<PAGE>
                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-KSB
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

                        FOR THE TRANSITION PERIOD FROM TO

                           COMMISSION FILE NO. 0-24676

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

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

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

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

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

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

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

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

                           Common Stock, No Par Value
                                (Title of Class)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]

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

STATE ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR: $22,380,964

STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE AVERAGE
BID AND ASKED PRICES OF SUCH STOCK, AS OF A SPECIFIED DATE WITHIN 60 DAYS PRIOR
TO THE DATE OF THE FILING.

                                   $23,220,513
            (BASED UPON THE AVERAGE BID-ASK PRICE OF THE REGISTRANT'S
           COMMON SHARES ON THE OTC BULLETIN BOARD ON MARCH 14, 2003)

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

      AS OF MARCH 14, 2003, THERE WERE 23,762,532 COMMON SHARES OUTSTANDING

                      Documents Incorporated By Reference:

         Portions of the definitive 2003 Proxy Statement in connection with the
Annual Meeting of Stockholders to be held on June 2, 2003, are incorporated by
reference into Part III.


<PAGE>


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.
                                   FORM 10-KSB

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

FORWARD LOOKING STATEMENTS

This report, other than the historical financial and business information, may
contain forward looking statements. Those statements include statements
regarding the intent, belief, and current expectation of the Company. These
statements are not guarantees of future performance and are subject to risks and
uncertainties that cannot be predicted or quantified. Consequently, actual
results could differ materially from those expressed or implied by such forward
looking statements. Such risks and uncertainties include: (i) that the
information is of a preliminary nature and may be subject to further adjustment;
(ii) inability to renegotiate and extend the Company's loan with the Economic
Development Corporation (See "Item 2 - EDC Financing"); (iii) not obtaining FDA
approval for new products or delays in receiving FDA approvals; (iv)
governmental restrictions on the sale of certain products; (v) dependence on key
personnel; (vi) development by competitors of new or superior products or
cheaper products or new technology for the production of products or the entry
into the market of new competitors; (vii) market and customer acceptance and
demand for new pharmaceutical products, (viii) availability of raw materials,
(ix) timing and success of product development and launch (x) integrity and
reliability of the Company's data; (xi) lack of success in attaining full
compliance with regard to regulatory and cGMP compliance; and (xii) other risks
identified in this report and identified from time to time in the Company's
reports and registration statements filed with the Securities and Exchange
Commission.


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

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

A significant source of our funding has been from private placement offerings
(including stock purchases by Sun Pharmaceutical Industries, Limited ("Sun
Pharma")) and loans. Sun Pharmaceutical Industries, Ltd., a specialty
pharmaceutical corporation organized under the laws of India, which owns 49% of
our outstanding shares as of December 31, 2002, has purchased equity capital for
$7.5 million in cash, advanced us loans of approximately $9.8 million and
guaranteed term loans totaling $17.5 million from two foreign banks. Also,
pursuant to a products agreement with us, Sun Pharma has transferred certain
products to us. See "Current Status" and "Sun Pharmaceutical Industries, Ltd."
below. Our manufacturing facility and executive offices were constructed in 1990
pursuant to a $9.1 million loan from the Economic Development Corporation of the
City of Detroit (the "EDC"). See "Current Status" and "EDC Financing" below.


                                       2
<PAGE>


CURRENT STATUS OF CORPORATION

For the first time since inception, during the second, third and fourth quarters
of 2002, we achieved sales necessary to support our operations. Net sales for
the twelve months ended December 31, 2002 were $22.4 million as compared to $5.9
million for the twelve months ended December 31, 2001. We have incurred a
nominal operating loss of $730,365 for the twelve months ended December 31, 2002
as compared to an operating loss of $4,023,926 for the twelve months ended
December 31, 2001. After interest costs, we have incurred a net loss of
$2,256,004 for the twelve months ended December 31, 2002 as compared to a net
loss of $5,757,463 for the twelve months ended December 31, 2001. At December
31, 2002, we had a stockholders' deficit of $19,623,290 as compared to a deficit
of $22,945,249 at December 31, 2001. We have continued to be dependent on the
support of Sun Pharma, but the financial support is reduced due to the increased
revenues and improved cash flows from internal operations. See "Sun
Pharmaceutical Industries, Ltd." and "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations."

We received 6 Abbreviated New Drug Application ("ANDA") approvals during the
twelve months ended December 31, 2002 and 1 ANDA approval during the first
quarter of 2003. See "Caraco's Products and Product Strategy" below. We also
filed 3 ANDAs with the FDA during the twelve months of 2002, bringing the total
pending approvals to 3.

During 2002, we completed a private placement of 635,000 shares of common stock
resulting in aggregate proceeds to us of $1,692,000.

We have been in default of our mortgage loan of approximately $7.8 million from
the EDC since February 1999. However, based on a resolution passed at a meeting
of the Board of Directors of the EDC on September 25, 2002, the EDC approved a
six year extension of the loan with interest rates starting at 2.75% and
increasing to 5.16%. Under the approval, the EDC would retain a first mortgage
on our property and a first lien on our furniture, fixtures and equipment and
intellectual property. The EDC would no longer retain a lien on our accounts
receivable and inventory. The EDC resolution, which provides that the
transaction must be completed by January 1, 2003, will not become effective
until a definitive agreement incorporating the above terms has been agreed to by
the parties. On March 19, 2003, the EDC extended the deadline to May 1, 2003
and agreed that the transaction, when it is finalized, would be effective as of
January 1, 2003.

On November 21, 2002, we entered into a products agreement with Sun Pharma
Global, Inc. ("Sun Global"), a wholly-owned subsidiary of Sun Pharmaceutical.
The previous products agreement with Sun Pharma expired. Under the agreement,
which was approved by our independent directors, Sun Global has agreed to
provide us with 25 new generic drugs over a five year period. In return, Sun
Global will receive 544,000 shares of a newly created preferred stock for each
generic drug transferred. The preferred shares are convertible into common
shares after three years on a one-to-one basis. See "Part II - Item 6. - Future
Outlook."

The FDA has informed us and sixty-six other manufacturers and distributors of
Guaifenesin that all of us must cease manufacturing Guaifenesin by May 23, 2003
and cease all sales past November 2003. We sold approximately $1.65 million of
Guaifenesin during the year ended December 31, 2002.

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


                                       3
<PAGE>


OVERVIEW OF THE GENERIC DRUG INDUSTRY

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

CARACO'S PRODUCTS AND PRODUCT STRATEGY

Our present product portfolio includes 14 prescription products in 23 strengths
in 47 package sizes. The products and their use for the indications are set
forth in the table below:

<Table>
<Caption>
                  GENERIC NAME                     PURPOSE
<S>                                                <C>
                  Guaifenesin LA *                 Decongestant
                  Metroprolol Tartrate             Hyper-Tension
                  Miraphen PSE                     Decongestant
                  Paromomycin Sulfate              Antibacterial
                  Salsalate                        Decongestant
                  CMT                              Arthritis/NSAID
                  Guai/DM                          Decongestant
                  Clonazepam                       Seizure, Panic Disorders
                  Flurbiprofen                     Arthritis/NSAID
                  Carbamazepine                    Epilepsy
                  Oxaprozin                        Rheumatoid Disease
                  Metformin Hydrochloride          Diabetes
                  Tramadol Hydrochloride           Analgesic
                  Miraphen PE                      Decongestant
</Table>

* See "Current Status of Corporation" with respect to the FDA's letter to us and
sixty-six other manufacturers and distributors to cease sales of Guaifenesin
after November 2003.

We have submitted 13 ANDAs to the FDA for approval since August 1997, including
3 filed during 2002. Of these 13 ANDAs, the FDA approved 3 during 2001, 6 during
2002 and one during the first quarter of 2003. Accordingly, we have 3 pending
ANDAs, most of which, we believe, may be approved by 2003 year-end. Of the 13
ANDAs, Sun Pharma has transferred the technology for 11 of them to us pursuant
to its now expired products agreement. See "Sun Pharmaceutical Industries
Limited"


                                       4
<PAGE>

Four of the ANDAs have not yet been marketed and are not included in the above
disclosure of our product portfolio. The products and their use for the
indications are set forth in the table below;


<Table>
<Caption>
                 GENERIC NAME                      PURPOSE
<S>                                                <C>
                 Ticlopidine Hydrochloride         Cardiology
                 Meperidine Hydrochloride          Analgesic
                 Clozapine                         Schizophrenia
                 Digoxin                           Cardiology
</Table>

These products, when launched, will increase our product portfolio to 18
prescription products in 30 strengths in 65 package sizes.

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

HEXAL-PHARMA GMBH & CO., KG

Pursuant to an agreement between us and Hexal-Pharma GmbH & Co., KG, a German
pharmaceutical company and its United States affiliate (together, "Hexal") dated
as of October 1, 1993, Hexal agreed to convey to us the formulations,
technology, manufacturing processes and know-how, and other relevant
information, and to pay for the bioequivalency studies required for the
preparation of ANDAs for each of two specified generic drugs (the "Products").
We agreed to pay Hexal royalties on the yearly sales of each Product (See
below). We filed an ANDA in March 1995 with respect to Metoprolol Tartrate,
received approval from the FDA in December 1996 and introduced it in 1997.
(Metoprolol Tartrate is one of our 13 current products. See "Caraco's Products
and Product Strategy".) Hexal has decided not to proceed with the development of
the second Product.

Pursuant to the agreement, we have, for each Product (i) a Sign-Up Option to
purchase 100,000 shares of Common Stock at $3.50 per share; and (ii) a Product
Option to purchase shares at an exercise price of $3.50 per share. These options
may be exercised and payment for shares may be made only out of royalties, and
any interest earned on the royalties while held by us payable to Hexal for sales
of the related product. No options have yet been exercised. Royalties payable to
Hexal, which are included in accrued expenses, amount to $801,144 at December
31, 2002.

We have recently learned that the formula provided to us by Hexal with respect
to Metoprolol Tartrate may be different than the formula currently used for
manufacturing, and we are investigating further whether or not we should
continue to accrue royalties based on the formula differences. If we find that
the formula as provided by Hexal is indeed different from ours, we would cease
to accrue any royalties.

SUN PHARMACEUTICAL INDUSTRIES LTD.

Pursuant to a stock purchase agreement, Sun Pharma had, as of December 31, 1998,
remitted a total of $7.5 million to us for the purchase of 5.3 million common
shares.

On October 15, 1998 Sun Pharmaceutical also made a loan to us of $5.3 million at
an annual interest rate of 10%. This loan was amended to provide Sun
Pharmaceutical with a security interest subordinated to the loan of the EDC. The
loan is payable in full in October 2003. The rate of interest on the loan from
Sun Pharmaceutical has been reduced from 10% to 8% effective April 1, 2001. In
2001, Sun Pharmaceutical loaned us an additional $2.45 million at an interest
rate of 8%. During the first quarter of 2002, Sun Pharmaceutical loaned us an
additional $1.4 million at an interest rate of 8%. The $2.45 million and $1.4




                                       5
<PAGE>

million loans mature and are due and payable on August 31, 2006. Prior to this,
Sun Global made a loan to us of $650,000 at an annual interest rate of 10%. We
have repaid $100,000 of this loan during 2001. The interest rate on this loan
has also been reduced by Sun Global from 10% to 8% effective April 1, 2001. The
loan is payable in full in October 2003.

