<PAGE>   1
                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                        FOR THE TRANSITION PERIOD FROM TO

                           COMMISSION FILE NO. 0-24676

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

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

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

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

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

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

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

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

                           Common Stock, No Par Value
                                (Title of Class)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.

YES  X    NO
   -----    -----

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

STATE ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR:  $2,895,022

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.

                                  $18,556,295
                              -------------------
            (BASED UPON THE AVERAGE BID-ASK PRICE OF THE REGISTRANT'S
           COMMON SHARES ON THE OTC BULLETIN BOARD ON MARCH 15, 2000)

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 15, 2000, THERE WERE 18,556,295 COMMON SHARES OUTSTANDING


                      Documents Incorporated By Reference:

         Portions of the Annual Report to Stockholders for the Year Ended
December 31, 1999 are incorporated by reference into Part II.

         Portions of the definitive Proxy Statement dated April 27, 2000, in
connection with the Annual Meeting of Stockholders to be held on June 8, 2000,
are incorporated by reference into Part III.



<PAGE>   2



                    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 on March 1, 1994 and
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 invested $7.5
million into the Corporation. Sun Pharma also agreed to provide the Corporation
with products in exchange for shares of Common Stock. (See "Sun Pharmaceutical
Industries Ltd." below.) The Corporation raised $396,000 pursuant to a private
placement of common stock which terminated in 1999.

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, 1999 includes 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.) The Corporation is currently renegotiating the repayment
schedule with the EDC and, as such, has not made any of the scheduled payments.
On February 22, 2000 and March 1, 2000, the Corporation made payments of
$600,000 and $200,000, respectively to the EDC. Such payments have not brought
the Corporation current in its obligations to the EDC, and such payments were
made without prejudice to the rights of the EDC to exercise all remedies
available to the EDC for failure to make the scheduled payments. While the terms
of the restructured loan are being renegotiated, the Corporation intends to
continue to make payments to the EDC, again without prejudice to the rights of
the EDC. Upon a final agreement of the restructured terms of the loan, of which
there can be no assurance, the Corporation shall then commence making the
requested

<PAGE>   3
restructured payments. As of February 1, 2000, the Corporation is indebted to
the EDC in the amount of $8,880,000 plus accrued interest.

         As disclosed above, Sun Pharma has, as of December, 1998, remitted a
total of $7.5 million to the Corporation for the purchase of common shares. On
October 15, 1998 Sun Pharma also made a loan to the Corporation up to $5.3
million at an annual interest rate of 10% (which loan was amended to provide Sun
Pharma with a security interest). The loan matures and is due and payable on the
earlier of October 15, 2003 or the occurrence of an event of default. On
December 24, 1999, Sun Pharma made an additional secured loan to the Corporation
of up to Two Million ($2,000,000) Dollars at annual interest rate of 10% which
matures no later than December 24, 2001. As of March 15, 2000 Caraco has
borrowed $1,600,000 of the $2,000,000. 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
continue to seek adequate financing to fund the foregoing objectives and current
operations.

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 14 products in 21 strengths
in 36 package sizes. The Corporation is currently manufacturing Selegeline Hcl
for Apotex for sale under the Apotex label.

         In 1999, the Corporation introduced four (4) DESIs into the marketplace
and completed two (2) ANDA submissions to the FDA. Currently, three (3) ANDA
products have been developed and are ready for submission.

         During 1999, Sun Pharma's dedicated development laboratory in Bombay
was actively working on multiple ANDA submissions and the introduction of DESI
products for 2000 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 15 products. To
date, including the transfer of technology by Sun Pharma, the Corporation has 21
products in various stages of active development. There is no assurance,
however, that any of these products will be marketed. The Corporation expects to
develop four (4) to six (6) products each year.

<PAGE>   4


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
has agreed to convey to the Corporation the formulations, technology,
manufacturing processes and know-how, and other relevant information, and to pay
for the bioequivalency studies required for the preparation of ANDAs for each of
two specified generic drugs (the "Products"). 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".) Hexal has decided not to proceed 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 shares at an exercise price of $1 3/8 as
of December 10, 1996, per share. These options may be exercised and payment for
shares may be made only out of royalties (and any interest earned on the
royalties while held by the Corporation) payable to Hexal for sales of the
related product.

       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 many 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 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

<PAGE>   5

being pursued due to changing market conditions and technical issues. There can
be no assurance that the Corporation will receive FDA approval of the ANDA which
has been filed or when FDA approval will be forthcoming; nor that the
Corporation will be able to manufacture and sell the product profitably. The
Corporation anticipates product introduction in the marketplace in the year
2000.

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. (See
"Caraco's Products and Product Strategy".)

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). To date, Sun Pharma has facilitated the transfer of technology to
Caraco with respect to 15 products. As of December 31, 1999 Sun Pharma has
earned 3,626,666 shares for 6 ANDAs and 2 DESI products. Substantially all of
these shares were issued in 1999 and the remainder will be issued during the
second quarter of 2000.

