<PAGE>   1
                             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, 1997

                  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(b) OF THE EXCHANGE ACT:

                           Common Stock, No Par Value
                        Warrants to purchase Common Stock
                                (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:  $871,573

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.

                                   $10,974,505
            (BASED UPON THE AVERAGE BID-ASK PRICE OF THE REGISTRANT'S
           COMMON SHARES ON THE OTC BULLETIN BOARD ON MARCH 20, 1998)
<PAGE>   2

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 20, 1998, THERE WERE
                      13,507,083 COMMON SHARES OUTSTANDING

DOCUMENTS INCORPORATED BY REFERENCE:

         Portions of the 1998 definitive Proxy Statement, in connection with the
1998 Annual Meeting of Stockholders are incorporated by reference into Part III.



                                       2
<PAGE>   3



                    CARACO PHARMACEUTICAL LABORATORIES, LTD.
                           FORM 10-KSB

                                PART I


ITEM 1. DESCRIPTION OF BUSINESS.

         Caraco Pharmaceutical Laboratories, Ltd. ("Caraco" or the
"Corporation") is a corporation organized under Michigan law in 1984, to engage
in the business of developing, manufacturing and marketing generic drugs for the
ethical (prescription) and over-the-counter (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 a discount to the branded product's price and for their
equivalence in quality and bioavailability.

         Up to 1996, a significant source of funding for the Corporation has
been from private placement offerings and from the Economic Development
Corporation of the City of Detroit (the "EDC"), which, pursuant to Section 108
of the Housing and Community Development Act of 1974, loaned approximately $9.1
million to the Corporation in accordance with a Development and Loan agreement
dated August 10, 1990 (the "EDC Agreement"), and amended August 5, 1997 (the
"Amended EDC Agreement") (See "EDC Financing" below). In 1997, the Corporation
and an Indian specialty pharmaceutical company, Sun Pharmaceutical Industries
Ltd. ("Sun Pharma") completed an agreement whereby in exchange for 5,300,000
shares of Caraco common stock Sun Pharma agreed to invest $7.5 million into the
Corporation over a period of approximately two years in four installments. Sun
Pharma will also provide the Corporation with products in exchange for shares of
Common Stock. (See "Sun Pharmaceutical Industries Ltd." below.)

CURRENT STATUS OF CORPORATION

         The Corporation continues to sustain substantial operating losses, and
its ability to continue as a going concern is dependent on raising additional
funds and achieving profitable operations (See "Item 6. Management's Discussion
and Analysis of Financial Condition and Results of Operations.") Debt at
December 31, 1997 consists of a note payable to the EDC in the amount of
$8,880,000 related to funds advanced to the Corporation pursuant to the EDC
Agreement. The Amended EDC Agreement included deferral of scheduled principal
and interest payments for the period April 1996 to January 1999 until February
1999 to aid the Corporation in achieving adequate cash flows to assure Caraco's
ability to fund its current operations and continue to develop products. (See
"EDC Financing" below.) On August 20, 1997, the Corporation and Sun Pharma
completed an agreement as noted above. Sun Pharma has, as of March 19, 1998,
remitted $5 million and it is anticipated that the balance will be invested in
the next year. Caraco is currently focusing its efforts on developing additional
products, strengthening its current relationships and developing new alliances
with industry partners in order to increase usage of its underutilized plant
capacity and increase revenues. Caraco intends to seek adequate financing to
fund the foregoing objectives and current operations.


                                       3
<PAGE>   4

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 Abbreviated New
Drug Applications (ANDAs) procedures for obtaining Food and Drug Administration
("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

         Caraco's present product portfolio includes eight products in 11
strengths in 24 package sizes. In 1997, the Corporation introduced Metoprolol
Tartrate (See "Hexal-Pharma GmbH & Co., Kg" below) and Paromomycin into its
product line. The Corporation developed an ANDA product, Selegeline HCL, for
Apotex, Inc. (See "Apotex, Inc." below) which was approved by the FDA in June,
1997. The Corporation is currently manufacturing the product for Apotex, for
sale under the Apotex label and, with respect to certain customers only, under
the Corporation's label. The Corporation has developed four drug efficacy study
implementation ("DESI") products (two of which have been provided by Sun as
discussed below) which are currently being validated. It is anticipated that
these products will be introduced in the market during the second half of 1998.

         During 1997, Sun Pharma's dedicated development laboratory in Bombay
was actively working on multiple ANDA submissions and the introduction of DESI
products for 1998 in connection with its agreement with the Corporation. (See
"Sun Pharmaceutical Laboratories Ltd." below.) To date, Sun Pharma has
facilitated the transfer of technology to Caraco with respect to four ANDAs and
two DESI products. In addition to these, the Corporation is also expecting to
introduce line extensions and combinations of additional products commencing in
the second half of 1998.

         The Corporation is in the process of negotiating strategic alliances
with three pharmaceutical companies for product development, manufacturing
and/or marketing.

R.P. SCHERER CORPORATION

         The Corporation and R.P. Scherer Corporation entered into a supply
contract, dated March 22, 1990, for the Corporation's purchases of Nifedipine.
Under this agreement, the Corporation purchases this product on commercial terms
in bulk, packages it, and markets it under its own label.  Sales of Nifedipine
have decreased significantly since the third quarter of 1995.  (See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.")

HEXAL-PHARMA GmbH & CO., KG

         The Corporation and Hexal-Pharma GmbH & Co., KG, a German
pharmaceutical company and its United States affiliate (together, "Hexal")
entered into an agreement dated as of October 1, 1993, pursuant to which 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


                                       4
<PAGE>   5


studies required for the preparation of ANDAs for each of two specified generic
drugs (the "Products"). The Corporation undertook to prepare and file an ANDA
for each Product. Hexal will receive royalties on the yearly sales of each
Product. The Corporation filed an ANDA in March 1995, in which it received
approval from the FDA in December 1996. The product, Metoprolol Tartrate, was
introduced in 1997. (See "Caraco's Products and Product Strategy".) The
Corporation is currently discussing with Hexal the advisability of preceding
with the development of the second product.

         In addition, the Corporation has granted to Hexal, for each Product (i)
a Sign-Up Option to purchase 100,000 shares of Common Stock at $3.50 a share;
and (ii) a Product Option to purchase a presently indeterminable number of
shares at an exercise price equivalent to their fair market value (as defined)
when the related ANDA for that Product is filed with the FDA. 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. To date, there have been limited sales of the
Metoprolol Tartrate and provision has been made for the payment of royalties,
but no options have been exercised.

         The Agreement provides that the Corporation will hold all royalties
until receipt of Hexal's written instructions either to pay the royalties in
cash or to apply the royalties held to the exercise of the related options.
While a Sign-Up Option remains unexercised, the Corporation will accrue the
amount of royalties attributable to the related Product. If Hexal shall fail to
deliver to the Corporation, within 36 months after a given year's royalties on
sales of that Product become payable, its written instructions to apply those
funds to the exercise of the related Sign-Up Option, the number of shares
subject to that option shall be reduced by that number of shares which the
accrued royalties paid in cash could have purchased. Thereafter, each year's
royalties for sales of a Product will be held by the Corporation for a maximum
of five years, during which period Hexal may direct that the royalties be paid
to it in cash or applied to the exercise of the related Product Option. Any
royalties paid in cash to Hexal may not thereafter be applied to the exercise of
a Sign-Up or a Product Option.

CLONMEL CHEMICALS CO., LTD. (IRELAND)

         On October 22, 1993, the Corporation entered into an agreement with
Clonmel Chemicals Co., Ltd. ("Clonmel"), pursuant to which Clonmel provided to
the Corporation, with respect to each of two generic pharmaceutical products,
formulations that have been previously tested, the formulation and manufacturing
methods, in process controls, finished product specifications, analytical
methods and stability data required for the Corporation to manufacture its own
bio- batches (sample batches of the product in amounts necessary for testing on
humans) for use in the preparation and filing with the FDA of ANDAs with respect
to these products. Pursuant to the agreement, Caraco must bear all costs of
developing the products and filing the ANDAs and must pay Clonmel $10,000 on
delivery of complete files containing the foregoing data, another $20,000 on
completion of a successful bioequivalency study (which study will be at Caraco's
expense), and a final $20,000 upon receipt of FDA approval of the related ANDA.
Clonmel has granted the Corporation the exclusive right to manufacture and
market these products in the United States, including its territories and Puerto
Rico, and in Canada; and the Corporation has agreed to pay royalties to Clonmel
on net sales (as defined) of these products for five years from the date on
which the




                                       5
<PAGE>   6
marketing of the respective product commences. The formulations were delivered
to the Corporation in 1994 and a bioequivalency study of one of the products was
conducted and an ANDA was filed in January 1997. The second product is not
currently being actively pursued due to changing market conditions and technical
issues. (See "Item 6. Management's Discussion and Analysis or Plan of
Operation.") There can be no assurance that the Corporation will receive FDA
approval of any ANDA which is filed or when FDA approval will be forthcoming;
nor that the Corporation will be able to manufacture and sell either of these
products profitably.

APOTEX, INC.

         In June 1994, the Corporation announced its agreement to develop and
manufacture one or more generic drug products for Apotex U.S.A., the New York
based subsidiary of Apotex, Inc., reportedly the largest wholly-Canadian-owned
pharmaceutical company. The Corporation formulated the first product, Selegeline
HCL in 1995 and an ANDA was filed in March 1996. The ANDA was approved by the
FDA in June, 1997, and the product is currently being marketed by Apotex, and
also, to certain customers only, by Caraco. (See "Caraco's Products and Product
Strategy".)