Sun Pharma has assisted us in obtaining line of credit loans from ICICI Bank
Limited and The Bank of Nova Scotia in the amount of $5.0 million and $12.5
million respectively. We have utilized $5 million from ICICI Bank Limited and
$10.9 million from The Bank of Nova Scotia. The amounts borrowed under the ICICI
Bank Limited credit facility must be repaid in eight equal quarterly
installments beginning December 31, 2003 and ending September 30, 2005. The
amounts borrowed under the Bank of Nova Scotia credit facility must be repaid in
four semi-annual installments on February 4, 2004, August 24, 2004, February 24,
2005 and August 25, 2005. The loan may not be prepaid until August 24, 2003.
Interest is at LIBOR plus 140 basis points on the loan from ICICI Bank Limited
and LIBOR plus 30 basis points on the loan from the Bank of Nova Scotia, and is
payable at one, two, three or six months periods at our option.

In August 1997, we entered into an agreement with Sun Pharma whereby Sun Pharma
was required to transfer to us the technology formula for 25 generic
pharmaceutical products over a period of five years in exchange for 544,000
shares of our common stock to be issued for each ANDA product and 181,333 shares
for each DESI (Drug Efficacy Study Implementation) product. The products
provided to us from Sun Pharma were selected by mutual agreement. Under such
agreement, which has expired, we conducted, at our expense, all tests including
bioequivalency studies. Also, under such agreement, Sun Pharma delivered to us
the formula for 13 products and beneficially owns approximately 49% of our
outstanding common stock.

On November 21, 2002, we entered into a products agreement with Sun Global.
Under the agreement, which was approved by our independent directors, Sun Global
has agreed to provide us with 25 ANDAs over a five year period. Our rights to
the products are limited to the United States and its territories or
possessions, including Puerto Rico. Sun Global retains rights to the products in
all other territories. Under such agreement, we conduct, at our expense, all
tests including bioequivalency studies. We are also obligated to market the
products consistent with our customary practices and to provide marketing
personnel. In return for the technology transfer, Sun Global will receive
544,000 shares of a newly created preferred stock for each generic drug
transferred. 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. See "Item 2 - 6. - Future Outlook."

Sun Pharma has established a Research and Development Center in Mumbai with a
staff of 30 persons, including PhDs, pharmacy graduates, analytical chemists and
regulatory professionals. Sun Pharma primarily performs development work for us
at this laboratory.

Sun Pharma also supplies us with certain raw materials and machinery and
equipment to enhance our production capacities. In the year ended December 31,
2002, we purchased approximately $2,422,000 in raw materials and $310,000 in
machinery and equipment from Sun Pharma. Sun has also provided us with qualified
technical professionals. Twenty-one of our technical professional employees were
former Sun Pharma employees.

MARKETING

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


                                       6
<PAGE>

companies, among others. Management is aware that, despite any success in
creating these distribution links, sales volume will remain low until we can
offer a broader range of products needed by drug purchasers in significant
amounts.

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

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

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

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

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

SALES AND CUSTOMERS

Presently, we have only a small in-house sales organization comprised of 4
persons. In time as new products are added to the existing product line, we plan
to expand our customer sales effort through adding additional sales personnel
and/or contracting with an independent sales and marketing firm.

Shipments to one wholesale customer accounted for approximately 65% and 35% of
sales in 2002 and 2001, respectively. Balances due from this customer
represented approximately 80% and 40% of accounts receivable at December 31,
2002 and 2001, respectively.

We have entered into a sales contract with an agency of the U.S. government. Our
agreement with this customer is for the period of June 21, 2002 through June 20,
2003 ("base contract period"), with four 1-year option periods and is for the
purchase of one product. The agreement may be terminated by the purchaser
without cause and in such case, we would only be entitled to a percentage of the
contract price reflecting the percentage of the work performed prior to the
notice of termination plus reasonable charges that have resulted from the
termination. The agreement provides that approximately $13.0 million of product
should be shipped to the customer over the base contract period, and further
provides that certain penalties would be incurred if we are unable to meet our
sales commitment.

RESEARCH AND DEVELOPMENT

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

                                       7
<PAGE>

An outline of research and development expenses incurred directly by Caraco for
2002 and 2001 follows (000's):

<Table>
<Caption>
                                                      2002        2001
                                                     ------      ------
<S>                                                  <C>         <C>
         Salaries                                    $  678      $  530
         Raw Materials/Supplies                         165         131
         Bioequivalency Studies                         594         132
         Laboratory                                     505         264
         Technology Transfer, non-cash                3,887           0
         Other                                        1,407       2,022
                                                     ------      ------
             TOTAL                                   $7,236      $3,079
                                                     ======      ======
</Table>

The 2002 research and development expenses shown above include the non-cash cost
of the products transferred by Sun Pharma to Caraco of $3,887,423 for 1,632,000
shares of our common stock. No technology transfer cost was incurred in 2001.

Information with respect to two research and development projects in 2002 are
presented below:

PROJECT INFORMATION - PRODUCT A

<Table>
<Caption>
                                                                         Risks and uncertainties of           Period in which
Costs Incurred on Product A         Nature, Timing and costs             not completing development           net cash inflows
DRUG FOR TREATMENT OF               to complete project and              on schedule and financial            are expected to
SPASTICITY                          anticipated date of completion       consequences.                        commence
---------------------------         ------------------------------       --------------------------           ----------------
<S>                                 <C>                                  <C>                                  <C>
Raw Material Cost -                 The additional cost for the          Product A was completed on           Mid-year 2004.
$29,200 paid in 2002                product will be approximately        time and an ANDA was filed
                                    $25,000, which includes              with the FDA. If the FDA does
BIO STUDY COSTS                     stability testing and other          not approve the submission,
$226,226 paid in 2002               regulatory costs.                    we can either re-do the
                                                                         bioequivalency study and
Other in-house Costs                The ANDA was submitted               incur all of the other
                                    to the FDA in May 2002.              referenced costs again,
Approximately $50,000 paid          Normally, it takes 12-18             except for the technology
in 2002 for preparation of          months for approval after            transfer costs, or determine
batches for R&D,                    the submission of the ANDA           not to go forward.
manufacturing, quality              to the FDA.
control, quality assurance,                                              If the FDA does not timely
regulatory departments and                                               approve the submission, it
facility overhead                                                        may have the effect of
                                                                         delaying the marketing of the
Technology Transfer Cost                                                 product and thereby cause us
                                                                         to miss a window of
544,000 shares of common                                                 opportunity.
stock - $1,408,960 in 2002.

TOTAL COST INCURRED

Approximately $1,714,386
</Table>

                                       8
<PAGE>


PROJECT INFORMATION - PRODUCT B

<Table>
<Caption>
                                                                         Risks and uncertainties of           Period in which
Costs Incurred on Product B         Nature, Timing and costs             not completing development           net cash inflows
DRUG FOR TREATMENT OF               to complete project and              on schedule and financial            are expected to
SPASTICITY                          anticipated date of completion       consequences.                        commence
---------------------------         ------------------------------       --------------------------           ----------------
<S>                                 <C>                                  <C>                                  <C>
Raw Material Cost -                 The additional costs for the         Product B was completed on           End of 2004
$117,400 paid in 2002               product will be approximately        time and an ANDA was filed
                                    $72,000, which includes two          with the FDA. If the FDA does
BIO STUDY COSTS                     payments for bio-study costs         not approve the submission, we
$191,838 paid in 2002               of approximately $47,000,            can either re-do the
                                    stability testing and other          bioequivalency study and incur
Other in-house Costs                regulatory costs.                    all of the other referenced
                                                                         costs again, except for the
Approximately $50,000 paid in       The ANDA was submitted to the        technology transfer costs, or
2002 for preparation of batches     FDA in November 2002. Normally       determine not to go forward.
for R&D, manufacturing, quality     it takes 12-18 months for
control, quality assurance,         approval after submission of         If the FDA does not timely
regulatory departments and          the ANDA to the FDA.                 approve the submission, it may
factory overhead                                                         have the effect of delaying
                                                                         the marketing of the product
Technology Transfer Cost                                                 and thereby cause us to miss
                                                                         a window of opportunity.
544,000 shares of common
stock $910,656 in fourth
quarter of 2002.

TOTAL COST INCURRED
Approximately $1,269,894
</Table>


REGULATION

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

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


                                       9
<PAGE>

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

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

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

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

The FDA may deny an ANDA if applicable regulatory criteria are not satisfied.
Product approvals may be withdrawn by the FDA 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.

FDA policy and its stringent requirements have increased the time and expense
involved in obtaining ANDA approvals and in complying with FDA's cGMP standards.
The ANDA filing and approval process takes approximately 12 to 18 months. FDA
approval is required before each dosage form of any new drug can be marketed.
Applications for FDA approval must contain information relating to
bioequivalency, 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
bioequivalency studies are conducted.

The Generic Drug Enforcement Act of 1992 establishes penalties for wrongdoing in
connection with the development or submission of an ANDA by authorizing the FDA
to permanently or temporarily bar companies or individuals from submitting or
assisting in the submission of an ANDA, and to temporarily deny approval and
suspend applications to market off-patent drugs. The FDA has authority to
withdraw



                                       10
<PAGE>

approval of an ANDA under certain circumstances and to seek civil penalties. The
FDA can also significantly delay the approval of a pending ANDA under certain
circumstances and to seek civil penalties. The FDA can also significantly delay
the approval of a pending ANDA under its "Fraud, Untrue Statements of Material
Facts, Bribery, and Illegal Gratuities Policy." Manufacturers of drugs must also
comply with the FDA's cGMP standards or risk sanctions such as the suspension of
manufacturing or the seizure of drug products and the FDA's refusal to approve
additional ANDAs.The Drug Enforcement Agency ("DEA") conducts inspections
bi-annually.

We underwent FDA inspections during March and April 2001 and in November 2002
and on each occasion we were found to be in substantial compliance with cGMPs.
We did receive FDA 483s but we do not believe the observations are material and
we have taken appropriate remedial actions. Subsequent to the end of 2002, we
received approval for one of the then pending ANDAs. We now have 3 ANDAs pending
approval


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

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

We believe that we are in compliance with environmental laws.

SUPPLIERS AND MATERIALS

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

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

COMPETITION

The market for generic drugs is highly competitive. There is intense competition
in the generic drug industry in the United States, which is eroding price and
profit margins. We compete with numerous pharmaceutical manufacturers, including
both generic and brand-name manufacturers, many of which have been in business


                                       11
<PAGE>

for a longer period of time than us, have a greater number of products in the
market and have considerably greater financial, technical, research,
manufacturing, marketing and other resources. We believe that our primary
competitors are EON Labs, Inc., Ivax Pharmaceuticals, Inc., Mylan Laboratories,
Inc. and Taro Pharmaceutical Industries, Ltd.

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

EMPLOYEES

As of December 31, 2002 and 2001, we had 128 and 76, respectively, full-time and
employees who are engaged in research and development, quality assurance,
quality control, administration, sales and marketing, materials management,
facility management and manufacturing and packing. Most of our scientific and
engineering employees have had prior experience with pharmaceutical or medical
products companies, including Sun Pharma. See "Sun Pharmaceutical Industries
Ltd." A union represents some of the employees of materials management, facility
management and manufacturing and packaging departments.

PRODUCT LIABILITY AND INSURANCE

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

ITEM 2. DESCRIPTION OF PROPERTY.

EDC FINANCING

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

The mortgage is a first priority mortgage lien against the property and may not
be subordinated to the lien on any other mortgage or encumbrance except as
otherwise provided in the Modification Agreement. In addition, we granted EDC a
continuing security interest in all of our assets, accounts, equipment, proceeds
thereof, ANDAs and in the products to be provided by Sun Pharma to us under its
then products agreement with us.


                                       12
<PAGE>

See "Part I - Sun Pharmaceutical Industries Ltd." above. In addition to other
covenants, we agreed that our capital expenditures would not exceed $2 million
without the consent of the EDC and that we will not redeem any of our
outstanding shares, pay any dividends with respect to our outstanding common or
preferred shares or merge or consolidate with any other corporation or other
entity without the prior written consent of the EDC.

