1.85           141,000        $1.85
       $2.01 - $3.00           6,481,500               8.44             2.28         2,782,694         2.28
      --------------          ----------              -----            -----        ----------        -----

       $1.00 - $3.00           6,622,500               7.77            $2.28         2,923,694        $2.26
      --------------          ----------              -----            -----        ----------        -----
</TABLE>


                                      F-43
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 9 - STOCK OPTION PLANS (CONTINUED)

      STOCK-BASED COMPENSATION (CONTINUED)

      The per share  weighted-average  fair value of each option  granted during
      fiscal 2007, 2006, and 2005 ranged from $1.36 to $1.39 during fiscal 2007,
      $1.48 to $1.70 during fiscal 2006 and $1.91 during fiscal 2005 on the date
      of grant using the Black-Scholes  options pricing model with the following
      weighted-average  assumptions;  no dividend yield;  expected volatility of
      ranging  from 46.12% to 57.95% for fiscal  2007,  expected  volatility  of
      97.84% for fiscal  year 2006 and  76.69% for fiscal  year 2005;  risk-free
      interest  rates  of 5.00%  in  2007,  4.18% in 2006 and  4.00% in 2005 and
      expected lives ranging from five to ten years.

      There are  888,500  options  available  for future  grant  under our Stock
      Option Plan.

NOTE 10 - MAJOR CUSTOMERS

      For the years ended March 31,  revenues from its three major customers are
      as follows:

                                          2007            2006          2005
                                          ----            ----          ----

      Customer A -                        100%            100%         49.80%
      Customer B -                         --              --             --
      Customer C -                         --              --          49.80%


                                      F-44
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 11 - SUBSEQUENT EVENTS

      On April 3, 2007,  a holder of 145 shares of Series B 8%  Preferred  Stock
      converted his shares and accrued  dividends through the date of conversion
      into 64,490 shares of Common Stock.

      On April 17, there was a cashless  exercise of 39,630  warrants  issued in
      our October,  2004 Private  Placement,  which  resulted in the issuance of
      15,456 shares of Common Stock.

      On April 20,  $61,500 was  received  from the  exercise  of stock  options
      previously  granted to purchase 41,000 shares of Common Stock at $1.50 per
      share.

      On April 24,  2007,  the  Company  sold  15,000  shares of its Series C 8%
      Convertible  Preferred Stock, par value $0.01, and 1,939,655  warrants for
      gross proceeds of $15,000,000.  The 15,000  Preferred  Series C shares are
      convertible  into  6,465,517  shares of common  stock.  The  warrants  are
      exercisable at $3.00 per share and are exercisable through April 27, 2012.
      The Company paid  $1,050,000 in  commissions  to the  placement  agent and
      others in connection with the sale of the Series C Preferred. In addition,
      the Company  granted the placement agent 193,965  warrants  exercisable at
      $3.00 per share which were valued at $129,627. The Series C 8% Convertible
      Preferred  will pay a quarterly  dividend at 8% per annum on its  purchase
      price of $1,000 per share. The dividend will be payable in other shares or
      cash. The gross proceeds of the private placement were $15,000,000  before
      payment of $1,050,000 in commissions  to the Placement  Agent and selected
      dealers. In addition,  the Company agreed to reimburse the Placement Agent
      for all documented  out-of-pocket expenses incurred by the Placement Agent
      in connection with the private  placement,  including  reasonable fees and
      expenses of its counsel,  which the Company and Placement  Agent agreed to
      be limited to $25,000.  Pursuant to the  placement  agent  agreement,  the
      Company  issued to the  Placement  Agent  and its  designees  warrants  to
      purchase 193,965 shares of Common Stock.  Such warrants are at an exercise
      price of $3.00 per share, exercisable on or prior to April 24, 2012.

      On April 24, 2007,  pursuant to the  authority of its Board of  Directors,
      Company filed with the Secretary of State of Delaware the  Certificate  of
      Designations, Preferences and Rights of Series C Preferred Stock .


                                      F-45
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 11 - SUBSEQUENT EVENTS (CONTINUED)