                                       6
<PAGE>   7



SUN PHARMACEUTICAL INDUSTRIES LTD.

         In 1997, Sun Pharma and the Corporation entered into an agreement
pursuant to which, during a five year period, Sun Pharma shall sell to Caraco
the right to develop, manufacture and sell 25 generic pharmaceutical products,
(provided that any product which is a DESI (drug efficiency study
implementation) product only counts as 1/3 of a product), in exchange for
544,000 shares of Caraco Common Stock for each product (181,333 shares, for each
DESI product).

         In connection therewith Sun Pharma has invested in a dedicated
development laboratory employing 16 scientists (four PhDs, pharmacy graduates,
analytical chemists and regulatory professionals) in Bombay, India, to
facilitate speedy development of new products and smooth technology transfer.
(See also "Caraco's Products and Product Strategy" below.) In addition Sun
Pharma may sell an additional product to the Corporation in exchange for 544,000
shares of Common Stock each time the Corporation issues shares of its Common
Stock to Hexal, (generally one product any time shares are issued to Hexal, but
only one product for each 544,000 shares issued to Hexal Pharma).

EDC FINANCING

         Pursuant to Section 108 of the Housing and Community Development Act of
1974, the EDC loaned approximately $9.1 million to the Corporation in 1990 in
accordance with the EDC Agreement. These funds were used to pay the direct costs
of acquiring land and constructing thereon the Corporation's pharmaceutical
manufacturing facility and executive offices. (See Item 2. "Description of
Property.") In 1993, repayment of this indebtedness was personally guaranteed by
Dr. and Mrs. Curry. (See "Current Status of Corporation", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 4 of Notes to Financial Statements.)

         On August 5, 1997, the Corporation and EDC restructured the
Corporation's loan from the EDC, pursuant to a Second Note and Modification
Agreement (the "Modification Agreement"), in connection with the Corporation's
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, and interest on the current
outstanding indebtedness (approximately $8.9 million) would continue to accrue
during March 1, 1996 through December 1, 1998 ("Deferral Period"). On February
1, 1999, Caraco is 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) accrued 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 Caraco's operating income before federal income
taxes plus depreciation exceeds $500,000.00, on the first day of the six months
succeeding such quarter, the regularly scheduled payment required to be made
shall resume and the Additional Payments shall commence, provided, however, that
the


                                       7
<PAGE>   8

Additional Payments shall 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.

         The Mortgage is a first priority mortgage lien against the property and
may not be subordinated to the lien of any other mortgage or encumbrance except
as otherwise provided in the Modification Agreement. In addition, Caraco has
granted EDC a continuing security interest in all of its assets, accounts,
equipment, proceeds thereof, ANDAs and in the products to be provided by Sun to
Caraco under its agreement with Caraco. See "Sun Pharmaceutical Industries
Limited" above. In addition to other covenants, Caraco has agreed that during
the Deferral Period, its capital expenditures will not exceed $2 million without
the consent of the EDC and it will not redeem any of its outstanding shares, pay
any dividends with respect to its outstanding common shares during the Deferral
Period or merge or consolidate with any other corporation or other entity
without the prior written consent of the EDC.

MARKETING

         The Corporation's marketing objective has been to create a distribution
system by which to obtain access to a wide range of purchasers of generic
pharmaceutical products. Internally, this requires at least a minimum sales
force (see "sales" below); externally, it requires forging relationships, often
contractual in nature, with wholesalers, distributors, governmental agencies,
and buying groups, among others. Management is aware that, despite any success
in creating these distribution links, sales volume will remain low until the
Corporation can offer a broader range of products needed by drug purchasers in
significant amounts. In anticipation of its ability, through strategic alliances
and its own internal product development efforts to broaden its product line, it
has been putting distribution links in place.

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

         The top four drug wholesalers in 1997 accounted for over $40 billion in
sales. Caraco's product line is now represented in the four top drug
wholesalers; McKesson Drug, Bergen Brunswig, Cardinal, and AmeriSource. On
August 7, 1995 the Corporation entered into an agreement with McKesson Drug
Company pursuant to which McKesson is to provide the Corporation with access to
its existing distribution networks. For the year ended December 31, 1997 sales
to McKesson accounted for 24% of gross sales of the Corporation. A gradually
increasing number of additional drug wholesalers now stock some or all of the
Corporation's products, partly as a result of the Corporation's arrangements
discussed below with buying groups.

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


                                       8
<PAGE>   9


Vendor Program, the Department of Defense and by various state agencies.
To date, revenues from these agencies have been insignificant.

         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. The Corporation
intends, as part of its ongoing marketing efforts, to pursue arrangements with
additional wholesalers and to expand its sales network of buying groups,
wholesalers, hospitals and hospital chains, nursing home groups, state and
federal government agencies, and retail pharmacies. As and if the Corporation's
financial resources permit an increase in personnel, these efforts will be
expanded as discussed below.

SALES

         Still a small organization with a relatively small product line, Caraco
has only a small sales organization. At the present time, the Corporation's
sales department consists of four employees. As the product line grows and sales
increase, management intends to increase its sales personnel as its resources
permit. This will enable the Corporation to expand sales coverage to more
generic drug purchasers which, in turn, the Corporation believes, will generate
additional sales volume.

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, the Corporation's FDA-required testing for bioequivalence is done
through independent testing laboratories. Each dosage level of a specific drug
generally requires separate bioequivalence studies, although more than one
dosage level can be included in a single ANDA.

         An outline of research and development expenses for 1997 and 1996
follows (000's):


<TABLE>
<CAPTION>
                                          1997                  1996
              <S>                         <C>                   <C>
              Employee Costs              $  760                $1,243
              Raw Materials/Supplies         146                   421
              Bioequivalency Studies           0                   220
              Laboratory Expenses            404                   263
              Other                          136                    75
                                          ------                 ------
                                          $1,446                 $2,222
                                          ======                 ======
</TABLE>


                                       9
<PAGE>   10

         Significant cost reductions are due to: reduction in personnel costs
and no bioequivalency studies due to unavailability of funds. The increase in
laboratory expenses is attributable to the purchase of tools and external
testing for two ANDA products.

REGULATION

         The research and development, manufacture and marketing of the
Corporation's 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, recordkeeping, 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 all aspects of the Corporation's business. Noncompliance
with applicable requirements can result in fines and other judicially imposed
sanctions, including product seizures, injunction actions and criminal
prosecutions. In addition, administrative remedies can involve voluntary recall
of products, and the total or partial suspension of products as well as the
refusal of the government to approve pending applications or supplements to
approved applications. The FDA also has the authority to withdraw approval of
drugs in accordance with statutory due process procedures.

         FDA approval is required before any dosage form of any new unapproved
drug, including a generic equivalent of a previously approved drug, can be
marketed. All applications for FDA approval must contain information relating to
product formulation, stability, manufacturing processes, packaging, labeling and
quality control. To obtain FDA approval for an unapproved new drug, a
prospective manufacturer must also demonstrate compliance with the FDA's current
good manufacturing practices ("cGMP") regulations as well as provide substantial
evidence of safety and efficacy of the drug product. Compliance with cGMP'S 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. Caraco does 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


                                       10
<PAGE>   11


         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.

         Changes in FDA policy and 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 now averages approximately two
to five years. 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 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 Corporation was subject to two FDA inspections and one Drug
Enforcement Administration ("DEA") inspection in 1996. The first FDA inspection
was a routine inspection for cGMP compliance as well as a pre-approval
inspection for two ANDAs. The second FDA inspection was a pre-approval
inspection for another ANDA. NO FDA 483s were issued as a result of either
inspection and the District recommended approval of the ANDAs. These
recommendations were forwarded to the FDA reviewing staff in Washington, DC.

         The DEA inspection was a routine inspection conducted bi-annually. No
deviations from compliance were noted at the conclusion of this inspection.
Although management believes that the Corporation is in substantial compliance
with the FDA's cGMP's, there can be no assurance that, as the Corporation
endeavors to engage in increasing drug manufacturing activities, it will be able
to maintain a successful compliance program. The evolving and complex nature of
regulatory requirements, the broad authority and discretion of the FDA and the


                                       11
<PAGE>   12



generally high level of regulatory oversight results in a continuing possibility
that from time to time the Corporation will be adversely affected by regulatory
actions despite its ongoing efforts and commitment to achieve and maintain full
compliance with all regulatory requirements. If the Corporation should fail to
maintain full compliance, it may be the target of any of the range of
enforcement remedies available to the government described above.

         Each domestic drug product manufacturing establishment must be
registered with the FDA. Establishments handling controlled substances must be
licensed by the United States Drug Enforcement Administration.

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

         The Corporation believes that it is in substantial compliance with all
environmental laws.

SUPPLIERS AND MATERIALS

         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. Development and
approval of the Corporation's pharmaceuticals are dependent upon the
Corporation's 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. The Corporation has been,
and continues to be, active in identifying and validating alternative suppliers
for its active ingredients. However, the Corporation has no alternative supplier
for the supply of Nifedipine. (See "R.P. Scherer Corporation" above.)