On March 1, 1994, the EDC Agreement was amended to extend the maturity date to
July 1, 2002. On August 5, 1997, we restructured the loan from the EDC, pursuant
to a Second Note and Modification Agreement ("Modification Agreement"), in
connection with our default on such loan. Among other things, the Modification
Agreement modified the previous note then in effect (the "Note") to provide that
the regularly scheduled monthly payments which would otherwise be due and
payable during the period from April 1, 1996 through and including January 1,
1999 (the "Deferred Payments") would be deferred until February 1, 1999. On
February 1, 1999, we were required to resume making regularly scheduled monthly
payments of principal and interest, together with additional payments of
principal and interest in an amount sufficient to amortize the total amount of:
(i) the Deferred Payments, and (ii) accrue interest on that portion of the
currently outstanding indebtedness that would have been amortized by the
Deferred Payments, commencing on the date when due under the terms of the
original loan agreement, at the rate set forth in the note over a period of 42
consecutive months commencing on February 1, 1999 and ending on July 1, 2002
("Additional Payments"). In the event, however, that with respect to the first
quarter of operation in which our operating income before federal income taxes
plus depreciation exceeds $500,000 on the first day of the six months succeeding
such quarter, the regularly scheduled payment required to be made would resume
and the Additional Payments would commence, provided, however, that the
Additional Payments would be reduced to the amount necessary to amortize the
total of the sums set forth in (i) and (ii) above over a 42 month period
commencing on the first day of the six months succeeding such quarter.

During the month of December 1998 we approached the EDC regarding
reconsideration of the repayment terms. We are currently in default of the
Modification Agreement and have not made any of the scheduled payments, however,
in response to our proposal on September 25, 2002, the Board of Directors of the
EDC passed a resolution approving a six year extension of the loan of
approximately $7.8 million, with interest rates starting at 2.75% and increasing
to 5.16%. Under the approval, the EDC would retain a first mortgage on our
property, and a first lien on our furniture, fixtures and equipment and
intellectual property. However, the EDC would release its lien on our accounts
receivable and inventory. In addition, the EDC has generally informally agreed
to remove the $2 million restriction on capital expenditures, subject to certain
conditions, and to allow us to pay the cash dividends and any accrued interest
owed on the recently converted Series A preferred stock. The EDC resolution,
which provides that the transaction must be completed by January 1, 2003, would
not become effective until a definitive agreement incorporating the above terms
has been agreed to by the parties. On March 19, 2003, the EDC extended the
deadline to May 1, 2003 and agreed that the transaction, when it is finalized,
would be effective as of January 1, 2003. Until we sign a final agreement, we
intend to continue to make $100,000 monthly payments to the EDC. Since 2000 and
through 2002, such payments have totaled $4.7 million. Such payments have not
brought us current in our obligations to the EDC, and such payments were made
without prejudice to the rights of the EDC to exercise all remedies available to
the EDC for failure to make the scheduled payments.

THE FACILITY

Our approximately 72,000 square foot facility, which was designed and
constructed to our specifications and completed in 1992, contains our
production, packaging, research and corporate office. It is on a four-acre site.
The manufacturing facility has a special building and systems design, with each
processing area equipped with independent zone and air handling units to provide
temperature and humidity control to each


                                       13
<PAGE>

room. These air handling units are designed to prevent product cross
contamination through the use of pre-filter and final HEPA filter banks. All
processing air quarters are maintained in a negative pressure mode using laminar
airflow design. This system of airflow provides a measurable control of air
borne particulate entrapment in each room. Environmental segregation of
individual rooms within a particular zone is accomplished by the use of duct
HEPA filter booster fan units that facilitate the isolation and confinement of
room activities. These special dynamics provide an added dimension and
flexibility in product selection and processing techniques. We believe the
facility is suitable and adequate for our current and near term future use. We
also believe that our facility is adequately covered by insurance.

ITEM 3. LEGAL PROCEEDINGS.

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

                  On February 12, 2003, C. Arnold Curry filed a complaint in the
                  Wayne County Circuit Court alleging breach of a written
                  employment agreement. Mr. Curry is seeking 175,000 shares of
                  our common stock (35,000 shares for each of the first five
                  ANDAs approved by the FDA). We intend to vigorously defend
                  ourselves against these claims which we believe have no merit.

                  We have been named as one of two defendants and as one of
                  several defendants in two separate product liability suits,
                  involving Miraphen which contains phenylpropanolame (PPA), one
                  in federal court in Pennsylvania and another in state court in
                  New Jersey, respectively. These lawsuits seek damages
                  generally for personal injury as well as punitive damages
                  under a variety of liability theories including strict
                  products liability, breach of warranty and negligence. We are
                  being defended in these two PPA lawsuits by our primary
                  commercial general liability insurer subject to aggregate
                  policy limits in the amount of $10 million, however, the
                  insurance carrier has not formally confirmed its coverage of
                  our claims. The damages claimed exceed the policy limits.
                  Although the ultimate outcome of these cases and the potential
                  effect on us cannot be determined, we believe we have
                  substantial defenses to the claims and we will vigorously
                  defend the lawsuits

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

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


                                       14
<PAGE>

                                     PART II

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

Our common stock trades in the over-the-counter market on the OTC Bulletin
Board, under the symbol "CARA." The following table sets forth, in U.S. dollars
and in dollars and cents (in lieu of fractions), the high and low bid prices for
each of the calendar quarters indicated. These bid prices were obtained from the
Nasdaq OTCBB. These quotations reflect inter-dealer prices, without retail mark
up, mark down or commissions and may not represent actual transactions.

<Table>
<Caption>
2002                                          HIGH                         LOW
<S>                                           <C>                          <C>
First Quarter                                 $4.96                        $1.10
Second Quarter                                $3.73                        $2.25
Third Quarter                                 $3.07                        $1.73
Fourth Quarter                                $2.77                        $1.72
</Table>

<Table>
<Caption>
2001                                          HIGH                         LOW
<S>                                           <C>                          <C>
First Quarter                                 $0.60                        $0.20
Second Quarter                                $0.85                        $0.32
Third Quarter                                 $0.70                        $0.55
Fourth Quarter                                $1.11                        $0.58
</Table>

       As of February 12, 2003 there were 153 holders of our Common Stock.

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

During the year ended December 31, 2002, we issued 1,632,000 shares to Sun
Global in exchange for the transfer of products pursuant to the then existing
products agreement between Sun Pharma and us. See "Part I. Sun Pharmaceutical
Industries Ltd." All issued shares of common stock to Sun Pharma are issued
pursuant to exemptions from registration under Section 4(2), Section 4(6) and
Regulation D under the Securities Act of 1933.

During 2002, certain of our non-employee directors earned 21,000 shares of
common stock for attending board meetings. The shares of common stock were
issued pursuant to exemptions from registration under Section 4(2), Section 4(6)
and Regulation D under the Securities Act of 1933. For 2001, certain of our
non-employee directors earned 13,000 shares of common stock for attending board
meetings and received non-qualified stock options for 18,000 shares of common
stock, at an exercise price of $0.68 per share. The options are exercisable at
the rate of 20% per year commencing one year from the date of grant and may be
exercised until September 8, 2007.

DIVIDEND POLICY

We never have declared or paid cash dividends on our common stock. We currently
intend to retain all future earnings for the operation and expansion of our
business. We do not anticipate declaring or paying cash dividends on our common
stock in the foreseeable future. Any payment of cash dividends on the common
stock will be at the discretion of the Board of Directors and will depend upon
our results of operations, earnings, capital requirements, contractual
restrictions and other factors deemed relevant by our Board of Directors. No
dividend may be declared without the consent of the EDC. The EDC has informed us
that as part of the proposed final restructured loan agreement, it would consent
to our paying the cash dividends and accrued interest on the recently converted
Series A preferred stock.


                                       15
<PAGE>

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

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

The discussion in the section contains forward-looking statements that involve
risks and uncertainties. When used in this document, the words "anticipate,"
"believe," "estimate," and "expect" and similar expressions generally are
intended to identify forward-looking statements. Our actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences are identified in "Item 1 - Description of Business -
Forward-looking Statements," in this section and elsewhere in this report.


OVERVIEW

2002 was a year of record revenues for us. While we still experienced net
losses, our cash flow improved significantly. In comparison we have historically
experienced limited sales, operating losses and cash-flow difficulties.

During 2001 and 2000, Sun Pharma assisted Caraco in obtaining loans from ICICI
Bank Limited and The Bank of Nova Scotia of $5.0 million and $12.5 million. We
have utilized the $5.0 million from ICICI Bank Limited during 2000 and $10.9
million from The Bank of Nova Scotia during 2002, 2001 and 2000. Also, Sun
Pharma provided loans of an additional $1.40 million and $2.45 million to us
during 2002 and 2001, respectively. The loans were primarily utilized by us to
fund the operations, research and development of new products and finance the
increased working capital needs resulting from the increase in our product
portfolio following FDA approvals of 3 products during the last two quarters of
2001 and 6 products in 2002. In February 2003, the FDA approved an additional
ANDA. We also filed 3 ANDA applications to the FDA during 2002, bringing the
total pending approvals to 3. We continue to negotiate with the EDC to
restructure our loan which has been in default and continue to pay the EDC
$100,000 a month with aggregate payments to the EDC through 2002, totaling $4.7
million. See "Item 2 - Description of Property" for a discussion of the EDC
resolution approving a restructuring of the loan.


FDA COMPLIANCE AND PRODUCT APPROVALS

Towards the end of the first and beginning of the second quarters of 2001, and
in November 2002, the FDA conducted inspections of our facility. During these
inspections, we were found to be substantially in compliance with the cGMP
regulations. While the FDA did issue us an FDA 483 list of observations after
each inspection, we do not believe they are material and we have taken
appropriate remedial actions. During 2002, the FDA approved 6 ANDAs. In February
2003, the FDA approved an additional ANDA. 3 ANDAs are currently pending
approval.


TWELVE MONTHS ENDED DECEMBER 31, 2002 COMPARED WITH TWELVE MONTHS ENDED
DECEMBER 31, 2001

NET SALES. Net sales for the twelve months ended December 31, 2002 and 2001 were
$22,380,964 and $5,922,431, respectively, reflecting an increase of almost 278%.
The increase is due to the higher production and marketing of our existing and
newly approved products following the achievement of substantial compliance with
cGMPs. Currently, we manufacture and market six of the nine ANDAs which were
approved by the FDA during 2001 and 2002. Net sales of these newly approved
products were almost 45% of total net sales for the twelve months ended December
31, 2002. The majority of the net sales increase from

                                       16
<PAGE>


sales of new products were from net sales of Metformin Hydrochloride and
Tramadol Hydrochloride, 55% and 5% of net sales for the twelve months ended
December 31, 2002, respectively.

Net sales have also improved for the following reasons:

         o        Net sales of Metoprolol Tartrate have increased significantly
                  to $6.60 million during the twelve months of 2002 as compared
                  to $1.85 during the same period of 2001.

         o        We have been successful in obtaining larger sales contracts in
                  2002 with an agency of the U.S. government and with one large
                  mail order company, however, the sales of Metformin
                  Hydrochloride to such agency have been made at lower profit
                  margins. (See discussion on "Gross Profit" below)

         o        With our larger base of products, we have been able to attract
                  both new customers as noted above, and larger orders.

GROSS PROFIT. We earned a gross profit of $10,333,554 during the twelve months
ended December 31, 2002 as compared to a gross profit of $1,736,372 during the
corresponding period in 2001. 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 2001 and ability to absorb operational
overheads due to higher sales.

