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, 2007o
Transition
  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission
File No. 0-24676   CARACO
PHARMACEUTICAL LABORATORIES, LTD.(Exact name of registrant as specified in its charter) Michigan
  (State of Incorporation)

38-2505723
  (I.R.S. Employer Identification No.) 1150 Elijah
McCoy Drive, Detroit, MI 48202(Address of principal executive office) (313) 871-8400(Registrants telephone
number)   Securities Registered Pursuant to Section
12(b) of the Exchange Act: Title of Each Class 
to be so Registered

Name of Each
Exchange
On which Each Class
is to be RegisteredCommon Stock, No Par Value       American Stock
  ExchangeSecurities Registered Pursuant to Section
  12(g) of the Exchange Act: None. Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yeso Nox Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15 (d) of the
Act.  Yeso Nox Indicate by check mark if the registrant is a
shell company (as defined in Rule 12 b-2 of the Exchange Act).  Yeso Nox Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.  Yesx Noo   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 or any amendments to this Form 10-K. o

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

Large Accelerated Filero
     Accelerated Filer
x     
Non-Accelerated
Filero

The aggregate market value of the voting
common stock held by non-affiliates, based on the last sale price of the common
stock as of September 30, 2006, the last day of the Registrants most recently
completed second quarter, as reported on the American Stock Exchange, was
$96,010,994.

Indicate the number of shares outstanding of
each of the registrants classes of Common Stock, as of the latest practicable
date.

As of May 11, 2007, there were 28,117,394
shares of common stock outstanding.

Documents Incorporated By Reference:

Incorporated
by reference into Part III, Items 10-14 of this Form are portions of the
registrants Proxy Statement for the 2007 Annual Meeting of Shareholders to be
held in September 2007, which will be filed with the Securities and Exchange
Commission on or before July 29, 2007.


CARACO PHARMACEUTICAL LABORATORIES, LTD.
FORM 10-K

Forward Looking Statements

This
report, other than the historical financial and business information, may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act. Without
limitation, the words believes, plans, expects, and similar expressions
are intended to identify forward-looking statements. Those statements include
statements regarding our intent, belief, and current expectation. These
statements are not guarantees of future performance and are subject to risks
and uncertainties that cannot be predicted or quantified. Consequently, actual
results could differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, but are not
limited to those referenced in Part I, Item 1A below. These forward-looking
statements represent our judgment as of the date of this report. We disclaim,
however, any intent or obligation to update our forward-looking statements.

PART I

Item 1. Business

Introduction

Caraco
Pharmaceutical Laboratories, Ltd. (Caraco which is also referred to as the
Company, the Corporation, we, us or our) is a corporation organized
under Michigan law in 1984, engaged in the business of developing,
manufacturing, marketing and distributing generic and private-label
pharmaceuticals to the nations largest wholesalers, distributors, warehousing
and non-warehousing chain drugstores and managed care providers, throughout the
U.S. and Puerto Rico.

Generic
pharmaceutical products are the
chemical and therapeutic equivalents of reference brand drugs. A reference
brand drug is an approved drug product listed in the U.S. Food and Drug
Administration (FDA) publication entitledApproved Drug Products with Therapeutic Equivalence Evaluations,
popularly known as the Orange Book. The Drug Price Competition and Patent
Term Restoration Act of 1984 (Waxman-Hatch Act) provides that generic drugs
may enter the market after the approval of an Abbreviated New Drug Application
(ANDA) and the expiration, invalidation or circumvention of any patents on
the corresponding brand drug, or the end of any other market exclusivity
periods related to the brand drug. Generic drugs are bioequivalent to their
brand name counterparts. Accordingly, generic products provide a safe,
effective and cost-efficient alternative to users of these brand products.
Branded generic pharmaceutical products are generic products that are more
responsive to the promotion efforts generally used to promote brand products.
Growth in the generic pharmaceutical industry has been driven by the increased
market acceptance of generic drugs, as well as the number of brand drugs for
which patent terms and/or other market exclusivities have expired.

The
Companys principal executive offices are located at 1150 Elijah McCoy Drive,
Detroit, Michigan 48202, and its telephone number is (313) 871-8400. The
Company files annual reports, quarterly reports, current reports, proxy
statements and other information with the U.S. Securities and Exchange
Commission. You may read and copy any of the Companys SEC filings at the SECs
Public Reference Room at 100 F Street, NE Washington, DC 20549. You may call the SEC at
1-800-SEC-0330 for further information about the Public Reference Room. Our SEC
filings are also available to the public on the SECs website at
http://www.sec.gov and at our principal Internet address at www.caraco.com. We
believe that these reports are made available as soon as reasonably practicable
after we electronically file with or furnish them to the SEC.

On
January 27, 2005, the Board of Directors of the Company resolved to change the
Companys fiscal year end from December 31 to March 31 commencing in 2005. This
change was made in order to make the Companys fiscal year conform to the March
31 fiscal year of its parent company, Sun Pharmaceutical Industries, Limited
(Sun Pharma). This Form 10-K covers the audited fiscal year, April 1, 2006 to
March 31, 2007 (Fiscal 2007), and comparative information for the Audited fiscal
year, April 1, 2005 to March 31, 2006 (Fiscal 2006) and with respect to the
twelve month period, April 1, 2004 to March 31, 2005, which is unaudited
(Fiscal 2005). Additional information is provided with respect to the
transition period (January 1, 2005 through March 31, 2005) which is audited
(the Transition Period). (See Item 6 and Item 7 below)

1

Overview

Our manufacturing
facility was
originally constructed in 1991, pursuant to a $9.1 million loan from the
Economic Development Corporation of the City of Detroit (the EDC). Since
August 1997 a significant source of our funding has been from Sun Pharma. Sun
Pharma has contributed equity capital and has advanced us loans. In addition,
among other things, Sun Pharma has acted as a guarantor on loans to Caraco, has
supplied us with a substantial portion of raw materials for our products,
helped us obtain machinery and equipment to enhance our production capacities
at competitive prices and transferred certain generic products and technology
to us. Sun Pharma, along with its subsidiaries, own approximately 66% of the
outstanding shares of the Company (approximately 75% including the convertible
Series B Preferred Stock), (See Current Status of the Corporation and Sun
Pharmaceutical Industries Limited below.). We currently have zero debt. Our
cash flow from operations provides the working capital necessary to effectively
manage the company

Current Status

During
Fiscal 2007 we recorded net sales of $117.0 million compared to $82.8 million
during Fiscal 2006. We have generated cash from operations of $27.9 million as
compared to $8.9 million during the relevant periods. Cash was used primarily
to augment working capital. We earned net income of $26.9 million compared to a
net loss of $10.4 million during the relevant periods. This higher profit was
primarily due to lower non-cash research and development expense (R&D) of
$11.8 million as compared to $35.1 million during the relevant period and an
increase in sales. This non-cash R&D expense relates to three products
passing their bio-equivalency studies during Fiscal 2007 and the related value
of the preferred stock issued to Sun Pharma Global, Inc., a wholly-owned
subsidiary of Sun Pharma (Sun Global), pursuant to the Products Agreement (as
defined below), as compared to nine products during Fiscal 2006. At March 31,
2007, we had stockholders equity of $95.2 million as compared to stockholders
equity of $56.4 million at March 31, 2006. See Part II  Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations.

Pursuant
to our products agreement with Sun Global, we have selected, through March 31,
2007, all of the 25 products to be transferred to us by Sun Global. Of these,
23 products have passed their bio-equivalency studies as of March 31, 2007. Sun
Global has thereby earned 544,000 preferred shares for each such product. See
Sun Pharmaceutical Industries Limited and Part II  Item 7.  Future
Outlook.

We
filed 19 ANDAs with the FDA during Fiscal 2007, (Three products filed had
multiple ANDAs). This brings our total number of ANDAs pending approval by the
FDA to 29 (Including one tentative approval) or 21 products awaiting approval.
We also submitted three other filings to the FDA for new strengths on existing
ANDAs and for new sources on the Active Pharmaceutical Ingredients (API).

Overview of the Generic Drug Industry

We
believe that sales of generic pharmaceuticals have increased in recent years
due to a number of factors including (i) increased number of formerly patented
drugs which have become available to generic competition; (ii) changes in
governmental and third-party payor healthcare reimbursement policies to
encourage cost containment; (iii) increased acceptance of generic drugs by
physicians, pharmacists and consumers; (iv) modification of state and federal
laws to permit or require substitution of generic drugs by pharmacists; and (v)
enactment of ANDA procedures for obtaining FDA approval to manufacture generic
prescription drugs.

The
generic pharmaceutical business is highly competitive. Although generic
pharmaceuticals must meet the same quality standards as branded
pharmaceuticals, they could potentially be sold at prices that reflect a
discount up to 95% (in some cases even more) than the price of their branded
counterparts. The discount is primarily driven by the number of competitors
selling any given product.

Companies
aspiring to differentiate themselves and earn higher margins for generic drugs
may have a strategy of manufacturing niche products or hard to replicate
products. For instance, products that are difficult to develop, requiring
difficult-to-source raw materials or representing smaller therapeutic niche markets,
are generally marketed by fewer companies and may also offer margins that are
higher than those where barriers to entry do not exist. Companies may also
employ a litigious strategy of patent challenges. The developer of a generic
product that is the first to have its ANDA accepted for filing by the FDA and
whose filing includes a Paragraph IV Certification that the patent on the
brand-name drug

2

is invalid,
unenforceable and/or not infringed may be eligible to receive a 180-day period
of generic market exclusivity (first to file). During that 180-day period,
the exclusive generic product generally earns higher margins on a higher volume
of sales than in a situation in which other generic competition was also
present. Recently this strategy has also seen reduced margins as authorized
generics (an industry term that describes instances when the brand innovator
has licensed its brand product to a generic manufacturer or has chosen to
produce another label and provide the brand drug generically at typical generic
discounts) have become more prevalent..

Caracos Products and Product Strategy

Our present
product portfolio includes 33 prescription products in 66 strengths delivered
in various package sizes. Our current products and their use for
the indications are set forth in the table below:

Generic Name

PurposeMetroprolol
  Tartrate

Hyper-TensionParomomycin
  Sulfate

AntibacterialSalsalate

DecongestantCholine
  Magnesium Trisalicylate

Arthritis/NSAIDClonazepam

Seizure, Panic
  DisordersFlurbiprofen

Arthritis/NSAIDCarbamazepine
  Chewable

Anti-convulsantCarbamazepine
  IR

Anti-convulsantOxaprozin

Rheumatoid
  DiseaseMetformin
  Hydrochloride

DiabetesTramadol
  Hydrochloride

Opiate
  Agonist/AnalgesicTramadol Hydrochloride
  with Acetominophen

Opiate
  Agonist/AnalgesicMeperidine
  Hydrochloride

AnalgesicTiclopidine

Reduction of
  incidence of strokesTizanidine

Management
  of muscle tone associated with spasticityDigoxin

Heart
  failureMirtazapine

Anti-depressantCitalopram
  Hbr

Anti-depressantClozapine

Anti-psychoticMidrin*

Vascular
  & Migraine Headache suppressantFluvoxamine

Anti-depressantMeloxicam

Arthritis/NSAIDBaclofen

Skeletal
  Muscle ReleaxanGlipizide

DiabetesMetformin
  Extended Release **

DiabetesZonisamide
  **

Anti-convulsantGabapentin
  Tablets **

Anti-convulsantGabapentin
  Capsules **

Anti-convulsantExtended
  Phenytoin **

Anti-convulsantHydrochlorothiazide

Hyper-TensionNimodipine**

Cardiac,
  Channel BlockerZolpidem

Sedative
  hypnoticOndansetron
  Injectible**

Anti-Nausea* Product marketed on behalf of Sun Pharmaceutical Industries, Inc., a wholly
owned subsidiary of Sun Pharma

** Products marketed on behalf of Sun Pharma.



3

We have
submitted 53 ANDAs to the FDA for approval as of March 31, 2007, including 19
filed during Fiscal 2007, which includes three products with multiple ANDAs. Of
these 53 ANDAs filed, the FDA has approved 24 through March 31, 2007.
Accordingly, we have 29 pending ANDAs (including one tentative approval) or 21
products.

To
date, our strategy has been to analyze the marketplace and try to determine
opportunities for products having good market potential, that are difficult to
develop, that require difficult-to-source raw materials and/or products
representing smaller therapeutic niche markets. Recently, we have begun
developing products which will face potential patent litigation, and/or first
to file opportunities. We anticipate also seeking opportunities to in-license
authorized generics and other generic pharmaceuticals.

Sun Pharmaceutical Industries Limited

Pursuant to
a stock purchase agreement, Sun Pharma made an initial investment
of $7.5 million for the purchase of 5.3
million common shares of Caraco in 1997.

Sun
Pharma and its affiliates had loaned us approximately $10 million since August
1997. As of December 2003, we had repaid all of such loans. Sun Pharma also
assisted us by acting as guarantor in obtaining line of credit loans from ICICI
Bank Limited, The Bank of Nova Scotia and Citibank FSB in the amounts of $5.0
million, $12.5 million and $10.0 million, respectively, all of which have been
terminated and repaid as of December 31, 2004.

In
August 1997, we entered into an agreement, whereby Sun Pharma was required to
transfer to us the technology formula for 25 mutually agreed upon generic
pharmaceutical products over a period of five years through August 2003. We
exchanged 544,000 shares of our common stock for each such technology transfer
of an ANDA product (when bio-equivalency studies were successfully completed)
and 181,333 shares for each technology transfer of a DESI (Drug Efficacy Study
Implementation Program-DESI) product. DESI products are Pharmaceutical products marketed
prior to 1962 that required only a demonstration of safety. With the passage of
the Drug Amendments of 1962, this changed and the law required drug products
also show efficacy. Under the terms of this agreement, we conducted, at our
expense, all tests including bio-equivalency studies. Sun Pharma delivered 13
out of a possible 25 products to us under this agreement.

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

In
2004, the products agreement was amended by the Independent Committee,
comprised of the three independent directors, to eliminate the provision
requiring that the Independent Committee concur in the selection of each
product, and provides instead, that each product satisfy certain objective
criteria developed by management and approved by the Independent Committee.
Pursuant to such objective criteria, we have selected all the 25 products, 23
of which have passed bio-equivalency studies as of March 31, 2007. See Part II
 Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations  Future Outlook.

During
the first quarter of 2004, Sun Pharma acquired 3,452,291 additional shares of
common stock and 1,679,066 stock options from two former directors and a
significant shareholder. Sun exercised these stock options during the fourth
quarter of 2004.

Sun
Pharma has been instrumental in our growth. They have established Research and
Development Centers in Mumbai and Vadodara, India, where the development work
for products is performed. In addition, Sun Pharma and its

4

subsidiaries
supply us with certain raw materials and formulations and assist us in
acquiring machinery and equipment to enhance our production capacities. During
Fiscal 2007, we purchased approximately $38.8 million in raw materials and
formulations from Sun Pharma and its subsidiaries, as compared to $28.1 million
during Fiscal 2006 and $5.3 million during the Transition Period. We acquired
$0.8 million worth of machinery and equipment during Fiscal 2007 from Sun
Pharma and its affiliates as compared to $0.2 million during Fiscal 2006 and
$0.1 million during the Transition Period. Such machinery and equipment was
sold to us at Sun Pharmas cost. Sun Pharma has provided us with a number of
highly qualified technical professionals who now work as Caraco employees. Sun
Pharma uses Caraco as a contract manufacturer and/or distributor for two of
their products pursuant to agreements entered into in December 2004 and in January
2005, of which only one is currently being marketed.

In
Fiscal 2007, the Company entered into a three-year marketing agreement with Sun
Pharma, which was reviewed and approved by the Independent Committee. Under the
agreement, the Company purchases selected product formulations offered from Sun
Pharma and markets and distributes the same as part of our current product
offerings in the U.S., its territories and possessions, including Puerto Rico.

On
March 31, 2007, Sun Global converted 1,632,000 shares of Series B Preferred
Stock into 1,632,000 shares of Common Stock. Sun Pharmas current beneficial
ownership is 66%, (75% including its
convertible Series B Preferred Stock).

During
the Transition Period, SPARC Bioresearch Private Limited (SPARC), an
affiliate of Sun Pharma, performed certain analytical studies required as part
of the bio-equivalency process for two products. The Corporation incurred
approximately $172,000 of costs during the period for the studies performed by
SPARC. No similar studies were performed by SPARC during Fiscal 2007, Fiscal
2006 or during the year ended December 31, 2004.

Marketing

We
believe the primary factors driving competition in the generic pharmaceutical
industry are price, product development, timely FDA approval, manufacturing
capabilities, product quality, customer service and reputation.

Caraco
competes effectively with respect to each of these factors; however, price is a
key competitive factor in the generic pharmaceutical business. To compete
effectively on the basis of price and remain profitable, a generic drug
manufacturer must manufacture its products in a cost-effective manner. In
addition, we must maintain an adequate level of inventories to meet customer
demands in a timely manner.

Our
products are effectively marketed among all classes of customers, including
wholesalers, buying groups, managed care organizations, chain retail
pharmacies, distributors, independent retail pharmacies, hospitals, etc. Increased
competition, the emergence of large buying groups representing independent
retail pharmacies, the continued growth of managed care organizations and
consolidation among wholesalers has resulted in higher discounts on
pharmaceutical products. As the influence of these entities continues to grow,
the Company will continue to face pricing pressure on our portfolio of
products.

Our
marketing objective is to compete effectively, encourage long-term
relationships and supply contracts, increase our market share on products that
have not matured, gain market share on new products that are to be launched,
and continue to expand our customer base.

Sales and Customers

Our Company
effectively executed its
operating plan during Fiscal 2007. The organization continues to be
strengthened to meet the demands of a competitive US generic pharmaceutical
market, while providing additional support for our future growth and reducing
costs where possible.

As
is typical in the US retail sector, many of our customers are serviced through
their designated wholesalers such as Amerisource-Bergen Corporation, McKesson
Corporation and/or Cardinal Health, which provide a service to supplement our
indirect relationships with our customers or act as an intermediary to service
the customers directly in lieu of direct shipments from our Company.
Collectively, for Fiscal 2007 these wholesale accounts equated to 58% of our
net sales. These net sales include sales for various customers of ours that
have underlying direct contracts with our Company that are facilitated through
our wholesale customers. During Fiscal 2006 shipments to these three large
wholesale customers accounted for approximately

5

77% of gross
sales. Balances due from these customers represented approximately 82% and 72%
of gross accounts receivable as at March 31, 2007 and 2006 respectively. No
other single customer accounted for more than 10% of net sales for Fiscal 2007
or Fiscal 2006.

As
described above certain of the Corporations customers purchase its products
through designated wholesalers, who act as an intermediary distribution channel
for the Corporations products. One such customer, the Veterans Administration,
an agency of the United States Government, entered into a sales contract with
the Corporation effective August 5, 2002 to purchase a minimum of $13.0 million
of product per year over a one year base contract period that ended June 30,
2003. The contract has four one-year option periods, the last of which was exercised
in August 2006. The agreement may be terminated by the purchaser without cause,
and in such case; Caraco would only be entitled to a percentage of the contract
price, plus reasonable charges that have resulted from the termination. The
agreement further provides for certain penalty provisions if the Corporation is
unable to meet its sales commitment.

Seasonality

The
Companys business, taken as a whole, is not materially affected by seasonal
factors.

Research and Development

The
development of new prescription ANDA products, including formulation, stability
testing and the FDA approval process, averages from two to five years. A drug
is bioequivalent to a brand-name drug if the rate and extent of absorption of
the drug are not significantly different from those of the brand-name drug.
Although we perform our own stability testing, bioequivalence is done through
independent testing laboratories. The Companys research and development
consists in conducting market research, patent research on brand name and
generic pharmaceuticals in order to determine which products we may want to
develop. We develop selected products, which include product formulation,
bioequivalence testing, and analysis, and manage the development process of all
our potential filings. We coordinate development provided by Sun Pharma and
support the scale up to commercial batch sizes. We also integrate the work of
other third party developers whose development projects run parallel with our
own in order to improve the number of filings we submit annually. Our
development list consists of both near term launches and launches that we
intend to market several years in the future.

We
incurred total R&D Expenses for Fiscal 2007, Fiscal 2006 and Fiscal 2005 as
set forth below:

Fiscal 2007

$22.4
  millionFiscal 2006

$43.5
  millionFiscal 2005
  (Unaudited)

$33.4
  millionThe non-cash
  R&D Expense for the Fiscal 2007, Fiscal 2006 and Fiscal 2005 are set
  forth below:Fiscal 2007

$11.8
  millionFiscal 2006

$35.1
  millionFiscal 2005
  (Unaudited)

$26.8
  millionThe
non-cash technology transfer charges are for research and product development
provided by Sun Global. The charges are based on the fair value of the
preferred shares on the date the respective product formula passes the
bio-equivalency studies. The fair value of such shares is based upon an
independent valuation.

Regulation

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

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

6

well as the refusal of the government to approve pending applications
or supplements to approved applications. The FDA also has the authority to
withdraw approval of drugs in accordance with statutory due process procedures.

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

Following
such inspections, the FDA may issue notices on Form 483 and Warning
Letters that could cause a company to modify certain activities identified
during the inspection. A Form 483 notice may be issued at the conclusion
of an FDA inspection and lists conditions the FDA inspectors believe may
violate cGMP or other FDA regulations. FDA guidelines specify that a Warning
Letter is issued only for violations of regulatory significance for which the
failure to adequately and promptly achieve correction may be expected to result
in an enforcement action.

The FDA
routinely performs inspection of pharmaceutical company facilities. The FDA
completed an inspection of the Companys facility in June 2006. Observations
were provided on FDA Form 483. The Company submitted a response to the
observations to the FDA. The Company believes that we remain substantially cGMP
compliant. We have since received approval from the FDA for four products
previously submitted. We continue to focus on improving the amount of support
in both quality assurance and quality control in order to continually improve
our performance in quality. This support is derived from the improvement of
systems, training on risk management and cGMP, while adding the appropriate level
of personnel to support our growth. During Fiscal 2007, in addition to our own
internal audits we have retained outside companies to audit both the laboratory
and manufacturing areas of our Company in order to improve and or maintain our
systems of operation. These audits were based on a historical look back and
offered improvements based on Caracos future requirements. There are generally
two types of applications that would be used to obtain FDA approval for
pharmaceutical human use products:

1)
New Drug
  Application (NDA). Generally, the NDA procedure is required for drugs with
  active ingredients and/or with a dosage form, dosage strength or delivery
  system of an active ingredient not previously approved by the FDA. We have
  not submitted an NDA to date.2)
Abbreviated
  New Drug Application (ANDA). The Hatch-Waxman Act established a statutory
  procedure for submission of ANDAs to the FDA covering generic equivalents of
  previously approved brand-name drugs. Under the ANDA procedure, an applicant
  is not required to submit complete reports of preclinical and clinical
  studies of safety and efficacy, but instead is required to provide
  bioavailability data illustrating that the generic drug formulation is
  bioequivalent to a previously approved drug. Bioavailability measures the
  rate and extent of absorption of a drugs active ingredient and its
  availability at the site of drug action, typically measured through blood
  levels. A generic drug is bioequivalent to the previously approved drug if the
  rate and extent of absorption of the generic drug are not significantly
  different from that of the previously approved brand-name drug.The FDA may
deny an ANDA if applicable regulatory criteria are not satisfied. The FDA may
withdraw product approvals if compliance with regulatory standards is not
maintained or if new evidence demonstrating that the drug is unsafe or lacks
efficacy for its intended uses becomes known after the product reaches the
market.