         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 the Corporation 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. The Corporation competes with numerous pharmaceutical
manufacturers, including both generic and brand-name manufacturers, many of
which have been in business for a longer period of time than the Corporation,
have a greater number of products on the market and have considerably greater
financial, technical, research, manufacturing, marketing and other resources.


                                       12
<PAGE>   13

         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. The Corporation believes 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.

EMPLOYEES

         As of December 31, 1997, the Corporation had 32 full-time employees, of
which 3 is in research and development, four in quality assurance, six in
quality control, 2 in administration, 6 in sales and marketing, one in
finance and ten in manufacturing. Most of the Corporation's scientific and
engineering employees have had prior experience with pharmaceutical or medical
products companies. No employee is represented by a union, and the Corporation
has never experienced a work stoppage. (See Management's Discussion & Analysis
for disclosure with respect to personnel cost savings.)

SEC INVESTIGATION

         As previously disclosed, during the year ended December 31, 1994 the
Corporation determined that approximately $514,000 of Corporation funds had been
misappropriated by the Corporation's former controller, a son of the
Corporation's former Chairman of the Board. The Corporation has made filings
about this matter with the Securities and Exchange Commission (the "SEC"). The
Corporation's former Chairman of the Board has reimbursed the $514,000. The SEC
has conducted an investigation into the matter. On November 1, 1996, the
Corporation, through its Washington DC legal counsel, was notified by the SEC
that its Enforcement Division tentatively decided not to recommend that the
Commission authorize an enforcement action against the Corporation however, the
investigation was ongoing. In 1997, the Corporation was notified by the SEC that
the defalcation which was reported October 18, 1994 had also occurred in 1993,
as well as in the first half of 1994, and that the 1993 defalcation had totaled
at least an additional $300,000. On September 4, 1997, the SEC instituted a
civil complaint proceeding against the Corporation's former controller and his
brother, neither of whom have been associated with the Corporation since June of
1994.

PRODUCT LIABILITY AND INSURANCE

         The Corporation currently has in force general and product liability
insurance, with coverage limits of $3 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.


                                       13
<PAGE>   14

ITEM 2. DESCRIPTION OF PROPERTY.

         The Corporation's 70,611 square foot facility, which was designed and
constructed to the Corporation's specifications and completed in 1992, contains
its production, packaging, research and executive operations. It is on a four
acre site acquired by the Corporation from the EDC of the City of Detroit
pursuant to a mortgage loan. (See "EDC Financing" above.) This manufacturing
facility has a special building and systems design, with each processing area
equipped with independent zone and air handling units to provide temperature and
humidity control to each room. These air handling units are designed to prevent
product cross contamination through the use of pre-filter and final HEPA filter
banks. All processing air quarters are maintained in a negative pressure mode
using laminar air flow design. This system of air flow 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. The design allows all processing areas, with a modest capital
addition, to be equipped with purified breathing air systems to facilitate the
use of custom handling and control as product requirements warrant. That capital
addition will not be made until consummation of a strategic alliance, with
specific product requirements, which would make such addition financially sound.

ITEM 3. LEGAL PROCEEDINGS.

         The Corporation is not a party to any litigation which, individually or
in the aggregate, is believed to be material to the Corporation's business.

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

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

                                     PART II

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


         The following table sets forth the high and low bid information for the
Corporation's Common Stock for each full quarter from January 1, 1996 through
December 31, 1997 as disclosed on the OTC Bulletin Board. The quotations reflect
inter-dealer prices without retail mark-up, mark-down or commission and may not
represent actual transactions.


PERIOD                                        HIGH BID   LOW BID


Quarter Ended March 31, 1996                    5 1/4    2 1/2

Quarter Ended June 30, 1996                     4 3/8    2 5/8


                                       14
<PAGE>   15


Quarter Ended September 30, 1996                3 1/4    0 13/16

Quarter Ended December 31, 1996                 2 3/4    0 13/16

Quarter Ended March 31, 1997                    1 5/16   1 1/8

Quarter Ended June 30, 1997                       3/4     13/20

Quarter Ended September 30, 1997                1 3/16   1 3/16

Quarter Ended December 31, 1997                   3/4      5/8


DIVIDEND POLICY

         The Corporation has not declared or paid any dividends and does not
intend to declare or pay any dividends in the foreseeable future. The
Corporation intends to employ all available funds in the development of its
business. The Corporation's Series A Preferred Stock contains provisions
restricting the payment of dividends to the holders of the Common Stock unless
the holders of the Series A Preferred Stock have been paid the dividends to
which they are entitled. Dividends accrue on the Series A Preferred Stock from
and after January 1, 1997.

SHAREHOLDERS AND OWNERSHIP

On March 20, 1998, there were approximately 143 shareholders of record of the
Corporation's Common Stock. The Corporation's common shares outstanding were
held individually or in bank, money management, company and brokerage house
nominee accounts for an estimated 800 beneficial owners.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

         The following discussion and analysis provides information which
Management believes is relevant to an understanding of the Corporation's
consolidated results of operation and financial condition. The discussion should
be read in conjunction with the consolidated financial statements and notes
thereto.

OVERVIEW

         For most of 1997, the Corporation's main focus and concern was to find
investors or partners to provide the necessary equity funding to enable the
Corporation to continue operations and meet operating goals. During this time
period, the Corporation incurred significant operating losses and cash flow
difficulties. Funding for new products were significantly reduced. This time
period was a serious setback financially. The long-term plans of the Corporation
were in jeopardy as overhead expenses were being incurred with limited revenues
to absorb them. The first eight months of the year were spent on entering into
definitive agreements with Sun Pharma of India, the City of Detroit, and the
Economic Development Corporation for Sun's purchase of 5.3 million shares of
common stock at a total value of $7.5 million. This agreement was reached in
August, 1997.

         Since then, the Corporation has achieved the following:

         Infusion of $5 million from Sun Pharma has taken place through March,
1998, though the agreement provided for the inflow of $7.5 million over a period
of



                                       15
<PAGE>   16


approximately two years. Sun Pharma has recognized the importance of providing
funds to the Corporation on a timely and advanced basis to ensure that
opportunities are not lost. As a result, the Corporation has received 67% of the
total funds through March, 1998. The balance of funds are expected to be
received by the third quarter of 1998.

         Conversion of interest payments of $533,365 on $2.04 million in
borrowings from two shareholder directors and Sun Global Inc. (a subsidiary of
Sun Pharma) into equity shares of the Corporation has thereby helped the
Corporation's cash flow.

         With the funds received to date, a significant amount of the past due
trade payables (approximately $1.2 million) have been paid. Management believes
that this has greatly improved the relationships with the Corporation's supplier
base and has opened up additional supply alternatives. As a result, suppliers
have generally been willing to provide credit terms and more competitive
pricing.

         The generic pharmaceutical business requires significant investment of
resources in research and development. The business cannot afford a top heavy
and complex organizational matrix, as efficiency and timeliness is of paramount
importance. The Corporation recognized these facts of business and is currently
working to build the proper structure.

         During 1997, the organization was restructured to focus on internal
development of new products and to strengthen quality control, quality assurance
and manufacturing. This organization has in place an effective, though smaller
in number, senior management team, and at the same time the middle management
and plant level organization has been reinforced. The Corporation has attempted
to identify and enhance key skill levels within the organization. These changes
are expected to prepare the Corporation for the challenging task of developing,
manufacturing and maintaining a dynamic product portfolio.

         Personnel expenses were reduced by 22% from an average of $216,000 per
month in 1996 to $172,000 per month by December, 1997. Management believes the
reduction in expenses was achieved without compromising on the quality of
personnel or timeliness of overall objectives. The number of employees was
reduced from 34 permanent and 12 temporaries in 1996 to 33 permanent and 2
temporaries at the end of 1997. It is anticipated with the increase in product
development and manufacturing activities that personnel costs will increase in
1998.

         Manufacturing and product development activities increased
substantially during the last quarter of 1997. With the increased level of
activities, existing capacity utilization has improved and is expected to have a
positive effect on gross profit.

         The Corporation is focusing on putting its major investments in
manufacturing and development to use. This is being achieved by improving the
product mix with proprietary manufactured products, and manufacturing or
developing products for third parties.


                                       16

<PAGE>   17
agreements were renegotiated and costs optimized, which provided the reduction
in yearly costs from $239,886 in 1996 to $193,219 in 1997.

         Management is critically reviewing the selling expenses such as
freight, chargebacks, rebates and cost of returns.

         Alternatives were being evaluated to assess the feasibility of gearing
the laboratory resources for internal testing rather than incurring the costs of
external testing.

         With the infusion of funds and the restructuring of the organization,
the focus on new product developments has intensified. A development center
supported and paid for totally by Sun Pharma and dedicated to provide products
to Caraco pursuant to its agreement with Caraco was started in Bombay, India in
the last quarter of 1997. This center employs sixteen well-qualified and
experienced pharmaceutical researchers. The emphasis, in the future, will be on
internal development of products. (See "Caraco's Products and Products
Strategy" above).

         Over the period of the last six months, the Corporation has developed
four DESI products, two of which have been provided by Sun pursuant to its
agreements with Caraco, which are currently being validated. It is anticipated
that these products will be introduced in the market during the second half of
1998.