As a result of increased sales, the gross profit margin has also improved when
comparing the gross profit margins for the twelve month periods ending December
31, 2002 and 2001. Gross profit margin for the twelve months ended December 31,
2002 was 46% as compared to almost 29% for the twelve months ended December 31,
2002. The increases were the result of:

         o        Change in sales mix to higher profit margin products such as
                  Metoprolol Tartrate, Tramadol Hydrochloride and Oxaprozin.

         o        Reduction in manufacturing costs due to increased batch sizes.
                  For example, Metoprolol Tartrate batch sizes have increased by
                  approximately four fold.

         o        Improved efficiency in the overall manufacturing process
                  associated with higher utilization of plant capacity.

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

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the twelve months ended December 31, 2002 and 2001,
respectively were $3,827,727 and $2,680,494 respectively, representing an
increase of 43%. Selling, general and administrative expenses have effectively
decreased to 14.8% of net sales during the twelve months ended December 31, 2002
from almost 37% of net sales during the same period in 2001.

The actual increase of approximately $1,147,213 between the selling, general and
administrative expenses incurred during 2002 in comparison to 2001 was due to
additional legal and professional costs ($250,000) primarily in connection with
the negotiations of a new product agreement with Sun Global, litigation defense,
SEC and blue sky registration, and negotiations with the EDC, costs of
introducing new products into the market ($150,000), additional sales personnel
($40,000), increases in the salaries of sales and administrative staff
($80,000), recording of variable compensation expense on the extension of the
term of a director's stock options ($262,000), and the balance for royalties and
costs associated with development of improved services and quality measures to
customers.

RESEARCH AND DEVELOPMENT EXPENSES. Cash research and development expenses of
$3,348,789 for the twelve months ended December 31, 2002 were higher by 9% when
compared with $3,079,804 incurred during the corresponding period of 2001. We
incurred non-cash research and development expenses



                                       17
<PAGE>

(technology transfer cost) of $3,887,424 for the 1,632,000 shares of common
stock issued to Sun Global for 3 product transfers made to us during 2002. There
was no similar expense for the corresponding period of 2001. The major reason
for the additional cash research and development expenses were the costs for
three bio-study projects, for which we recorded expenditures of approximately
$593,000 during 2002.


INTEREST EXPENSE. Interest expense, which was incurred in connection with our
mortgage obligation to the EDC, interest on notes payable to Sun Pharma and Sun
Global as well as on term loans granted to us by ICICI Bank and the Bank of Nova
Scotia, and guaranteed by Sun Pharma, was $1,539,075 and $1,748,922, for the
twelve months ended December 31, 2002 and 2001, respectively. The decrease in
the amount of interest is due to a lower LIBOR rate on the loans from ICICI Bank
of India and Bank of Nova Scotia, despite an increase in borrowing levels. Also,
effective April 1, 2001, Sun Pharma and Sun Global reduced the rate of interest
payable to them from 10% to 8%.

RESULTS OF OPERATIONS. The net losses for the twelve months ended December 31,
2002 and 2001 were $2,256,004 and $5,757,464, respectively, reflecting a
reduction of almost 61%. The net losses for the twelve month periods are
directly related to net sales, which were inadequate to absorb our interest
costs and the impact of our non-cash technology transfer cost of $3,887,424
recorded during the twelve months ended December 31, 2002. The significantly
lower net losses in the current twelve-month period as compared to the previous
period are primarily due to significantly higher sales volumes and better-cost
absorption due to increased sales and an improved product mix. Also, the
utilization in the third and fourth quarters of 2002 of $1.59 million of new
equipment installed during the twelve months ended December 31, 2002 helped to
improve productivity.

A number of uncertainties exist that may influence our future operating results,
including general economic conditions, changes in conditions affecting the
pharmaceutical industry primarily related to generic drug competition, obtaining
additional financing, government restrictions on sale of certain products,
obtaining new FDA approvals, development by competitors of new or superior
products or new technology for production of products or the entry into the
market of new competitors.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2002, we had negative working capital of $1,647,253 compared
with a negative working capital of $6,039,331 at the corresponding period of
2001. The negative working capital positions as of December 31, 2002 and 2001
respectively were mainly due to the classification of the $5.85 million loan
payable to Sun Pharma and its affiliates as current as it becomes due in
October 2003.

To enable us to fund our research and development activities, repay certain term
loans and fund working capital needs, Sun Pharma has become a security guarantor
for a credit line of $5 million from ICICI Bank of India and $12.5 million from
Bank of Nova Scotia. As of December 31, 2002 we have received $5 million from
ICICI Bank of India and $10.9 million from Bank of Nova Scotia through these
credit facilities.




                                       18
<PAGE>


Further, we have received an additional loan of $2.45 million during the fourth
quarter of 2001 and $1.4 million during the first quarter of 2002 from Sun to
help us finance our R&D activities, debt reduction and working capital
requirements.

In addition, during the first six months of 2002, 635,000 shares of common stock
have been issued by the Corporation for cash of $1,692,000 pursuant to a private
placement to accredited investors.



FUTURE OUTLOOK

We have experienced difficult times in the past. With our having been found to
be in substantial compliance by the FDA with respect to cGMPs during the second
quarter of 2001 and fourth quarter of 2002, and also with the approvals of nine
ANDAs during 2001 and 2002, and one more during 2003, management feels that our
future outlook is brighter. Management's plan for improving profitability, cash
flow positions and operations include increased sales and infusion of additional
funding through the issuance of equity, if required. Management believes that
the new products agreement ("Products Agreement") with Sun Global, pursuant to
which products are paid for in a newly created preferred stock and not in cash
should benefit Caraco. As noted above, in "Part I-Business-Sun Pharmaceutical
Industries Ltd," under the Products Agreement, we conduct, at our expense, all
tests, including bioequivalency studies. The new Products Agreement, which was
approved by an independent committee of directors of Caraco, provides that Sun
Global, an affiliate of Sun Pharma, will provide us with 25 ANDAs in exchange
for convertible preferred stock (544,000 shares of preferred stock for each
ANDA). The preferred stock has a number of restrictive features. It is
non-voting, does not pay dividends and, unless there is a change in control, may
not be converted for a period of 3 years from the date it is earned. We believe
that the new Products Agreement benefits us by, among other things, preserving
our cash resources. By acquiring products for stock instead of cash or instead
of for cash and for royalties, we should thereby have such cash available to
support our operations. While the payment for products in stock would have the
effect of reducing earnings or causing a loss because the stock will be valued
on the respective dates on which it is earned and constitute a non-cash research
and development expense, we believe that the advantages to us of preserving our
cash for operations outweighs the non-cash effect on earnings. We also believe
that receiving products from Sun Global, which products, it is believed, will be
originated by Sun Pharma, provides us with a partner with a proven track record;
one that already has provided us with quality products. In addition, the
products to be selected must receive the concurrence of the independent
committee. This will help provide independent input into the process of
selecting products which appear likely to be economically sound. Moreover, the
new Products Agreement, which will have the effect of increasing Sun Pharma's
beneficial ownership in us, should, we believe, provide it with the incentive to
continue to help us succeed. Sun Pharma has already provided us with millions of
dollars in capital, loans, and guarantees of loans, and with personnel, raw
materials and equipment which have significantly helped us to date. We expect
Sun Pharma to continue to support us in 2003 as it has in the past.

During 2002, we generated substantial revenues as compared to the past. Capacity
utilizations are improving and costs are being controlled. We expect revenues to
improve during 2003. Management's plans for the remainder of 2003 include:

         o        Continued focus on FDA compliance.

         o        Continued research and development activities.

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

                                       19
<PAGE>

         o        Prompt introduction of newly approved products to the market.

         o        Striving to capture larger market share for existing products.

         o        Achieving operational efficiencies by attaining economies of
                  scale, cost reduction per unit, and obtaining additional cost
                  reductions for active raw materials acquired from competitors
                  and/or Sun Pharma.

         o        Increasing the width and depth of product portfolio to serve
                  customers effectively.

         o        Increasing the number of products, as well as anticipated
                  volume increases for existing products, which, in turn, will
                  improve manufacturing capacity utilization.

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

         o        Prompt restructuring of the EDC Loan.

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

ITEM 7.  FINANCIAL STATEMENTS

                          INDEX TO FINANCIAL STATEMENTS

<Table>
<Caption>
                                                                        Page
                                                                        ----
<S>                                                                     <C>
Independent Auditors' Report                                            F-1

Financial Statements as of December 31, 2002 and 2001
     and for Each of the Years Then Ended

         Balance Sheets                                                 F-2

         Statements of Operations                                       F-4

         Statements of Stockholders' Deficit                            F-5

         Statements of Cash Flows                                       F-6

         Notes to Financial Statements                                  F-7
</Table>


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

None.


                                       20
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.

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

ITEM 10. EXECUTIVE COMPENSATION.

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

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

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

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

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

(a)       Exhibits

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

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

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

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

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

3.06     Amendment to Amended and Restated Bylaws.(10)

3.07     Amendment to Amended and Restated Bylaws.(+)


                                       21
<PAGE>

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

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

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

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

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

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

10.07    Form of 1993 Stock Option Plan.(1)

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

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

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

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

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

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

10.14    Second Note and Mortgage Modification Agreement.(6)

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

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

10.17    1999 Equity Participation Plan.(8)

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


                                       22
<PAGE>

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

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

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

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

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

10.24    Sales contract with government vendor.(+)

24.1     Power of Attorney (on signature page).

99.1     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


                                       23
<PAGE>
(1)      Incorporated by reference from Exhibits to Registrant's Registration
         Statement on Form SB-2, as amended, filed on November 5, 1993 as
         Commission File No. 33-71398C.

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

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

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

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

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

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

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

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

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

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

 (b)              Reports on Form 8-K
                  None.

ITEM 14. CONTROLS AND PROCEDURES.

a.       The term "disclosure controls and procedures" is defined in Rules
         13a-14 (c) and 15d-14 (c) 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 a date within 90 days before the filing
         of this annual 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
         Corporation known to others within the Corporation which is required to
         be included in our periodic reports filed under the Exchange Act.

b.       There have been no significant changes in our internal controls or in
         other factors which could significantly affect internal controls
         subsequent to the Evaluation Date.


                                       24
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 28th day of March,
2003

                                        CARACO PHARMACEUTICAL LABORATORIES LTD.


                                        By: /s/ Narendra N. Borkar
                                            ---------------------------------
                                            Narendra N. Borkar
                                            Chief Executive Officer


                                       25
<PAGE>


                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Narendra N. Borkar and Jitendra N. Doshi, and each of
them, this 28th day of March, 2003, his true and lawful attorney(s)-in-fact and
agent(s), with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any or all amendments
to this report and to file the same, with all exhibits and schedules thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney(s)-in-fact and agent(s) full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney(s)-in-fact and
agent(s), or their substitutes(s), may lawfully do or cause to be done by virtue
hereof.

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


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


/s/ Narendra N. Borkar         Director, President and Chief Executive Officer
-------------------------      (Principal Executive Officer)
Narendra N. Borkar


/s/ Jitendra N. Doshi          Director, Chief Financial Officer and Chief
-------------------------      (Principal Financial and Accounting Officer)
Jitendra N. Doshi


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


/s/ David A. Hagelstein        Director
-------------------------
David A. Hagelstein


/s/ Phyllis Harrison-Ross      Director
-------------------------
Phyllis Harrison-Ross


/s/ Jay F. Joliat              Director
-------------------------
Jay F. Joliat


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


                                       26
<PAGE>


                                  CERTIFICATION

I, Narendra N. Borkar, the Chief Executive Officer of Caraco Pharmaceutical
Laboratories Ltd. (the "registrant") certify that:

1.       I have reviewed this annual report on Form 10-KSB of the registrant;

2.       Based on my knowledge, this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this annual report;

3.       Based on my knowledge, the financial statements, and other financial
         information included in this annual report, fairly present in all
         material respects the financial condition, results of operations and
         cash flows of the registrant as of, and for, the periods presented in
         this annual report;

4.       The registrant's other certifying officers and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         we have:

         (a)      designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant is made
                  known to us by others, particularly during the period in which
                  this annual report is being prepared;

         (b)      evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         (c)      presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.       The registrant's other certifying officers and I have disclosed, based
         on our most recent evaluation, to the registrant's auditors and the
         audit committee of the board of directors (or persons fulfilling the
         equivalent function):

         (a)      all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

         (b)      any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

6.       The registrant's other certifying officers and I have indicated in this
         annual report whether or not there were significant changes in internal
         controls or in other factors that could significantly affect internal
         controls subsequent to the date of our most recent evaluation,
         including any corrective actions with regard to significant
         deficiencies and material weaknesses.