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

FDA policy
and its stringent requirements have increased the time and expense involved in
obtaining ANDA

7

approvals and in complying with FDAs cGMP standards. The ANDA filing
and approval process takes approximately 12 to 18 months. The timing of final
FDA approval of ANDA applications depends on a variety of factors, including
whether or not the maker of the applicable branded drug is entitled to the
protection of one or more statutory exclusivity periods, during which the FDA
is prohibited from approving generic products. 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. For example, the
FDA may now extend the exclusivity of a product by six months past the date of
a patent expiration if the manufacturer undertakes studies on the effect of
their product in children (a so-called pediatric extension). FDA approval is
required before each dosage form of any new drug can be marketed. Applications
for FDA approval must contain information relating to bio-equivalency, product
formulation, raw material suppliers, stability, manufacturing processes, packaging,
labeling and quality control. FDA procedures require full-scale manufacturing
equipment to be used to produce test batches for FDA approval. Validation of
manufacturing processes by the FDA also is required before a company can market
new products. The FDA conducts pre-approval and post-approval reviews and plant
inspections to enforce these rules. Supplemental filings are required for
approval to transfer products from one manufacturing site to another and may be
under review for a year or more. In addition, certain products may only be
approved for transfer once new bio-equivalency studies are conducted.

The
Hatch-Waxman Act provides incentives for generic pharmaceutical manufacturers
to challenge patents on branded pharmaceutical products and/or their methods of
use, as well as to develop non-infringing forms of the patented subject matter.
The Hatch-Waxman legislation places significant burdens on the challenger to
ensure that such suits are not frivolous, but also offers the opportunity for
significant financial reward if the challenge is successful.

If there is
a patent listed in the FDAs Orange Book at the time of filing an ANDA with the
FDA and the generic drug company intends to market the generic equivalent prior
to the expiration of that patent, the generic company files with its ANDA a
certification asserting that the patent is invalid, unenforceable and/or not
infringed (a so-called Paragraph IV Certification). After receiving notice
from the FDA that its application is acceptable for filing, the generic company
sends the patent holder and the holder of the New Drug Application (NDA) for
the brand-name drug a notice explaining why it believes that the patents in
question are invalid, unenforceable or not infringed. Upon receipt of the
notice from the generic company, the patent holder has 45 days during
which to bring a patent infringement suit in federal district court against the
generic company. The discovery, trial and appeals process in such suits can take
several years.

If a suit
is commenced by the patent holder, the Hatch-Waxman Act provides for an
automatic stay on the FDAs ability to grant final approval of the ANDA for the
generic product. The period during which the FDA may not approve the ANDA and
the patent challenger therefore may not market the generic product is
30 months, or such shorter or longer period as may be ordered by the
court. The 30-month period may or may not, and often does not, coincide with
the timing of the resolution of the lawsuit or the expiration of a patent, but
if the patent challenge is successful or the challenged patent expires during
the 30-month period, the FDA may approve the generic drug for marketing,
assuming there are no other obstacles to approval such as exclusivities given
to the NDA holder.

Under the
Hatch-Waxman Act, the developer of a proposed generic drug which is the first
to file and have its ANDA accepted for filing by the FDA, and whose filing
includes a Paragraph IV Certification, may be eligible to receive a 180-day
period of generic market exclusivity. This period of market exclusivity may
provide the patent challenger with the opportunity to earn a return on the
risks taken and its legal and development costs and to build its market share
before competitors can enter the market.

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

The Drug
Enforcement Agency (DEA) conducts inspections of pharmaceutical company
facilities bi-annually. Each domestic drug product-manufacturing establishment
must be registered with the FDA. Establishments, like ours, handling controlled
substances, must be licensed by the DEA. We are licensed by both the FDA and
DEA.

8

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

Reimbursement
legislation, such as Medicaid, Medicare, and other programs, governs
reimbursement levels. All pharmaceutical manufacturers rebate to individual
states a percentage of their revenues arising from Medicaid-reimbursed drug
sales. Generic drug manufacturers currently rebate an applicable percentage of
calculated average manufacturer price (AMP) marketed under ANDAs. We believe
that the federal and state governments may continue to enact measures in the
future aimed at reducing the cost of drugs and devices to the public. We cannot
predict the nature of such measures or their impact on our profitability.

Environment

The Company
is subject to federal, state, and local laws and regulations relating to the
protection of the environment. These evolving laws and regulations may require
expenditures over a long period of time to control environmental impacts. The
Company has established procedures for the ongoing evaluation of its operations
to identify potential environmental exposures and assure compliance with
regulatory policy and procedures.

The Company
believes that its operations comply in all material respects with applicable
laws and regulations concerning the environment. While it is impossible to
accurately predict the future costs associated with environmental compliance
and potential compliance with environmental laws, any compliance is not
expected to require significant capital expenditures and has not had, and is not
presently expected to have, a material adverse effect on the Companys earnings
or competitive position.

Suppliers and Materials

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

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

Competition

The generic
pharmaceutical industry is undergoing rapid and significant changes due to
increasing number of generic manufacturers, introduction of authorized generics,
technological advancement and consolidation among the customers. Many of our
competitors have greater financial, production, and research and development
resources and greater name recognition. Competition continues to be intense
which could result in further erosion of prices and profit margins. The number
of generic manufacturers both domestic and from overseas is increasing,
resulting in increased pricing pressure. The most significant means of
competition are price, innovation and development, timely FDA approval,
manufacturing capabilities, product quality, marketing, customer service and
reputation. Other principal competitive factors in the generic pharmaceutical
market are the ability to be the first company, or among the first companies,
to introduce a generic product after the related patent expires, methods of
distribution, maintenance of inventories for timely delivery, and breadth of
product line. Approvals for new products may have a synergistic effect on a
companys entire product line since orders for new products are frequently
accompanied by, or bring about, orders for other products available from the
same source. We believe that price is the most significant competitive factor
in the generic industry, particularly as the number of generic entrants with
respect to a particular product increases. As competition from other
manufacturers intensifies, selling prices typically decline.

9

We compete by keeping our prices competitive, selecting appropriate
products, based on therapeutic segments, market sizes and number of competitors
manufacturing the products, by providing reliability in the timely delivery,
and in the continued quality, of our products.

Line of Credit

On November
17, 2005, the Company entered into a one-year, $10 million Credit Agreement
with JP Morgan Chase Bank, N.A. Under the Credit Agreement, the lender may make
loans and issue letters of credit to the Company for the Companys working
capital needs and general corporate purposes. Letters of credit, if issued, expire
one year from their date of issuance, but no later than November 17, 2007. On
November 16, 2006, this agreement was renewed through November 30, 2007.
Borrowings are secured by the Companys receivables and inventory. Interest is
payable based on a LIBOR Rate or an alternate base rate (determined by
reference to the prime rate or the federal funds effective rate), as selected
by the Company. The rate of interest is LIBOR plus 75 basis points or the
banks prime rate minus 100 basis points (effective rates of 6.1% and 7.25%,
respectively at March 31, 2007.) The Credit Agreement requires that certain
financial covenants be met on a quarterly basis. The Company is in compliance
with these financial covenants at March 31, 2007. There are no outstanding borrowings
under this Credit Agreement as of March 31, 2007.

Employees

We
had a total of 446 and 272 full-time equivalent and contract employees at March
31, 2007 and 2006, respectively, engaged in research and development,
manufacturing, quality assurance, quality control, administration, sales and
marketing, materials management, facility management and packaging. Most of our
scientific and engineering employees have had prior experience with
pharmaceutical or medical products companies, including Sun Pharma. See Sun
Pharmaceutical Industries Limited.

A
union represents substantially all of our permanent, full-time hourly
employees. In September 2004, we successfully negotiated a four-year collective
bargaining agreement with the union. This agreement sets forth the minimum wage
increases which the union employees will receive in each of the next four
years, and thereby giving us and the union employees, we believe, a measure of
certainty and stability.

Product Liability and Insurance

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

Item 1A. Risk Factors:

The
following discussion highlights some of the risks related to our business and
others are discussed elsewhere in this report. These and other risks could
materially and adversely affect our business, financial condition, operating
results or cash flows and the market value of our common stock. These risk
factors may not include all of the important factors that could affect our
business or our industry or that could cause our future financial results to
differ materially from historic or expected results or cause the market price
of our common stock to fluctuate or decline.

Risks Related to Our
Industry

If brand
pharmaceutical companies are successful in limiting the use of generics through
litigation, legislature and regulatory efforts, our sales of generic products
may suffer.

Many brand
pharmaceutical companies increasingly have used state and federal legislative
and regulatory and other litigation as means to delay generic competition.
These efforts have included:


pursuing new
  patents for existing products which may be granted just before the expiration
  of one patent, which could extend patent protection for additional years or
  otherwise delay the launch of our generic product;10


submitting
  for changes in U.S. Pharmacopoeia which is an organization that publishes
  industry wide compendia of drug standards;
using the
  Citizens Petition process to request amendments to FDA standards;
attaching
  patent extension amendments to non-related federal legislation;
engage in
  state-by-state initiative to enact legislation that restricts substitution of
  certain generic drugs which could possibly impact products that we are
  developing.FDA approval is
required before any generic drug products can be marketed. The process of
obtaining FDA approval to manufacture and market new and generic pharmaceutical
products is rigorous, time-consuming, costly and largely unpredictable.

We, or a
business partner, may be unable to obtain requisite FDA approvals on a timely basis
for new generic products that we may develop, license or otherwise acquire. The
timing and cost of obtaining FDA approvals could adversely affect our product
introduction plans, financial position and results of operations and could
cause the market value of our common stock to decline.

The ANDA approval
process may result in the FDA granting final ANDA approvals to more competitors
than anticipated for a given product at the time a patent claim for a
corresponding brand product or other market exclusivity expires resulting in
lower than anticipated margins and sales.

The
addition of more competition when we introduce a generic product into the
market potentially lowers our gross profit margin and overall sales.
Additionally, ANDA approvals often continue to be granted for a given product
subsequent to the initial launch of the generic product. These circumstances
generally result in significantly lower prices, as well as reduced margins, for
generic products compared to brand products pricing. New generic market
entrants generally cause continued price and margin erosion over the generic
product life cycle.

Extensive industry
regulation has had, and will continue to have, a significant impact on our
business, especially our product development, manufacturing and distribution
capabilities.

All
pharmaceutical companies, are subject to complex, costly regulations that
continue to evolve as set forth by the federal government, principally the FDA
and to a lesser extent by the DEA and state government agencies. The Federal
Food, Drug and Cosmetic Act, the Controlled Substances Act and other federal
statutes and regulations govern the testing, manufacturing, storage, packing,
labeling, record keeping, safety, sales and marketing, promotion, and
distribution of our products.

Under these
regulations, we are subject to periodic routine inspection of our facilities,
procedures, operations and the testing of our products by the FDA, the DEA and
other authorities that regulate our business. These inspections are designed to
confirm that we are in compliance with all applicable regulations. Following an
inspection, the FDA may issue notices on Form 483 and /or warning letters
that could cause us to modify certain activities identified during the
inspection. A Form 483 notice is generally issued at the conclusion of a
FDA inspection and lists conditions the FDA inspectors believe may violate cGMP
or other FDA regulations. FDA guidelines specify that a warning letter is
issued only for violations of regulatory significance for which the failure
to promptly and adequately achieve correction may be expected to result in an
enforcement action. Possible sanctions could include among others, FDA issuance
of adverse publicity, fines, product recalls, total or partial suspension of
production and/or distribution, suspension of the FDAs review of product
applications, enforcement actions, injunctions, and civil or criminal
prosecution. These sanctions, if imposed, could materially harm our operating results
and financial condition. Under certain circumstances, the FDA also has the
authority to revoke previously granted drug approvals. Although we have
internal compliance programs in place these programs may not meet regulatory
agency standards or if compliance is deemed deficient in any significant way,
it could materially harm our business. Certain of our vendors that sell to us
are also subject to similar regulation and periodic inspections.

We are also
subject to various federal, state and local laws regulating working conditions,
as well as environmental protection laws and regulations, including those
governing the discharge of materials into the environment. Although we have not
incurred significant costs associated with complying with environmental
provisions in the past, if changes to such

11

environmental laws and regulations are made in the future that require
significant changes in our operations or if we engage in the development and
manufacturing of new products requiring new or different environmental
controls, we may be required to expend significant funds. Such changes 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.

Risks Related to Our
Company

If we are unable to
successfully develop or commercialize new products, our operating results will
suffer.

Our future
results of operations depend to a significant extent upon our ability to
successfully commercialize new products in a timely manner. There are numerous
difficulties in developing and commercializing new products, including:


developing,
  testing and manufacturing products in compliance with regulatory standards in
  a timely fashion;
receiving
  the requisite regulatory approvals for such products in a timely manner;
the
  availability of raw materials at a competitive cost, including active
  pharmaceutical ingredients and other key ingredients;
development
  and commercializing a new products is time consuming, costly and subject to
  various factors, including litigation brought by our competitors, that may
  delay or prevent the development and commercialization of new products
  expected to market.Our gross profit may
fluctuate from period to period depending upon our product sales mix including
new launches, our product pricing, customer class of trade, and our costs for
active ingredients.

Some
  specific issues that could result in a fluctuation could include any or all
  of the following;
the amount
  of new product introductions;
the level of
  competition and associated pricing pressure in the marketplace for certain
  products;
the
  availability of raw materials;
The balance
  of sales between manufactured product margin and distributed products margin.The profitability of our product sales is also dependent upon the
prices we are able to charge for all our products, the costs of excipients
purchased from third parties, and our ability to manufacture our products in a
cost effective manner.

An unaffiliated third party may make a claim
for royalties which could have a material adverse effect on our results of
operations.

In 1993, we
entered into a products agreement with an unaffiliated generic drug company (the
Non-Affiliate). Under the agreement, two products were to be delivered to us
in exchange for royalties and options. Pursuant to the agreement, we received a
formulation for one product (the Product) from the Non-Affiliate. However, we
have determined that the formula provided to us by the Non-Affiliate with
respect to the Product is different than the formula submitted and approved by
the FDA and marketed by us. Accordingly, since April 2003, we have discontinued
to accrue royalties. The Product has been one of our top selling products.
There is no assurance that the Non-Affiliate will not challenge our
determination and make a claim those royalties and/or options are owed. If
successful, such a claim could have a material adverse effect on our results of
operations.

Our policies
regarding returns and chargebacks by wholesalers may reduce our revenues in
future fiscal periods.

Based on
industry practice, generic product manufacturers including Caraco have liberal
return policies and make decisions whether or not to provide shelf stock
allowances (or credits) for inventories on hand on product that has already
been sold to the customer. If a new competitor enters the marketplace and
significantly lowers the price of any of its competing products, it is possible
that we would make a decision to reduce the price of our product. As a result,
we would be obligated to provide significant credits to our customers who are
then holding inventories of such products, which could

12

reduce sales revenue and gross margin for the period the credit is
provided. Like our competitors, we also give credits for chargebacks to
wholesale customers that have contracts with us for their sales to chain drug
retail, group purchasing organizations, or other retail customers.

A
chargeback represents an amount payable in the future to a wholesaler for the
difference between the invoice price paid to us by our wholesale customer for a
particular product and the negotiated contract price that the wholesalers
customer pays for that product. Although we establish reserves we believe to be
adequate that are based on our historical experience, actual
chargebacks received, current chargeback rates and on hand inventory remaining
at our wholesale customers, for the potential impact that these policies may
have, we cannot ensure that our reserves are adequate or that actual product
returns, allowances and chargebacks will not exceed our estimates, which could
adversely affect our financial condition, cash flows and market price of our
stock.

We are and may become involved in various
legal proceedings including, but not limited to, patent infringement and
products liability involving substantial amounts of money or for other relief.

The
manufacture, use and sale of new products that are the subject of conflicting
patent rights have been the subject of substantial litigation in the
pharmaceutical industry. These lawsuits relate to the validity and infringement
of patents or proprietary rights of third parties. We may have to defend
against charges that we violated patents or proprietary rights of third
parties. Litigation may be costly and time-consuming, and could divert the
attention of our management and technical personnel. If it is found that we infringe
on the rights of others, we could lose our right to develop or manufacture
products or could be required to pay monetary damages or royalties to license
proprietary rights from third parties. An adverse determination in a judicial
or administrative proceeding relating to patent infringement and/or product
liability could prevent us from manufacturing and selling a product(s), which
could negatively affect our financial condition and results of operations.
Although we carry insurance, we believe that no reasonable amount of insurance
can fully protect against all such risks because, among other things, of the
potential liability inherent in the business of producing pharmaceuticals for
human consumption. To the extent that a loss occurs, depending on the nature of
the loss and the level of insurance coverage maintained, it could have a
material adverse effect on our business, financial position and results of
operations and could cause the market value of our common stock to decline.

The loss of our key
personnel could cause our business to suffer.

The success
of our present and future operations will depend, to a significant extent, upon
the experience, abilities and continued services of key personnel. We cannot
assure you that we will be able to attract and retain key personnel. We do not
maintain key person insurance.

Sales of our products
may continue to be adversely affected by the continuing consolidation of the
distribution network and the concentration of customers.

Our
principal customers are wholesale drug distributors, major retail drug store
chains and managed care companies. These customers comprise a significant
portion of the distribution network for pharmaceutical products in the U.S.
This distribution network is continuing to undergo significant consolidation
marked by mergers and acquisitions among wholesale distributors, large retail
drug store chains, managed care companies and mergers of a combination of trade
classes. As a result, a small number of large wholesale distributors and large
chain drug stores and managed care providers control a significant share of the
market. We expect that consolidation of drug wholesalers, retailers and managed
care providers will increase competitive pressures on drug manufacturers, including
Caraco.

Even if we are able to obtain regulatory
approvals for our new pharmaceutical products, the success of those products is
dependent upon market acceptance. Levels of market acceptance for our new
products could be impacted by several factors, including:


availability
  of alternate product from our competitors;
the timing
  of our market entry;
acceptance
  of our product on government and private formularies;13


the prices
  that we sell our products at versus our competitors prices.From time to time a relatively small group of
products could represent a significant portion of our sales and if the products
sales of these product decline unexpectedly it could have a negative material
effect on our business and could cause our market value of our common stock to
decline.

Sales of a
limited number of our products often represent a significant portion of our net
revenues and net earnings. If the volume or pricing of our largest selling
products declines in the future, our business, financial position and results
of operations could be materially adversely affected, and the market value of
our common stock could decline.

Our competitors may be able to develop
products and processes competitive with or superior to our own for many reasons,
including that they may have:


proprietary
  processes or product delivery systems;
larger
  research and development and marketing staffs;
larger
  production capacity in general or for a given product;
more
  financial resources than Caraco;
more experience
  in developing new drugs.Our reporting and
payment obligations under Medicaid and other governmental programs are complex
and may change periodically based upon new guidelines provided by those
agencies.

Although
the regulations regarding reporting and payment obligations are complex, we
believe we are properly and accurately calculating and reporting the amounts
owed in respect of Medicaid and other governmental pricing programs. Our
calculations are subject to review and challenge by the applicable governmental
agency, and it is possible that any such review could result in material
changes. Any governmental agencies may initiate an investigation of the Company
and could impose, based on a claim of violation of fraud and false claims laws
or otherwise, civil and/or criminal sanctions, including fines, penalties and
possible exclusion from federal health care programs (including Medicaid and
Medicare).

We depend primarily
on Sun Global and Sun Pharma to assist us in our research and development.

Collectively
Sun Global and Sun Pharma could determine that its own research and development
takes precedent over the research and development it provides to Caraco. Though
we believe we have made efforts to mitigate this risk by working with other
third party developers and increasing our own research and development
capabilities, there could be a development gap if Sun Pharma chose to
prioritize their internal projects over Caracos development projects. This
could cause a gap in our research and development timelines until further
increase of our own capabilities. This gap could possibly cause future growth
deficits until resolved.

We depend primarily
on Sun Pharma for the active pharmaceutical ingredients that we use to
manufacture our products.

We
typically purchase the active pharmaceutical ingredient (i.e. the chemical
compounds that produce the desired therapeutic effect in our products) and
other materials and supplies that we use in our manufacturing operations, as
well as certain finished products from Sun Pharma. Sun Pharma could face supply
issues or not be capable of supplying the raw material for certain products we
manufacture. While we have begun the process of identifying and contracting
with other third party suppliers, any disruption in Suns supply could cause
lower sales or possibly lower margins until we negotiate with new suppliers and
gain the requisite approvals to manufacture our product with a new raw material
source.

We maintain
safety stocks in our raw materials inventory, and in certain cases where we
have listed only one supplier in our applications with the FDA, Additionally,
we have received and submitted for FDA approval to use alternative suppliers
should the need arise. However, there is no guarantee that we will always have
timely and sufficient access to a critical raw material or finished product. A
prolonged interruption in the supply of a single-sourced raw material,
including the active

14

ingredient, or finished product could cause our financial position and
results of operations to be materially adversely affected, and the market value
of our common stock could decline. In addition, our manufacturing capabilities
could be impacted by quality deficiencies in the products which our suppliers
provide.

The Company
utilizes controlled substances in certain of its current products and products
in development and therefore must meet the requirements of the Controlled
Substances Act of 1970 and the related regulations administered by the Drug
Enforcement Administration (DEA). These regulations relate to the
manufacture, shipment, storage, sale and use of controlled substances. The DEA
limits the availability of the active ingredients used in certain of our
current products and products in development and, as a result, our procurement
quota of these active ingredients may not be sufficient to meet commercial
demand or complete clinical trials. We must annually apply to the DEA for
procurement quota in order to obtain these substances. Any delay or refusal by
the DEA in establishing our procurement quota for controlled substances could
delay or stop our clinical trials or product launches, or could cause trade
inventory disruptions for those products that have already been launched, which
could have a material adverse effect on our business, financial position and
results of operations and could cause the market value of our common stock to
decline.