         The Corporation has identified promising candidates for ANDA
submission. Work on some of these products has commenced and the technology for
four products has been transferred to Caraco from Sun Pharma pursuant to its
agreement with Caraco. Two of the Corporation's ANDA applications are awaiting
clearance from the FDA. The approval procedure for ANDAs involve both
bioequivalence studies and submittance to FDA, which is a time-consuming
process; although the products are developed with utmost care, the Corporation
cannot guarantee the success of the bioequivalence studies, or FDA approval.

NET SALES

         Net sales for the years ended December 31, 1997 and 1996 were $871,573
and $1,273,903, respectively. The decrease of approximately 32% in 1997 was
primarily attributable to non-availability of funds to manufacture product
for higher customer sales. However, the sales for the first two months of 1998
averaged approximately $191,813 per month compared to an average of $72,631 in
1997. The Corporation's dependence on the sale of Nifedipine, which is a low
net margin product is progressively being reduced by improving the sales of
other manufactured products without hampering the level of sales and net
margins. Also, the two recently approved ANDA products, Metoprolol
Tartrate an Paramonycin, were introduced during the third quarter of 1997. The
initial response from the Corporation's customers is encouraging.

COST OF SALES

         Cost of sales for the years ended December 31, 1997 and 1996 were
$1,673,102 or 192.0% of sales and $1,642,237 or 128.9% of sales. The increased
percentage in cost of sales is a result of lower sales and manufacturing volumes
due to the Corporation's inability to purchase raw materials and bulk product
from its suppliers. This left the Corporation unable to maintain adequate
supply of products for customers. These reduced sales were insufficient to
absorb  the Corporation's fixed production costs. As discussed above, the
Corporation has undertaken several steps to optimize the cost of sales and
ensure better product margins.


                                       17
<PAGE>   18

         Capacity utilization has been enhanced by introduction of new products,
increasing the batch sizes, and providing contract manufacturing services for
third parties. Sales have been increased with a broader product portfolio,
better customer coverage and focus, and better customer inventory management.
Costs have been controlled and supply availability has been improved by
identifying alternative material sources. Credit terms have been established
with key suppliers, and certain fixed costs, such as, utilities, have been
critically evaluated.

NET LOSSES

         Net losses for the years ended December 31, 1997 and 1996 were
$4,778,275 and $5,498,932 respectively. The reduction in losses by 13% is
directly related to the significant reduction in general and administrative
expenses and other operating expenses.

INTEREST EXPENSE

         Interest expense, which is incurred primarily in connection with the
Corporation's mortgage obligation to the Economic Development Corporation of
Detroit, was $817,586 and $680,767 for the years ended December 31, 1997 and
1996, respectively. The increase in interest expense in 1997 relates to
increased borrowings from certain shareholder directors on short term loans used
to finance the Corporation's short term cash needs.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 1997, the Corporation's working capital was $239,243
compared with a working capital deficit of $1,695,591 for 1996. This reduction
in working capital deficit is due to increased investments in working capital
and the liquidation of a substantial portion of trade accounts payables with the
infusion of funds from Sun Pharma coupled with investments in increased
inventories of raw materials and finished products. The Corporation also intends
to seek additional equity financing in 1998 in order to fund its objectives and
current operations.

         Management estimates that, at its currently planned and anticipated
level of operations, the Corporation will experience progressive reduction in
the present level of operating losses in 1998. However, increased investments in
research and development will be reflected in the Statement of Operations for
1998. The benefits of these will not be available in 1998 because of the long
lead times for development, biostudies and the FDA approvals.

         The Corporation has no material commitments for capital expenditures.

         There is no assurance that the Corporation will be able to successfully
raise additional equity financing or that any of the Corporation's ANDAs will be
approved by the FDA within time parameters anticipated by the management or at
all, or that the Corporation will be able to manufacture in commercial
quantities and sell profitably any product resulting from FDA approval of an
ANDA filed by the Corporation.

ITEM 7. FINANCIAL STATEMENTS

         The Financial Statements included in this report are set forth
following the index to financial statements included in this report.

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

         None.


                                       18
<PAGE>   19




                                    PART III

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

         The information with respect to directors and executive officers of the
Corporation is included in the Corporation's definitive Proxy Statement under
the sections "Election of Directors", "Meetings and Committees of the Board of
Directors", and "Compliance with Section 16(a)", 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 "Executive
Compensation", which is incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information with respect to the security ownership of certain
beneficial owners and management is included in the Corporation's definitive
Proxy Statement under the section "Security Ownership of Certain Beneficial
Owners and Management", which is 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 "Certain Relationships and Related Transactions", 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**




                                       19
<PAGE>   20


 3.02        Registrant's Amended and Restated Bylaws

 3.03        Certificate of Amendment to the Articles of Incorporation filed
             February 13, 1997.*****

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.*

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.*

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.*

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.*

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.*

10.06        Agreement, dated March 22, 1990, between Registrant and R.P.
             Scherer North America, a division of R.P. Scherer Corporation.*

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

10.08        Agreement, dated October 20, 1993, between Registrant and Clonmel
             Chemicals Co., Ltd.*

10.09        Form of 1993 Stock Option Plan.*

10.10        Employment Agreement, dated October 28, 1993, with William R.
             Hurd.*

10.12        Employment Agreement, dated October 22, 1993, with Robert
             Kurkiewicz.*

10.13        Agreement, dated as of January 6, 1994, among the Registrant, NBD
             Bank, N.A., C. Arnold Curry, as Trustee of the Clevius Arnold Curry
             Living Trust dated September 18, 1976, C. Arnold Curry, M.D., P.C.,
             C. Arnold Curry and Cara Jean Curry.*

10.14        Form of Lock-Up Agreement between First Equity Corporation and each
             of C. Arnold Curry, as Trustee of the Clevius Arnold Curry Living
             Trust dated September 18, 1976, C. Arnold Curry, M.D., P.C., C.
             Arnold Curry, Cara Jean Curry, William R. Hurd, Robert Kurkiewicz,
             H. Craig Sutzer and Mark Curry.*

10.15        Employment Agreement dated May 17, 1994, with Allan J. Hammer.**



                                       20
<PAGE>   21


10.16        Form of Subscription Agreement dated February 22, 1995 and
             signature pages of investors.**

10.17        Warrant Purchase Agreement dated November 30, 1994, with Jay F.
             Joliat.**

10.18        Series A Preferred Stock Purchase Agreement dated November 30,
             1994, with Jay F. Joliat.**

10.19        Consulting Agreement dated January 12, 1995, with David A.
             Hagelstein, and Amendment to Consulting Agreement dated March 20,
             1995 with David A. Hagelstein.**

10.20        Security Agreement dated January 12, 1995, with David A.
             Hagelstein.**

10.21        Security Agreement dated February 2, 1995, with David A.
             Hagelstein.**

10.22        Warrant to Purchase Common Stock of Caraco Pharmaceutical
             Laboratories, Ltd. dated January 12, 1995, with David A.
             Hagelstein.**

10.23        Contract Manufacturing Agreement dated May 1994, with Apotex USA,
             Inc.**

10.24        Letter agreement dated February 22, 1995, with Abbott
             Laboratories.**

10.25        Form of Subscription Agreement dated June 1995.***

10.26        Form of Subscription Agreement dated October 1995.***

10.27        Security Agreement dated February 15, 1996 with Jay F. Joliat.***

10.28        Secured Promissory Note dated February 15, 1996 with Jay F.
             Joliat.***

10.29        Joint venture agreement dated on March 11, 1996, with Sun
             Pharmaceutical Industries, Inc.***

10.30        Form of Subscription Agreement dated March 1996.***

10.31        Employment Agreement dated February 16, 1996 with C. Arnold
             Curry.****

10.32        Secured Promissory Note dated August 21, 1996 with David A.
             Hagelstein.*****

10.33        Secured Promissory Note dated August 21, 1996, with Jay F.
             Joliat.*****

10.34        Secured Promissory Note dated August 21, 1996, with John R.
             Morris.*****

10.35        Loan Commitment Letter dated August 21, 1996 with David A.
             Hagelstein, Jay F. Joliat and John R. Morris.*****

10.36        Secured Promissory Note dated October 18, 1996 with Jay F.
             Joliat.*****

10.37        Loan Agreement dated October 18, 1996 with Jay F. Joliat.*****



                                       21
<PAGE>   22

10.38        Secured Promissory Note dated November 15, 1996 with David A.
             Hagelstein as Trustee of the TTEE David Hagelstein Trust UA 10-27-
             93.*****

10.39        Secured Promissory Note dated November 15, 1996 with Jay F.
             Joliat.*****

10.40        Secured Promissory Note dated November 15, 1996 with John R.
             Morris.*****

10.41        Security Agreement dated December 19, 1996, with Rosemary Joliat
             Living Trust DTD 4/12/88 as amended.*****

10.42        Subordination Agreement, dated December 23, 1996, between Sun
             Pharma Global, Inc., Jay F. Joliat, individually, and as Trustee of
             the Jay F. Joliat Qualified Terminable Interest Marital Trust,
             u/a/d 4/8/82, David A. Hagelstein, individually, and as Trustee of
             the TTEE David Hagelstein Trust, u/a/d 10/27/93 and John R.
             Morris.*****

10.43        Secured Promissory Note dated December 23, 1996 with Sun Pharma
             Global, Inc.*****

10.44        Security Agreement dated December 23, 1996 with Sun Pharma Global
             Inc.*****

10.45        Secured Short Term Demand Note dated December 26, 1996, with
             Rosemary Joliat Living Trust DTD 4/12/88 as amended.*****