                                        CARACO PHARMACEUTICAL LABORATORIES LTD.

                                        By: /s/ Narendra N. Borkar
                                            ----------------------------------
                                            Narendra N. Borkar
                                            Chief Executive Officer

Dated:  March 28, 2003


                                       27
<PAGE>

                                  CERTIFICATION

I, Jitendra N. Doshi, the Chief Financial Officer of Caraco Pharmaceutical
Laboratories Ltd. (the "registrant") certify that:

1.       I have reviewed this annual report on Form 10-KSB of the registrant;

2.       Based on my knowledge, this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this annual report;

3.       Based on my knowledge, the financial statements, and other financial
         information included in this annual report, fairly present in all
         material respects the financial condition, results of operations and
         cash flows of the registrant as of, and for, the periods presented in
         this annual report;

4.       The registrant's other certifying officers and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         we have:

         (a)      designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant is made
                  known to us by others, particularly during the period in which
                  this annual report is being prepared;

         (b)      evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         (c)      presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.       The registrant's other certifying officers and I have disclosed, based
         on our most recent evaluation, to the registrant's auditors and the
         audit committee of the board of directors (or persons fulfilling the
         equivalent function):

         (a)      all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

         (b)      any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

6.       The registrant's other certifying officers and I have indicated in this
         annual report whether or not there were significant changes in internal
         controls or in other factors that could significantly affect internal
         controls subsequent to the date of our most recent evaluation,
         including any corrective actions with regard to significant
         deficiencies and material weaknesses.

                                        CARACO PHARMACEUTICAL LABORATORIES LTD.

                                        By: /s/ Jitendra N. Doshi
                                            ----------------------------------
                                            Jitendra N. Doshi
                                            Chief Financial Officer

Dated:  March 28, 2003


<PAGE>

SECURITIES AND EXCHANGE COMMISSION





                    CARACO PHARMACEUTICAL LABORATORIES, LTD.





                              FINANCIAL STATEMENTS

                                       AND

                          INDEPENDENT AUDITORS' REPORT

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



<PAGE>


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          INDEX TO FINANCIAL STATEMENTS

                                      2002



                              FINANCIAL STATEMENTS



INDEPENDENT AUDITORS' REPORT


FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 AND 2001
     AND FOR EACH OF THE YEARS THEN ENDED

         Balance Sheets

         Statements of Operations

         Statements of Stockholders' Deficit

         Statements of Cash Flows

         Notes to Financial Statements



<PAGE>
(REHMANN ROBSON LETTERHEAD)


INDEPENDENT AUDITORS' REPORT



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


We have audited the accompanying balance sheets of Caraco Pharmaceutical
Laboratories, Ltd. (a Michigan corporation) as of December 31, 2002 and 2001,
and the related statements of operations, stockholders' deficit and cash flows
for the years then ended. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Caraco Pharmaceutical
Laboratories, Ltd. as of December 31, 2002 and 2001 and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.


                                              REHMANN ROBSON

Troy, Michigan
February 7, 2003


                                      F-1
<PAGE>

                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                                 BALANCE SHEETS

<Table>
<Caption>
                               ASSETS                    DECEMBER 31
                                               --------------------------
                                                   2002           2001
                                               -----------    -----------
<S>                                            <C>            <C>
         CURRENT ASSETS
              Cash and cash equivalents        $   534,228    $   241,110
              Accounts receivable, net           5,484,135      1,486,508
              Inventories                        5,615,962      2,909,055
              Prepaid expenses and deposits        471,314        179,201
                                               -----------    -----------

         TOTAL CURRENT ASSETS                   12,105,639      4,815,874
                                               -----------    -----------

         PROPERTY, PLANT AND EQUIPMENT
              Land                                 197,305        197,305
              Buildings and improvements         7,346,797      6,829,377
              Equipment                          5,458,314      4,407,323
              Furniture and fixtures               232,112        207,750
                                               -----------    -----------

              Total                             13,234,528     11,641,755
              Less accumulated depreciation      5,487,018      4,947,673
                                               -----------    -----------

         NET PROPERTY, PLANT AND EQUIPMENT       7,747,510      6,694,082
                                               -----------    -----------





         TOTAL ASSETS                          $19,853,149    $11,509,956
                                               ===========    ===========
</Table>


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


                                       F-2

<PAGE>

<Table>
<Caption>
                LIABILITIES AND STOCKHOLDERS' DEFICIT                                  DECEMBER 31
                                                                              -----------------------------
                                                                                  2002             2001
                                                                              ------------     ------------
<S>                                                                           <C>              <C>
         CURRENT LIABILITIES
              Accounts payable                                                $  1,958,809     $    689,233
              Accounts payable, Sun Pharma                                       2,024,028          273,668
              Accrued expenses                                                   1,391,623          296,715
              Current portion of subordinated notes payable to stockholder       5,850,000               --
              Current portion of loans payable to financial institutions           625,000               --
              Short-term borrowings                                                     --           75,000
              EDC loan payable, current                                          1,004,000        5,380,000
              Preferred stock dividends payable, current                           350,380               --
              Accrued interest                                                     549,052        4,140,589
                                                                              ------------     ------------

         TOTAL CURRENT LIABILITIES                                              13,752,892       10,855,205
                                                                              ------------     ------------

         LONG-TERM LIABILITIES
              Loans payable to financial institutions                           15,275,000       15,000,000
              EDC loan payable, net of current portion                           6,598,547               --
              Notes payable to stockholder, net of current portion               3,850,000        8,300,000
              Preferred stock dividends payable                                         --          300,000
                                                                              ------------     ------------

         TOTAL LONG-TERM LIABILITIES                                            25,723,547       23,600,000
                                                                              ------------     ------------

         TOTAL LIABILITIES                                                      39,476,439       34,455,205
                                                                              ------------     ------------

         COMMITMENTS AND CONTINGENCIES (NOTES 5, 9 AND 12)

         STOCKHOLDERS' DEFICIT
              Series A preferred stock, no par value; authorized 5,000,000
                shares, issued and outstanding -0- and 285,714                          --        1,000,000
              Common stock, no par value; authorized 30,000,000 shares,
                issued and outstanding 23,767,532 and 21,173,818 shares         40,457,028       34,111,543
              Additional paid-in capital                                           282,858               --
              Preferred stock dividends                                           (350,380)        (300,000)
              Accumulated deficit                                              (60,012,796)     (57,756,792)
                                                                              ------------     ------------

         TOTAL STOCKHOLDERS' DEFICIT                                           (19,623,290)     (22,945,249)
                                                                              ------------     ------------

         TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                          $ 19,853,149     $ 11,509,956
                                                                              ============     ============
</Table>


                                       F-3

<PAGE>


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                            STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                   YEAR ENDED DECEMBER 31
                                                                -----------------------------
                                                                    2002             2001
                                                                ------------     ------------
<S>                                                             <C>              <C>
         Net sales                                              $ 22,380,964     $  5,922,431

         Cost of goods sold                                       12,047,410        4,186,059
                                                                ------------     ------------

         GROSS PROFIT                                             10,333,554        1,736,372

         Selling, general and administrative expenses              3,827,707        2,680,494
         Research and development costs - affiliate (Note 7)       3,887,423               --
         Research and development costs                            3,348,789        3,079,804
                                                                ------------     ------------

         OPERATING LOSS                                             (730,365)      (4,023,926)
                                                                ------------     ------------

         OTHER INCOME (EXPENSE)
              Interest expense                                    (1,539,075)      (1,748,922)
              Interest income                                         13,436           15,385
                                                                ------------     ------------

         OTHER EXPENSE - NET                                      (1,525,639)      (1,733,537)
                                                                ------------     ------------

         NET LOSS                                               $ (2,256,004)    $ (5,757,463)
                                                                ============     ============

         NET LOSS PER BASIC AND DILUTED COMMON SHARE            $      (0.10)    $      (0.29)
                                                                ============     ============
</Table>


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


                                       F-4
<PAGE>


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                       STATEMENTS OF STOCKHOLDERS' DEFICIT

<Table>
<Caption>
                                              PREFERRED STOCK                    COMMON STOCK             ADDITIONAL
                                       ------------------------------    ----------------------------      PAID-IN
                                           SHARES          AMOUNT           SHARES            AMOUNT       CAPITAL
                                       ------------     ------------     ------------    ------------    ------------
<S>                                    <C>              <C>              <C>             <C>             <C>
Balances at
  January 1, 2001, as
  restated (Note 13)                        285,714     $  1,000,000       21,172,618    $ 34,111,093    $         --
Preferred stock dividends                        --               --               --              --              --
Issuance of common stock to
  directors in lieu of
  cash compensation                              --               --            1,200             450              --
Net loss                                         --               --               --              --              --
                                       ------------     ------------     ------------    ------------    ------------

Balances at
  December 31, 2001                         285,714        1,000,000       21,173,818      34,111,543              --
Preferred stock dividends                        --               --               --              --              --
Issuance of common stock to
  directors in lieu of
  cash compensation                              --               --           36,000          41,400              --
Issuance of common stock under
  private placement                              --               --          635,000       1,692,000              --
Issuance of common stock to
  affiliate in exchange for product
  technology transfers                           --               --        1,632,000       3,887,423              --
Common stock subscribed                          --               --               --           7,520              --
Preferred stock converted to
  common stock                             (285,714)      (1,000,000)         285,714         717,142         282,858
Net loss                                         --               --               --              --              --
                                       ------------     ------------     ------------    ------------    ------------

Balances at
  December 31, 2002                              --     $         --       23,762,532    $ 40,457,028    $    282,858
                                       ============     ============     ============    ============    ============

<Caption>

                                         PREFERRED
                                           STOCK         ACCUMULATED
                                         DIVIDENDS         DEFICIT           TOTAL
                                       ------------     ------------     ------------
<S>                                    <C>              <C>              <C>
Balances at
  January 1, 2001, as
  restated (Note 13)                   $   (240,000)    $(51,999,329)    $(17,128,236)
Preferred stock dividends                   (60,000)              --          (60,000)
Issuance of common stock to
  directors in lieu of
  cash compensation                              --               --              450
Net loss                                         --       (5,757,463)      (5,757,463)
                                       ------------     ------------     ------------

Balances at
  December 31, 2001                        (300,000)     (57,756,792)     (22,945,249)
Preferred stock dividends                   (50,380)              --          (50,380)
Issuance of common stock to
  directors in lieu of
  cash compensation                              --               --           41,400
Issuance of common stock under
  private placement                              --               --        1,692,000
Issuance of common stock to
  affiliate in exchange for product
  technology transfers                           --               --        3,887,423
Common stock subscribed                          --               --            7,520
Preferred stock converted to
  common stock                                   --               --               --
Net loss                                         --       (2,256,004)      (2,256,004)
                                       ------------     ------------     ------------