      On May 8, 2007,  the Company  approved  the details  provided by Veerappan
      Subramanian of the Initial  Business Plan for purposes of the requirements
      set forth in the Strategic  Alliance  Agreement  dated December 6, 2006 by
      and between the parties.  Upon agreement to the Initial Business Plan, the
      milestones for the Company's  remaining  contributions  were  established.
      Upon achievement of agreed upon milestones  relating to the identification
      and commencement of development of generic drug products, on May 15, 2007,
      the Company  funded  $2,000,000 and $3,000,000 on May 15, 2007 and on June
      15,  2007,  respectively,  to  Novel  Laboratories,   Inc.  The  remaining
      contributions to be made by the Company shall be funded in the amounts and
      upon the occurrence of the following milestones:  (i) $10,000,000 upon the
      submission  to  the  FDA  of  three  ANDAs  related  to  three   different
      prospective  products  developed  by Novel and (ii)  $10,000,000  upon the
      submission to the FDA of three ANDAs related to at least three  additional
      different  prospective  products  developed  by Novel;  provided  that the
      aggregate  contributions  to be made by the  Company  shall not exceed (i)
      $15,000,000  prior to November 1, 2007 or (ii) $25,000,000 prior to May 1,
      2008.  The  remaining  contributions  of  the  Company  are  not  monetary
      obligations  but  rather  conditions  that  must be met in  order  for the
      Company to maintain its current equity  interest in Novel. In the event of
      the Company's  failure to fund remaining  contributions,  VGS Pharma shall
      have the right to exercise the VGS Purchase  Right under the  Stockholders
      Agreement  dated  December  6,  2006 and if Novel  fails  to  achieve  its
      performance milestones, the Company may exercise remedies set forth in the
      Strategic Alliance Agreement and Stockholders  Agreement dated December 6,
      2006.

      On June 11, 2007, the Company  borrowed  $3,000,000 from a commercial bank
      at the bank's prime rate minus 1/2% per annum,  with interest only payable
      on July 1, 2007 and on the 1st day of each month thereafter until June 30,
      2008,  when all unpaid  principal and interest is due in full. The Company
      pledged  $3,000,000 of its cash to the  commercial  bank as collateral for
      the loan.  There were no other forms of  guarantees by the Company or fees
      associated  with the  line of  credit  agreement.  The  $3,000,000  credit
      facility is a short-term bridge in order to fund the June 15, 2007 funding
      commitment  to Novel.  The  Company  intends to raise up to an  additional
      $5,000,000  through  the sale of the  remaining  5,000  shares of Series C
      Preferred  Stock.  The net proceeds of the Series C funding would fund the
      repayment,  without prepayment  penalty, of the $3 million credit facility
      to the commercial bank.

      On June 5, 2007,  the Board of Directors  unanimously  authorized  Bernard
      Berk,  as the Company  designee  to the board of  directors  of Novel,  to
      approve the Novel employee stock option plan reserving up to 26,582 shares
      of Novel's  Class B non-voting  common  stock,  as well as the  employment
      contract  for  Muthusamy  Shanmugam  ("Sammy"),   its  Head  of  Technical
      operations,  and the grant of options to purchase  8,861 shares of Novel's
      Class  B  non-voting   common  stock  to  each  of  Sammy  and   Veerappan
      Subramanian.


                                      F-46
<PAGE>

                  ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          MARCH 31, 2007, 2006 AND 2005

NOTE 11 - SUBSEQUENT EVENTS (CONTINUED)

      Sammy's  employment  contract  calls  for a base  salary of  $170,000  per
      calendar year,  subject to annual review for increase at the discretion of
      the Board of Directors of Novel. The term of the agreement is three years.

      The options  granted by Novel to Sammy to  purchase up to 8,861  shares of
      Novel's Class B non-voting common stock vest and become exercisable,  with
      an exercise price of $22.50 per share, at the rate of 2,953 options on the
      first  anniversary  of the grant date and 2,954  exercisable on the second
      and third anniversaries of the grant date, respectively.

      The options  granted by Novel to Dr.  Subramanian  to purchase up to 8,861
      shares  of  Novel's  Class B  non-voting  common  stock  vest  and  become
      exercisable,  with an exercise  price of $22.50 per share,  at the rate of
      (i) 1,266 option  shares on the date of each  submission  to the FDA of an
      ANDA for the first six new prospective  products  developed by Novel which
      is not the  subject  of any prior ANDA  submitted  to the FDA by Novel and
      (ii)  1,265  option  shares on the date of  approval  by the FDA of a drug
      product  that is the subject of an ANDA related to a  prospective  product
      developed by Novel which has not been  previously  approved by the FDA for
      Novel.

      The  remaining  8,860  options  under the stock  option plan have not been
      granted to date and are being served for future awards to employees at the
      discretion of Novel's Board of Directors.

      Upon the grant and  subsequent  exercise of all of the stock options under
      the Novel stock option plan,  The Company's 49% current  interest in Novel
      would be diluted to  approximately  39%, VGS Pharma's 51% current interest
      in Novel would be diluted to 40%,  Sammy  would  maintain a 7% interest in
      Novel and Dr. Subramanian's would maintain a 7% interest in Novel.

      On June 28, 2007, Elite and PLIVA  terminated the Product  Development and
      License  Agreement  entered  into  on  June  22,  2005.  According  to the
      termination  agreement,  effective as of January 31,  2007,  it was agreed
      that  Elite  owns  all  intellectual   property  rights  relating  to  the
      controlled  released  generic  product in  development  under the  Product
      Development  and License  Agreement and PLIVA agreed to pay Elite $100,000
      in discharge of  outstanding  payments under the Product  Development  and
      License Agreement.


                                      F-47