10.46        Secured Promissory Note dated January 30, 1997 with Jay F. Joliat,
             as Trustee of the Jay F. Joliat Qualified Terminable Interest
             Marital Trust u/a/d April 8, 1982.*****

10.47        Inter-Creditor Agreement, dated January 30, 1997, between Sun
             Pharma Global, Inc., Jay F. Joliat, individually, and as Trustee of
             the Jay F. Joliat Qualified Terminable Interest Marital Trust,
             u/a/d 4/8/82, David A. Hagelstein, individually, and as Trustee of
             the TTEE David Hagelstein Trust, u/a/d 10/27/93.*****

10.48        Security Agreement dated January 30, 1997 with Jay F. Joliat, as
             Trustee of the Jay F. Joliat Qualified Terminable Interest Marital
             Trust u/a/d April 8, 1982.*****

10.49        Secured Promissory Note dated February 3, 1997 with Jay F. Joliat,
             as Trustee of the Jay F. Joliat Qualified Terminable Interest
             Marital Trust u/a/d April 8, 1982.*****

10.50        Secured Promissory Note dated February 11, 1997 with David A.
             Hagelstein as Trustee of the TTEE David Hagelstein Trust UA 10-27-
             93.*****

10.51        Security Agreement dated February 11, 1997, individually, with
             David A. Hagelstein as Trustee of the TTEE David Hagelstein Trust
             UA 10-27- 93.*****



                                       22
<PAGE>   23

10.52        Allonge to Promissory Note of August 21, 1996 - Jay F. Joliat.*****

10.53        Allonge to Promissory Note of August 21, 1996 - David A.
             Hagelstein.*****

10.54        Allonge to Promissory Note of August 21, 1996 - John R.
             Morris.*****

10.55        Allonge to Promissory Note of October 18, 1996 - Jay F.
             Joliat.*****

10.56        Allonge to Promissory Note of November 15, 1996 - Jay F.
             Joliat.*****

10.57        Allonge to Promissory Note of November 15, 1996 - John R.
             Morris.*****

10.58        Allonge to Promissory Note of November 15, 1996 -  David A.
             Hagelstein.*****

10.59        Allonge to Promissory Note of November 15, 1996 - John R.
             Morris.*****

10.60        Stock Purchase Agreement by and between Caraco Pharmaceutical
             Laboratories, Ltd. and Sun Pharmaceutical Industries, Ltd. dated as
             of April 23, 1997.******

10.61        Products Agreement by and between Caraco Pharmaceutical
             Laboratories, Ltd. and Sun Pharmaceutical Industries, Ltd. dated as
             of April 23, 1997.******

10.62        Registration Rights Agreement dated as April 1997.******

10.63        Stock Pledge Agreement dated as July 28, 1997.******

10.64        Contribution Agreement dated as of March 27, 1997.******

10.65        Addendum to Contribution Agreement dated as of July 27, 1997.******

10.66        Second Note and Mortgage Modification Agreement.

10.67        Debt Conversion Agreement

10.68        Amendment to Employment Agreement of William R. Hurd dated as of
             April 1, 1997.

10.69        Amendment to Employment Agreement of Allan J. Hammer dated as of
             April 1, 1997.

10.70        Amendment to Employment Agreement of Robert Kurkiewicz dated as of
             April 1, 1997.

23.01        Preferability Letter of Grant Thornton LLP.**



                                       23
<PAGE>   24

24.          Power of Attorney.

27.          Financial Data Schedule.
------------------

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

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

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

****         Incorporated by reference from Exhibits to Registrant's
             Registration Statement of Form SB-2 filed on July 12, 1996 with the
             SEC.

*****        Incorporated by reference from Exhibits to Registrant's Form 10-KSB
             which was originally filed on or about March 30, 1997, as
             Commission File no. 0-24676.

******       Incorporated by reference from Exhibits to Registrant's Form 10-QSB
             dated as of August 13, 1997.


(b)          Reports on Form 8-K

             (1)     A Form 8-K was filed on October 9, 1997 with respect to
                     "Item 5. Other Events" disclosing a change in membership on
                     the Board of Directors.

             (2)     A Form 8-K was filed on December 29, 1997 with respect to
                     "Item 5. Other Events" disclosing the termination of
                     employment of the then President of Caraco.


                         INDEX TO FINANCIAL STATEMENTS

         The following financial statements of the Corporation are filed with
this report:

      Report of Independent Auditor ...............................  F-1

      Balance Sheet at December 31, 1997 ..........................  F-2

      Statements of Operations for the years ended
        December 31, 1997 and 1996 ................................  F-4

      Statements of Stockholders' Deficit for the
        years ended December 31, 1997 and 1996 ....................  F-5

      Statements of Cash Flows for the years
        ended December 31, 1997 and 1996 ..........................  F-6

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


                                       24
<PAGE>   25




                                   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
31st day of March, 1997.

                           CARACO PHARMACEUTICAL LABORATORIES, LTD.

                           By:/s/ Narendra Borkar
                              ----------------------------------------------
                                  Narendra Borkar (Principal Executive and
                                  Financial Officer)
                                  Chief Executive Officer

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

        Signature                       Title


/s/ Narendra Borkar
--------------------------              Director and Chief Executive Officer
Narendra Borkar

/s/ N. Ramakrishnan                     Controller
--------------------------
N. Ramakrishnan

         *
--------------------------
David W. Adamany                        Director

         *
--------------------------
David A. Hagelstein                     Director

         *
--------------------------
Phyllis Harrison-Ross                   Director

         *
--------------------------
Jay F. Joliat                           Director

         *
--------------------------
John R. Morris                          Director

         *
--------------------------
Dilip S. Shanghvi                       Chairman of the Board



                                       25
<PAGE>   26


         *
--------------------------
Shantilal Shanghvi                      Director

         *
--------------------------
Sudhir Valia                            Director



*By: /s/ Narendra Borkar
--------------------------
    Narendra Borkar
    Attorney-in-Fact




                                       26
<PAGE>   27



                          INDEPENDENT AUDITORS' REPORT



Stockholders and Board of Directors
CARACO PHARMACEUTICAL LABORATORIES, LTD.
Detroit, Michigan


We have audited the accompanying balance sheet of Caraco Pharmaceutical
Laboratories, Ltd. (a Michigan corporation) as of December 31, 1997, and the
related statements of operations, stockholders' deficit and cash flows for the
years ended December 31, 1997 and 1996. 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 generally accepted auditing
standards. 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, 1997 and the results of its operations and
its cash flows for the years ended December 31, 1997 and 1996 in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming the
Corporation will continue as a going concern. As described in Note 1 to the
financial statements, conditions exist that raise substantial doubt about the
Corporation's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.



Rehmann Robson, P.C.


Farmington Hills, Michigan
March 27, 1998




                                      F-1
<PAGE>   28



                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                                  BALANCE SHEET

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


<TABLE>
<CAPTION>

                                                                                DECEMBER 31,
                                   ASSETS                                          1997
                                                                                ---------------
<S>                                                                             <C>
CURRENT ASSETS
   Cash and cash equivalents  ...............................................   $      422,856
   Accounts receivable, net of allowances of $90,000 (Note 3)  ..............          149,647
   Inventories (Note 1)  ....................................................          540,983
   Prepaid expenses and deposits  ...........................................          444,650
                                                                                --------------

TOTAL CURRENT ASSETS  .......................................................        1,558,136
                                                                                --------------

PROPERTY, PLANT AND EQUIPMENT - AT COST (NOTE 4)
   Land   ...................................................................          197,305
   Buildings and improvements  ..............................................        6,682,725
   Equipment  ...............................................................        3,587,747
   Furniture and fixtures  ..................................................          156,908
                                                                                --------------

   Total  ...................................................................       10,624,685
   Less accumulated depreciation  ...........................................        2,736,403
                                                                                --------------

NET PROPERTY, PLANT AND EQUIPMENT  ..........................................        7,888,282
                                                                                --------------





TOTAL ASSETS  ...............................................................   $    9,446,418
                                                                                ==============
</TABLE>






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


                                      F-2
<PAGE>   29








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


<TABLE>
<CAPTION>

                                                                                DECEMBER 31,
                   LIABILITIES AND STOCKHOLDERS' DEFICIT                           1997
                                                                                ---------------
<S>                                                                             <C>
CURRENT LIABILITIES
   Accounts payable (Note 1)   ...............................................  $     1,159,145
   Accrued expenses  .........................................................          159,748
                                                                                ---------------

TOTAL CURRENT LIABILITIES  ...................................................        1,318,893
                                                                                ---------------

LONG-TERM LIABILITIES
   Note payable (Note 4)  ....................................................        8,880,000
   Notes payable to stockholders (Note 4)  ...................................        2,040,000
   Accrued interest  .........................................................        1,166,756
                                                                                ---------------

TOTAL LONG-TERM LIABILITIES  .................................................       12,086,756
                                                                                ---------------

TOTAL LIABILITIES  ...........................................................       13,405,649
                                                                                ---------------

COMMITMENTS AND CONTINGENCIES (NOTES 4, 8 AND 9)