Balances at
  December 31, 2002                    $   (350,380)    $(60,012,796)    $(19,623,290)
                                       ============     ============     ============
</Table>


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


                                       F-5

<PAGE>


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                            STATEMENTS OF CASH FLOWS


<Table>
<Caption>
                                                                   YEAR ENDED DECEMBER 31
                                                                ---------------------------
                                                                   2002            2001
                                                                -----------     -----------
<S>                                                             <C>             <C>
Cash flows from operating activities
     Net loss                                                   $(2,256,004)    $(5,757,463)
     Adjustments to reconcile net loss to
       net cash used in operating activities
        Depreciation                                                539,374         508,682
        Common shares issued in exchange for product formula      3,887,423              --
        Common shares issued in lieu of compensation                 41,400             450
        Changes in operating assets and liabilities
          which provided (used) cash:
           Accounts receivable                                   (3,997,627)     (1,020,062)
           Inventories                                           (2,706,907)     (1,497,134)
           Prepaid expenses and deposits                           (292,112)       (115,817)
           Accounts payable                                       3,019,936          45,902
           Accrued expenses and interest                            925,917         748,315
                                                                -----------     -----------
NET CASH USED IN OPERATING ACTIVITIES                              (838,600)     (7,087,127)
                                                                -----------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES
     Purchases of property, plant and equipment                  (1,592,802)       (108,531)
                                                                -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from bank term loans                                  900,000       6,150,000
     Repayments of short-term borrowings                            (75,000)             --
     Proceeds from stockholder loans                              1,400,000       2,300,000
     Repayments of EDC loan                                      (1,200,000)     (1,200,000)
     Proceeds from issuance of common stock                       1,699,520              --
                                                                -----------     -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                         2,724,520       7,250,000
                                                                -----------     -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS                           293,118          54,342
Cash and cash equivalents, beginning of year                        241,110         186,768
                                                                -----------     -----------
CASH AND CASH EQUIVALENTS, END OF YEAR                          $   534,228     $   241,110
                                                                ===========     ===========
</Table>



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


                                      F-6
<PAGE>


                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS


1.       ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Organization and Nature of Business

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

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

         The Corporation and a Mumbai, India based specialty pharmaceutical
         manufacturing company, Sun Pharmaceutical Industries, Ltd. ("Sun
         Pharma") completed an agreement, in 1997, whereby Sun Pharma invested
         $7,500,000 into the common stock of the Corporation, and was required
         to transfer to the Corporation the technology formula for 25 generic
         pharmaceutical products over a period of five years through August 2002
         in exchange for 544,000 shares of Caraco common stock to be issued for
         each ANDA product and 181,333 shares for each DESI (Drug Efficacy Study
         Implementation) product. As of December 31, 2002, Sun Pharma has
         delivered to Caraco the formula for 13 products and beneficially owns
         approximately 49% of the outstanding common stock of the Corporation.
         In November 2002, a subsidiary of Sun Pharma agreed to transfer to the
         Corporation a technology formula for 25 generic pharmaceutical products
         over a period of five years through November 2007 in exchange for
         544,000 shares of a new convertible preferred stock for each formula
         received (Note 7). In addition to Sun Pharma's equity holdings, the
         product and technology transfers which include various research and
         development activities conducted on an ongoing basis by Sun Pharma,
         loans made directly to and loans guaranteed on behalf of Caraco (see
         Note 5), Sun Pharma has also supplied Caraco with certain raw materials
         and equipment (see Note 4) and transferred to Detroit a number of
         qualified technical and management professionals having pharmaceutical
         experience. Furthermore, five of the eight Caraco directors are or were
         affiliated with Sun Pharma. Caraco is substantially dependent on the
         active involvement and support of Sun Pharma.

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


                                      F-7
<PAGE>


                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS


         Operations

         For the first time since inception, during the second, third and fourth
         quarters of 2002, the Corporation has achieved sales necessary to
         support operations. During 2002, the Corporation's results did improve
         such that its loss from operations decreased from approximately
         $4,000,000 in 2001 to approximately $730,000 in 2002. The Corporation's
         net loss also decreased from approximately $5,750,000 in 2001 to
         approximately $2,250,000 in 2002. The net loss in 2002 includes
         approximately $3.9 million of research and development costs related to
         technology transfers from Sun Pharma Global in exchange for common
         stock of Caraco. There were no such technology transfers in 2001. In
         addition, cash used by operations decreased from approximately
         $7,100,000 in 2001 to approximately $840,000 in 2002. While management
         views these results as positive developments, the Corporation must
         still overcome its stockholders' deficit, which is $19,623,290 as of
         December 31, 2002. Realization of a major portion of its assets is thus
         dependent upon the Corporation's ability to meet its future financing
         requirements and the success of future operations. Management believes
         that continued improvement in profitability and cash flow, along with
         sustained financial and operating support from Sun Pharma, are key
         factors in the Corporation's ability to continue to operate in the
         normal course of business. While management has a basis to reasonably
         believe that Sun Pharma's substantial investment in Caraco provides Sun
         Pharma with sufficient economic incentive to continue to assist Caraco
         in developing its business, and Sun Pharma has expressed its intent to
         continue to support Caraco's operations in the near term, as it has
         done in the past, there can be no assurance that such support will, in
         fact, continue for a period of time sufficient to ensure Caraco's
         ultimate business success. For example, Sun Pharma, which is subject to
         the prevailing regulatory process in India, may be constrained from
         fully pursuing its business interest outside of India. The accompanying
         financial statements do not include any adjustments relating to the
         recoverability and classification of asset carrying amounts or the
         amount of liabilities that might be necessary should the Corporation be
         unable to continue operating in the normal course of business.

         Management's  plans with regard to improving profitability, cash flows
         and operations include infusion of additional funding from new
         investors pursuant to equity offerings planned to be carried out during
         the first half of 2003. Management's plans also include for 2003:

         o        Continued focus on FDA compliance.

         o        Continued research and development activities.

         o        Increased market share for certain existing products and
                  recently introduced new products and enhance customer reach
                  and satisfaction.

         o        Prompt introduction of newly approved products to the market.

         o        Striving to capture larger market share for existing products.

         o        Achieving operational efficiencies by attaining economies of
                  scale, cost reduction per unit, and obtaining additional cost
                  reductions for active raw materials acquired from competitors
                  and/or Sun Pharma.

         o        Increase the width and depth of product portfolio to serve the
                  customers effectively.


                                      F-8
<PAGE>

                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS

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

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

         o        Prompt restructuring of the EDC loan.

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


         Use of Estimates

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities and disclosure of contingent assets and liabilities at the
         date of the financial statements and the reported amounts of revenues
         and expenses during the reporting period. Actual results could differ
         from those estimates. Significant estimates include, but are not
         limited to, valuation allowances for accounts receivable and the
         recoverability of the Corporation's property, plant and equipment.

         Cash and Cash Equivalents

         The Corporation considers all highly liquid debt instruments purchased
         with original maturities of three months or less to be cash
         equivalents. The Corporation from time to time may have cash balances
         which exceed federally insured limits.

         Revenue Recognition

         The Corporation recognizes revenue at the time its products are shipped
         to its customers as, at that time, the risk of loss or physical damage
         to the product passes to the customer, and the obligations of customers
         to pay for the products are not dependent on the resale of the product
         or the Corporation's assistance in such resale. Customers are permitted
         to return unused product in, certain instances, after approval from the
         Corporation upon the expiration date of the product's lot. Amounts
         billed by the Corporation, if any, in advance of performance with
         contracts to render certain manufacturing or research and development
         services are deferred and then recognized upon performance of those
         services.

         Provisions for estimated returns, discounts, rebates and other price
         adjustments including chargebacks can be reasonably determined in the
         normal course of business based on historical results. A significant
         portion of the current allowance has been reserved for expected
         chargebacks. Chargebacks are price adjustments given to wholesale
         customers for product it resells to parties with whom the Corporation
         has established contractual pricing. The chargeback represents the
         difference between the sales price to the wholesaler and the contracted
         price. Approximately 96% of the current allowance for trade receivables
         has been reserved for estimated chargebacks.


                                      F-9
<PAGE>

                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS

         Accounts Receivable

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

         Inventories

         Inventories are stated at the lower of cost determined by the first in,
         first-out method, or market.

         Loss Per Share

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

         At December 31, 2002 and 2001, options to purchase 310,000 and
         2,705,199 shares, respectively, were excluded from the computation of
         loss per share because the options' exercise prices were greater than
         the average market price of the common shares.

         The following table sets forth the computation of basic and diluted
         loss per common share.

<Table>
<Caption>
                                                             2002           2001
                                                         -----------    -----------
<S>                                                      <C>            <C>
         Numerator:

           Loss from continuing operations               $ 2,256,004    $ 5,757,463
                                                         -----------    -----------

           Preferred stock dividends                          50,380        300,000
                                                         -----------    -----------

                                                           2,306,384      6,057,463
           Loss available for common stockholder
                                                         -----------    -----------

         Denominator:

           Weighted average shares outstanding, basic
              and diluted                                 22,031,425     21,173,522
                                                         -----------    -----------

           Loss per basic and diluted common share       $       .10    $       .29
                                                         ===========    ===========
</Table>

         Property, Plant and Equipment and Depreciation

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


                                      F-10
<PAGE>

                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS

         Federal Income Taxes

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

         Research and Development Costs

         Research and development costs are charged to expense as incurred.

         Fair Values of Financial Instruments

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

         The Corporation does not believe it is practicable to estimate the fair
         value of its note payable to the Economic Development Corporation of
         the City of Detroit. Management does not believe that comparable
         financing would currently be available on similar terms.

         Common Stock Issued to Directors

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

         Common Stock Issued to Sun Pharma

         Common stock is issued from time to time to Sun Pharma and its
         affiliates in exchange for the formula for products delivered by Sun
         Pharma to the Corporation. Research and development costs are recorded
         based on the fair value of the shares on the date the respective
         product formula has passed the bioequivalency study.

         Recent Accounting Pronouncements

         In June 2001, the Financial Accounting Standards Board ("FASB") also
         issued Statement No. 142 "Goodwill and Other Intangible Assets" which
         was effective generally beginning January 1, 2002. Statement 142
         requires that goodwill and intangible assets with indefinite useful
         lives no longer be amortized but, instead, tested for impairment at
         least annually in accordance with the provisions of Statement 142. The
         Company has no goodwill and, accordingly, adoption of the new standard
         did not impact the Company's financial statements.


                                      F-11
<PAGE>

                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS

         In June 2001, the FASB issued Statement No. 143 "Accounting for Asset
         Retirement Obligations." Statement 143 requires entities to record the
         fair value of a liability for an asset retirement obligation in the
         period in which it is incurred. When the liability is initially
         recorded, the entity capitalizes the cost by increasing the carrying
         amount of the related long-lived asset. Over time, the liability is
         accreted to its present value each period and the capitalized cost is
         depreciated over the remaining useful life of the related asset. Upon
         settlement of the liability, the entity either settles the obligation
         for the amount recorded or incurs a gain or loss. Statement 143 is
         effective for fiscal years beginning after June 15, 2002. Adoption of
         this statement is not expected to impact the Company's results of
         operations or financial position.