A significant portion
of our net sales are from sales to a limited number of customers. Should we
lose a particular contract with a customer or the customer is acquired by a
non-customer, our sales and operational results could face a significant
decline.

A
significant portion of our net revenues are derived from sales to a limited
number of customers. As such, a reduction in or loss of business with one
customer, or if one customer were to experience difficulty in paying us on a
timely basis, our business, financial position and results of operations could
be materially adversely affected. One such agreement is with the Veterans
Administration. The Company entered into a sales contract with the Veterans
Administration effective August 5, 2002 to purchase a minimum of $13.0 million
of product per year over a one year base contract period that ended June 30, 2003.
The contract has four one-year option periods, the last of which was exercised
in August 2006. Upon termination of this agreement, the Company must re-bid to
renew this business. While we are hopeful that we will succeed in renewing this
business, there can be no assurance that we will be successful.

We
manufacture our product line predominately from one FDA approved facility.
There is a possibility that our production could be negatively impacted by a
business disruption or closure of this facility

Although we
have access to other facilities, we currently produce our products at our
facility in Detroit, Michigan. We carry a limited amount of finished goods on
hand and much of our inventory is either work in progress or is in bulk
amounts. Should we experience an act of God that closes our facility, or
production is stopped or a power outage continues for an inordinate period of
time, it would impair our ability to produce and ship products to the market on
a timely basis, which 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.

We
must maintain adequate internal controls and be able to demonstrate, and
provide, on an annual basis an assertion as to the effectiveness of such
controls. Failure to maintain adequate internal controls or to implement new or
improved internal controls 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.

Effective
internal controls are necessary for the Company to provide reasonable assurance
with respect to its financial reports. We spend a substantial amount of
management time and resources to comply with changing laws, regulations and
standards relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002 and new SEC regulations and rules. In particular,
Section 404 of the Sarbanes-Oxley Act of 2002 requires managements annual
review and evaluation of our internal control systems, and attestations as to
the effectiveness of these systems by our independent registered public
accounting firm. If we fail to maintain the adequacy of our internal controls,
we may not be able to ensure that we can conclude on an ongoing basis that we
have effective internal control over financial reporting. Additionally,
internal control over financial reporting may not prevent or detect
misstatements because of its inherent limitations, including the possibility of
human error, the circumvention or overriding of controls, or fraud. Therefore,
even effective internal controls can provide only reasonable assurance with
respect to the preparation and fair presentation of financial statements. In addition,
projections of any evaluation of effectiveness of internal control over
financial reporting to future periods are subject to the risk that the control
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. If the Company
fails to maintain the adequacy of its internal controls, including any

15

failure to implement required new or improved controls, this could have
a material adverse effect on our business, financial position and results of
operations, and the market value of our common stock could decline.

Any of
these factors and others 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.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties.

The Facilities

Our entire
property, plant, equipment and intellectual property are free of any mortgages,
liens or similar restrictions. Our primary facility located in Detroit,
Michigan, which was designed and constructed to our specifications and
completed in 1994, contains our production, research and development and
corporate office. During Fiscal 2006, we added approximately 10,000 square feet
of manufacturing space, giving us a total of 82,000 square feet of usable
space. The manufacturing portion of the facility has a special building and
systems design, with each processing area equipped with independent zone and
air handling units to provide temperature and humidity control to each room.
These air handling units are designed to prevent product cross contamination
through the use of pre-filter and final HEPA filter banks. All processing air
quarters are maintained in a negative pressure mode using laminar airflow
design. This system of airflow provides a measurable control of air borne
particulate entrapment in each room. Environmental segregation of individual
rooms within a particular zone is accomplished by the use of duct HEPA filter
booster fan units that facilitate the isolation and confinement of room
activities. These special dynamics provide an added dimension and flexibility
in product selection and processing techniques.

During
Fiscal 2007, the Company acquired a packaging facility for $1.7 million. This
33,369 sq. ft. facility was previously owned and operated by a third party
packager of our portfolio of products. We envision this acquisition will
improve overall costs in packaging, bottling and increase our production.
During Fiscal 2007 the Company acquired six acres of land directly adjacent to
its existing manufacturing facility for $0.3 million. We are contemplating the
construction of a 125,000 sq. ft. facility on this site.

We
have leased an approximately 55,000 square foot facility located near our
primary facility for finished goods distribution, storage of inventory and
office space. The lease expires in 2009 and includes an option to renew until
2011.

We
also have leased an approximately 13,000 square foot office space for our
administrative, sales and marketing and accounting offices. The lease expires
in 2009.

We
have invested approximately $6.0 million during Fiscal 2007 as compared to $3.6
million during Fiscal 2006 and $3.3 million during twelve months ending March
31, 2005 to upgrade our facilities and production. We have invested
approximately $0.6 million during the Transition Period as compared to $1.3
million during the corresponding period of 2004. We invested $4.0 million in
the year 2004.

We
believe the existing facilities are suitable and adequate for our current level
of operations and anticipated growth in the near future. We also believe that
our facilities are adequately covered by insurance.

Item 3. Legal Proceedings.

While
it is not possible to determine with any degree of certainty the ultimate
outcome of the following legal proceedings, the Company believes that it has
meritorious defenses with respect to the claims asserted against it and intends
to vigorously defend its position. An adverse outcome in any of these proceedings
could have a material adverse effect on the Companys financial position and
results of operations.

As
previously disclosed, on September 29, 2006, Schering Corporation (Schering)
filed a complaint in the United States District Court for the District of New
Jersey. A nearly identical complaint was filed on October 5, 2006, in the
Eastern

16

District of
Michigan. Both complaints allege, inter alia, that Sun Pharmaceutical
Industries, Ltd.s (Sun) filing of ANDA 78-359 - seeking approval to market
its generic version of Scherings Clarinex® drug product - infringed Scherings
U.S. Patent No. 6,100,274 (the 274 patent), which expires July 7, 2019.
Schering further alleges that Caraco Pharmaceutical Laboratories, Ltd.
(Company) either directly infringed the 274 patent by aiding in the filing
of Suns ANDA, or will induce others to infringe by marketing and/or selling
Suns generic version of Clarinex® upon receiving FDA approval. Scherings
complaint seeks an order from the Court which, among other things, directs the
FDA not to approve Suns ANDA any earlier than the claimed expiration date. The
ANDA filed by Sun contains a Paragraph IV certification challenging the 274
patent. Sun believes that the 274 patent is invalid, unenforceable and/or will
not be infringed by Suns or Companys manufacture, use or sale of the product
and both Sun and the Company intend to vigorously defend this action in order
to capitalize on the potential 180 days of marketing exclusivity available for
this product.

As
previously disclosed, on June 9, 2005, Novo Nordisk A/S and Novo Nordisk, Inc.
(Novo Nordisk) filed a complaint in the United States District Court for the
Eastern District of Michigan alleging that the Companys filing of an ANDA
seeking approval to market its generic version of Novo Nordisks Prandin® drug
product infringed Novo Nordisks U.S. Patent No. 6,677,358. Novo Nordisk seeks
an order from the Court which, among other things, directs the FDA not to
approve the Companys ANDA any earlier than the claimed expiration date. The
ANDA filed by the Company contains a Paragraph IV certification challenging the
Novo Nordisk patent. The Company believes that this Novo Nordisk patent is
invalid and/or will not be infringed by the Companys manufacture, use or sale
of the product. The Company believes that it is the first to file an ANDA with
a paragraph IV certification for this drug product and it intends to defend
this action vigorously to capitalize on the potential for obtaining 180 days
exclusivity available for this product.

As
previously disclosed, on July 10, 2006, Forest Laboratories, Inc., Forest
Laboratories Holdings, Ltd., and H. Lundbeck A/S (collectively, Forest) filed
a complaint in the United States District Court for the Eastern District of Michigan
alleging that the Companys filing of an ANDA seeking approval to market its
generic version of Forests Lexapro® (escitalopram oxalate) drug product
infringed Forests Patent No. Re. 34,712, which is set to expire on September
13, 2011 (extended to March 14, 2012 based upon a six month pediatric
exclusivity). Forest seeks an order from the court which, among other things,
directs the FDA not to approve the Companys ANDA any earlier than the claimed
expiration date. The ANDA filed by the Company contained a Paragraph IV
Certification challenging the Forest patent. The Company believes that the
Forest patent is invalid and/or will not be infringed by the Companys
manufacture, use or sale of the product and the Company intends to vigorously
defend this action.

Prior
to this action, Forest had filed two lawsuits against other manufacturers who
sought to market a generic version of Lexapro®, one against Alphapharm Pty.
Ltd. (Alphapharm) and the other against IVAX Pharmaceuticals, Inc. (IVAX)
and CIPLA Ltd. (CIPLA). Forest settled the lawsuit with Alphapharm in October
2005, granting Alphapharm the exclusive right to distribute generic versions of
Lexapro® for five years. Alphapharms launch date is dependent on a number of
factors but is set to be no later than two weeks before the claimed expiration
of the Forest patent.

Forest
proceeded in its action against IVAX and CIPLA. On July 13, 2006, Forest
obtained an order from the United States District Court for the District of
Delaware, holding that IVAX and CIPLAs proposed generic version of Lexapro®
infringed the Forest patent and that the asserted claims of the Forest patent
were valid and enforceable. On November 6, 2006, IVAX and CIPLA filed a notice
to appeal the decision to the United States Court of Appeals for the Federal
Circuit. The appeal is currently pending.

On
August 23, 2006, Forest filed a motion to transfer its action against the
Company to the United States District Court for the District of Delaware, where
a similar action by Forest was pending. On November 15, 2006 the Court denied
the motion and, accordingly, the litigation will proceed in the Eastern
District of Michigan. In February of 2007, the Eastern District of Michigan
court granted plaintiffs motion to stay the proceeding until June 20, 2007.

As
previously disclosed, on September 22, 2004, Ortho-McNeil Pharmaceutical, Inc.
(Ortho-McNeil) filed a complaint in the United States District Court for the
Eastern District of Michigan alleging that the Companys filing of an ANDA
seeking approval to market its generic version of Ortho-McNeils Ultracet®
brand tramadol/acetaminophen drug product infringed Ortho-McNeils patent,
which expires on September 6, 2011. Ortho-McNeil sought an order from the
district court which, among other things, directed the FDA not to approve the
Companys ANDA any earlier than the claimed expiration date. The ANDA filed by
the Company contained a Paragraph IV Certification challenging the Ortho-McNeil
patent. The Company asserted that the Ortho-McNeil patent is invalid and/or
will not be infringed by the Companys manufacture, use or sale of the product.
Since filing this action, Ortho-McNeil has entered into a license agreement
with

17

another
manufacturer which has launched its product generically while another
manufacturer has launched its approved generic at risk. On October 19, 2005 the
Companys motion for summary judgment was granted.  On December 19, 2005, the FDA approved the manufacture, use and
sale of the Companys generic product. Ortho-McNeil filed an appeal of the
finding of non-infringement by the district court with the United States Court
of Appeals for the Federal Circuit.. On January 19, 2007, the United States
Court of Appeals for the Federal Circuit affirmed the United States District
Court for the Eastern District of Michigan decision granting the Companys
motion for summary judgment. Additionally the United States Patent and
Trademark Office has approved Ortho-McNeils request for a reissue patent.  Although the district court had determined
that the Company does not infringe Ortho-McNeils original patent, on July 31,
2006, Ortho-McNeil filed a lawsuit against the Company in the United States
District Court for the District of New Jersey, alleging that the Companys
generic version of Ultracet® brand tramadol/acetaminophen drug product
infringes its reissue patent. On September 26, 2006, the Company filed an
answer denying, among other things, that its generic product infringes any
valid claims of Ortho-McNeils reissue patent.
The Company believes that, like its original patent, Ortho-McNeils
reissue patent is invalid and/or is not infringed by the Companys manufacture,
use or sale of the product and the Company intends to vigorously defend this
action. There is no assurance, however, that the Company will prevail in this
action.

The
Company is also involved in certain legal proceedings from time to time
incidental to normal business activities. While the outcome of any such
proceedings cannot be accurately predicted, the Company does not believe the
ultimate resolution of any existing matters would have a material adverse
effect on its financial position or results of operations.

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

We did not
submit any matters to a vote of security holders in the fourth quarter of
Fiscal 2007 through the solicitation of proxies or otherwise.

PART II

Item 5. Market for Registrants Common
Equity, Related Stockholder Matters and Issuers and Affiliates Purchases of
Equity Securities.

Our
common stock is listed on the American Stock Exchange under the symbol
CPD.  The following table sets forth
for Fiscal 2007, Fiscal 2006, the Transition Period and the year ended December
31, 2004, the high and low sales prices for each of the applicable quarters.

Fiscal 2007

High

LowFirst
  Quarter

$
13.10

$
9.00Second
  Quarter

$
11.99

$
8.15Third
  Quarter

$
14.00

$
9.98Fourth Quarter

$
14.99

$
10.50Fiscal 2006

High

LowFirst
  Quarter

$
8.97

$
7.06Second
  Quarter

$
9.29

$
8.10Third
  Quarter

$
9.81

$
7.50Fourth
  Quarter

$
13.42

$
8.762005

High

LowTransition
  Period

$
9.32

$
7.442004

High

LowFirst
  Quarter

$
13.74

$
7.31Second
  Quarter

$
11.94

$
9.40Third
  Quarter

$
10.24

$
6.80Fourth
  Quarter

$
10.00

$
6.8218

As
of May 11, 2007 there were 87 registered holders of our Common Stock.

During
Fiscal 2007, 1,632,000 shares of preferred stock were converted into equal
number of common stock and issued to Sun Pharma Global Inc

During
Fiscal 2007, we issued to Sun Global 1,632,000 preferred shares in exchange for
the transfer of three products. During Fiscal 2006, we issued to Sun Global
4,896,000 preferred shares in exchange for the transfer of nine products.
During the Transition Period, we issued to Sun Global 1,632,000 preferred
shares in exchange for the transfer of three products. During 2004, we issued
to Sun Global 4,352,000 preferred shares in exchange for the transfer of eight
products (of which 544,000 preferred shares were earned during 2003 for one
product transfer) pursuant to our current products agreement.

Pursuant
to various stock and option purchase agreements between Sun Pharma and three
stockholders and their affiliates, Sun Pharma acquired in January and February,
2004, 3,452,291 shares of common stock and rights to acquire options for 1,679,066
shares of common stock.  The shares were
acquired for $9.00 per share and the rights to the options were acquired for
$9.00 less the exercise price of each option.

During
2004, we issued 1,679,066 shares of common stock to Sun Pharma against exercise
of stock options, which Sun Pharma had acquired from two former directors
during the first quarter of 2004.

All
shares of preferred stock and common
stock specified above that were issued by the Company were issued
pursuant to exemptions from registration under Section 4(2) of the Securities
Act of 1933.

The
information in Item 12 relating to Equity Compensation Plan Information is
incorporated herein by reference.

Dividend Policy

We
have never declared or paid cash dividends on our common stock.  We currently intend to retain all future
earnings for the operation and expansion of our business.  We do not anticipate declaring or paying
cash dividends on our common stock in the foreseeable future.  Any payment of cash dividends on the common
stock will be at the discretion of the Board of Directors and will depend upon
our results of operations, earnings, capital requirements, and other factors
deemed relevant by our Board of Directors.

Item 6. Selected Financial Data

The
following selected financial data of the Company is qualified by reference to
and should be read in conjunction with the financial statements and notes
thereto and other financial information included elsewhere herein. The summary
balance sheet data as of March 31, 2007 and 2006 and summary statements of
operations data for the years ended March 31, 2007 and 2006, the three month
period ended March 31, 2005 and the year ended December 31, 2004 are derived
from and qualified by reference to the audited financial statements of the
Company which are included elsewhere herein. The summary balance sheet data as
of March 31, 2005, December 31, 2004, and 2003 and the summary of the
statements of operations for the years ended December 31, 2003, and 2002 are
derived from the audited financial statements of the Company which are not
included herein and have been previously filed with the SEC.

19

Financial Data

(In thousands, except per share data)Year ended
  March 31,

Transition
  Period
  Ended
  March 31,

Year ended
  December 31,Statements of operations data

2007

2006

2005

2004

2003

2002Net sales

$
117,027

$
82,789

$
17,337

$
60,340

$
45,498

$
22,381Cost of goods sold


59,243


41,873


7,879


24,441


19,507


12,047Gross profit


57,784


40,916


9,457


35,899


25,991


10,334Selling, general and
administrative
  expenses


9,880


8,183


1,879


5,277


7,363


3,828Research and development costs
 affiliate
   non cash


11,761


35,055


10,200


24,397


3,103


3,887Research and development costs
 other


10,591


8,437


1,720


6,053


3,112


3,348Operating income /
(loss)


25,552


(10,759
)

(4,342
)

172


12,412


(730
)Other income /
(expense)


1,306


336


21


(371
)

(1,189
)

(1,526
)Net Income / (Loss)


26,858


(10,423
)

(4,322
)

(199
)

11,223


(2,256
)Net Income / (Loss) per
shareBasic


1.02


(0.39
)

(0.16
)

(0.01
)

0.46


(0.10
)Diluted


0.72


(0.39
)

(0.16
)

(0.01
)

0.44


(0.10
)Weighted Average Shares
Outstanding:Basic


26,447


26,392


26,348


24,734


24,137


22,031Diluted


37,255


26,392


26,348


24,734


25,482


22,031Financial Data
(continued)

(In thousands)As at March 31,

As at December 31,Balance Sheet Data

2007

2006

2005

2004

2003Current assets

$
95,439

$
62,282

$
32,938

$
24,857

$
18,918Property, plant and equipment,
net


19,030


14,960


12,897


12,546


9,506Total assets


114,469


77,242


45,835


37,403


28,424Current liabilities


19,276


20,864


14,149


11,627


20,008Long term debt














13,395Total liabilities


19,276


20,864


14,149


11,627


33,404Stockholders
Equity (Deficit)


95,193


56,378


31,686


25,776


(4,980
)Working Capital
(Deficiency)


76,163


41,418


18,789


13,230


(1,090
)Item 7.
Managements Discussion and Analysis Of Financial Condition and Results
of Operations.

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

20

Critical Accounting Policies and Estimates

Our
discussion and analysis of our financial condition and results of operations
are based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States.  Certain of our accounting policies are
particularly important to the portrayal of our financial position and results
of operations and require managements subjective judgments.  As a result, these judgments are subject to
an inherent degree of uncertainty.  In
applying these policies, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those
estimates.  Our significant estimates
include our provisions for price adjustments (primarily chargebacks), valuation
allowances for deferred tax assets, and valuation of overhead components in
inventory.

We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our financial
statements.  There have neither been
material changes to our critical accounting policies for the periods presented
nor any material quantitative revisions to our critical accounting estimates
for the periods presented.

Revenue Recognition

Revenue
from product sales, net of estimated provisions, is recognized when there is
persuasive evidence that an arrangement exists, shipment of the goods has
occurred, the selling price is fixed or determinable, and collectibility is
reasonably probable.  Our customers
consist primarily of large pharmaceutical wholesalers who sell directly into
the retail channel, chain drug stores, distributors, and managed care customers.  Provisions for sales discounts, and
estimates for chargebacks, rebates, and product returns are established as a
reduction of product sales revenue at the time revenues are recognized, based
on historical experience and current market trends adjusted to reflect known
changes in the factors that impact these reserves.  These revenue reductions are reflected as a direct reduction to
accounts receivable through an allowance.

Chargebacks

Chargebacks
represent our most significant provision against gross accounts receivable and
related reduction to gross revenue. Chargebacks are retroactive credits given
to our wholesale customers that represent the difference between the lower
price they sell (contractual price) to retail, chain stores, and managed care
organizations and what we charge the wholesaler. We estimate chargebacks at the
time of sale for our wholesale customers. We are currently unable to
specifically determine whether the amounts allowed in specific prior periods
for chargeback reserves have been over or understated. Wholesaler customers who
submit chargebacks to the company do not reference a specific invoice that the
chargeback is related to when the chargeback is submitted to the Company. Thus,
we cannot determine the specific period to which the wholesalers chargeback
relates.

We
consider the following factors in the determination of the estimates of
chargebacks.

1. The
historical data of chargebacks as a percentage of sales, as well as actual
chargeback reports from our primary wholesaler customers.

2. Volume of
all products sold to wholesaler customers and the average chargeback rates for
the current quarter as compared to the previous quarter and compared to the
last six month period.

3. The sales
trends and future estimated prices of our products, wholesale acquisition cost
(WAC), the contract prices with the retailers, chain stores, managed care
organizations (end-users), and our wholesaler customers contract prices.

4. We utilize
remaining inventories on hand at our primary wholesaler customers at the end of
the period in the calculation of our estimates.

Such
estimated amounts, in addition to certain other deductions, are deducted from
our gross sales to determine our net revenues. The amount of actual chargebacks
claimed could be either higher or lower than the amounts we accrued. Changes in
our estimates, if any, would be recorded in the income statement in the period
of the change. If we materially over or under estimate the amount that will
ultimately be charged back to us by our wholesale customers, there could be a
material impact on our financial statements.

21

Shelf Stock Adjustments

Shelf
stock adjustments are credits issued to our customers to reflect decreases in
the selling prices of our product. These credits are customary in the industry
and are intended to reduce the customers inventory cost to better reflect
current market prices. The determination to grant a shelf stock adjustment to a
customer following a price decrease is at our discretion.

Factors
considered when recording a reserve for shelf stock adjustments include
estimated launch dates of competing products based on market intelligence,
estimated decline in market price of our product based on historical experience
and input from customers and levels of inventory held by customers at the date
of the adjustments as provided by them.

Product returns and other allowances

In
the pharmaceutical industry, customers are normally granted the right to return
product for credit if the product has not been used prior to its expiration
date.  Our return policy typically
allows product returns for products within a 12-month window from six months
prior to the expiration date and up to six months after the expiration
date.  We estimate the level of sale,
what will ultimately be returned pursuant to our return policy, and record a
related reserve at the time of sale.
These amounts are deducted from our gross sales to determine our net
revenues.  Our estimates take into
consideration historical returns of our products and our future
expectations.  We periodically review
the reserves established for returns and adjust them based on actual
experience, if necessary.  The primary factors
we consider in estimating our potential product returns include shelf life of
expiration date of each product and historical levels of expired product
returns.  In case we become aware of any
returns due to product related issues, such information from the customers is
used to estimate an additional reserve.
The amount of actual product return could be either higher or lower than
the amounts we accrued.  Changes in our
estimates, if any, would be recorded in the income statement in the period of
the change.  If we over or under
estimate the quantity of product which will ultimately be returned, there may
be a material impact on our financial statements.

Discounts
(trade and prompt payment discounts) are accrued at the end of every reporting
period based on the gross sales made to the customers during the period and based
on their terms of trade. We review the contracts between the customer and us as
well as the historical data and percentages to estimate the discount accrual.