STOCKHOLDERS' DEFICIT (NOTE 6)
   Preferred stock, no par value, authorized 5,000,000 shares;
     issued and outstanding, 285,714 Series A shares  ........................        1,000,000
   Common stock, no par value, authorized 20,000,000 shares;
     issued 13,507,083 shares; and outstanding, 9,620,416 shares   ...........       27,830,340
   Common stock subscription receivable   ....................................       (4,220,000)
   Preferred stock dividends  ................................................          (60,000)
   Accumulated deficit .......................................................      (28,509,571)
                                                                                ---------------

TOTAL STOCKHOLDERS' DEFICIT  .................................................       (3,959,231)
                                                                                ---------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT  .................................  $     9,446,418
                                                                                ===============


</TABLE>



                                      F-3
<PAGE>   30



                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                            STATEMENTS OF OPERATIONS

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


<TABLE>
<CAPTION>

                                                                                     YEAR ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                    1997                  1996
                                                                                    ----                  ----
<S>                                                                             <C>                    <C>
Net sales ....................................................................  $   871,573            $ 1,273,903
Cost of goods sold ...........................................................    1,673,102              1,642,237
                                                                                -----------            -----------
GROSS MARGIN (DIFFERENTIAL) ..................................................     (801,529)              (368,334)
Selling, general and administrative expenses .................................    1,704,623              1,915,910
Research and development costs ...............................................    1,446,862              2,222,220
                                                                                -----------            -----------
OPERATING LOSS ...............................................................   (3,953,014)            (4,506,464)
                                                                                -----------            -----------
OTHER INCOME (EXPENSE)
   Interest income ...........................................................        6,417                  6,272
   Interest expense ..........................................................     (817,586)              (680,767)
   Writedown of marketable securities ........................................           --               (194,750)
   Gain (loss) on disposal of equipment ......................................        7,179               (111,183)
   Other .....................................................................      (21,271)               (12,040)
                                                                                -----------            -----------
OTHER EXPENSE - NET ..........................................................     (825,261)              (992,468)
                                                                                -----------            -----------
NET LOSS .....................................................................  $(4,778,275)           $(5,498,932)
                                                                                ===========            ===========

Net loss per basic and diluted common share ..................................       ($0.57)                ($0.73)
                                                                                ===========            ===========

Weighted average number of common
  shares outstanding .........................................................    8,435,091              7,551,044
                                                                                ===========            ===========
</TABLE>






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


                                      F-4
<PAGE>   31



                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                       STATEMENTS OF STOCKHOLDERS' DEFICIT

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

<TABLE>
<CAPTION>




                                                                                                  COMMON
                                       PREFERRED STOCK                  COMMON STOCK               STOCK
                                  --------------------------   ------------------------------   SUBSCRIPTION
                                    SHARES        AMOUNT          SHARES          AMOUNT         RECEIVABLE
                                  ----------   -------------   -------------  ---------------  --------------
<S>                                  <C>       <C>                 <C>        <C>              <C>
Balance at
   January 1, 1996  .............    285,714   $   1,000,000       6,855,807  $    17,545,401  $      (14,087)
Issuances of common stock
   (Note 6) .....................         --              --         986,299        2,101,573              --
Writedown of marketable
   securities for decline in value
   considered to be other than
   temporary  ...................         --              --              --               --              --
Net loss  .......................         --              --              --               --              --
                                  ----------   -------------   -------------  ---------------  --------------
Balance at
   December 31, 1996  ...........    285,714       1,000,000       7,842,106       19,646,974         (14,087)
Receipt of common stock
  subscription ..................         --              --              --               --          14,087
Preferred stock dividends
   (Note 6)  ....................         --              --              --               --              --
Issuances of common stock
   (Note 6)......................         --              --       5,664,977        8,183,366      (4,220,000)
Net loss  .......................         --              --              --               --              --
                                  ----------   -------------   -------------  ---------------  --------------
Balance at                           285,714   $   1,000,000      13,507,083  $  27,830,340    $   (4,220,000)
   December 31, 1997  ........... ==========   =============   =============  ===============  ==============


<CAPTION>

                                                                                           UNREALIZED
                                                           PREFERRED                         LOSS ON
                                                             STOCK        ACCUMULATED      MARKETABLE
                                                           DIVIDENDS        DEFICIT        SECURITIES        TOTAL
                                                           ---------      ------------     ----------     -----------

<S>                                                         <C>           <C>              <C>             <C>
Balance at
   January 1, 1996  .............                           $      --     $(18,232,364)    $(160,924)      $  138,026
Issuances of common stock
   (Note 6) .....................                                  --               --            --        2,101,573
Writedown of marketable
   securities for decline in value
   considered to be other than
   temporary  ...................                                  --               --       160,924          160,924
Net loss  .......................                                  --       (5,498,932)           --       (5,498,932)
                                                             --------     ------------     ---------      -----------
Balance at
   December 31, 1996  ...........                                  --      (23,731,296)           --       (3,098,409)
Receipt of common stock
  subscription ..................                                  --               --            --           14,087
Preferred stock dividends
   (Note 6)  ....................                             (60,000)              --            --          (60,000)
Issuances of common stock
   (Note 6)......................                                  --               --            --        3,963,366
Net loss  .......................                                  --       (4,778,275)           --       (4,778,275)
                                                             --------     ------------     ---------      -----------
Balance at                                                   $(60,000)    $(28,509,571)    $      --      $(3,959,231)
   December 31, 1997  ...........                            ========     ============     =========      ===========


</TABLE>






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


                                      F-5
<PAGE>   32



                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                            STATEMENTS OF CASH FLOWS

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


<TABLE>
<CAPTION>

                                                                                       YEAR ENDED DECEMBER 31,
                                                                                  ---------------------------------
                                                                                       1997                1996
                                                                                  ------------        -------------
<S>                                                                               <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss  .................................................................    $   (4,778,275)     $  (5,498,932)
   Adjustments to reconcile net loss to
     net cash used in operating activities:
     Depreciation   ..........................................................           486,942            532,775
     (Gain) loss on disposal of equipment  ...................................            (7,179)           111,183
     Writedown of marketable securities  .....................................                 -            194,750
     Realized loss on sale of marketable securities  .........................             7,240              8,302
     Changes in operating assets and liabilities
       which provided (used) cash:
       Accounts receivable  ..................................................           (52,306)           315,850
       Inventories  ..........................................................          (250,718)            89,095
       Prepaid expenses and deposits  ........................................          (241,033)           (41,974)
       Accounts payable  .....................................................          (402,615)           572,366
       Accrued interest and other expenses  ..................................           526,029            524,695
                                                                                  --------------    ---------------
NET CASH USED IN OPERATING ACTIVITIES  .......................................        (4,711,915)        (3,191,890)
                                                                                  --------------    ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property, plant and equipment  ...............................           (31,863)           (61,526)
   Proceeds from sale of property, plant and equipment  ......................            14,000                  -
   Proceeds from sale of marketable securities  ..............................            74,760                  -
                                                                                  --------------    ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES  .........................            56,897            (61,526)
                                                                                  --------------    ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of common stock  ...................................         3,963,366          2,101,573
   Proceeds from receipt of subscribed stock  ................................            14,087                  -
   Net short-term borrowings (repayments)  ...................................           (65,000)           955,000
   Proceeds from long-term debt  .............................................         1,150,000           (120,000)
                                                                                  --------------    ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES  ...................................         5,062,453          2,936,573
                                                                                  --------------    ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  ........................           407,435           (316,843)
Cash and cash equivalents, beginning of year  ................................            15,421            332,264
                                                                                  --------------    ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR  ......................................    $      422,856    $        15,421
                                                                                  ==============    ===============
Supplemental disclosures of cash flows information:
   Cash paid for interest  ...................................................    $        1,164    $       164,241
                                                                                  ==============    ===============
</TABLE>






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



                                      F-6
<PAGE>   33
                       CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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



1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Organization and Basis of Presentation

     Caraco Pharmaceutical Laboratories, Ltd. ("Caraco" or the "Corporation")
     was incorporated on February 22, 1984, and has generated limited revenue
     from planned principal operations. The Corporation, since inception, has
     primarily been involved in planning, obtaining financing, constructing a
     permanent facility, acquiring and validating production equipment, hiring
     and training employees and beginning the development of product lines. The
     Corporation was established to develop, manufacture and market generic
     prescription and over-the-counter pharmaceuticals in the United States. The
     process of developing a line of proprietary drugs requires approvals by the
     Food and Drug Administration (FDA) of Abbreviated New Drug Applications
     (ANDA). While ANDA build-ups have proceeded, the Corporation has generated
     limited sales revenue through December 31, 1997.

     The Corporation is subject to certain risks associated with companies in
     the 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 Abbreviated New Drug
     Applications (ANDA), develop new products and continue to raise in the near
     term the necessary equity capital to keep the Corporation in business.

     Going Concern

     The accompanying financial statements have been prepared assuming that the
     Corporation will continue as a going concern, which contemplates the
     realization of assets and the satisfaction of liabilities in the normal
     course of business.

     A summary of the significant accounting policies consistently applied in
     the preparation of the accompanying financial statements follows:

     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.