         In August 2001, the FASB issued Statement No. 144 "Accounting for the
         Impairment or Disposal of Long-Lived Assets," effective prospectively
         for fiscal years beginning after December 15, 2001. Statement 144
         supersedes Statement No. 121 "Accounting for the Impairment of
         Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
         accounting and reporting provisions of APB No. 30 "Reporting the
         Results of Operations - Reporting the Effects of Disposal of a Segment
         of a Business, and Extraordinary, Unusual and Infrequently Occurring
         Events and Transactions ("Opinion 30") for the disposal of a segment of
         business (as previously defined under Opinion 30). The FASB issued
         Statement No. 144 to establish a single accounting model for long-lived
         assets to be disposed of by sale. Statement 144 broadens the
         presentation of discontinued operations in the income statement to
         include a component of an entity (rather than a segment of a business).
         A component of an entity comprises operations and cash flows that can
         be clearly distinguished, operationally and for financial reporting
         purposes, from the rest of an entity. Statement 144 also requires that
         discontinued operations be measured at the lower of the carrying amount
         or fair value less cost to sell, rather than net realizable value. The
         Company does no believe Statement No. 144 will have a material impact
         on its financial position or results of operations.

         In December 2002, the FASB issued Statement 148, "Accounting for
         Stock-Based Compensation - Transition and Disclosure - an amendment of
         Statement No. 123", which is effective for years beginning after
         December 15, 2002. This statement amends Statement No. 123, "Accounting
         for Stock-Based Compensation", to provide alternative methods of
         transition for a voluntary change to the fair value based method of
         accounting for stock-based employee compensation. In addition, this
         statement amends the disclosure requirements of Statement No. 123 to
         require prominent disclosures in both annual and interim financial
         statements about the method of accounting for stock based employee
         compensation and the effect of the method used on reported results. The
         Company does not currently plan to voluntarily adopt this statement and
         accordingly, the provisions will not have a material impact on its
         financial position or results of operations.


                                      F-12
<PAGE>

                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS


2.       SUPPLEMENTAL CASH FLOWS INFORMATION

         Other Cash Flows Information

         Cash paid for interest during 2002 and 2001 was approximately
         $1,820,000 and $1,044,000, respectively.


3.       ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE

         The Corporation sells its products using customary trade terms; the
         resulting accounts receivable are unsecured. Accounts receivable and
         related allowances are summarized as follows as of December 31:

<Table>
<Caption>
                                                       2002           2001
                                                   -----------    -----------
<S>                                                <C>            <C>
         Accounts receivable                       $14,774,382    $ 1,886,508
                                                   -----------    -----------
         Allowances:
           Chargebacks (Note 1)                      8,972,247        283,000
           Sales returns and allowances                223,000         42,000
           Doubtful accounts                            95,000         75,000
                                                   -----------    -----------
         Total allowances                            9,290,247        400,000
                                                   -----------    -----------
         Accounts receivable, net of allowances    $ 5,484,135    $ 1,486,508
                                                   ===========    ===========
</Table>

4.       INVENTORIES

         Inventories consist of the following amounts at December 31:

<Table>
<Caption>
                                2002          2001
                             ----------    ----------
<S>                          <C>           <C>
         Raw materials       $3,117,293    $1,810,364
         Goods in transit       801,043       144,716
         Work in process      1,153,913       719,729
         Finished goods         543,713       234,246
                             ----------    ----------
         Total               $5,615,962    $2,909,055
                             ==========    ==========
</Table>

         The principal components used in the Corporation's business are active
         and inactive pharmaceutical ingredients and certain packaging
         materials. Many of these components are available only from sole source
         suppliers, most of whom must be FDA approved. Qualification of a new
         supplier could serve to delay the manufacture of the drug involved.

         During 2002 and 2001, the Corporation purchased raw materials of
         approximately $2,422,000 and $1,138,000, respectively, from Sun Pharma.


                                      F-13
<PAGE>


                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS


         The Corporation also purchased approximately $-0- and $148,785 of raw
         materials from an entity owned by a shareholder during 2002 and 2001,
         respectively.


5.       DEBT (INCLUDING RELATED PARTIES)

         EDC Loan

         Debt at December 31, 2002 includes a note payable to the Economic
         Development Corporation (EDC) of the City of Detroit (classified as a
         current obligation of $7,602,547 at December 31, 2002), plus accrued
         interest there on, related to funds advanced to the Corporation
         pursuant to a Development and Loan Agreement (the "Agreement") dated
         August 10, 1990, as amended. The note is collateralized by a first
         mortgage, effectively, on all of the Corporation's property and
         equipment purchased pursuant to the Agreement.

         Effective April 2, 1993, and subsequently on August 5, 1997, the
         Corporation and the EDC of the City of Detroit restructured the
         Agreement discussed above. The amendment included the deferral of
         scheduled principal and interest payments until February 1, 1999, at
         which time additional deferred principal and interest due under the
         terms of the original agreement were required in amounts sufficient to
         amortize the total deferred amount through July 2002. Additionally the
         amendment included a reduction in the stipulated interest rate from the
         inception of the loan through 1993 from 10% to 8.5%. The interest rates
         from 1994 through July 2002 vary from 5% to 6.4%, as described in the
         amendments (effective rate of 6.31% at December 31, 2001).

         As a condition of the deferral, the EDC was provided additional
         security on all the Corporation's existing equipment and the
         Corporation agreed to comply with several additional financial and
         operating covenants which include, limiting capital expenditures made
         without the consent of the EDC to under $2,000,000 during the deferral
         period, and abstaining from share redemption during the payment
         deferral period.

         During both 2002 and 2001, the Corporation made payments of $1,200,000.
         Such payments have not brought the Corporation current in its
         obligations to the EDC, and such payments were made without prejudice
         to the rights of the EDC to exercise all remedies available to the EDC
         for failure to make the scheduled payments. While the terms of the
         restructured loan are being negotiated, the Corporation intends to
         continue to make payments to the EDC, again without prejudice to the
         rights of the EDC. Upon a final agreement of the restructured terms of
         the loan, the Corporation expects to then commence making the requisite
         agreed upon payments, which management believes has been agreed upon in
         principle.

         The Corporation had submitted a proposal in April 2002 to the EDC to
         restructure the loan. Based on a resolution passed at a meeting of the
         Board of Directors of the EDC on September 25, 2002 and further
         extended at a meeting on March 19, 2003, the EDC approved a six year
         extension of the loan of approximately $7.8 million, with interest
         rates starting at 2.75% and increasing to 5.16% commencing effective
         January 1, 2003. Under the approval, the EDC would retain a first
         mortgage on the property, and a first lien on furniture, fixtures and
         equipment and intellectual property. The EDC resolution will not become
         effective until a definitive agreement incorporating the above terms
         has been agreed to by the parties. Subsequent to the close of the year,
         the Corporation has received drafts of the agreement from the EDC,
         which is pending final approval. Management believes that the
         Corporation has the intent and ability to finalize this agreement and,
         accordingly, the EDC debt has been classified on the accompanying
         December 31, 2002 balance sheet according to the payment terms approved
         by the resolution.


                                      F-14
<PAGE>


                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS


        Loans Payable

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

<Table>
<Caption>
                                                                             2002         2001
                                                                         -----------   -----------
<S>                                                                      <C>           <C>
        Term loan payable to ICICI Bank of India, with
        quarterly principal payments of $625,000 commencing
        on December 31, 2003 and ending on September 30,
        2005. Interest is adjusted semi-annually and is
        charged at the LIBOR rate plus 140 basis points
        (effective rate of 2.8% at December 31, 2002), and is
        due in quarterly installments.                                   $ 5,000,000   $ 5,000,000

        $12.5 million term loan payable to Bank of Nova
        Scotia, with semi-annual principal payments of
        $3,125,000 commencing in February 2004 and ending in
        August 2005. Interest is charged at the LIBOR rate
        plus 30 basis points (effective rate of 1.7% at
        December 31, 2002), and is due in quarterly installments.
        An additional annual fee of $15,000 is charged.                   10,900,000    10,000,000
                                                                         -----------   -----------
                  Total loans payable                                    $15,900,000   $15,000,000
                                                                         ===========   ===========
</Table>

         At December 31, 2002, $10,900,000 has been drawn on the Bank of Nova
         Scotia term loan. Additional amounts available to be drawn must be
         drawn prior to March 25, 2003, at which time no further draws are
         permitted. Principal prepayments are not permitted until August of
         2003.

         The Corporation incurred approximately $62,500 in bank fees as
         stipulated in the Bank of Nova Scotia term loan during both 2002 and
         2001. The repayment of these term loans is guaranteed by Sun Pharma.

         Stockholder Notes Payable

         Stockholder notes payable consist of the following obligations as of
         December 31:

<Table>
<Caption>
                                                                        2002           2001
                                                                     ----------     ----------
<S>                                                                  <C>            <C>
        Promissory note payable to Sun Pharma with the
        entire principal balance due in October 2003.
        Interest is charged at 8% per annum and is payable
        in semi-annual installments.                                 $5,300,000     $5,300,000

        Promissory note payable to Sun Pharma with the
        entire principal balance due in August 2006.
        Interest is charged at 8% per annum and is
        payable in semi-annual installments.                          3,850,000      2,450,000

        Promissory note payable to Sun Pharma Global, Inc.,
        a wholly-owned subsidiary of Sun Pharma, with the
        entire principal balance due in October 2003. Interest
        is charged at 8% per annum and is payable in
        semi-annual installments.                                       550,000        550,000
                                                                     ----------     ----------
                  Total shareholder notes payable                    $9,700,000     $8,300,000
                                                                     ==========     ==========
</Table>


                                      F-15
<PAGE>

                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS

         Notes payable to Sun Pharma and Sun Pharma Global, Inc. are
         subordinated to the EDC loan.

         Interest incurred on these stockholder notes amounted to $765,337 and
         $528,608 in 2002 and 2001, respectively. Accrued expenses include
         approximately $393,545 and $630,000 of accrued interest payable on
         stockholder notes at December 31, 2002 and 2001, respectively.

         Scheduled maturities of all long-term debt for each of the years
         succeeding December 31, 2002 are summarized as follows:

<Table>
<Caption>
              Year ended
              December 31                        Amount
              -----------                     -----------
<S>                                           <C>
                 2003                         $ 7,479,000
                 2004                           9,955,000
                 2005                           7,740,000
                 2006                           5,095,000
                 2007                           1,292,000
                 Thereafter                     1,641,547
                                              -----------
                 Total                        $33,202,547
                                              ===========
</Table>


6.       INCOME TAXES

         At December 31, 2002 a deferred income tax asset and related valuation
         allowance, attributable primarily to the net operating loss
         carryforwards (calculated using a 34% tax rate) of approximately
         $18,100,000 has been established. Changes in the valuation allowance
         were approximately $770,000 and $1,930,000 in 2002 and 2001,
         respectively

         At December 31, 2002, net operating loss carryforwards of approximately
         $53,000,000 are available to offset future federal taxable income, if
         any. Certain of the net operating losses begin to expire in 2007. The
         Corporation's ability to utilize the net operating loss carryforwards
         may be limited due to ownership changes.


7.       STOCKHOLDERS' DEFICIT

         Other Common Stock Issuances (also see Note 2)

         During 2002, the Corporation issued 1,632,000 shares of common stock to
         an affiliate of Sun Pharma in exchange for the formula for three ANDA
         products delivered to Caraco. The issuance of such shares have been
         recorded as research and development expense, based on the fair value
         of the respective shares on the date earned, which totaled $3,887,423
         in 2002. These shares have also been included in the calculation of the
         weighted average number of common shares outstanding in the year the
         respective formula was delivered.


                                      F-16
<PAGE>

                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS


         During 2002, 285,714 shares of preferred stock were converted into
         285,714 shares of common stock. The Corporation recorded additional
         paid-in capital of $287,888 for the differences between the fair value
         of the common stock on the conversion date and the per share value of
         the preferred stock.

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

         During 2002 and 2001, the Corporation issued 36,000 and 1,200 shares,
         respectively, of common stock to non-employee directors in exchange for
         services rendered. The Corporation recorded compensation expense of
         $41,400 and $450, respectively, based on the fair values of such shares
         on the dates they were earned.