Customer
rebates are estimated at every period end, based on direct or indirect purchases.
If the purchases are direct, the rebates are recognized when products are
purchased and a periodic credit is given. For indirect purchases, the rebates
are recognized based on the terms with such customer. Medicaid rebates are
estimated based on the historical data we receive from the public sector
benefit providers, which is based on the final dispensing of our product by a
pharmacy to a benefit plan participant.

Doubtful
Accounts

Doubtful
accounts are estimated based on the data available from external sources,
including information on financial condition of customers. Also, a regular
review of past due receivables is done on a quarterly basis to identify and
make provision for such receivables not expected to be collected.

Gross Sales and Related Reserves

Our
gross sales for Fiscal 2007 were $316.6 million, as compared to $200.4 million
for Fiscal 2006. Chargebacks, returns, discounts and other customary customer
deductions and other sales costs constituted approximately 63% for Fiscal 2007
compared to 59% for Fiscal 2006. Net sales for Fiscal 2007 were $117.0 million,
as compared to $82.8 million for Fiscal 2006. The primary cause of increase in
the sales diluters by almost 4% between the periods is the impact of price
erosions for the products we sell and the corresponding impact of such price
erosions on chargebacks.

22

The
following is a roll forward of the provisions for chargebacks, shelf stock
adjustments, returns and allowances and estimated doubtful account allowances
during Fiscal 2006 and Fiscal 2007.


($ in Thousands)Fiscal 2006

Roll forward allowances
  at beginning of Fiscal 2006

Allowances charged to
  Gross Sales for Fiscal 2006

Credits taken by
  customers during Fiscal 2006

Balance at the end of
  Fiscal 2006Current Period

Prior PeriodChargebacks
  & shelf stock adjustments

$
19,810

$
111,525

$
-0-

$
119,868

$
11,467Returns
  and other allowances


1,120


7,471


-0-


7,091


1,500Doubtful
  Accounts


100


-0-


-0-


-0-


100Fiscal
2007

Roll forward allowances
  at beginning of Fiscal 2007

Allowances charged to
  Gross Sales for Fiscal 2007

Credits taken by
  customers during Fiscal 2007

Balance at the end of
  Fiscal 2007Current Period

Prior PeriodChargebacks
  & shelf stock adjustments

$
11,467

$
190,586

$
-0-

$
169,415

$
32,638Returns
  and other allowances


1,500


9,000


-0-


6,748


3,752Doubtful
  Accounts


100


-0-


-0-


-0-


100Income Taxes

As
part of the process of preparing our financial statements we are required to
estimate our income taxes in each of the jurisdictions in which we
operate.  We account for income taxes by
the liability method.  Under this
method, deferred income taxes are recognized for tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted laws and
statutory tax rates applicable for the differences that are expected to affect
taxable income.  In assessing the
realizability of deferred tax assets, the Company considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.  The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.  Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. We have net deferred tax assets of $7.5
million and $20.1 million as at March 31, 2007 and March 31, 2006 respectively.
Valuation allowances are provided based upon the weight of available evidence,
it is more likely than not that some or all of the deferred tax assets will not
be realized.  We have not recorded any
net federal tax provision or benefit for the Fiscal 2007, Fiscal 2006, the
Transition Period or for the year ended December 31, 2004. We have provided a
valuation allowance for $7.0 million as at March 31, 2007 and the full amount
of our net deferred tax assets at March 31, 2006 since realization of any
future benefit from deductible temporary differences and net operating loss (NOL)
carryforwards cannot be sufficiently assured. During the year ended March 31,
2007, carryforwards of approximately $26.8 million were used to offset taxable
income. In addition, the Company determined that approximately $13.1 million of
previous NOLs were not available for utilization under the provisions of
Internal Revenue Code Section 382. Accordingly,  at March 31, 2007, we had federal net operating loss carryforwards
of approximately $18.7 million available to reduce taxable income, which will
expire between 2008 and 2026.

23

Inventory

We
value inventories at the lower of cost or market.  We determine the cost of raw materials, work in process and
finished goods using the specific identification cost method.  We analyze our inventory levels quarterly
and write down inventory that has become obsolete and inventory that has a cost
basis in excess of its expected net realizable value. Expired inventory is
disposed of and the related costs are written off. Materials acquired for
R&D on products yet to be launched are written off in the year of
acquisition. The determination of whether or not inventory costs will be
realizable requires estimates by management.
A critical estimate in this determination is the estimate of the future
expected inventory requirements, whereby we compare our internal sales
forecasts to inventory on hand.  Actual
results may differ from those estimates and inventory write-offs may be
required.  We must also make estimates
about the amount of manufacturing overhead to allocate to our finished goods
and work in process inventories.
Although the manufacturing process is generally similar for our
products, we must make judgments as to the portion of costs to allocate to purchased
product, work in process and finished goods, and such allocations can vary
based upon the composition of these components and the fact that each product
produced does not necessarily require the same amount of time or effort for the
same production step.  Accordingly, the
assumptions we make can impact the value of reported inventories and cost of
sales.

FDA Compliance

The
FDA completed an inspection of the Companys facility in June 2006.
Observations were provided on FDA Form 483. The Company submitted a response to
the observations to the FDA. The Company believes that we remain substantially
cGMP compliant. We have since received approval from the FDA for four products
previously submitted. We continue to focus on improving the amount of support
in both quality assurance and quality control in order to continually improve
our performance and outcome in quality. This support is derived from the
improvement of systems, training on risk management, improvement on our
Corrective And Preventative Actions (CAPA) and cGMP, while adding the
appropriate level of personnel to support our growth. During  Fiscal 2007, in addition to our own internal
audits we have retained outside companies to audit both our laboratory and
manufacturing areas of our Company in order to improve and or maintain our
systems of operation. These audits were based on a historical look back and
offered improvements based on  the
Companys future requirements and included follow up on the recommendations
made by the FDA.

We
remain extremely pro-active in regards to growing our business
appropriately.  Since April 2006, the
analytical staff has been increased from 32 to approximately 64 employees,
thereby enabling the laboratory to better cope with a significantly increased
workload with improved timeliness, higher quality, and increased cGMP
compliance. Several members of the lab staff attend supplemental professional
training courses and conferences, which increases the laboratorys technical
and cGMP proficiency. The lab facility has also undergone major upgrades,
including a significant increase in working space to improve analyst efficiency
and safety. Additional lab instruments and equipment have been purchased which
will enable increased compliance with cGMP requirements, cut future costs by
enabling in-house rather than contract analyses, and speed sample testing.
Significant resources have also been spent to improve overall lab operations.
Such expenditures demonstrate to the regulators, clients and shareholders that
upper management is continually committed to adding quality individuals to the
work force, providing the resources necessary to upgrade lab equipment and
improve the effectiveness of lab operations and cGMP compliance.

24

Overview of Fiscal 2007

The
Company is engaged in the business of developing, manufacturing, marketing and
distributing generic and private-label pharmaceuticals to the nations largest
wholesalers, distributors, warehousing and non-warehousing chain drugstores and
managed care providers, throughout the U.S. and Puerto Rico.

Our Company
effectively executed its
operating plan during Fiscal 2007 and laid the ground work to support future
growth. The organization continues to be strengthened to meet the demands of a
competitive US generic pharmaceutical market.

We
recorded net sales of $117.0 million during Fiscal 2007 compared to $82.8
million during Fiscal 2006.  We have
generated cash from operations of $27.9 million during Fiscal 2007 as compared to
$8.9 million during Fiscal 2006.  This
cash was generated after funding our working capital requirements of $12.8
million and $17.5 million during the relevant periods. We earned a net income
of $26.9 million during Fiscal 2007 compared to a net loss of $10.4 million
during Fiscal 2006.  The higher income
was primarily due to higher sales and lower non-cash research and development
expense (R&D) of $11.8 million during Fiscal 2007 as compared to $35.1
million during Fiscal 2006.  This
non-cash R&D expense relates to three products passing their
bio-equivalency studies and related value of the preferred stock issued to Sun
Global during Fiscal 2007 as compared to nine products during Fiscal 2006.  At March 31, 2007, we had stockholders
equity of $95.2 million as compared to stockholders equity of $56.4 million at
March 31, 2006.

In
January 2005, the Company changed its fiscal year end from December 31 to March
31 to better align our financial reporting with our parent company, Sun Pharma.
The following discussion of historical operating results compares Fiscal 2007
to Fiscal 2006, Fiscal 2006 to Fiscal 2005. Results from Fiscal 2005 were
derived from the Companys published quarterly results and are unaudited.
Accordingly, this twelve month period is not disclosed in the accompanying
financial statements. It is included in this discussion for comparative
purposes only. For the previous calendar year ended December 31, 2004, the
comparison is to the calendar year ended December 31, 2003. The discussion of
historical operating results also includes and compares the three months ended
March 31, 2006 to the Transition Period. Results from the three month period
ended March 31, 2006 were derived from the Companys published quarterly
results and are unaudited.

Fiscal 2007 Compared to Fiscal 2006

Net Sales.
Net sales for the relevant periods of 2007
and 2006 were $117.0 and $82.8 million, reflecting an increase of over 41%. The
increase is primarily due to the higher production of existing products; new
product launches (primarily the sales of our generic equivalent of Ultracet®)
and increased marketing of our products to new and existing customers.  Currently, we manufacture and market all
except two of the approved products.  Sales of four products accounted for approximately 69% of net
sales for Fiscal 2007 as compared to sales of three products accounting for
approximately 70% of net sales for Fiscal 2006.  See Note 1 to Financial
Statements  Revenue Recognition for explanation of the determination of net
sales.

Gross
Profit.  We earned a gross
profit of $57.8 million as compared to a gross profit of $40.9 million during
the relevant periods, reflecting an increase of 41% which is consistent with
our growth in net sales. The increase in gross profit for the relevant periods
is primarily due to higher sales, new product launches, an improved balance in
the mix of customers or the class of trade and product selection being sold
partially offset by price erosion during the year.

The
gross profit margin remained constant at 49% during the relevant periods though
the product and customer mix changed through out the year. The product mix
included our manufactured products and also the distributed products being
marketed and distributed pursuant to the Sun Pharma marketing agreement. The
company also continued to experience increased competition, both domestic and
foreign, resulting in erosion of prices and profit margins on certain products.
We believe that as distributed sales increase our overall margin percentage
could decrease depending on the weighted margin between our manufactured
products and the distributed products.

The
net sales for distributed products were $4.6 million for Fiscal 2007. The gross
profit margin on distributed products sold was 30%. The net sales for
manufactured products were $112.4 million for Fiscal 2007. The gross profit
margin for manufactured products was 50%.

Selling,
General and Administrative Expense.
Selling, general and administrative expenses during the relevant

25

periods were
$9.9 million and $8.2 million, representing an increase of 21%. The selling,
general and administrative expenses, as a percentage of net sales, have
declined to 8% as compared to 10% during the relevant periods.

The
increase in SG&A for Fiscal 2007 over Fiscal 2006 was primarily due to an
increase in costs for additions to the management team and associated
compensation and higher SG&A expenses associated with higher sales volumes.

Research
and Development Expenses.  Total R&D expenses for the relevant periods were $22.4
million for Fiscal 2007 and $43.5 million for Fiscal 2006. Actual cash research
and development expenses were $10.6 million for Fiscal 2007 and $8.4 million
for Fiscal 2006. We incurred non-cash research and development expenses
(technology transfer cost) of $11.8 million for the 1,632,000 shares of
preferred stock for three product transfers as compared to $35.1 million for
the 4,896,000 shares of preferred stock for nine product transfers. The cash
R&D expenses during Fiscal 2007 were higher compared to those during Fiscal
2006 due to increased internal R&D activity and initial milestone payments
paid to third parties for initiating technology transfer of four products (see
Future Outlook). We filed 19 ANDAs with the FDA during Fiscal 2007,
(Three  products filed  had multiple ANDAs). This brings our total
number of ANDAs pending approval by the FDA to 29 (including one tentative
approval) or 21 products. We also submitted three other filings to the FDA for
new strengths on existing ANDAs and for new sources on the Active
Pharmaceutical Ingredients (API)

Net Other Income. We earned net other income of $1.3 million
during Fiscal 2007 as compared to $0.3 million during Fiscal 2006. The net
interest income during the relevant periods were $1.1 million and $0.2 million
respectively after incurring interest expense of twenty eight thousand dollars
and four thousand dollars in respective periods. The higher income is
reflective of our increase in cash balances during Fiscal 2007

Results of
Operations. We
earned a net income of $26.9 million during Fiscal 2007 as compared to net loss
of $10.4 million during the Fiscal 2006. The higher results of operation are
primarily due to higher volumes of sales and lower non-cash R&D expenses.

Fiscal
2006  Compared to Fiscal  2005

Year ended March 31,2006
  (Audited)

2005
  (Unaudited)Statement of operations data

(in thousands, except per share data)Net sales

$
82,789

$
64,116Cost of goods sold


41,873


26,930Gross profit


40,916


37,186Selling, general and
administrative expense


8,183


5,874Research and development costs
 affiliate
   non cash


35,055


26,769Research and development costs
 other


8,437


6,640Operating
  loss


(10,759
)

(2,097
)Other income (expense)


336


(181
)Net Loss


(10,423
)

(2,278
)Net Loss
  per shareBasic


(0.39
)

(0.08
)Diluted


(0.39
)

(0.08
)Weighted Average Shares
Outstanding:Basic


26,392


26,348Diluted


26,392


26,34826

Net Sales.
Net sales for the relevant periods of 2006
and 2005 were $82.8 and $64.1 million, reflecting an increase of over 29%. The
increase is primarily due to the higher production, new product launches
(primarily the sales of our generic equivalent of Ultracet® and increased
marketing of our products to new and existing customers.  Currently, we manufacture and market all
except one of the approved products.  Sales of three products accounted for approximately 70% and 77% of
net sales for the relevant periods of 2006 and 2005, respectively.  See
Note 1 to Financial Statements  Revenue Recognition for explanation of the
determination of net sales.

Gross
Profit.  We earned a gross
profit of $40.9 million as compared to a gross profit of $37.2 million during
the relevant periods, reflecting an increase of 10%.  The increase in gross profit for the relevant periods is
primarily due to higher sales, new product launches, an improved balance in the
mix of customers or the class of trade and product selection being sold
partially offset by price erosion during the year.

The
gross profit margin declined to 49% as compared to 58% during the relevant
periods.  The decrease was primarily the
result of increased competition, both domestic and foreign, resulting in
erosion of prices and profit margins.

Selling,
General and Administrative Expense.
Selling, general and administrative expense during the relevant periods
were $8.2 million and $5.9 million, representing an increase of 39%. The
selling, general and administrative expense have increased to 9.9% of net sales
as compared to 9.2% of net sales during the relevant periods.

The
increase in SG&A for Fiscal 2006 over Fiscal 2005 was due to an increase in
regulatory costs for compliance with SEC regulations, including Sarbanes-Oxley
requirements ($0.4 million), primarily additions to management and associated
compensation ($0.7 million), higher taxes on property ($0.2 million) and higher
SG&A expenses associated with higher sales volumes as well as a one time charge
($0.3 million) associated with our decision to forego an acquisition of  real property in favor of alternate
expansion  opportunities.

Research and
Development Expenses. Total R&D expenses for the relevant
periods were $43.5 million   for Fiscal
2006 and $33.4 million for Fiscal 2005. Cash research and development expenses
were $8.4 million for Fiscal 2006 and $6.6 million during Fiscal 2005.  We incurred non-cash research and
development expenses (technology transfer cost) of $35.1 million for the
4,896,000 shares of preferred stock for nine product transfers as compared to
$26.8 million for the 4,352,000 shares of preferred stock for eight product
transfers. The substantially higher R&D expenses, both cash and non-cash,
represent increased R&D activities.

Interest
Expense. We incurred
approximately four thousand dollars interest expense during Fiscal 2006 on a
short term borrowing from JPMorgan Chase Bank  See Note 2 to Financial Statements. Interest expense on loans from
the EDC, ICICI Bank, the Bank of Nova Scotia and Citibank was $0.2 million
during Fiscal 2005. The decrease in the amount of interest is primarily due to
paying off the entire loans due to the EDC, ICICI Bank, the Bank of Nova Scotia
and CitiBank during Fiscal 2005.

Results of
Operations.  We incurred a
net loss of $10.4 million and $2.3 million during the relevant periods.
The  lower results of operation are
primarily due to higher non-cash R&D expenses and higher Cash R&D
expenses.

27

Three months ended March 31, 2006 compared
with the Transition Period

2006
  (Unaudited)

Transition
  Period
  (Audited)Statement of operations data

(in thousands, except per
  share data)Net sales

$
24,701

$
17,337Cost of
  goods sold


12,011


7,879Gross profit


12,690


9,457Selling,
  general and administrative expenses


2,481


1,879Research and
  development costs  affiliate  non cash


14,008


10,200Research and
  development costs  other


2,925


1,720Operating loss


(6,724
)

(4,342
)Other income
  (expenses)


185


21Net Loss


(6,539
)

(4,322
)Net Loss per
  shareBasic


(0.25
)

(0.16
)Diluted


(0.25
)

(0.16
)Weighted
  Average Shares Outstanding:Basic


26,392


26,348Diluted


26,392


26,348Net Sales.
Net sales for the relevant periods of 2006
and 2005 were $24.7 million and $17.3 million, reflecting an increase of almost
43%. The increase is primarily due to the higher production, new product
launches and increased marketing of our products to new and existing customers.  Currently, we manufacture and market all
except one of the approved products.
See Part I, Item 1. Business  Current Status above.  Sales
of four and three products accounted for approximately 76% and 77% of net sales
for the relevant periods, respectively.  See Note 1 to Financial
Statements  Revenue Recognition.

Gross
Profit.  We earned a gross
profit of $12.7 million as compared to a gross profit of $9.5 million during
the relevant periods, reflecting an increase of 34%.  The improvement was primarily due to higher sales volumes during
the three months ended March 31, 2006 compared to the Transition Period.

The
gross profit margin declined to 51% as compared to 55% during the relevant
periods.  The decrease was primarily the
result of increased competition, both domestic and foreign, resulting in
erosion of prices and profit margins.

Selling,
General and Administrative Expenses.  Selling, general and administrative expenses during the relevant
periods were $2.5 million and $1.9 million, representing an increase of 32%.
The selling, general and administrative expenses have reduced to 9.4% of net
sales compared to 10.8% of net sales during the relevant periods.

The
increase in SG&A during the relevant periods has been due to an increase in
regulatory costs for compliance with SEC regulations, including Sarbanes-Oxley
requirements ($0.1 million), primarily additions to management and associated
compensation ($0.2 million), and higher SG&A expenses associated with
higher sales volumes.

Research and
Development Expenses. Total R&D expenses for the relevant
periods were  $16.9 million  and $11.9 million. Cash research and
development expenses were $3.0 million and $1.7 million during the relevant
periods.  We incurred non-cash research
and development expenses (technology transfer cost) of $14.0 million for the
1,632,000 shares of preferred stock for three product transfers as compared to
$10.2 million for the 1,632,000 shares of preferred stock for three product
transfers. The substantially higher R&D expenses, both cash and non-cash,
represent increased R&D activities.

Interest
Expense.  Interest expense on
loans from the JP Morgan Chase Bank was approximately four thousand dollars
during the relevant period of 2006. There was no corresponding expense during
the Transition Period.

28

Results of
Operations.  We incurred a
net loss of $6.5 million and $4.3 million during the relevant periods. The
lower results of operation are primarily due to higher non-cash R&D
expenses.

Year Ended December 31, 2004 Compared with
Year Ended December 31, 2003

Net Sales.
Net sales for 2004 and 2003 were $60.3
million and $45.5 million, respectively, reflecting an increase of almost 33%.
The increase is due to the higher production and marketing of our products to
new and existing customers.  Currently,
we manufacture and market all except one of the approved products.  See Part I, Item 1. Business  Current
Status above. Sales of two products accounted for approximately 74% and 87% of
net sales in 2004 and 2003, respectively.

Gross
Profit.  We earned a gross
profit of $35.9 million for 2004 as compared to a gross profit of $26.0 million
for 2003, reflecting an increase of 38% over 2003.  The improvement was primarily due to higher sales volumes with
improved margins due to product mix in the current period as compared to the
corresponding period of 2003 and ability to absorb operational overheads due to
higher sales.

In
addition to increased sales, the gross profit margin has marginally improved to
59% in 2004 as compared to 57% for 2003.
The increase was primarily the result of:


Change in
  the product mix of sales.
Reduction in
  manufacturing costs due to increased batch sizes.
Further
  improved efficiency in the overall manufacturing process associated with
  higher utilization of plant capacity.
Utilization
  of newly installed larger and faster equipment to achieve economies of scale.Selling,
General and Administrative Expenses.  Selling, general and administrative expenses for 2004 and 2003
were $5.3 million and $7.4 million, respectively, representing a decrease of
28%.  Selling, general and
administrative expenses have decreased to 9% of net sales for 2004 as compared
to 16% of net sales for 2003.

The decrease
in SG&A of approximately $2.1 million in 2004 was primarily due to one time
recording of variable compensation expense during 2003 on the extension of the
term of two former directors stock options and severance compensation to a
former CEO.

Research and
Development Expenses. Total R&D expense for 2004 of $30.5
million was substantially higher as compared to $6.2 million during 2003. Cash
research and development expenses of $6.1 million for 2004 were higher by 97%
when compared with $3.1 million incurred for 2003.  We incurred non-cash research and development expenses
(technology transfer cost) of $24.4 million for the 3,808,000 shares of
preferred stock for seven product transfers during 2004 as compared to $3.1
million for the 544,000 shares of preferred stock for one  product transfer
during 2003. The substantially higher
R&D expenses, both cash and non-cash, represent increased R&D
activities.

Interest
Expense.  Interest expense on
loans from the EDC, Sun Pharma and its affiliates, ICICI Bank, the Bank of Nova
Scotia and Citibank, was $0.4 million and $1.2 million for 2004 and 2003,
respectively. The decrease in the amount of interest is primarily due to paying
off the entire loans due to the EDC, ICICI Bank, the Bank of Nova Scotia and
CitiBank during 2004 as well as Sun Pharma loans during 2003.

Results of
Operations.  We incurred a
net loss of $0.2 million for 2004 as compared to earning a net income of $11.2
million for 2003. The significantly lower results of operation for 2004 as
compared to 2003 are primarily due to higher non-cash R&D expenses.