                                      F-7
<PAGE>   34


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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



1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (Continued)

     In August 1997, the Corporation and an Indian specialty pharmaceutical
     company, Sun Pharmaceutical Industries, Ltd. ("Sun Pharma") completed an
     agreement whereby: a) in exchange for 5,300,000 shares of Caraco common
     stock Sun Pharma agreed to invest $7,500,000 into the Corporation over a
     period of approximately two years in four installments; b) the number of
     products to be sold to the Corporation by Sun Pharma is 25 over a period of
     five years in exchange for 544,000 shares of Caraco common stock to be
     issued for each product (181,333 shares, for each DESI (Drug Efficacy Study
     Implementation) product); and c) two Caraco shareholder directors have each
     agreed to contribute to the Corporation the equivalent of up to $500,000 in
     cash or in shares of Caraco common stock, not to exceed 250,000 shares
     each. During 1997, one shareholder director contributed $150,000 in
     accordance with this agreement, thereby reducing his future obligation to
     either $350,000 in cash or 100,000 shares. The contributions from the
     shareholder directors are required to be satisfied within 90 days of
     receipt of $4,000,000 of the Sun proceeds. As of January 5, 1998, Sun had
     delivered $4,000,000 of the $7,500,000 investment. An additional $1,000,000
     of these proceeds had been received through March 19, 1998.

     The Corporation has not currently achieved sales necessary to support
     operations. The Corporation has, as of December 31, 1997, a stockholders'
     deficit of $3,959,231. Realization of a major portion of the assets is
     dependent upon the Corporation's ability to meet its future financing
     requirements and the success of future operations, the outcome of which
     cannot be determined at this time. These factors raise substantial doubt
     about the Corporation's ability to continue as a going concern in the
     absence of sufficient additional funds and the achievement of profitable
     operations. 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 as a going concern.

     Management's plans with regard to these matters include eliminating the
     stockholders' deficit with the infusion of additional remaining funding
     from Sun Pharma in the amount of $4,220,000 and generating operating
     profits by:

     -    Introducing in the short-run, DESI products which do not require
          lengthy and elaborate FDA approval procedures, thereby strengthening
          the existing product portfolio.

     -    Restructuring and strengthening the Corporation to focus on new
          product development, reliable supplies to customers, better customer
          focus, improving the product mix for better contribution, and better
          utilization of manufacturing capacities.

     -    Preparing for mid to long term product releases by the rapid
          development of products requiring ANDA from FDA. Here, significant
          investments have been made by Sun Pharma in India, to establish a
          state of the art development center dedicated to Caraco's product
          development needs. This center commenced operations in the third
          quarter of 1997.



                                      F-8
<PAGE>   35


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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



1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (Continued)

     -    Establishing strategic alliances with leading pharmaceutical companies
          in manufacturing, development of new products in partnerships, and
          co-marketing.

     -    Leveraging the strengths of Sun Pharma in the area of rapid product
          development in psychiatry, neurology, cardiology and eventually,
          oncology.

     -    Identifying additional funding opportunities to support research and
          development.

     Cash Equivalents

     The Corporation considers all highly liquid debt instruments purchased with
     original maturities of three months or less to be cash equivalents.

     Revenue Recognition

     Sales are recognized upon the shipment of product with allowances provided
     for returns and price adjustments in the normal course of business based
     primarily upon actual subsequent activity. Amounts billed by the
     Corporation, if any, in advance of performance in connection with contracts
     to render certain research and development services are deferred.

     Inventories

     Inventories are stated at the lower of cost determined by the first in,
     first-out method, or market. Direct labor and indirect manufacturing
     overhead costs have not been capitalized and inventoried due to the
     relatively low levels of production volume and plant capacity utilization
     to date.

     Inventories consist of the following amounts at December 31, 1997:

<TABLE>
<S>                                                       <C>
             Raw materials  ...........................   $      361,269
             Work in process  .........................          117,392
             Finished goods  ..........................           62,322
                                                          --------------
             Total  ...................................   $      540,983
                                                          ==============
</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.



                                      F-9
<PAGE>   36


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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



1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     (Continued)

     In 1997 and 1996, the Corporation purchased approximately $198,000 and
     $334,000, respectively, of its raw materials in the form of bulk Nifedipine
     pursuant to a supply contract with one vendor. The Corporation has no
     alternative supplier for Nifedipine.

     In 1997 and 1996, the Corporation purchased raw materials of approximately
     $182,500 and $211,000, respectively, from a business owned and controlled
     by a shareholder director of the Corporation. Included in accounts payable
     at December 31, 1997 is $132,000 due to this vendor.

     Property, Plant and Equipment

     Depreciation is provided for in amounts sufficient to relate the cost of
     property, plant and equipment to operations over their estimated service
     lives using the straight-line method. Building and improvements are
     depreciated over 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.

     Marketable Securities

     Unrealized holding losses on marketable securities that are considered to
     be temporary are recognized as a separate component of stockholders'
     deficit. Declines in value that are considered to be other than temporary
     are recognized as losses in the period such determination is made. Realized
     gains or losses are determined using the specific identification method.

     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 the
     net operating losses.

     Loss Per Share

     Loss per share is computed using the weighted average number of common
     shares outstanding during each year. The Corporation adopted Statement of
     Financial Accounting Standards (SFAS) No. 128., "Earnings Per Share",
     effective December 31, 1997. This statement requires a dual presentation
     and reconciliation of "basic" and "diluted" per share amounts. Diluted
     reflects the potential dilution of all common stock equivalents. Since the
     assumed exercise of common stock options and warrants and the assumed
     conversion of preferred stock and convertible stockholder notes into common
     stock would be antidilutive, such exercise is not assumed for purposes of
     determining diluted loss per share. Accordingly, diluted and basic per
     share amounts are equal in each year.


                                      F-10
<PAGE>   37


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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



1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     (Continued)

     Research and Development Costs

     Research and development costs are charged to expense as incurred.

     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 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 believes the cost to do so would exceed the
     benefits, particularly since such information is not needed to manage the
     business. Further, 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 generally the fair value
     on the date of issuance.

     Recently Issued Financial Accounting Standards

     Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
     Comprehensive Income" and Statement No. 131 "Disclosures About Segments of
     an Enterprise and Related Information" will become effective during 1998.
     The implementation of these standards is not expected to have a material
     effect on the Corporation's financial statements or reporting disclosures,
     although SFAS may require reclassification of certain amounts.


2.   SUPPLEMENTAL CASH FLOWS INFORMATION

     Non-cash Investing and Financing Activities

     During 1997, the Corporation issued 355,577 shares of common stock in
     exchange for the satisfaction of interest incurred on loans from
     stockholders through August 1, 1999. At December 31, 1997, the cash
     equivalent value of 215,362 of these shares at a per share price of $1.50
     ($323,043) represents prepaid interest through August 1, 1999.

     During 1996, the Corporation converted stockholder notes and interest owed
     thereon totaling $250,000 into 111,111 shares of common stock.



                                      F-11
<PAGE>   38


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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



3.   SALES AND ACCOUNTS RECEIVABLE

     The Corporation sells its products using customary trade terms; the
     resulting accounts receivable are unsecured. Accounts receivable and
     related allowances, as of December 31, 1997, are summarized as follows:

<TABLE>
<S>                                                         <C>
           Accounts receivable  .........................   $   239,647
                                                            -----------
           Allowances:
              Doubtful accounts  ........................        10,000
              Sales returns and allowances  .............        30,000
              Price adjustments  ........................        50,000
                                                            -----------
           Total allowances  ............................        90,000
                                                            -----------
           Accounts receivable, net of allowances  ......   $   149,647
                                                            ===========
</TABLE>

     Net sales in 1997 and 1996 included $53,061 and $185,528, respectively,
     related to contracted research and development activities.


4.   DEBT INCLUDING RELATED PARTIES

     Debt at December 31, 1997 consists of a note payable to the Economic
     Development Corporation (EDC) of the City of Detroit, 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
     and repayment is personally guaranteed by the Corporation's founder and
     former Chairman of the Board and his spouse.

     Effective April 2, 1993, and again on August 5, 1997, the Corporation and
     the EDC of the City of Detroit restructured the Agreement discussed above.
     The amendments included:

     -    The deferral of scheduled principal and interest payments until
          February 1, 1999.

     -    On February 1, 1999, the Corporation shall resume making the regularly
          scheduled monthly payments of principal and interest due under the
          note. Additional deferred principal and interest due under the terms
          of the original agreement are also required in amounts sufficient to
          amortize the total deferred amount through July 2002.

     -    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 6.3%, as described in the amendments
          (effective rate of 5.44% at December 31, 1997).



                                      F-12
<PAGE>   39


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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



4.   DEBT INCLUDING RELATED PARTIES (Continued)

     -    Administrative costs to the EDC in the amount of $50,000 related to
          the restructuring will be reimbursed by the Corporation.

     -    As a condition of the deferral, the EDC was provided additional
          security on all the Corporation's existing equipment and the
          Corporation is required 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.

     -    Scheduled aggregate principal maturities of this note are summarized
          as follows:

<TABLE>
<CAPTION>
              Year ending
              December 31,                           Amount
                                                 --------------
                  <S>                            <C>
                  1998  ......................   $            -
                  1999  ......................        1,335,960
                  2000  ......................        1,486,275
                  2001  ......................        1,518,358
                  2002  ......................          615,000
                  Thereafter  ................        3,924,407
                                                 --------------
                  Total  .....................   $    8,880,000
                                                 ==============
</TABLE>

          Stockholder Notes Payable

          During 1997 and 1996, respectively, the Corporation borrowed $600,000
          from two, and $890,000 from three, including the two previously
          mentioned, stockholder directors of the Corporation. During 1997, the
          Company also borrowed $550,000 from Sun Pharma Global, Inc. ("Sun"), a
          wholly owned subsidiary of Sun Pharma. These demand notes, which
          accrue interest at 10% and are unsecured, were restructured on
          September 15, 1997. The restructuring agreement provides for the
          principal to be due on or before August 1, 1999 in cash or an
          equivalent number of common shares of the Corporation, at the
          discretion of the note holder, at a per share price of $1.50. Interest
          at 10% was prepaid in exchange for equivalent number of common shares
          of the Corporation at a per share price of $1.50 (see Note 6). The
          stockholder director notes are subordinated to the Sun notes of
          $550,000.