         Common Stock

         During 2002, the Corporation's Board of Directors approved the
         authorization of an additional 20,000,000 shares of common stock, which
         would be formally authorized upon the approval by the shareholders of
         the Corporation.

         Preferred Stock

         The Corporation has authorized 5,000,000 shares of preferred stock
         which are issuable in series with the terms and amounts set at the
         Board of Directors discretion. During 2002, the Corporation's Board of
         Directors authorized an additional 10,000,000 shares of preferred
         stock, which would be formally authorized upon the approval of the
         shareholders of the Corporation.

         Each share of Series A Preferred Stock is nonvoting and was
         convertible, at the option of the holder, into one share of common
         stock. The preferred shares required annual dividends of $0.21 per
         share on a cumulative basis. Accrued dividends on preferred stock at
         December 31, 2002 and 2001 were $350,380 and $300,000, respectively. It
         is expected that such dividends will be paid in 2003 and, accordingly,
         the related liability is classified as a current obligation on the
         accompanying balance sheet.

         In November 2002, in connection with the technology transfer agreement
         with a subsidiary of Sun Pharma (Note 1), the Corporation created a new
         series of preferred stock designated as the Series B Convertible
         Preferred Stock, consisting of 13,600,000 shares of no par
         nonredeemable preferred stock. The Series B Preferred Stock, which has
         no voting or dividend rights or liquidation preference other than
         priority liquidation based on their face value, can be converted after
         3 years from the issuance date into one share of common stock, subject
         to a conversion adjustment in the event common stock equivalents are
         issued by the Corporation in certain circumstances. Formal
         authorization of these shares are pending final shareholder approval.


                                      F-17
<PAGE>

                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS

8.       COMMON STOCK OPTIONS

         Stock Option Plans

         The Corporation maintains the 1999 Plan and the 1993 Stock Option Plan
         in which the Corporation may grant options to employees and
         non-employee-directors for the purchase of up to 3,450,000 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 vest in annual installments, from the date of
         grant, over a five year period, and expire within six years from the
         date of the grant. Activity with respect to these options is summarized
         as follows:

<Table>
<Caption>
                                                      2002                    2003
                                             ---------------------  ---------------------
                                                         Weighted                Weighted
                                                         Average                 Average
                                                         Exercise                Exercise
                                             Shares       Price      Shares       Price
                                             -------     ---------  --------     --------
<S>                                          <C>         <C>        <C>         <C>
         Outstanding, beginning of year       679,375     $ 1.03     428,331     $   1.51

         Granted                                   --        --      343,000         0.96

         Terminated                           (14,000)      1.74     (91,956)       (3.31)
                                             --------     ------    --------     --------
         Outstanding, end of year             665,375     $ 1.01     679,375     $   1.03
                                             ========     ======    ========     ========

         Options exercisable, end of year     288,075     $ 1.04     168,200     $   1.13
                                             ========     ======    ========     ========
</Table>

         Options at December 31, 2002:

<Table>
<Caption>
                                   Options Outstanding           Options Exercisable
                             --------------------------------    -------------------
                                      Remaining
                                      Contractual   Exercise               Exercise
Range of Exercise Prices    Shares      Life *       Price *     Shares    Price *
------------------------    -------   -----------   ---------    ------    --------
<S>                         <C>       <C>            <C>         <C>       <C>
     $0.68 to $1.00         334,375    3.4 years      $0.84      137,075    $ 0.89
     $1.01 to $2.00         331,000    3.4 years       1.19      151,000      1.17
                            -------    ---------      -----      -------    ------
Total                       665,375    3.4 years      $1.01      288,075    $ 1.04
                            =======    =========      =====      =======    ======
</Table>

                      *Weighted average

         Other Common Stock Option Agreements

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

<Table>
<Caption>
                                                       2002                        2003
                                             ------------------------    -------------------------
                                                            Weighted                     Weighted
                                                            Average                      Average
                                                            Exercise                     Exercise
                                               Shares        Price         Shares          Price
                                             ----------    ----------    ----------     ----------
<S>                                           <C>          <C>            <C>           <C>
         Outstanding, beginning of year       2,250,824    $     2.00     2,300,824     $     2.01
         Granted                                     --            --            --             --
         Terminated                                  --            --       (50,000)          3.50
                                             ----------    ----------    ----------     ----------
         Outstanding, end of year             2,250,824    $     2.00     2,250,824     $     2.10
                                             ==========    ==========    ==========     ==========
         Options exercisable, end of year     2,250,824    $     2.00     2,250,824     $     2.00
                                             ==========    ==========    ==========     ==========
</Table>


                                      F-18
<PAGE>

                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS



         Options at December 31, 2002:

<Table>
<Caption>
                                          Options Outstanding            Options Exercisable
                                  ----------------------------------    ---------------------
                                               Remaining
                                              Contractual   Exercise                Exercise
Range of Exercise Prices          Shares        Life *       Price *     Shares      Price *
------------------------         ---------    -----------   --------     ------     --------
<S>                              <C>          <C>           <C>         <C>         <C>
    $0.66 to $1.00                 250,000     1.9 years    $   0.75      250,000   $   0.75
    $1.01 to $2.00               1,024,158     2.9 years        1.45    1,024,158       1.45
    $2.01 to $3.00                 666,666     3.3 years        2.63      666,666       2.63
    $3.01 to $4.00                 310,000     1.4 years        3.50      310,000       3.50
                                 ---------    ----------    --------    ---------   --------
Total                            2,250,824     2.7 years    $   2.00    2,250,824   $   2.00
                                 =========     =========    ========    =========   ========
</Table>

          *Weighted average

         The Corporation follows the disclosure aspects of Statement of
         Financial Accounting Standards (SFAS) No. 123, "Accounting for
         Stock-Based Compensation". The Corporation continues to apply
         Accounting Principles Board (APB) Opinion No. 25 in accounting for its
         plans and, accordingly, no compensation cost has generally been
         recognized in the financial statements for its outstanding stock
         options. Had stock compensation expense been determined pursuant to the
         methodology provided in SFAS No. 123, using the Black-Scholes option
         pricing model, the following weighted average assumptions for grants in
         2001 would have been employed: expected volatility of 104%, risk free
         interest rate of 1.7%, and expected lives of 6 years. The proforma
         effect on operations would have been an increase in the 2001 net loss
         of approximately $265,000, or $0.01 per common share. The weighted
         average fair value of the options granted in 2001 was $0.77 per share.
         No options were granted during 2002.

         In December 2001, the Board of Directors extended the exercise date to
         December 31, 2005 with respect to options for 224,158 shares of Caraco
         common stock previously granted to an independent director. The
         modification has resulted in the options being treated as variable
         rather than fixed in accordance with Financial Accounting Standards
         Board Interpretation 44 (FIN 44). Variable compensation expense of
         $262,265 has been recorded during 2002 for the difference between the
         fair value of the underlying common stock and the exercise price of the
         respective options. No corresponding compensation expense was
         appropriate in 2001.

         Strategic Alliance Stock Option Arrangement

         Pursuant to an agreement between the Corporation and Hexal-Pharma BmbH
         & Co., KG, a German pharmaceutical company and its United States
         affiliate (together, "Hexal") dated October 1, 1993, Hexal agreed to
         convey to the Corporation the formulations, technology, manufacturing
         processes and know-how, and other relevant information, and to pay for
         the bioequivalency studies required for the preparation of ANDAs for
         each of two specified generic drugs (the "Product"). The Corporation
         agreed to pay Hexal royalties on the yearly sales of each Product (see
         below). The Corporation filed an ANDA in March 1995 with respect to
         Metoprolol Tartrate, received approval from the FDA in December 1996
         and introduced it in 1997. (Metoprolol Tartrate is one of our 13
         current products. See "Caraco's Products and Product Strategy".) Hexal
         has decided not to proceed with the development of the second Product.

         Pursuant to the agreement, the Corporation has, for each Product (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


                                      F-19
<PAGE>


                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS


         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 payable to Hexal
         for sales of the related product. No options have yet been exercised.
         Royalties payable to Hexal, which are included in accrued expenses,
         amount to $801,144 and $296,715 at December 31, 2002 and 2001,
         respectively. The Corporation has recently learned that the formula
         provided to them by Hexal, with respect to Metoprolol Tartrate, may be
         different than the formula currently used for manufacturing by the
         Corporation. The Corporation is investigating further whether they
         should continue to accrue the related royalties based on these formula
         differences.


9.       LEASES

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

         The Corporation entered into a noncancelable operating lease with an
         unrelated party during 2002 to lease an additional warehouse. The lease
         requires monthly payments of $8,750 and expires in November 2005.

         Net rental expense on these operating leases was $51,460 and $33,960 in
         2002 and 2001, respectively.

         The following is a schedule of annual future minimum lease payments
         required under the operating leases with remaining noncancelable lease
         terms in excess of one year as of December 31, 2002:

<Table>
<Caption>
                   Year                             Amount
                   ----                            --------
<S>                                                <C>
                   2003                            $138,960
                   2004                             138,960
                   2005                             108,985
                                                   --------
                   Total minimum payments due      $386,905
                                                   ========
</Table>

         The Corporation also paid Sun Pharma approximately $310,000 during 2002
         for the purchase of various parts needed to operate production
         machinery.

10.      RETIREMENT PLAN

         The Corporation established in 2001 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. No discretionary
         contributions were made by the Corporation during either 2002 or 2001.


                                      F-20
<PAGE>


                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS

11.      SALES AND CUSTOMERS

         Major Customer

         Shipments to one wholesale customer accounted for approximately 65% and
         35% of net sales in 2002 and 2001, respectively. Balances due from this
         customer represented approximately 80% and 40% of accounts receivable
         at December 31, 2002 and 2001, respectively.

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

         Sales Commitment

         The Corporation entered into an agreement with an unrelated party in
         June of 2002 to ship approximately $13,000,000 of product to the
         customer over a one year base contract period. The agreement provides
         for certain penalty provisions if the Corporation is unable to meet its
         sales commitment and additionally provides for four one year option
         periods.

         Other

         Net sales in 2002 and 2001 included approximately $850,000 and $250,000
         related to contracted manufacturing activities.


12.      OTHER MATTERS

         Employment Contracts

         The Corporation has employment agreements with three of its executive
         officers which provide for fixed annual salaries and a six month
         continuance including insurance benefits and immediate stock options
         vesting upon termination without cause. The agreement with one of the
         executives also provides for six-month salary and benefits continuance
         in the event of a change in ownership control of the Corporation and a
         significant change in employment duties.

         Litigation

         The Corporation is involved in routine litigation incidental to its
         business. The Corporation is defending its interests and is contesting
         the claims against it. Management believes the ultimate disposition of
         these matters will not have a material adverse effect on the financial
         statements.

         Product Liability and Insurance

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


                                      F-21
<PAGE>

                     CARACO PHARMACEUTICAL LABORATORIES LTD.

                          NOTES TO FINANCIAL STATEMENTS


13.      RESTATEMENT

         In 2002, the Corporation recorded a prior period adjustment to restate
         common stock and the accumulated deficit as of January 1, 2001 in
         connection with the valuation of its common shares issued to Sun Pharma
         in exchange for product technology transfers received through that
         date. The restatement, which served to increase the accumulated deficit
         and capital previously reported at that date by $1,155,492, had no
         effect on operating results in 2002 or 2001.


                                    * * * * *

                                      F-22
<PAGE>


                                  EXHIBIT INDEX

<Table>
<S>      <C>
3.04     Certificate of Determination of Rights, Privileges and Preferences
         Series B Preferred Stock.

3.07     Amendment to Amended and Restated Bylaws.

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

10.24    Sales contract with government vendor.

24.1     Power of Attorney (on signature page).

99.1     Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
         to Section 906 of the Sarbanes-Oxley Act of 2002
</Table>