Liquidity and Capital Resources

Fiscal
2007 and Fiscal 2006

We
generated cash of $27.9 million from operations as compared to $8.9 million
during the relevant periods. During the second quarter of Fiscal 2007, Caraco
acquired a packaging facility for $1.7 million. This 33,369 sq. ft. facility
was previously owned and operated by our third party packager of our portfolio
of products. We envision this acquisition will

29

improve
overall costs in packaging, bottling and increase our production by adding
additional packaging lines. During Fiscal 2007, Caraco acquired six acres of
land directly adjacent to its existing manufacturing facility for $0.3 million.
We are contemplating the construction of a 125,000 sq. ft. facility on this
site.

Accounts
receivable increased by $5.2 million to $26.1 million as at the end of Fiscal
2007, as compared to $20.9 million at the end of fiscal 2006. The increase in
accounts receivable is primarily commensurate with the increase in sales. Our
days sales outstanding, (DSO), as at the end of Fiscal 2007 improved to 72
days from 76 days outstanding at the end of Fiscal 2006.

At
March 31, 2007, we had working capital of $76.2 million compared to a working
capital of $41.4 million at March 31, 2006. The working capital was
significantly higher due to higher receivables and inventories at the end of
March 2007 compared to that at March 31, 2006, and also due to reduction of
current liabilities.

Fiscal
2006 and Fiscal 2005

We
generated cash of $8.9 million from operations as compared to cash of $20.6
million during the relevant periods. The lower cash generation during Fiscal
2006 was primarily due to augmenting working capital. Cash generated from
operations was used to finance our capital expenditures of $3.6 million. Cash
from operations during Fiscal 2005 was used to finance capital expenditure of
$3.3 million.

At
March 31, 2006, we had working capital of $41.4 million compared to a working
capital of $18.8 million at March 31, 2005. The working capital was
significantly higher due to higher receivables and inventories at the end of
March 2006 compared to that at March 31, 2005, partially offset by higher
current liabilities.

Three
Months ended March 31, 2006 to the Transition Period

We
generated cash of $4.3 million from operations as compared to cash of $4.8
million during the relevant periods. In addition to augmenting working capital,
the cash generated from operations was used to finance our capital expenditures
of $1.2 million and $0.7 million during the relevant periods.

At
March 31, 2006, we had working capital of $41.4 million compared to a working
capital of $18.8 million at March 31, 2005.
The working capital was significantly higher due to higher receivables
and inventories at the end of March 2006 compared to that at March 31, 2005,
partially offset by higher current liabilities.

Years
ended December 31, 2004 and 2003

During
2004, we generated cash of $22.0 million from operations as compared to cash
of  $15.5 million during 2003. The
higher cash generation during 2004 has been primarily due to higher sales
volumes, better-cost absorption, an improved product mix, obtaining more
competitive prices for raw materials and better utilization of new equipment to
improve production and productivity.

In
addition to paying down debt, the cash generated from operations for both 2004
and 2003 was used to finance our capital expenditures of $4.0 million during
2004 and $2.4 million during 2003.

During
2004, we repaid the entire balance of $4.4 million due to ICICI Bank Limited
and the $6.4 million mortgage loan due to the Economic Development Corporation
of the City of Detroit (the EDC), and repaid $12.5 million due to the Bank of
Nova Scotia. These payoffs were funded from internal cash flow and by utilizing
a $10.0 million credit line arranged with Citibank, FSB. We have also repaid
the entire borrowing of $10.0 million from Citibank during 2004. These
repayments leave us debt-free (other than normal accounts payables and
accruals) at December 31, 2004, and our entire property, plant, equipment and
intellectual property free of any mortgages, liens or restrictions. In
comparison, during 2003 we borrowed $1.6 million from the Bank of Nova Scotia
and repaid the entire Sun Pharma loans of $9.7 million and the scheduled
payments of $1.2 million to the EDC and $0.6 million to the ICICI Bank.

During
2004, we generated $3.5 million from the exercise of stock options by Sun
Pharma, our employees and one officer and director. During 2003, we generated
$0.9 million from the exercise of stock options by our employees and directors.

30

At
December 31, 2004, we had working capital of $13.2 million compared to a
negative working capital of $1.1 million at December 31, 2003.  The negative working capital as on December
31, 2003 was primarily due to classification of loans as current of $8.8 million
due to ICICI Bank and the Bank of Nova Scotia and $1.1 million due to the EDC.

The
available increased cash flow during 2004 was partly utilized to increase
inventories, up from $9.6 million in 2003 to $17.1 million. These increased
inventories served us well to satisfy increased sales requirement from $45.5
million in 2003 to $60.3 million in 2004.
To meet customer demands in timely manner, it is essential to keep
sufficient inventories at all levels including Finished goods stock. Therefore,
if necessary the trend of increasing inventories will continue in 2005 to
support increased sales.

The
following tables present a summary of each of the four quarters of Fiscal 2007.
The unaudited interim financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of such
information when read in conjunction with our audited financial statements and
related notes. Our quarterly operating results have varied in the past, may continue
to do so and are not necessarily indicative of results for any future period.

Fiscal 2007 
April 1, 2006 to March 31, 2007 (unaudited)

(In thousands, except per share data)Quarter 1

Quarter 2

Quarter 3

Quarter 4Net Sales

$
24,751

$
28,280

$
31,257

$
32,739Net  Profit


4,986


2,311


10,059


9,502Earnings Per
  ShareBasic


0.19


0.09


0.38


0.36Diluted


0.13


0.06


0.26


0.25Contractual Obligations and Off Balance Sheet
Transactions

Contractual
Obligations

Contractual Obligations


1-2 yearsOperating Leases


$0.7 millionThere
are no other contractual obligations requiring disclosure.

Off Balance
Sheet Transactions

None

Future Outlook

We
believe the competitive environment we find ourselves in is conducive to our
success. Due to our size and management structure, we believe that we are able
to move swiftly and effectively. We are disciplined and have the aptitude to
execute our plan. We believe we are substantially compliant with cGMP. We
continue to invest in improved systems, training and personnel in quality
assurance, quality control and manufacturing to improve our overall performance
in quality.

Currently,
we have 29 ANDAs pending approval at the FDA (including one tentative approval)
or 21 products. We continue to expand and upgrade our facilities, attract and
hire talented individuals and expand our customer base. Our internal

31

efforts,
combined with Sun in developing new products have also picked up momentum and
this should permit us to grow at the level of our guidance as provided below.
We now have eight products, Metformin, Metoprolol, Tramadol, Salsalate,
Tramadol with Acetaminophen, Clonazepam, Mirtazapine and Tizanidine, whose
market share is ranked third or higher against the same products of our generic
competitors. Based on current trends, we believe we will achieve 30% growth in
sales for Fiscal 2008, compared to Fiscal 2007.

Although
gross profit margins may come down over time due to price erosion, we are
confident that our sales growth, expanding product portfolio and successful
execution of our business plan will offset any long-term impact. However,
should the pricing pressures become more severe than anticipated; the result
may be lower growth rates and gross margins. Management has and will continue
to work diligently to counter the pricing pressures through increased sales
volumes, expansion of our customer base, improved productivity, and better cost
absorption of operational overheads, cost reductions and increased development
plans.

As
previously disclosed, under the products agreement dated November 21, 2002
between Sun Global and the Company, Sun Global agreed to transfer the
technology for 25 products to the Company over a five year period in exchange
for 544,000 preferred shares (which are convertible on a one-to-one basis into
common shares) per product. Since the date of the products agreement, the
Company has selected all 25 products for development and 23 of these products
have passed their respective bio-equivalency studies. There are two products
that remain in our development pipeline that pertain to this agreement.

While
the development of new products will increase our cash R&D expense and
impact EPS, we expect that we will continue to have the cash and other means
available to meet increased working capital requirements, fund potential
Paragraph IV Certification litigation and finance further capital investments.
Product development is critical in meeting expectations in the future.

The
Company intends to aggressively move forward with the development of new
products. We believe that Sun Pharma is a partner with a proven track record;
and one that already has provided the Company with quality products. Moreover,
Sun Pharmas increased beneficial ownership in the Company to approximately 66%
(approximately 75% including the convertible Series B Preferred Stock), should,
we believe, provide it with the vested interest to continue to help the Company
succeed. Sun Pharma has previously provided the Company with capital, loans,
guarantees of loans, personnel, raw materials and equipment, which have
significantly helped the Company to date. In addition to the Sun products
agreement, we have implemented additional development strategies with various
third parties both domestically and abroad that will complement the Sun
development pipeline.

During
Fiscal 2007, the Company entered into three definitive agreements with different
companies to develop four additional ANDAs for Caraco and provide additional
opportunities for the future development of products. These agreements contain,
for three products, both milestone payments to be paid in cash and profit
sharing based upon future sales for a defined period, and for one product only
milestone payments in cash without any obligation to share profits in the
future.

We
anticipate additional development agreements will be entered into in order to
eliminate any future gaps in our calendar of approvals that we anticipate from
the FDA. We expect these agreements to run parallel to our own product development.
In order to improve the amount of filings during the Fiscal 2008, we continue
to fortify our own research and development team by adding formulators and
increasing the number of products we have in development internally. We filed
19 ANDAs in Fiscal 2007 or 11 products.

As
previously mentioned, we have entered into a definitive agreement to market Sun
Pharma ANDAs that are either approved or awaiting approval at the FDA.
Accordingly, we have begun marketing a number of these products. This agreement
will provide for an alternate stream of products that will complement our
internal research and development, our outsourced development and our current
technology agreement with Sun Pharma, providing four diverse paths of
development, an increased product pipeline and potential revenue. These various
paths mitigate the risk of each other, potentially allowing for an ongoing
stream of approvals from the FDA.

Managements
plans for Fiscal 2008 include:


Continued
  focus and improvement on FDA compliance.32


Increased
  pace of research and development activities, with a view to increase the
  number of ANDA filings.
Continue to
  invest in equipment and facilities to expand capacity to meet requirements of
  projected short and long-term growth while improving quality.
Increased
  market share for certain existing products and recently introduced products
Enhanced
  customer reach and satisfaction.
Prompt
  introduction of new approved products to the market.
Achieving
  further operational efficiencies by attaining economies of scale and cost
  reduction per unit.
Increase the
  number of products, as well as anticipated volume increases for existing
  products, which, in turn, will improve manufacturing capacity utilization.
Consider
  alternative ways of increasing cash, such as marketing ANDAs owned by Sun
  Pharma.
Expand our
  relationships with financial institutions to fortify our credit position and
  borrowings as necessary.
Research
  alternate product development sources and product licenses such as in
  licensing authorized generics from brand innovator companies and acquisitions
  of ANDAs from competitor manufacturers both domestically and abroad.
Research
  possible development of brands for existing stream of products where such
  potential exists.
Increase
  focus on succession planning
Increase
  training in cGMP.
Increase
  management training and development.
Maintain
  balance in trade class.Item 7A. Quantitative and Qualitative
Disclosures About Market Risk.

The Company
has no debt or other market risk securities or transactions in foreign
exchange.

Line of Credit

On
November 17, 2005, the Company entered into a one-year, $10 million Credit
Agreement with JP Morgan Chase Bank, N.A. Under the Credit Agreement, the
lender may make loans and issue letters of credit to the Company for the Companys
working capital needs and general corporate purposes. Letters of credit, if
issued, expire one year from their date of issuance, but no later than November
17, 2007. On November 16, 2006, this agreement was renewed through November 30,
2007. Borrowings are secured by the Companys receivables and inventory.
Interest is payable based on a LIBOR Rate or an alternate base rate (determined
by reference to the prime rate or the federal funds effective rate), as
selected by the Company. The rate of interest is LIBOR plus 75 basis points or
the banks prime rate minus 100 basis points (effective rates of 6.1% and
7.25%, respectively at March 31, 2007.) The Credit Agreement requires that
certain financial covenants be met on a quarterly basis. The Company is in
compliance with these financial covenants at March 31, 2007. There are no
outstanding borrowings under this Credit Agreement as of March 31, 2007.

33

Item 8. Financial Statements and
Supplementary Data

INDEX TO FINANCIAL STATEMENTS

Page1.
Report of Independent Registered Public Accounting Firm on Internal
  Control Over Financial Reporting

F-1 & F-22.
Report of Independent Registered Public Accounting Firm

F-3 & F-43.
Financial Statements:Balance Sheets as of March 31, 2007 and 2006

F-5 & F-6Statements of Operations for the years ended March 31, 2007 and 2006,
  the Transition Period and for the year ended December 31, 2004

F-7Statements of Stockholders Equity (Deficit) for the years ended
  March 31, 2007 and 2006, the Transition Period and for the year ended December
  31, 2004

F-8Statements of Cash Flows for the years ended March 31, 2007 and 2006,
  the Transition Period and for the year ended December 31, 2004

F-9Notes to Financial Statements

F-10 to F-36Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

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

b. There
has been no change in the Companys internal control over financial reporting
that occurred during the fiscal quarter ended March 31, 2007 that materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.

Managements Report on Internal Control Over
Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).

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

Based
on our evaluation, management concluded that our internal control over
financial reporting was effective as of March 31, 2007. Our managements
assessment of the effectiveness of our internal control over financing
reporting as of March 31, 2007 has been audited by Rehmann Robson, an
independent registered public accounting firm, as stated in its Report of
Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting which appears on pages F-1 and F-2 below.

Item 9B. Other Information.

None.

34

PART III

Item 10. Directors,
Executive Officers and Corporate Governance.

The
information with respect to directors and executive officers of the Company,
the nomination of directors, the Companys Code of Ethics, compliance with
Section 16(a) of the Exchange Act and the Companys audit committee are included
under the sections Nominees For Directors Terms Expiring in 2008, Incumbent
Directors Terms Expiring in 2006, Incumbent Directors Terms Expiring in
2007, Committees and Meetings of Directors, Nomination of Directors, Executive
Officers, Code of Business Conduct and Ethics, and Section 16(a) Beneficial
Ownership Reporting Compliance in our 2007 Proxy Statement to be filed with
the Securities and Exchange Commission on or before July 29, 2007, is
incorporated herein by reference.

Item 11. Executive
Compensation.

The
information regarding executive compensation, director compensation,
compensation committee interlocks and the compensation committee report are included
under the sections Compensation of Executive Officers, Compensation of
Directors, Compensation Committee Interlocks and Insider Participation and Compensation
Committee Report in our 2007 Proxy Statement to be filed with the Securities
and Exchange Commission on or before July 29, 2007, is incorporated herein by
reference.

Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.

The
information with respect to the security ownership of certain beneficial owners
and management and with respect to equity compensation plans included under the
sections Security Ownership of Certain Beneficial Owners, Security Ownership
of Management and Directors and Equity Compensation Plan Information in our
2007 Proxy Statement to be filed with the Securities and Exchange Commission on
or before July 29, 2007, is incorporated herein by reference.

Item 13. Certain
Relationships and Related Transactions, and Director Independence.

The
information with respect to certain relationships and related transactions and
director independence are included under the sections Transactions of
Directors, Executive Officers and Certain Beneficial Owners of Caraco in our 2007 Proxy Statement to
be filed with the Securities and Exchange Commission on or before July 29, 2007,
is incorporated herein by reference.

Item 14. Principal
Accountant Fees and Services.

The
information under the caption Relationship with Independent Auditors  Audit
and Non-Audit Fees in our 2007 Proxy Statement to be filed with the Securities
and Exchange Commission on or before July 29, 2007, is incorporated herein by
reference.

35

Part
IV

Item 15. Exhibits Financial Statement
Schedules.

(a)
1
Financial StatementsPage1.
Report of Independent Registered Public Accounting Firm on Internal
  Control Over Financial Reporting

F-1 & F-22.
Report of Independent Registered Public Accounting Firm

F-3 & F-43.
Financial Statements:Balance Sheets as of March 31, 2007 and 2006

F-5 & F-6Statements of Operations for the years ended March 31, 2007 and 2006,
  the Transition Period and for the year ended December 31, 2004

F-7Statements of Stockholders Equity (Deficit) for the years ended
  March 31, 2007 and 2006, the Transition Period and for the year ended December
  31, 2004

F-8Statements of Cash Flows for the years ended March 31, 2007 and 2006,
  the Transition Period and for the year ended December 31, 2004

F-9Notes to Financial Statements

F-10 to F-362
Financial Statement SchedulesNone3
Exhibits. The exhibits filed in response to Item 601 of Regulation
  S-K are listed in the Exhibit Index, which is incorporated herein by
  reference.(b)
ExhibitsThe exhibits filed in response to Item 601 of Regulation S-K are
  listed in the Exhibit Index, which is incorporated herein by reference.(c)
Other SchedulesNoneSIGNATURES

Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 14th day of May, 2007.

CARACO PHARMACEUTICAL LABORATORIES, LTD./s/ Daniel H. MovensDaniel H. MovensChief Executive Officer36

POWER OF ATTORNEY

KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Daniel H. Movens and / or Mukul Rathi, this 14th
day of May, 2007, his true and lawful attorney(s)-in-fact and agent(s), with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any or all amendments to this
report and to file the same, with all exhibits and schedules thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney(s)-in-fact and agent(s) full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney(s)-in-fact and agent(s), or their
substitutes(s), may lawfully do or cause to be done by virtue hereof.

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

/s/ Dilip S. Shanghvi

Chairman of the BoardDilip S. Shanghvi/s/ Daniel H. Movens

Director, Chief Executive Officer, Principal Executive OfficerDaniel H. Movens/s/ Mukul Rathi

Interim Chief Financial Officer, Principal Accounting OfficerMukul Rathi/s/ Jitendra N. Doshi

DirectorJitendra N. Doshi/s/ John D. Crissman

DirectorJohn D. Crissman/s/ Sailesh T. Desai

DirectorSailesh T. Desai/s/ Timothy Manney

DirectorTimothy Manney/s/ Madhava Reddy

DirectorMadhava Reddy/s/ Georges Ugeux

DirectorGeorges Ugeux/s/ Sudhir V. Valia

DirectorSudhir V.
  Valia37

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a
  subsidiary of Sun Pharmaceutical Industries Limited)FINANCIAL STATEMENTS

AND

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

FOR THE YEARS ENDED MARCH 31, 2007 AND 2006,
THE THREE MONTHS ENDED MARCH 31, 2005 AND
THE YEAR ENDED DECEMBER 31, 2004

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary
of Sun Pharmaceutical Industries Limited)





INDEX TO FINANCIAL STATEMENTSReport of Independent
  Registered Public Accounting Firm on Internal Control Over Financial
  Reporting

F-1 - 2Report of Independent
  Registered Public Accounting Firm

F-3 - 4Financial Statements as of March 31, 2007
  and 2006, and for the Years Ended 
March 31, 2007 and 2006, the Three Months
  Ended March 31, 2005 and the Year Ended December 31, 2004Balance Sheets

F-5 - 6Statements of Operations

F-7Statements of Stockholders Equity
  (Deficit)

F-8Statements of Cash Flows

F-9Notes to Financial Statements

F-10 - 36* * * * *

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

We have
audited managements assessment, included in the accompanying Managements
Annual Report on Internal Control Over Financial Reporting thatCaraco Pharmaceutical Laboratories, Ltd.
(a Michigan corporation) (a subsidiary of Sun Pharmaceutical Industries
Limited) (the Corporation) maintained effective internal control over
financial reporting as of March 31, 2007, based on criteria established in Internal Control -Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). The Corporations management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on managements assessment and an
opinion on the effectiveness of the Corporations internal control over
financial reporting based on our audit.

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

A
corporations internal control over financial reporting is a process designed
by, or under the supervision of, the corporations principal executive and
principal financial officers, or persons performing similar functions, and
effected by the corporations board of directors, management, and other
personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
corporations internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the corporation; (2) provide reasonable assurance
that transactions are recorded as

F-1

necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial statements.

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

In our
opinion, managements assessment that the Corporation maintained effective
internal control over financial reporting as of March 31, 2007, is fairly
stated, in all material respects, based on the COSO criteria. Also in our
opinion, the Corporation maintained, in all material respects, effective
internal control over financial reporting as of March 31, 2007, based on the
COSO criteria.

We have also
audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the financial statements as of and for the year ended March 31, 2007 of the
Corporation and our report dated May 14, 2007 expressed an unqualified opinion
on those financial statements.

/s/  Rehmann Robson

Troy, Michigan
May 14, 2007.

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

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

We have
audited the accompanying balance sheets of Caraco Pharmaceutical Laboratories,
Ltd. (a Michigan corporation) (a subsidiary of Sun Pharmaceutical Industries
Limited) (the Corporation) as of March 31, 2007 and 2006 and the
related statements of operations, stockholders equity (deficit) and cash flows
for the years ended March 31, 2007 and 2006, the three months ended March 31,
2005 and for the year ended December 31, 2004. These financial statements
are the responsibility of the Corporations management.  Our responsibility is to express an opinion
on these financial statements based on our audits.

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

In our opinion,
the financial statements referred to above present fairly, in all material
respects, the financial position of Caraco Pharmaceutical Laboratories, Ltd. as
of March 31, 2007 and 2006, and the results of its operations and its cash
flows for the years ended March 31, 2007 and 2006, the three months ended March
31, 2005, and for  the year ended
December 31, 2004 in conformity with accounting principles generally accepted
in the United States of America.

F-3

We have also
audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the effectiveness of the Corporations internal control over financial
reporting as of March 31, 2007, based on the criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated May 14, 2007 expressed an
unqualified opinion on managements assessment of the effectiveness of the
Corporations internal control over financial reporting and an unqualified
opinion on the effectiveness of the Corporations internal control over
financial reporting.

/s/  Rehmann Robson

Troy, Michigan
May 14, 2007

F-4

CARACO
PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary of Sun
Pharmaceutical Industries Limited)

BALANCE
  SHEETSASSETS

March 312007

2006Current assetsCash and
cash equivalents

$
33,897,622

$
11,924,245Accounts
receivable, net


26,125,146


20,859,099Inventories


31,943,297


26,965,690Prepaid
expenses and deposits


3,473,340


2,532,561Total current assets


95,439,405


62,281,595Property, plant and equipmentLand


975,311


197,305Buildings
and improvements


12,448,221


10,790,703Equipment


15,292,499


12,040,688Furniture
and fixtures


992,013


681,705Total


29,708,044


23,710,401Less
accumulated depreciation


10,678,157


8,749,997Net property, plant and equipment


19,029,887


14,960,404Total assets

$
114,469,292

$
77,241,999The accompanying notes are an integral part
of these financial statements.

F-5

LIABILITIES
  AND STOCKHOLDERS EQUITYMarch 312007

2006Current
  liabilitiesAccounts
payable, trade

$
3,350,024

$
3,696,265Accounts
payable, Sun Pharma


12,143,157


14,678,085Accrued
expenses


3,782,702


2,489,398Total
  liabilities (all current)


19,275,883


20,863,748Commitments
  and contingencies  (Notes 9, 11 and
  12)Stockholders
  equity (Note 7)Series B
convertible preferred stock, no par value; issued and
  outstanding 10,880,000 shares at March 31, 2007 and 2006.