          The notes with Sun and two of the three stockholder directors in the
          amount of $1,840,000, are subject to the provisions of an
          Inter-Creditor Agreement. Among other things, the Inter-Creditor
          Agreement provides for an equal priority in collateral and principal
          payments based on each creditors' respective share of total debt.


                                      F-13
<PAGE>   40


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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



4.        DEBT INCLUDING RELATED PARTIES (Continued)

          On December 19, 1996, the Corporation borrowed $65,000 from a family
          member of a shareholder director of the Corporation. This amount was
          repaid in January 1997 from proceeds of the Sun debt.

          Letter of Credit

          The Corporation has a $100,000 letter of credit agreement with NBD
          Bank N.A. to support purchases of inventories. At December 31, 1997
          there was $73,500 outstanding under this agreement. Amounts
          outstanding under this letter of credit are included in accounts
          payable.


5.        INCOME TAXES

          At December 31, 1997 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
          $8,500,000 has been established. Changes in the valuation allowance
          were approximately $1,400,000 and $1,800,000 in 1997 and 1996,
          respectively

          At December 31, 1997, net operating loss carryforwards of
          approximately $25,000,000 are available to offset future federal
          taxable income through future years. The Corporation's ability to
          utilize the net operating loss carryforwards may be limited due to an
          ownership change.


6.        STOCKHOLDERS' DEFICIT

          Sun Pharma

          During 1997, the Corporation agreed to issue 5,300,000 shares of
          common stock to Sun Pharma in exchange for $7,500,000 to be received
          by the Corporation over a period of approximately two years in four
          installments. The number of shares issued and to be issued as
          consideration received is summarized as follows:

<TABLE>
<CAPTION>

                  Installment
                     Date                   Consideration           Shares
                ---------------             --------------       -----------
                <S>                         <C>                  <C>
                August 5, 1997 ..........  $     2,000,000         1,413,333
                January 5, 1998 .........        2,000,000         1,413,333
                August 5, 1998 ..........        2,000,000         1,413,333
                January 5, 1999 .........        1,500,000         1,060,001
                                            --------------       -----------
                                            $    7,500,000         5,300,000
                                            ==============       ===========
</TABLE>




                                      F-14
<PAGE>   41


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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



6.        STOCKHOLDERS' DEFICIT (Continued)

          Other Common Stock Issuances

          During 1997, the Corporation issued 355,577 shares of common stock at
          $1.50 per share to satisfy interest incurred on loans from
          stockholders (see Note 4). At December 31, 1997, there were 215,362
          shares of common stock issued but not earned. These shares represent
          consideration for future interest payments and are classified as
          prepaid interest in the accompanying balance sheet, as they will be
          earned ratably through August 1, 1999.

          During 1997, the Corporation issued 9,400 shares of common stock, at
          the fair value of such shares on the date of issuance, to non-employee
          directors in exchange for services rendered.

          On March 31, 1996, the Corporation converted a $250,000 shareholder
          loan into 111,111 shares of its common stock at $2.25 per share.

          In connection with a private placement offering that was completed
          effective March 31, 1996, the Corporation sold 572,444 shares of
          common stock at $2.25 per share, netting approximately $1,288,000.

          On May 13, 1996, the Corporation sold privately 44,444 shares of
          common stock at $2.25 per share, netting $100,000.

          On May 31, 1996, the Corporation sold privately 250,000 shares of
          common stock at $2.00 per share, netting $500,000.

          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.

          Each share of preferred stock is nonvoting and is convertible into one
          share of common stock through January 1, 2004. The preferred shares
          require dividends at the option of the holder, of $.21 per share on a
          cumulative basis commencing in 1997. Accrued dividends on preferred
          stock at December 31, 1997 were $60,000.



                                      F-15
<PAGE>   42


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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



7.        STOCK BASED COMPENSATION

          Incentive Stock Option Plan

          Pursuant to the terms of an incentive stock option plan established in
          April 1993 and subsequently amended in 1995, the Corporation may grant
          options for the purchase of up to 450,000 shares of common stock.
          Options granted are exercisable ratably over five years on a
          cumulative basis. Activity with respect to these options is summarized
          as follows:


<TABLE>
<CAPTION>

                                                                 Number of
                                                                   Shares              Option Price
                                                                -------------      --------------------
                 <S>                                            <C>                 <C>
                 Balance January 1, 1996  ...................         365,493       $1.63 - $6.13
                     Options granted  .......................          12,000       $1.56 - $2.50
                     Options exercised  .....................               -             -
                     Options terminated or expired  .........         (53,408)      $1.63 - $5.50
                                                                -------------
                 Balance December 31, 1996  .................         324,085       $1.56 - $6.13
                     Options granted  .......................          15,184       $1.00 - $1.25
                     Options exercised  .....................               -             -
                     Options terminated or expired  .........         (88,248)      $1.00 - $5.00
                                                                -------------
                 Balance December 31, 1997  .................         251,021
                                                                =============
</TABLE>

          During the years ended December 31, 1997 and 1996, options for the
          purchase of 47,167 shares and 62,417 shares, respectively, became
          exercisable. None were exercised.

          On January 1, 1996, the Corporation adopted 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
          been recognized in the financial statements for its outstanding stock
          options. Companies that do not adopt a fair value method contemplated
          in SFAS No. 123 are required to make pro-forma disclosures of net loss
          and loss per share as if they had adopted the fair value accounting
          method. The pro-forma impact on net loss and loss per share for each
          of the years ended December 31, 1997 and 1996 is not significant and
          is antidilutive.

          Other Common Stock Option Arrangements

          Pursuant to a strategic alliance formalized by an agreement for the
          acquisition of certain technology with a third-party pharmaceutical
          company ("Hexal"), the Corporation granted to Hexal, for each product
          (i) a "sign-up" option to purchase 100,000 shares of the Corporation's
          common stock at a price of $3.50 per share and (ii) a "product" option
          to purchase a presently indeterminable number of common shares at an
          exercise price equivalent to their fair value, as defined, upon the
          filing of an ANDA related to each of the two specified generic drugs.
          Such options may be exercised and payment for shares may be made only
          out of royalties payable by the Corporation to Hexal for sales, if
          any, of the related products. To date, there have been limited sales
          of the products, but no options have been exercised.


                                      F-16
<PAGE>   43


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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



7.        STOCK BASED COMPENSATION (Continued)

          Other Common Stock Purchase Warrant and Option Agreements

          As of December 31, 1997, warrant and option agreements for the
          issuance of a total of 2,851,089 shares of common stock are
          outstanding at exercise prices ranging from $1.25 to $18.20 per share
          or unit, exercisable at various dates through October 2006. No
          warrants or options under these agreements have been exercised.


8.        EMPLOYMENT AGREEMENTS

          Included in accrued expenses at December 31, 1997 is approximately
          $92,000 related to the cost of employment agreements with former
          officers of the Corporation.


9.        OTHER MATTERS

          During the year ended December 31, 1994, the Corporation determined
          that approximately $514,000 of Corporation funds had been
          misappropriated by the Corporation's former controller, a son of the
          Corporation's former Chairman of the Board. The misappropriations
          occurred during the period from January through June of 1994. The
          Corporation's former Chairman of the Board reimbursed the Corporation
          the $514,000. In connection with this matter, approximately $56,000 in
          certain legal and other expenses incurred by the Corporation in
          conducting an investigation into this matter were paid directly by the
          former Chairman of the Board from his personal funds. These expenses
          were recognized in the 1995 statement of operations with a
          corresponding credit to common stock.

          The Corporation has made filings about this matter with the Securities
          and Exchange Commission (the "SEC"). On November 1, 1996, the
          Corporation, through its Washington DC legal counsel, was notified by
          the SEC that its Enforcement Division tentatively decided not to
          recommend that the Commission authorize an enforcement action against
          the Corporation, however, the investigation was ongoing. In 1997, the
          Corporation was notified by the SEC that the defalcation which was
          reported October 18, 1994 had also occurred in 1993, as well as in the
          first half of 1994, and that the 1993 defalcation had totaled at least
          an additional $300,000. On September 4, 1997, the SEC instituted a
          civil complaint proceeding against the Corporation's former controller
          and his brother, neither of whom have been associated with the
          Corporation since June of 1994.



                                      F-17

<PAGE>   44


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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


10.       MAJOR CUSTOMERS

          Shipments to one wholesale customer (Amerisource) accounted for
          approximately 20% of net sales in both 1997 and 1996. Balances due
          from this customer represented approximately 9% of accounts receivable
          at December 31, 1997.

          Shipments to another wholesale customer (McKesson Drug) accounted for
          approximately 24% and 17% of net sales in 1997 and 1996, respectively.
          Balances due from this customer represented approximately 16% at
          December 31, 1997.



                                   * * * * * *




                                      F-18