73,585,520


72,755,770Common
stock, no par value; authorized 50,000,000 shares, issued and
  outstanding 28,102,394 shares (March 31, 2007) and 26,421,994 shares (March
  31, 2006)


55,970,097


44,988,597Additional
paid-in capital


2,864,522


2,718,735Accumulated
deficit


(37,226,730
)

(64,084,851
)Total
  stockholders equity


95,193,409


56,378,251Total
  liabilities and stockholders equity

$
114,469,292

$
77,241,999F-6

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary of Sun Pharmaceutical
Industries Limited)

STATEMENTS OF OPERATIONS
Year Ended
  March 31, 2007

Year Ended
  March 31, 2006

Three
  Months Ended
  March 31, 2005

Year Ended
  December 31, 2004Net sales

$
117,027,016

$
82,788,918

$
17,336,500

$
60,340,309Cost of goods sold (Notes 1 and
4)


59,242,858


41,872,834


7,879,425


24,441,569Gross profit


57,784,158


40,916,084


9,457,075


35,898,740Selling, general and
administrative expenses


9,880,674


8,182,718


1,879,480


5,276,755Research and development costs
- affiliate (Note 7)


11,761,280


35,055,360


10,200,000


24,397,040Research and development costs
- other


10,590,643


8,437,338


1,719,865


6,053,334Operating income
(loss)


25,551,561


(10,759,332
)

(4,342,270
)

171,611Other income
(expense)Interest
income


1,081,208


233,385


16,385


40,316Interest
expense


(28,194
)

(3,740
)




(407,330
)Loss on sale
of equipment


(5,106
)







(10,636
)Other
income


258,652


106,375


4,172


6,671Other income (expense) -
net


1,306,560


336,020


20,557


(370,979
)Net income
(loss)

$
26,858,121

$
(10,423,312
)
$
(4,321,713
)
$
(199,368
)Net income (loss) per
shareBasic

$
1.02

$
(0.39
)
$
(0.16
)
$
(0.01
)Diluted

$
0.72

$
(0.39
)
$
(0.16
)
$
(0.01
)The accompanying notes are an integral part
of these financial statements.

F-7

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary
of Sun Pharmaceutical Industries Limited)

STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)
Preferred Stock

Common Stock

Additional
  Paid-in
  CapitalAccumulated
  DeficitShares

Amount

Shares

Amount



TotalBalances at January 1,
2004




$



24,577,828

$
41,442,311

$
2,718,735

$
(49,140,458
)
$
(4,979,412
)Issuance of preferred stock to
affiliate in exchange for product
  technology transfers


4,352,000


27,500,410














27,500,410Common stock options
exercised








1,756,866


3,453,946








3,453,946Net loss

















(199,368
)

(199,368
)Balances at December 31,
2004


4,352,000


27,500,410


26,334,694


44,896,257


2,718,735


(49,339,826
)

25,775,576Issuance of preferred stock to
affiliate in exchange for product
  technology transfers


1,632,000


10,200,000














10,200,000Common stock options
exercised








25,600


31,730








31,730Net loss

















(4,321,713
)

(4,321,713
)Balances at March 31,
2005


5,984,000


37,700,410


26,360,294


44,927,987


2,718,735


(53,661,539
)

31,685,593Issuance of preferred stock to
affiliate in exchange for product technology
  transfers


4,896,000


35,055,360














35,055,360Common stock options
exercised








61,700


60,610








60,610Net loss

















(10,423,312
)

(10,423,312
)Balances at March 31,
2006


10,880,000

$
72,755,770


26,421,994

$
44,988,597

$
2,718,735

$
(64,084,851
)
$
56,378,251Issuance of preferred stock to
affiliate in exchange for product
  technology transfers


1,632,000


11,761,280














11,761,280Conversion of preferred stock
into common stock


(1,632,000
)

(10,931,530
)

1,632,000


10,931,530Common stock options
exercised









48,400


49,970








49,970Stock option expense














145,787





145,787Net Income

















26,858,121


26,858,121Balances at March 31,
2007


10,880,000

$
73,585,520


28,102,394

$
55,970,097

$
2,864,522

$
(37,226,730
)
$
95,193,409The accompanying notes are an integral part of these financial
statements.

F-8

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary
of Sun Pharmaceutical Industries Limited)

STATEMENTS OF CASH FLOWS

Year
  Ended
  March 31, 2007

Year
  Ended
  March 31, 2006

Three
  Months Ended
  March 31, 2005

Year
  Ended
  December 31, 2004Cash flows from operating
activitiesNet Income
(loss)

$
26,858,121

$
(10,423,312
)
$
(4,321,713
)
$
(199,368
)Adjustments to
reconcile net income (loss) to net cash provided by
  operating activitiesDepreciation


1,931,423


1,552,578


306,626


932,419Capital stock
issued or to be issued to affiliate in exchange for
  product formula


11,761,280


35,055,360


10,200,000


24,397,040Loss on sale
of property, plant and equipment


5,106








10,636Stock option
expense


145,787








Changes in
operating assets and liabilities which (used) provided cashAccounts
receivable


(5,266,047
)

(14,122,321
)

(2,133,911
)

(64,393
)Inventories


(4,977,607
)

(8,497,997
)

(1,333,882
)

(7,523,001
)Prepaid
expenses and deposits


(940,778
)

(1,426,943
)

(441,807
)

(140,430
)Accounts
payable


(2,881,171
)

6,156,792


2,300,793


4,690,789Accrued
expenses


1,293,307


557,954


220,793


(64,548
)Net cash provided by
operating activities


27,929,421


8,852,111


4,796,899


22,039,144Cash flows for investing
activitiesPurchases of
property, plant and equipment


(6,006,014
)

(3,615,901
)

(657,673
)

(3,982,413
)Net cash used in investing
activities


(6,006,014
)

(3,615,901
)

(657,673
)

(3,982,413
)Cash flows from financing
activitiesProceeds from
loans payable to financial institutions


5,000,000


1,500,000





10,000,000Repayments of
loans payable to financial institutions


(5,000,000
)

(1,500,000
)




(26,875,000
)Repayments of
EDC loan











(6,385,490
)Proceeds from
issuance of common stock


49,970


60,610


31,730


3,453,946Net cash provided by (used
in) financing activities


49,970


60,610


31,730


(19,806,544
)Net increase (decrease) in
cash and cash equivalents


21,973,377


5,296,820


4,170,956


(1,749,813
)Cash and cash equivalents,
beginning of year / period


11,924,245


6,627,425


2,456,469


4,206,282Cash and cash equivalents,
end of year / period

$
33,897,622

$
11,924,245

$
6,627,425

$
2,456,469The accompanying notes are an integral part of these financial
statements.

F-9

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary of
Sun Pharmaceutical Industries Limited)

NOTES TO FINANCIAL STATEMENTS1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESOrganization and
  Nature of BusinessCaraco Pharmaceutical
  Laboratories, Ltd. (Caraco or the Corporation), based in Detroit,
  Michigan, develops, manufactures and markets generic, prescription and
  over-the-counter pharmaceuticals in the United States. The process of
  developing a line of proprietary drugs requires approvals by the Food and
  Drug Administration (FDA) of Abbreviated New Drug Applications (ANDA). The
  Corporations present product portfolio consists of 33 products in various
  strengths and package sizes. The Corporations drugs relate to a variety of
  therapeutic segments including the central nervous system, cardiology, pain
  management and diabetes.The
  Corporations manufacturing facility and executive offices were constructed
  in 1991, pursuant to a $9.1 million loan from the Economic Development
  Corporation of the City of Detroit (the EDC). Since August 1997, capital
  infusions and loans have primarily come from Sun Pharmaceutical Industries
  Limited, a specialty pharmaceutical corporation organized under the laws of
  India (Sun Pharma). Among other things, Sun Pharma has acted as a guarantor
  on loans to Caraco, has supplied the Corporation with raw materials for
  certain products, assisted in obtaining machinery and equipment to enhance
  production capacities at competitive prices, and has transferred certain
  generic products. As of March 31, 2007, Sun Pharma beneficially owns
  approximately 66% (75% including its convertible Series B Preferred stock) of
  the outstanding common shares of Caraco.Sun Pharmaceutical
  Industries LimitedPursuant to
  a stock purchase agreement, a Mumbai, India based specialty pharmaceutical
  manufacturing company, Sun Pharmaceutical Industries Limited (Sun Pharma),
  made an initial investment of $7.5 million for the purchase of 5.3 million
  common shares of Caraco in 1997.Sun Pharma
  and its affiliates have loaned the Corporation approximately $10 million
  since August 1997. As of December 31, 2003, all such loans had been repaid.
  Sun Pharma has also assisted the Corporation, by acting as guarantor, in
  obtaining line of credit loans from ICICI Bank Limited, The Bank of Nova
  Scotia and Citibank FSB in the amounts of $5.0 million, $12.5 million and
  $10.0 million, respectively, all of which have been repaid and terminated as
  of December 31, 2004.F-10

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary of
Sun Pharmaceutical Industries Limited)

NOTES TO FINANCIAL STATEMENTSIn August
  1997, Caraco entered into an agreement, whereby Sun Pharma was required to
  transfer the technology formula for 25 generic pharmaceutical products over a
  five-year period in exchange for 544,000 shares of Caraco
  common stock for each technology transfer of an ANDA product (when
  bio-equivalency studies were successfully completed) and 181,333 shares for
  each technology transfer of a DESI (Drug Efficacy Study Implementation)
  product. The products provided to the Corporation from Sun Pharma were
  selected by mutual agreement. Under such agreement, Caraco conducted, at its
  own expense, all tests including bio-equivalency studies. Pursuant to such
  agreement through 2002, Sun Pharma delivered the technology formula for 13
  products. This agreement expired on November 21, 2002, and the Corporation
  entered into a new technology transfer agreement with Sun Global, Inc. (Sun
  Global), an affiliate of Sun Pharma.Under the
  agreement, which was approved by the Corporations independent directors, Sun
  Global agreed to provide the formulations for 25 new generic drugs over a
  five-year period. Caracos rights to the products are limited to the United
  States and its territories or possessions, including Puerto Rico. Sun Global
  retains rights to the products in all other territories. The products are
  selected by mutual agreement. Under this agreement, Caraco conducts at its
  own expense all tests, including bio-equivalency studies. The Corporation
  also markets the products consistent with its customary practices. In return
  for the technology transfer, Sun Global receives 544,000 shares of Series B
  Preferred Stock for each generic drug transferred when such drug has passed
  its bio-equivalency studies.The products
  agreement was amended by the Independent Committee, comprised of the three
  independent directors, in the first quarter of 2004 to eliminate the provision
  requiring that the Independent Committee concur in the selection of each
  product, and provides instead that each product satisfy certain objective
  criteria developed by management and approved by the Independent Committee.
  Pursuant to such objective criteria, all 25 of the products under this
  agreement have been selected, 23 of which passed bio-equivalency studies
  through March 31, 2007.Sun Pharma
  has established research and development centers in Mumbai and Vadodara in
  India, where the development work for products is performed.Sun Pharma
  and its subsidiaries supply the Corporation with certain raw materials (Note
  4) and formulations, assist in acquiring machinery and equipment to enhance
  production capacities, and provide qualified technical professionals who work
  as Caraco employees.F-11

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary of
Sun Pharmaceutical Industries Limited)

NOTES TO FINANCIAL STATEMENTSAlso, four
  of the nine directors of Caraco are, or were, affiliated with Sun Pharma.
  Further, Sun Pharma and its affiliates may use Caraco as a contract
  manufacturer and/or distributor of their products. In December 2004 and
  January 2005, Caraco entered into agreements for two such products, of which
  one is currently being marketed.In Fiscal
  2007, the Corporation entered into a three-year marketing agreement with Sun
  Pharma, which was reviewed and approved by the Boards Independent Committee.
  Under the agreement, the Corporation purchases selected products offered by
  Sun Pharma and markets and distributes the same as part of the current
  product offerings in the U.S., its territories and possessions, including
  Puerto Rico. During Fiscal 2007 the Corporation made net sales of $4.6
  million of the marketed products.During the
  three month period ended March 31, 2005 SPARC Bioresearch Private Limited
  (SPARC), an affiliate of Sun Pharma, performed certain analytical studies
  required as part of the bio-equivalency process for two products. The
  Corporation incurred approximately $172,000 of costs during this period for
  the studies performed by SPARC. No similar studies were performed by SPARC
  during the years ended March 31, 2007 and 2006 and December 31, 2004.While
  management has a basis to reasonably believe that Sun Pharmas substantial
  investment in Caraco provides Sun Pharma with sufficient economic incentive
  to continue to assist Caraco in developing its business, and Sun Pharma has
  expressed its intent to continue to support Caracos operations in the near
  term, as it has done in the past, there can be no assurance that such support
  will, in fact, continue.During the
  first quarter of 2004, Sun Pharma acquired 3,452,291 additional shares of
  common stock and 1,679,066 stock options from two former directors and a
  significant shareholder. Sun Pharma exercised these stock options during the
  fourth quarter of 2004.In addition
  to its substantial relationship with and dependence on Sun Pharma as
  described above, the Corporation is subject to certain risks associated with
  companies in the generic pharmaceutical industry. Profitable operations are
  dependent on the Corporations ability to market its products at reasonable
  profit margins. In addition to maintaining profitable operations, the ongoing
  success of the Corporation will depend, in part, on its continuing ability to
  attract and retain key employees, obtain timely approvals of its ANDAs, and
  develop new products (see Operations, below).F-12

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary of
Sun Pharmaceutical Industries Limited)

NOTES TO FINANCIAL STATEMENTSOperationsThe
  Corporation recorded net sales of $117.0 million for the year ended March 31,
  2007 (Fiscal 2007) and generated cash from operations of $27.9 million
  during Fiscal 2007. This cash was generated after funding working capital
  requirements of $12.8 million. The Corporation earned a net income of $26.9
  million during Fiscal 2007. The income was primarily due to increased sales
  and lower non-cash research and development expense (R&D) of $11.8
  million recorded during Fiscal 2007, compared to $35.1 million during Fiscal
  2006. This non-cash R&D expense relates to three products passing their
  bio-equivalency studies and the related value of the preferred stock issued
  to Sun Global during this period. At March 31, 2007, the Corporation had
  stockholders equity of $95.2 million.Managements
  plans for Fiscal 2008 include:
Continued
  focus and improvement on FDA compliance.
Increased
  pace of research and development activities, with a view to increase the
  number of ANDA filings.
Continue to
  invest in equipment and facilities to expand capacity to meet requirements of
  projected short and long-term growth while improving quality.
Increased
  market share for certain existing products and recently introduced products
Enhanced
  customer reach and satisfaction.
Prompt
  introduction of new approved products to the market.
Achieving
  further operational efficiencies by attaining economies of scale and cost
  reduction per unit.
Increase the
  number of products, as well as anticipated volume increases for existing
  products, which, in turn, will improve manufacturing capacity utilization.
Consider alternative
  ways of increasing cash, such as marketing ANDAs owned by Sun Pharma.
Expand our
  relationships with financial institutions to fortify our credit position and
  borrowings as necessary.
Research
  alternate product development sources and product licenses such as in
  licensing authorized generics from brand innovator companies and acquisitions
  of ANDAs from competitor manufacturers both domestically and abroad.
Research
  possible development of brands for existing stream of products where such
  potential exists.F-13

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary of
Sun Pharmaceutical Industries Limited)

NOTES TO FINANCIAL STATEMENTS
Increase
  focus on succession planning
Increase
  training in cGMP.
Increase
  management training and development.
Maintain
  balance in trade class.Use of EstimatesThe
  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 dates of the financial statements
  and the reported amounts of revenues and expenses during the reporting periods.
  Actual results could differ from those estimates. Significant estimates
  include, but are not limited to, provisions for estimated customer returns,
  discounts, rebates and other price adjustments, including customer
  chargebacks (see Revenue Recognition, below), valuation allowances for
  deferred tax assets, and valuation of overhead components in inventory.Cash and Cash
  EquivalentsCash and
  cash equivalents consist of demand deposits in banks, cash on hand and all
  highly liquid investments purchased with an original maturity of three months
  or less. The Corporation invests its excess cash primarily in deposits with
  major banks and in other high quality short-term liquid money market
  investments. During the normal course of business, the Corporation may
  maintain cash on deposit in excess of federally insured limits with financial
  institutions. The Corporation maintains a policy of making investments only
  with institutions with at least an investment grade credit rating.Revenue RecognitionRevenue from
  product sales, net of estimated provisions, is recognized when there is
  persuasive evidence that an arrangement exists, shipment of the goods has
  occurred, the selling price is fixed or determinable, and collectibility is
  reasonably probable. The Corporations customers consist primarily of large
  pharmaceutical wholesalers who sell directly into the retail channel, chain
  drug stores, distributors, and managed care customers. Provisions for sales
  discounts, and estimates for chargebacks, rebates, and product returns are
  established as a reduction of product sales revenue at the timeF-14

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary of
Sun Pharmaceutical Industries Limited)

NOTES TO FINANCIAL STATEMENTSrevenues are
  recognized, based on historical experience and current market trends adjusted
  to reflect known changes in the factors that impact these reserves. These
  revenue reductions are reflected as a direct reduction to accounts receivable
  through an allowance.Allowances for
  Sales AdjustmentsChargebacksChargebacks
  represent the Corporations most significant provision against gross accounts
  receivable and related reduction to gross revenue. Chargebacks are
  retroactive credits given to wholesale customers that represent the
  difference between the lower price they sell (contractual price) to retail,
  chain stores, and managed care organizations and what the Corporation charges
  the wholesaler. The Corporation estimates chargebacks at the time of sale for
  their wholesale customers. The Corporation is currently unable to
  specifically determine whether the amounts allowed in specific prior periods
  for chargeback reserves have been over or understated. Wholesaler customers
  who submit chargebacks to the Corporation do not reference a specific invoice
  that the chargeback is related to when the chargeback is submitted to the
  Corporation. Thus, the Corporation cannot determine the specific period to which
  the wholesalers chargeback relates.The
  Corporation considers the following factors in the determination of the
  estimates of chargebacks.1.
The
  historical data of chargebacks as a percentage of sales, as well as actual
  chargeback reports from primary wholesaler customers.2.
Volume of
  all products sold to wholesaler customers and the average chargeback rates
  for the current quarter as compared to the previous quarter and compared to
  the last six month period.3.
The sales
  trends and future estimated prices of products, wholesale acquisition cost
  (WAC), the contract prices with the retailers, chain stores, managed care
  organizations (end-users), and wholesaler customers contract prices.4.
The
  Corporation utilizes data on remaining inventories on hand at primary
  wholesaler customers at the end of the period in the calculation of
  estimates.Such
  estimated amounts, in addition to certain other deductions, are deducted from
  the Corporations gross sales to determine net revenues. The amount of actual
  chargebacksF-15

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary of
Sun Pharmaceutical Industries Limited)

NOTES TO FINANCIAL STATEMENTSclaimed
  could be either higher or lower than the amounts accrued. Changes in
  estimates, if any, would be recorded in the income statement in the period of
  the change. If the Corporation materially over or under estimates the amount
  that will ultimately be charged back to it by its wholesale customers, there
  could be a material impact on the Corporations financial statements.
  Approximately 90% and 88% of the total allowance for trade receivables at
  March 31, 2007 and 2006, respectively, has been established to provide for
  estimated chargebacks and rebates (see Note 3).Shelf Stock
  AdjustmentsShelf
  stock adjustments are credits issued to customers to reflect decreases in the
  selling prices of products. These credits are customary in the industry and
  are intended to reduce the customers inventory cost to better reflect
  current market prices. The decision to grant a shelf stock adjustment to a
  customer following a price decrease is at the Corporations discretion.Factors
  considered when recording a reserve for shelf stock adjustments include
  estimated launch dates of competing products based on market intelligence,
  estimated decline in market price of products based on historical experience
  and input from customers, and levels of inventory held by customers at the
  date of the pricing adjustments.Product
  Returns and Other AllowancesIn the pharmaceutical
  industry, customers are normally granted the right to return product for
  credit if the product has not been used prior to its expiration date. The
  Corporations return policy typically allows product returns for products
  within a 12-month window from six months prior to the expiration date and up
  to six months after the expiration date. The Corporation estimates the level
  of sales, which will ultimately be returned pursuant to its return policy,
  and records a related reserve at the time of sale. These amounts are deducted
  from its gross sales to determine net revenues. These estimates take into
  consideration historical returns of the products and the Corporations future
  expectations. The Corporation periodically reviews the reserves established
  for returns and adjusts them based on actual experience, as necessary. The primary factors considered in
  estimating its potential product returns include shelf life of expiration
  date of each product and historical levels of expired product returns. If the
  Corporation becomes aware of any returns due to product related issues, this
  information is used to estimate an additional reserve. The amount of
  actual product return could be either higher or lower than the amounts
  reserved. Changes in these estimates, if any, would beF-16

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary of
Sun Pharmaceutical Industries Limited)

NOTES TO FINANCIAL STATEMENTSrecorded in the income
  statement in the period of the change. If the Corporation over or under
  estimates the quantity of product that will ultimately be returned, there may
  be a material impact to its financial statements.Discounts
  (trade and prompt payment discounts) are reserved for at the end of every
  reporting period based on the gross sales made to the customers during the
  period and based on their terms of trade. The Corporation reviews its
  contracts with its customers in addition to historical data and percentages
  to estimate the reserve for estimated discounts.Customer
  rebates are estimated at the end of every reporting period, based on direct
  or indirect purchases. If the purchases are direct, the rebates are
  recognized when products are purchased and a periodic credit is given. For
  indirect purchases, the rebates are recognized based on the terms with such
  customer. Medicaid Rebates are estimated based on the historical data the
  Corporation receives from the public sector benefit providers, which is based
  on the final dispensing of the products by a pharmacy to a benefit plan
  participant.Doubtful AccountsDoubtful
  accounts are estimated based on the data available from external sources,
  including information obtained related to the financial condition of
  customers. Delinquent accounts are reviewed by management on a quarterly
  basis, to identify and record allowances, as considered necessary, for
  accounts receivable not expected to be recoverable.Accounts
  ReceivableThe
  Corporation sells its products using customary trade terms; the resulting
  accounts receivable are unsecured. Accounts receivable are stated at the
  amount management expects to collect from outstanding balances. The
  Corporation provides for probable uncollectible amounts through a charge to
  earnings and a credit to a valuation allowance based on managements assessment
  of the current status of individual accounts. Balances that are still
  outstanding after the Corporation has attempted reasonable collection efforts
  are written off through a charge to the valuation allowance and a credit to
  trade accounts receivable.InventoriesInventories,
  which consist of raw materials, goods in transit and finished
  goods, as well as work-in-process, are stated at the lower of cost,
  determined using theF-17

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary of
Sun Pharmaceutical Industries Limited)

NOTES TO FINANCIAL STATEMENTSspecific
  identification method, or market. The Corporation analyzes its inventory
  levels quarterly and writes down any inventory that has become obsolete and
  inventory that has a cost basis in excess of its expected net realizable
  value. Expired inventory is disposed of and the related costs are written
  off. Materials acquired for research and development on products yet to be
  launched are written off in the year of acquisition. The determination of
  whether or not inventory costs will be realizable requires estimates by
  management. A critical estimate in this determination is the estimate of the
  future expected inventory requirements, whereby the Corporation compares its
  internal sales forecasts to inventory on hand. Actual results may differ from
  those estimates and inventory write-offs may be required. The Corporation
  must also make estimates about the amount of manufacturing overhead to
  allocate to its finished goods and work in process inventories. Although the
  manufacturing process is generally similar for its products, the Corporation
  must make judgments as to the portion of costs to allocate to purchased
  product, work in process and finished goods, and such allocations can vary
  based upon the composition of these components and the fact that each product
  produced does not necessarily require the same amount of time or effort for
  the same production step. Accordingly, the assumptions made can impact the
  value of reported inventories and cost of sales.Net Income (Loss)
  Per ShareNet income
  (loss) per share is computed using the weighted average number of common
  shares outstanding during each period and considers a dual presentation and
  reconciliation of basic and diluted per share amounts. Diluted reflects
  the potential dilution of all common stock equivalents.At March 31,
  2006 and 2005 and at December 31, 2004 options to purchase 341,400, 357,000
  and 381,600 common shares respectively, 10,880,000, 5,984,000 and 4,352,000
  shares of convertible preferred stock, respectively and 45,000 shares of
  common stock granted to the Corporations Chief Executive Officer during 2006
  (Note 7) were excluded from the computation of earnings per share because
  they would have an antidilutive effect on net loss per share.F-18

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary of
Sun Pharmaceutical Industries Limited)

NOTES TO FINANCIAL STATEMENTSThe
  following table sets forth the computation of basic and diluted net income (loss)
  per common share:

Year Ended
  March 31
  2007

Year Ended
  March 31
  2006

Three Months
  Ended March 31
  2005

Year Ended
  December 31
  2004Numerator:Net income (loss) available for
common
  stockholders

$
26,858,121

$
(10,423,312
)
$
(4,321,713
)
$
(199,368
)Denominator:Weighted average shares
outstanding, basic


26,447,312


26,392,054


26,348,347


24,734,282Incremental shares from assumed
conversion
  of --
  preferred stock


10,464,175








-
  common stock options


343,293








Weighted average shares
outstanding,
  diluted


37,254,780


26,392,054


26,348,347


24,734,282Net income (loss) per common
shareBasic

$
1.02

$
(0.39
)
$
(0.16
)
$
(0.01
)Diluted

$
0.72

$
(0.39
)
$
(0.16
)
$
(0.01
)Property, Plant
  and Equipment and DepreciationProperty,
  plant and equipment is carried at cost less accumulated depreciation. Land is
  carried at cost. Depreciation is computed using the straight-line method over
  the estimated useful lives of the related assets, which range from 3 to 40
  years. Major improvements and renewals are capitalized while ordinary
  maintenance and repairs are expensed. Management annually reviews these
  assets for impairment and believes the carrying value of these assets will be
  recovered through cash flows from operations.Federal Income
  TaxesDeferred
  income tax assets and liabilities are determined based on the difference
  between the financial statement and federal income tax basis of assets and
  liabilities as measured by the estimated tax rates that will be in effect
  when these differences reverse. Deferred income taxes result principally from
  the Corporations net operating loss carryforwards.Research and
  Development CostsSeries B
  convertible preferred stock (Note 7) is issued on an ongoing basis to Sun
  Pharma and its affiliates under the Products Agreement between the
  Corporation and Sun Global in exchange for the formulations of technology
  products delivered by Sun GlobalF-19

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary of
Sun Pharmaceutical Industries Limited)

NOTES TO FINANCIAL STATEMENTSto the
  Corporation. The resulting amount of research and development expense is
  charged to operations and is determined based on the fair value of the
  preferred shares on the date the respective product formula passes its
  bio-equivalency studies. The fair value of such shares is based upon an
  independent valuation.Research and
  development costs settled in cash are charged to expense as incurred.Fair Values of
  Financial InstrumentsThe carrying
  values of cash equivalents, accounts receivable, and accounts payable
  approximate their fair values due to the short-term maturities of these
  financial instruments.Recent Accounting
  PronouncementsIn February
  2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155 Accounting
  for Certain Hybrid Financial Instruments-An amendment of FASB Statements No.
  133 and 140. This statement requires evaluation of all interests
  in securitized financial assets to determine whether they represent either
  freestanding derivatives or contain embedded derivatives. These interests
  were previously exempted from such evaluation. SFAS No. 155 permits any
  hybrid instrument, such as an interest in securitized financial assets
  containing an embedded derivative, to be accounted at fair value as opposed
  to bifurcating and accounting for the embedded derivative separate from the
  host instrument. This Statement also eliminates restrictions on a qualifying
  special purpose entitys ability to hold passive derivative financial
  instruments pertaining to beneficial interests that are, or contain, a
  derivative financial instrument. The Corporation will adopt this statement in
  the first quarter of Fiscal 2008, and does not expect the adoption to have a
  material impact on the Corporations financial position or results of
  operations. This statement is effective for fiscal years beginning after
  September 15, 2006.In June
  2006, the FASB issued Interpretation No. 48 Accounting for Uncertainty in Income
  Taxes  An interpretation of FASB Statement no. 109 (FIN 48).
  This interpretation provides a comprehensive model for the financial
  statement recognition, measurement, presentation and disclosure of uncertain
  tax positions taken or expected to be taken in income tax returns. The
  Corporation will adopt this Interpretation in the first quarter of fiscal
  2008. The cumulative effects, if any, of applying FIN 48 will be recorded as
  an adjustment to retained earnings. The Corporation is currently assessing
  the impact of this Interpretation on its financial position and results of
  operations.F-20

CARACO PHARMACEUTICAL LABORATORIES, LTD.(a subsidiary of
Sun Pharmaceutical Industries Limited)

NOTES TO FINANCIAL STATEMENTSIn September
  2006, the FASB issued SFAS No. 157 Fair Value Measurements. This Statement
  replaces multiple existing definitions of fair value with a single
  definition, establishes a consistent framework for measuring fair value, and
  expands financial statement disclosures regarding fair value measurements.
  This Statement applies only to fair value measurements that are already
  required or permitted by other accounting standards and does not require any
  new fair value measurements. SFAS No. 157 is effective for fiscal years
  beginning subsequent to November 15, 2007. The Corporation will be required
  to adopt SFAS No. 157 for the first quarter of Fiscal 2009.In February
  2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
  Assets and Financial Liabilities, including an amendment of FASB Statement
  No. 115 (SFAS 159). SFAS No. 159 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. Unrealized gains and losses
  on items for which the fair value option has been elected are reported in
  earnings. SFAS 159 does not affect any existing accounting literature that
  requires certain assets and liabilities to be carried at fair value. SFAS 159
  is effective for fiscal years beginning after November 15, 2007. Management
  currently does not expect adoption of SFAS 159 will have a material effect on
  the Corporations financial position or results of operations. The
  Corporation plans to adopt SFAS for the first quarter of Fiscal 2009.2.
SUPPLEMENTAL CASH FLOWS INFORMATIONNon-Cash Financing
  ActivitiesAs described
  in Notes 1 and 7, pursuant to the technology transfer agreement with an
  affiliate of the Corporations parent, Caraco, on an ongoing basis, finances
  the acquisition of research and development costs in exchange for the
  issuance of preferred stock to its parent. Preferred stock earned or issued
  to affiliates had fair values of $11,761,280 and $35,055,360 for the years
  ended March 31, 2007 and 2006, respectively, $10,200,000 for the three month
  period ended March 31, 2005, and $24,397,040 for the year ended
  December 31, 2004. In March 2007, the Corporation issued 1,632,000 shares
  of its common stock to Sun Pharma Global Inc. in exchange for 1,632,000
  preferred shares at a value of $10,931,530.F-21

CARACO PHARMACEUTICAL LABORATORIES, LTD.
  (a subsidiary of Sun Pharmaceutical Industries Limited)NOTES TO FINANCIAL STATEMENTSOther Cash Flows InformationCash paid
  for interest was approximately $28,000, $4,000 and $407,000 for the years
  ended March 31, 2007 and 2006, and December 31, 2004, respectively. No cash
  was paid for interest for the three month period ended March 31, 2005.3.
ACCOUNTS RECEIVABLE, NET OF ALLOWANCES FOR SALES ADJUSTMENTS AND
  DOUBTFUL ACCOUNTS (NOTE 1)Accounts
  receivable and related allowances are summarized as follows:March 312007

2006Accounts
  receivable - gross

$
62,615,146

$
33,926,099Allowances:Chargebacks &
Rebates


32,638,000


11,467,000Sales returns and
allowances


3,752,000


1,500,000Doubtful
  accounts


100,000


100,000Total
  allowances


36,490,000


13,067,000Accounts
  receivable, net of allowances

$
26,125,146

$
20,859,099A
summary of the activity in accounts receivable allowances is as follows:

Total
  AllowancesBalance at December 31, 2003

$
16,043,000Additions
  charged to net sales


67,670,000Deductions
  allowed to customers


(65,578,000
)Balance at December 31, 2004


18,135,000Additions
  charged to net sales


21,712,000Deductions
  allowed to customers


(18,817,000
)Balance at March 31, 2005


21,130,000Additions
  charged to net sales


118,996,000Deductions
  allowed to customers


(126,959,000
)Balance at March 31, 2006


13,067,000Additions
  charged to net sales


199,586,000Deductions
  allowed to customers


(176,163,000
)Balance at March 31, 2007

$
36,490,000F-22

CARACO PHARMACEUTICAL LABORATORIES, LTD.
  (a subsidiary of Sun Pharmaceutical Industries Limited)NOTES TO FINANCIAL STATEMENTS4.
INVENTORIESInventories
  consist of the following amounts:March 312007

2006Raw
  materials

$
10,443,715

$
9,735,502Goods in
  transit


4,972,668


5,974,600Work in
  process


3,717,911


3,283,911Finished
  goods


12,809,003


7,971,677Total
  inventories

$
31,943,297

$
26,965,690The principal
  components used in the Corporations business are active and inactive
  pharmaceutical ingredients and certain packaging materials. Some of these
  components are purchased from single sources; however, the majority of the
  components have an alternate source of supply. Because the FDA approval
  process requires manufacturers to specify their proposed supplier of
  components in their applications, FDA approval of a new supplier would be
  required if components were no longer available from the specified suppliers.During the
  years ended March 31, 2007 and 2006, the three months ended March 31, 2005,
  and during the year ended December 31, 2004, the Corporation purchased
  inventory components of approximately $38.8 million, $28.1 million, $5.3
  million, and $16.7 million, respectively, from Sun Pharma.5.
DEBTLoans Payable to Financial InstitutionsDuring 2004,
  the Corporation obtained a $10,000,000 line-of-credit with Citibank, N.A.
  that incurred interest at the London Interbank Offered Rate (LIBOR) plus 125
  basis points. Borrowings on the line-of-credit were available to Caraco only
  when secured byF-23

CARACO PHARMACEUTICAL LABORATORIES, LTD.
  (a subsidiary of Sun Pharmaceutical Industries Limited)NOTES TO FINANCIAL STATEMENTSan
  irrevocable standby letter-of-credit from Sun Pharma. Such a letter was
  provided by Sun Pharma during 2004. The letter had expired as of December 31,
  2004, and the line was terminated on March 15, 2005.On November
  17, 2005, the Corporation entered into a one-year, $10 million Credit
  Agreement with JP Morgan Chase Bank, N.A. Under the Credit Agreement, the
  lender may make loans and issue letters of credit to the Corporation for the
  Corporations working capital needs and general corporate purposes. Letters
  of credit, if issued, expire one year from their date of issuance, but no
  later than November 17, 2007. On November 16, 2006, this agreement was
  renewed through November 30, 2007. Borrowings are secured by the
  Corporations receivables and inventory. Interest is payable based on a LIBOR
  Rate or an alternate base rate (determined by reference to the prime rate or
  the federal funds effective rate), as selected by the Corporation. The rate
  of interest is LIBOR plus 75 basis points or the banks prime rate minus 100
  basis points (effective rates of 6.1% and 7.25%, respectively at March 31,
  2007.) The Credit Agreement requires that certain financial covenants be met
  on a quarterly basis. There are no borrowings under this Credit Agreement at
  March 31, 2007.6.
INCOME TAXESThe
  Corporations deferred income taxes result principally from its net operating
  loss carryforwards (NOLs) and payment of alternative minimum tax. At March
  31, 2007 a net deferred income tax asset of approximately $7.5 million
  (computed using a 34% tax rate) relating to these temporary differences
  exists. Based on the Corporations prior operating results and operating
  characteristics, full utilization of this deferred tax asset to offset future
  taxable income is not reasonably assured. Accordingly, Caraco has recorded a
  valuation allowance of $7.0 million at March 31, 2007 ($20.1 million March
  31, 2006), to offset the net deferred tax asset, resulting in a net deferred
  tax asset of $0.5 million recognized at March 31, 2007. No net deferred tax
  asset or liability was recognized at March 31, 2006. The valuation allowance
  has decreased by approximately $13.1 million for the year ended March 31,
  2007 and increased by approximately $3.7 million for the year ended March 31,
  2006, $2.0 million for the three month period ended March 31, 2005, $0.4
  million in 2004.During the
  year ended March 31, 2007, NOL carryforwards of approximately $26.8 million
  were used to offset taxable income. In addition, the Corporation determined
  that approximately $13.1 million of previous NOLs have been lost
  under the provisions of Internal Revenue Code Section 382.
  Accordingly, at March 31, 2007, NOLF-24

CARACO PHARMACEUTICAL LABORATORIES, LTD.
  (a subsidiary of Sun Pharmaceutical Industries Limited)NOTES TO FINANCIAL STATEMENTScarryforwards
  of approximately $18.7 million, which expire between 2007 and 2026, are
  available to offset future federal taxable income, if any.7.
STOCKHOLDERS EQUITY (DEFICIT)Common StockDuring 2003,
  the Corporations shareholders approved the authorization of an additional
  20,000,000 shares of common stock. The Corporation filed an amendment to its
  articles of incorporation to effect this change in Fiscal 2007.The
  Corporation granted 45,000 shares of common stock on May 2, 2005 to its Chief
  Executive Officer, which vest at a rate of 15,000 shares on each anniversary
  date until they are fully vested on May 2, 2008. The Corporation has recorded
  compensation expense of approximately $119,000 and $109,000 related to the
  portion of the stock grant that vested during Fiscal 2007 and 2006,
  respectively.Preferred StockIn November
  2002, in connection with the new technology transfer agreement established
  with Sun Global (Note 1), the Corporation designated the Series B Convertible
  Preferred Stock. The Series B preferred shares are non-redeemable and have no
  par value. In addition, the Series B Convertible Preferred Stock has no
  voting or dividend rights or liquidation preference other than priority
  liquidation based on their values on the dates they were earned, and can be
  converted after three years from the issuance date (or immediately upon a
  change in control) into one share of common stock, subject to a conversion
  adjustment (Note 1). While such preferred shares are outstanding, Caraco
  cannot, without the consent of the holders of a majority of the outstanding
  shares of the preferred stock, amend or repeal its articles of incorporation
  or bylaws if such action would adversely affect the rights of the preferred
  stock. In addition, without such consent, capital stock having any preference
  or priority superior to the preferred stock may not be issued. As of March
  31, 2007, the Corporation has issued 12,512,000 shares of the Series B
  Convertible Preferred stock to Sun Pharma in exchange for twenty-three
  product transfers. Such shares have been cumulatively valued at $84,517,050
  as of March 31, 2007. On March 31, 2007, 1,632,000 shares of the preferred stock
  were converted into an equal number of shares of Corporations common stock
  at a value of $10,931,530.8.
COMMON STOCK OPTIONSF-25

CARACO PHARMACEUTICAL LABORATORIES, LTD.
  (a subsidiary of Sun Pharmaceutical Industries Limited)NOTES TO FINANCIAL STATEMENTSCommon Stock Option PlansAs of March
  31, 2007, the Corporation maintains one stock option plan, the 1999 Equity
  Participation Plan (the 1999 Plan) (all options under the 1993 plan were
  exercised during 2003), under which the Corporation may grant options to
  employees and non-employee-directors for the purchase of up to 3,000,000
  shares of common stock. The exercise price of options granted may not be less
  than the fair value of the common stock on the date of grant. Options granted
  under this plan generally vest in annual installments, from the date of
  grant, over a three and five-year period, and expire within six years from
  the date of the grant. Activity with respect to these options is summarized
  as follows:Year Ended
  March 31,
  2007

Year Ended
  March 31,
  2006

Three Months Ended
  March 31,
  2005

Year Ended
  December 31,
  2004Shares

Weighted
  Average
  Exercise
  Price

Shares

Weighted
  Average
  Exercise
  Price

Shares

Weighted
  Average
  Exercise
  Price

Shares

Weighted
  Average
  Exercise
  PriceOutstanding, beginning of year
/ period


141,400


3.93


160,500


1.68


181,600

$
1.41


277,000

$
1.00Granted


74,000


9.78


46,000


8.39


4,500


9.60


9,000


9.60Exercised


(48,400
)

1.03


(61,700
)

0.98


(25,600
)

1.24


(80,400
)

1.08Terminated


(1,100
)

8.83


(3,400
)

9.30








(24,000
)

0.80Outstanding, end of year /
period


165,900

$
7.36


141,400

$
3.93


160,500

$
1.67


181,600

$
1.41Options exercisable, end of
year


61,233

$
3.95


71,720

$
1.32


79,418

$
1.50


49,800

$
1.02Options at
  March 31, 2007:Options Outstanding

Options ExercisableRange of Exercise Prices

Shares

Remaining
  Contractual
  Life *

Exercise
  Price *

Shares

Exercise
  Price *$0.68 to $1.00


36,900


0.2

$
0.76


36,900

$
0.76$7.01 to $8.00


1,500


4.0


7.90


1,000


7.90$8.01 to $9.00


50,500


4.2


8.41


16,333


8.42$9.01 to $10.00


61,000


5.0


9.31


6,000


9.53$10.01 to $13.00


16,000


5.5


11.71


1,000


11.01Total


165,900


3.7

$
7.36


61,233

$
3.95* Weighted averageThe
  estimated fair value as of the date options were granted during the year
  ended March 31, 2007, is estimated on the date of the grant using the Black
  Scholes option-pricing model and is based upon the following assumptions:F-26

CARACO PHARMACEUTICAL LABORATORIES, LTD.
  (a subsidiary of Sun Pharmaceutical Industries Limited)NOTES TO FINANCIAL STATEMENTSYear ended
  March 31, 2007Weighted
  average estimated fair value per share of options granted during the period

$
9.78AssumptionsCommon stock price
volatility


36.50
%Risk free rate of
return


4.74
%Expected option term (in
years)


3Other Common Stock Option AgreementsThe
  Corporation has issued other stock options outside of the 1999 Plan. These
  stock options have been issued with various vesting schedules and expired at
  various dates through October 2006. Activity with respect to these options is
  summarized as follows:Year Ended
  March 31,
  2007

Year Ended
  March 31,
  2006

Three Months Ended
  March 31,
  2005

Year Ended
  December 31,
  2004Shares

Weighted
  Average
  Exercise
  Price

Shares

Weighted
  Average
  Exercise
  Price

Shares

Weighted
  Average
  Exercise
  Price

Shares

Weighted
  Average
  Exercise
  PriceOutstanding, beginning of
period


200,000

$
3.50


200,000

$
3.50


200,000

$
3.50


1,876,666

$
2.01Exercised




















(1,676,666
)

2.01Outstanding, end of
period


200,000

$
3.50


200,000

$
3.50


200,000

$
3.50


200,000

$
3.50Options exercisable, end of
period


200,000

$
3.50


200,000

$
3.50


200,000

$
3.50


200,000

$
3.50Options at
March 31, 2007:

Options
  Outstanding and ExercisableRange of Exercise Prices

Shares

RemainingContractualLife

ExercisePrice$3.01 to $4.00


200,000




$
3.50On April 1,
  2006, the Corporation adopted Statement of Financial Accounting Standards
  (SFAS) No. 123 (Revised 2004), Share-Based
  Payment (Statement No. 123 (R)), which requires employee
  share-based compensation to be accounted for under the fair value method and
  requires the use of an option pricing model for estimating the fair valueF-27

CARACO PHARMACEUTICAL
LABORATORIES, LTD.
(a
subsidiary of Sun Pharmaceutical Industries Limited)

NOTES TO FINANCIAL STATEMENTS>
>of stock
  options at the date of grant. Previously, the Corporation accounted for stock
  options under the intrinsic value method prescribed by Accounting Principles
  Board Opinion No. 25, Accounting for Stock Issued to Employees,
  and related interpretations, and provided the required pro forma disclosures
  prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, (Statement
  No. 123), as amended. Since the exercise price of options equaled the market
  price of the stock on the date of grant, the stock options had no intrinsic
  value and, therefore, no expense was recognized for stock options by the
  Corporation prior to the beginning of fiscal 2007.The
  Corporation elected to adopt Statement No. 123 (R) using the modified
  prospective method, which requires compensation expense to be recorded for
  all unvested share-based awards beginning in the first quarter of adoption.For the year
  ended March 31, 2007, the Corporation has recognized expense amounting to
  $145,787 related to share-based compensation. As of March 31, 2007 total
  unrecognized compensation cost related to stock options granted was $250,732.
  The unrecognized stock option compensation cost is expected to be recognized
  over a period of approximately 3 to 5 years.The
  Corporation estimates the fair value of stock options granted using the
  Black-Scholes option-pricing model, which requires the Corporation to
  estimate the expected term of the stock option grants and expected future
  stock price volatility over the term. The term represents the expected period
  of time the Corporation believes the options will be outstanding based on
  historical information. Estimates of expected future stock price volatility
  are based on historical volatility of the Corporations common stock. The
  Corporation calculates the historical volatility as the standard deviation of
  the differences in the natural logarithms of the weekly stock closing price,
  adjusted for dividends and stock splits.Options to
  purchase 74,000, 46,000, 4,500 and 9,000 shares of common stock were granted
  for the years ended March 31, 2007 and 2006, the three month period ended
  March 31, 2005 and the year ended December 31, 2004, respectively, to
  the independent directors, officers and employees of the Corporation. No
  options were granted during 2003.The
  Corporation granted options to purchase 40,000 shares of common stock each on
  June 11, 2006 and May 2, 2005 respectively, to its Chief Executive Officer,
  which vest at a rate of 1/3rd on each anniversary date until they are
  fully vested on June 11, 2009 and May 2, 2008, respectively.F-28

CARACO PHARMACEUTICAL
LABORATORIES, LTD.
(a subsidiary
of Sun Pharmaceutical Industries Limited)

>NOTES TO FINANCIAL STATEMENTS>
>Strategic Alliance Stock Options AgreementPursuant to
  an agreement between the Corporation and an unaffiliated large generic
  pharmaceutical corporation, dated October 1, 1993, the Corporation was to
  receive the formulations, technology, manufacturing processes and know-how,
  and other relevant information, and to pay for the bio-equivalency studies
  required for the preparation of ANDAs for two products. Pursuant to the
  agreement, the Corporation was required to pay (i) a Sign-Up Option to
  purchase 100,000 shares of Common Stock at $3.50 per share; and (ii) a
  Product Option to purchase shares at an exercise price of $3.50 per share.
  These options may be exercised and payment for shares may be made only out of
  royalties and any interest earned on the royalties while held by the
  Corporation. No options have yet been exercised (Note 12).9.
LEASES (INCLUDING RELATED PARTY)The
  Corporation entered into two non-cancelable operating leases during 2000 with
  Sun Pharma to lease production machinery. The leases each required quarterly
  rental payments of $4,245 and expired during 2005.The
  Corporation entered into a non-cancelable operating lease with an unrelated
  party during 2002 to lease additional warehouse space. This lease was
  subsequently modified during 2003 in lieu of a new non-cancelable operating
  lease for additional space at this warehouse.
  The lease was again modified during 2006 to change the term from 42 months to
  66 months. The new lease requires monthly payments that increase from $15,458
  to $18,623 over the term of the lease that expires in 2009 with an option to
  renew for an additional year.The
  Corporation entered into a non-cancelable operating lease with an unrelated
  party on March 13, 2006 to obtain additional space for its executives and
  administrative staffs. The lease was subsequently modified during 2006 in
  lieu of a new non-cancelable operating lease for additional office space. The
  lease commences in May 2006 and requires monthly payments that increase from
  $13,458 to $14,387 over the term of the lease that expires in 2008.Net rental
  expense on these operating leases was $314,917 and $224,569 for the years
  ended March 31, 2007 and 2006, respectively, $64,896 for the three months
  ended March 31, 2005 and $181,129 for the year ended December 31, 2004.F-29

CARACO PHARMACEUTICAL
LABORATORIES, LTD.
(a
subsidiary of Sun Pharmaceutical Industries Limited)

>NOTES TO FINANCIAL STATEMENTS>
>The
  following is a schedule of annual future minimum lease payments required
  under the operating leases with remaining non-cancelable lease terms in
  excess of one year as of March 31, 2007:>
>Year
Amount2008
$ 379,4422009
323,720>
>The
  Corporation also paid approximately $0.8 million and $0.2 million for the
  years ended March 31, 2007 and 2006, respectively, $0.1 million for the three
  month period ended March 31, 2005, and $0.6 million during the year ended
  December 31, 2004 to Sun Pharma and its associates for the purchase of
  various parts and machinery needed for operations.10.
RETIREMENT PLANThe
  Corporation maintains a deferred compensation plan qualified under Section
  401(k) of the Internal Revenue Code. Under this plan, eligible employees are
  permitted to contribute up to the maximum allowable amount determined by the
  Internal Revenue Code. The Corporation may make discretionary matching and
  profit sharing contributions under the provisions of the plan. The
  Corporation made contributions in the amount of $72,876 for the year ended
  March 31, 2007. The Corporation made no discretionary contributions during
  the year ended March 31, 2006, the three months ended March 31, 2005, or for
  the year ended December 31, 2004.11.
CONCENTRATIONS AND COMMITMENTSMajor CustomersShipments to
  three wholesalers accounted for approximately 58% of net revenue for the year
  ended March 31, 2007. Shipments to three wholesalers accounted for
  approximately 74% of gross revenue for the year ended March 31, 2006, 60% of
  gross revenue for the three months ended March 31, 2005 and 79% of gross
  revenue for the year ended December 31, 2004 respectively. Balances due from
  these customers represented approximately 82% and 72% of gross accounts
  receivable at March 31, 2007 and 2006, respectively.F-30

CARACO PHARMACEUTICAL
LABORATORIES, LTD.
(a
subsidiary of Sun Pharmaceutical Industries Limited)

>NOTES TO FINANCIAL STATEMENTS>
>The loss of
  any of these customers could have a materially adverse effect on short-term
  operating results.Major ProductsShipments of
  four products and three products accounted for approximately 69% of net
  revenue for the year ended March 31, 2007 and 70% of net revenue for the year
  ended March 31, 2006, Respectively. Shipments of three products
  accounted for approximately 74% of gross revenue for the three months ended
  March 31, 2005 and 80% of gross revenue for the year ended December 31,
  2004.Approximately
  79% and 84% of raw material purchases for the years ended March 31, 2007 and
  2006 respectively, 84% for the three months ended March 31, 2005 and 75% for
  the year ended December 31, 2004 were made from Sun Pharma. The Corporation,
  however, believes that other sources of raw materials are available.Product Sales CommitmentCertain of
  the Corporations customers purchase their products through designated
  wholesalers, who act as an intermediary distribution channel for the
  Corporations products. One such customer, the Veterans Administration, an
  agency of the United States Government, entered into a sales contract with
  the Corporation effective August 5, 2002 to purchase approximately
  $13,000,000 of product per year over a one year base contract period that
  ended June 30, 2003. The contract has four one-year option periods, the last
  of which was exercised in August 2006. The agreement may be terminated by the
  purchaser without cause and in such case, Caraco would only be entitled to a
  percentage of the contract price, plus reasonable charges that have resulted
  from the termination. The agreement further provides for certain penalty
  provisions if the Corporation is unable to meet its sales commitment.Labor ContractThe majority
  of the Corporations hourly work force is covered by a collective bargaining
  agreement that expires in September 2008.12.
OTHER MATTERSEmployment ContractsF-31

CARACO PHARMACEUTICAL
LABORATORIES, LTD.
(a
subsidiary of Sun Pharmaceutical Industries Limited)

>NOTES TO FINANCIAL STATEMENTS>
>The
  Corporation has employment agreements with three of its executive officers
  that provide for fixed annual salaries and at least a six-month continuance
  including insurance benefits and immediate vesting of stock options upon
  termination without cause.LitigationOn September
  29, 2006, Schering Corporation (Schering) filed a complaint in the United
  States District Court for the District of New Jersey. A nearly identical
  complaint was filed on October 5, 2006, in the Eastern District of Michigan.
  Both complaints allege, inter alia, that Sun Pharmaceutical Industries,
  Ltd.s (Sun) filing of ANDA 78-359 - seeking approval to market its generic
  version of Scherings Clarinex® drug product - infringed Scherings U.S.
  Patent No. 6,100,274 (the 274 patent), which expires July 7, 2019.
  Schering further alleges that Caraco Pharmaceutical Laboratories, Ltd.
  (Company) either directly infringed the 274 patent by aiding in the filing
  of Suns ANDA, or will induce others to infringe by marketing and/or selling
  Suns generic version of Clarinex® upon receiving FDA approval. Scherings
  complaint seeks an order from the Court which, among other things, directs
  the FDA not to approve Suns ANDA any earlier than the claimed expiration
  date. The ANDA filed by Sun contains a Paragraph IV Certification challenging
  the 274 patent. Sun believes that the 274 patent is invalid, unenforceable
  and/or will not be infringed by Suns or Companys manufacture, use or sale
  of the product and both Sun and the Company intend to vigorously defend this
  action in order to capitalize on the potential 180 days of marketing
  exclusivity available for this product.On June 9,
  2005, Novo Nordisk A/S and Novo Nordisk, Inc. (Novo Nordisk) filed a
  complaint in the United States District Court for the Eastern District of
  Michigan alleging that the Companys filing of an ANDA seeking approval to
  market its generic version of Novo Nordisks Prandin® drug product infringed
  Novo Nordisks U.S. Patent No. 6,677,358. Novo Nordisk seeks an order from
  the Court which, among other things, directs the FDA not to approve the
  Companys ANDA any earlier than the claimed expiration date. The ANDA filed
  by the Company contains a Paragraph IV Certification challenging the Novo
  Nordisk patent. The Company believes that this Novo Nordisk patent is invalid
  and/or will not be infringed by the Companys manufacture, use or sale of the
  product. The Company believes that it is the first to file an ANDA with a
  paragraph IV Certification for this drug product and it intends to defend
  this action vigorously to capitalize on the potential for obtaining 180 days
  exclusivity available for this product.F-32

CARACO PHARMACEUTICAL
LABORATORIES, LTD.
(a
subsidiary of Sun Pharmaceutical Industries Limited)

>NOTES TO FINANCIAL STATEMENTS>
>On July 10,
  2006, Forest Laboratories, Inc., Forest Laboratories Holdings, Ltd., and H.
  Lundbeck A/S (collectively, Forest) filed a complaint in the United States
  District Court for the Eastern District of Michigan alleging that the
  Companys filing of an ANDA seeking approval to market its generic version of
  Forests Lexapro® (escitalopram oxalate) drug product infringed Forests
  Patent No. Re. 34,712, which is set to expire on September 13, 2011 (extended
  to March 14, 2012 based upon a six month pediatric exclusivity). Forest seeks
  an order from the court which, among other things, directs the FDA not to
  approve the Companys ANDA any earlier than the claimed expiration date. The
  ANDA filed by the Company contained a Paragraph IV Certification challenging
  the Forest patent. The Company believes that the Forest patent is invalid
  and/or will not be infringed by the Companys manufacture, use or sale of the
  product and the Company intends to vigorously defend this action.Prior to
  this action, Forest had filed two lawsuits against other manufacturers who
  sought to market a generic version of Lexapro®, one against Alphapharm Pty.
  Ltd. (Alphapharm) and the other against IVAX Pharmaceuticals, Inc. (IVAX)
  and CIPLA Ltd. (CIPLA). Forest settled the lawsuit with Alphapharm in
  October 2005, granting Alphapharm the exclusive right to distribute generic
  versions of Lexapro® for five years. Alphapharms launch date is dependent on
  a number of factors but is set to be no later than two weeks before the
  claimed expiration of the Forest patent.Forest
  proceeded in its action against IVAX and CIPLA. On July 13, 2006, Forest
  obtained an order from the United States District Court for the District of
  Delaware, holding that IVAX and CIPLAs proposed generic version of Lexapro®
  infringed the Forest patent and that the asserted claims of the Forest patent
  were valid and enforceable. On November 6, 2006, IVAX and CIPLA filed a
  notice to appeal the decision to the United States Court of Appeals for the
  Federal Circuit. The appeal is currently pending.On August
  23, 2006, Forest filed a motion to transfer its action against the Company to
  the United States District Court for the District of Delaware, where a
  similar action by Forest was pending. On November 15, 2006 the Court denied
  the motion and, accordingly, the litigation will proceed in the Eastern
  District of Michigan. In February of 2007, the Eastern District of Michigan
  court granted plaintiffs motion to stay the proceeding until June 20, 2007.On September
  22, 2004, Ortho-McNeil Pharmaceutical, Inc. (Ortho-McNeil) filed a
  complaint in the United States District Court for the Eastern District of
  Michigan alleging that the Companys filing of an ANDA seeking approval to
  market its generic version of Ortho-McNeils Ultracet® brand
  tramadol/acetaminophen drug product infringed Ortho-F-33

CARACO PHARMACEUTICAL
LABORATORIES, LTD.
(a
subsidiary of Sun Pharmaceutical Industries Limited)

>NOTES TO FINANCIAL STATEMENTS>
>McNeils
  patent, which expires on September 6, 2011. Ortho-McNeil sought an order from
  the district court which, among other things, directed the FDA not to approve
  the Companys ANDA any earlier than the claimed expiration date. The ANDA
  filed by the Company contained a Paragraph IV Certification challenging the
  Ortho-McNeil patent. The Company asserted that the Ortho-McNeil patent is
  invalid and/or will not be infringed by the Companys manufacture, use or
  sale of the product. Since filing this action, Ortho-McNeil has entered into
  a license agreement with another manufacturer, which has launched its product
  generically while another manufacturer has launched its approved generic at
  risk. On October 19, 2005 the Companys motion for summary judgment was
  granted. On December 19, 2005, the FDA approved the manufacture, use and sale
  of the Companys generic product. Ortho-McNeil filed an appeal of the finding
  of non-infringement by the district court with the United States Court of
  Appeals for the Federal Circuit. On January 19, 2007, the United States Court
  of Appeals for the Federal Circuit affirmed the United States District Court
  for the Eastern District of Michigan decision granting the Companys motion
  for summary judgment. Additionally the United States Patent and Trademark
  Office has approved Ortho-McNeils request for a reissue patent. Although the
  district court had determined that the Company does not infringe
  Ortho-McNeils original patent, on July 31, 2006, Ortho-McNeil filed a
  lawsuit against the Company in the United States District Court for the
  District of New Jersey, alleging that the Companys generic version of
  Ultracet® brand tramadol/acetaminophen drug product infringes its reissue
  patent. On September 26, 2006, the Company filed an answer denying, among
  other things, that its generic product infringes any valid claims of
  Ortho-McNeils reissue patent. The Company believes that, like its original
  patent, Ortho-McNeils reissue patent is invalid and/or is not infringed by
  the Companys manufacture, use or sale of the product and the Company intends
  to vigorously defend this action. There is no assurance, however, that the
  Company will prevail in this action.The Company
  is also involved in certain legal proceedings from time to time incidental to
  normal business activities. While the outcome of any such proceedings cannot
  be accurately predicted, the Company does not believe the ultimate resolution
  of any existing matters would have a material adverse effect on its financial
  position or results of operations.Product Liability and InsuranceThe
  Corporation currently maintains general and product liability insurance, with
  coverage limits of $10 million per incident and in the aggregate. The
  Corporations insurance policies provide coverage on a claim made basis and
  are subject to annual renewal. Such insurance may not be available in the
  future on acceptable terms or at all.F-34

CARACO PHARMACEUTICAL
LABORATORIES, LTD.
(a
subsidiary of Sun Pharmaceutical Industries Limited)

>NOTES TO FINANCIAL STATEMENTS>
>There can be
  no assurance that the coverage limits of such policies will be adequate to
  cover the Corporations liabilities, should they occur.Royalty AccrualPursuant to
  the Strategic Alliance Stock Options Agreement (Note 8), Caraco received the
  formulation for one product, Metoprolol Tartrate, in March 1995. However,
  Caraco has determined that the formula provided to it with respect to
  Metoprolol Tartrate is different than the formula submitted in an ANDA to the
  FDA in 1995, approved by the FDA in 1996 and manufactured and introduced by
  Caraco since 1997. The Corporation has accrued royalties of approximately $1
  million, which is included with accrued expenses in the accompanying balance
  sheets at March 31, 2007 and 2006, and since April 2003, has discontinued to
  accrue royalties related to this agreement.Product DevelopmentThe
  Corporation during the year ended March 31, 2007, entered into three
  definitive agreements with different companies to develop four products.
  These agreements contain, for three products both milestone payments to be
  paid in cash and profit sharing based upon future sales for a defined period,
  and for one product only milestone payments in cash without any obligation to
  share profits in the future13.
SEGMENT INFORMATIONThe
  Corporation does not manufacture, produce or sell branded products or
  controlled-release products. The Corporation is primarily in the business of
  manufacturing, developing, selling and distributing various therapeutic
  classes of solid oral dosage of generic pharmaceuticals. There are no
  separate management teams or individuals assigned to a product or products or
  therapeutic classes of products, no separate allocation of funds or resources
  to distinct product or products or therapeutic classes or products, and the
  performance of any individual product or products or therapeutic classes of
  products is not separately assessed. The Corporations revenues are solely
  based on the receipt of customers orders.SFAS No.
  131, Disclosures
  About Segments of an Enterprise and Related Information
  establishes standards for reporting of financial information about operating
  segments in annual financial statements. The Corporation considers its
  business to be a single segment entity, as its revenues are solely
  attributable to its generic drug product line.F-35

CARACO PHARMACEUTICAL LABORATORIES,
LTD.(a
  subsidiary of Sun Pharmaceutical Industries Limited)NOTES TO FINANCIAL STATEMENTSFor
informational purposes, the Corporations sales, grouped by therapeutic
categories, for the years ended March 31, 2007 and March 31, 2006 the three
months ended March 31, 2005 and the year ended December 31, 2004 are as
follows:Therapeutic
  Category

Year Ended
  March 31
  2007

Year Ended
  March 31
  2006

Three Months
  Ended
  March 31
  2005

Year Ended
  December 31
  2004Antianxiety
  Drug

$
4,035,902

$
2,890,213

$
631,670

$
2,119,276Antibiotic


506,592


652,055


132,624


549,261Anticonvulsant


4,293,332


232,669


45,578


204,003Antidepressant


14,053,823


8,010,744


507,480


957,557Antidiabetic


30,056,770


32,110,625


7,362,962


30,842,081Antihypertensive
  Drug/Beta Blocker


19,751,939


16,788,820


4,178,650


14,257,386Antipsychotic


3,530,898


2,167,911


484,780


1,293,620Cardiac


2,446,608


1,239,431


514,139


1,344,603Decongestants


62,814


116,257


316,524


358,059Hormonal
  Replacement Therapy








295,172


Nonsteroidal
  Antiinflammatory Agent


2,886,593


2,101,804


544,983


1,719,487Opiate
  Agonist/Analgesic


31,257,560


14,082,000


1,887,640


5,121,809Platelet
  Aggregation Inhibitor


206,185


147,856


24,571


80,730Skeletal
  Muscle Relaxant


2,902,770


1,150,073


201,673


1,492,437Vascular and
  Migraine Headache Suppressant


1,035,230


1,098,460


208,054


Net Sales

$
117,027,016

$
82,788,918

$
17,336,500

$
60,340,309* * * * *

F-36

EXHIBIT INDEX

3.01
Registrants Amended and
  Restated Articles of Incorporation, as amended. (1)3.02
Certificate of Amendment
  to the Articles of Incorporation filed February 13, 1997. (2)3.03
Certificate of Amendment
  to the Articles of Incorporation filed February 10, 2000. (3)3.04
Certificate of
  Determination of Rights, Privileges and Preferences Series B Preferred Stock.
  (4)3.05
Registrants Amended and
  Restated Bylaws. (5)10.01
Agreement, dated as of
  October 1, 1993, among Registrant and Non-Affiliate (6)10.02
Employment Agreement,
  dated October 22, 1993, of Robert Kurkiewicz. (6)10.03
Stock Purchase Agreement
  by and between Caraco Pharmaceutical Laboratories, Ltd. and Sun
  Pharmaceutical Industries, Ltd. dated as of April 23, 1997. (7)10.04
Products Agreement by and
  between Caraco Pharmaceutical Laboratories, Ltd. and Sun Pharmaceutical
  Industries, Ltd. dated as of April 23, 1997. (7)10.05
Registration Rights
  Agreement dated as April 1997. (7)10.06
Amendment to Employment
  Agreement of Robert Kurkiewicz dated as of April 1, 1997. (8)10.07
1999 Equity Participation
  Plan. (9)10.08
Renewal to Employment
  Agreement of Robert Kurkiewicz dated as of January 1, 1999. (3)10.09
Third Amendment to
  Employment Agreement of Robert Kurkiewicz dated August 30, 2002. (3)10.10
Agreement between Caraco
  and Sun Pharma Global, Inc. dated November 21, 2002. (4)10.11
Sales contract with
  government vendor. (4)10.12
Employment Agreement of
  Mr. Singh (5)10.13
Employment Agreement of
  Mr. Movens (10)10.14
Confidentiality and
  Non-Competition Agreement of Dan Movens (10)10.15
Summary of Fiscal 2006
  Executive Officer Salaries (11)10.16
Credit Agreement with
  JPMorgan Chase Bank, N.A. (12)10.17
Security Agreement with
  JPMorgan Chase Bank, N.A. (12)10.18
Form of Grant of Employee
  Stock Option (13)10.19
Marketing Agreement
  between Caraco and Sun Pharmaceutical Industries, Limited (14)21
Subsidiaries
  of the Registrant (+)23.01
Consent of Registered
Independent Public
  Accountants (+)38

24.1
Power of Attorney
  (included on signature page) (+)31.1
Certificate of Chief
Executive Officer (+)31.2
Certificate of Chief
Financial Officer (+)32.1
Certification of Chief
Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
  906 of the Sarbanes-Oxley Act of 2002. (+)+
  Filed herewith(1)
Incorporated by reference
  from Exhibits to Registrants Form 10-KSB filed on or about March 30, 1995 as
  Commission File no. 0-24676.(2)
Incorporated by reference
  from Exhibits to Registrants Form 10-KSB filed on or about March 31, 1997,
  as Commission File No. 0-24676.(3)
Incorporated by reference
  from Exhibits to Pre-Effective Amendment No. 1 to Form SB-2 filed on
  September 4, 2002 as Commission File No. 333-91968.(4)
Incorporated by reference
  from Exhibits to Registrants Form 10-KSB filed on or about March 31, 2003,
  Commission File No. 0-24676.(5)
Incorporated by reference
  from Exhibit to Registrants Form 10-K filed on or about March 15, 2005,
  Commission File No. 0-24676.(6)
Incorporated by reference
  from Exhibits to Registrants Registration Statement on Form SB-2, as
  amended, filed on November 5, 1993 as Commission File No. 33-71398C.(7)
Incorporated by reference
  from Exhibits to Registrants Form 10-QSB filed on November 14, 1997 as
  Commission File No. 0-24676.(8)
Incorporated by reference
  from Exhibits to Registrants Form 10-KSB filed on or about March 31, 1998,
  as Commission File No. 0-24676.(9)
Incorporated by reference
  from Appendix A to Registrants Proxy Statement dated April 28, 1999 as
  Commission File No. 0-24676.(10)
Incorporated by reference
  from Exhibits to Registrants Form 10-K/A filed on or about May 2, 2005,
  Commission File No. 0-24676.(11)
Incorporated by reference
  from Exhibits to Registrants Form 8-K filed on or about August 25, 2005.
  Commission File No. 0-24676(12)
Incorporated by reference
  from Exhibits to Registrants Form 10-Q filed on or about January 26, 2006.
  Commission File No. 0-24676(13)
Incorporated by reference
  from Exhibits to Registrants Form 10-K filed on or about June 14, 2006.
  Commission File No. 0-24676(14)
Incorporated by reference
  from Exhibits to Registrants Form 8-K filed on or about January 19, 2007.
  Commission File No. 0-2467639