         In connection therewith Sun Pharma has invested in a dedicated
development laboratory employing 26 scientists (six 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".)

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", "Current Status of Corporation", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 5 of Notes
to Financial Statements.)

         On March 1, 1994, the EDC Agreement was amended to extend the maturity
date to July 1, 2002. On August 5, 1997, the Corporation and EDC restructured
the Corporation's loan from the EDC, pursuant to a Second Note and Modification
Agreement ("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. On February 1, 1999, Caraco
was required to resume making regularly scheduled monthly payments of principal
and interest, together with


<PAGE>   6

additional payments of principal and interest in an amount sufficient to
amortize the total amount of: (i) the Deferred Payments, and (ii) accrue
interest on that portion of the currently outstanding indebtedness that would
have been amortized by the Deferred Payments, commencing on the date when due
under the terms of the original loan agreement, at the rate set forth in the
note over a period of 42 consecutive months commencing on February 1, 1999 and
ending on July 1, 2002 ("Additional Payments"). In the event, however, that with
respect to the first quarter of operation in which Caraco's operating income
before federal income taxes plus depreciation exceeds $500,000 on the first day
of the six months succeeding such quarter, the regularly scheduled payment
required to be made shall resume and the Additional Payments shall commence,
provided, however, that the 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. During the month of December 1998 the Corporation approached the EDC
regarding reconsideration of the repayment terms. The Corporation is currently
renegotiating the repayment schedule with the EDC and, as such, has not made any
of the scheduled payments. On February 22, 2000 and March 1, 2000, the
Corporation made payments of $600,000 and $200,000, respectively to the EDC.
Such payments have not brought the Corporation current in its obligations to the
EDC, and such payments were made without prejudice to the rights of the EDC to
exercise all remedies available to the EDC for failure to make the scheduled
payments. The Corporation intends to continue to make payments to the EDC again
without prejudice to the rights of the EDC. Upon a final agreement of the
restructured terms of the loan, of which there can be no assurance, the
Corporation shall then commence making the requested restructured payments. As
of February 1, 2000, the Corporation is indebted to the EDC in the amount of
$8,880,000 plus accrued interest.

         The mortgage is a first priority mortgage lien against the property and
may not be subordinated to the lien on any other mortgage or encumbrance except
as otherwise provided in the Modification Agreement. In addition, 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 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 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.


<PAGE>   7

         The top five drug wholesalers in 1999 accounted for over $50 billion in
sales. Caraco's product line is now represented in these top drug wholesalers;
McKesson Drug, Bergen Brunswig, Cardinal, Ameri Source and Bindley. Caraco's
products are now stocked by many other drug wholesalers, 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 Vendor Program, the Department of Defense and by various state agencies.

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

SALES AND CUSTOMERS

         Caraco has only a small in house sales organization. In late 1999
Caraco contracted with a sales and marketing firm to represent Caraco with most
customers in the U.S. This firm acts as an independent contractor and is
compensated based on a percentage of net sales of such customers. Caraco
believes this is advantageous to the Corporation as this firm provides
additional customer coverage with their eight person sales force, greater
frequency of customer contact, and stronger relationships with many customers.
Additionally, this arrangement provides the Corporation with a fixed cost
against net sales by this firm.

         Shipments to one wholesale customer accounted for approximately 15% and
13% of net sales in 1999 and 1998, respectively. Balances due from this customer
represented approximately 10% and 13% of accounts receivable at December 31,
1999 and 1998, respectively.

         Shipments to another wholesale customer accounted for approximately 11%
and 17% of net sales in 1999 and 1998, respectively. Balances due from this
customer represented approximately 3% and 2% of accounts receivable at December
31, 1999 and 1998, respectively.

RESEARCH AND DEVELOPMENT

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




<PAGE>   8


An outline of research and development expenses, incurred directly by Caraco
for 1999 and 1998 follows (000's):

<TABLE>
<CAPTION>

                                                        1999                 1998
<S>                                                   <C>                   <C>
              Employee Costs                          $  726                $1,212
              Raw Materials/Supplies                     584                   377
              Bioequivalency Studies                   1,065                   421
              Laboratory Expenses                        228                   447
              Other                                    1,925                   393
                                                      ------                ------
                Total                                 $4,528                $2,850
                                                      ======                ======
</TABLE>

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, record keeping, advertising and promotion of pharmaceutical products.

       The Federal Food, Drug and Cosmetic Act, the Public Health Services Act,
the Controlled Substances Act and other federal statutes and regulations govern
or influence 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



<PAGE>   9

       bioavailability data illustrating that the generic drug formulation is
       bioequivalent to a previously approved drug. Bioavailability measures the
       rate and extent of absorption of a drug's active ingredient and its
       availability at the site of drug action, typically measured through blood
       levels. A generic drug is bioequivalent to the previously approved drug
       if the rate and extent of absorption of the generic drug are not
       significantly different from that of the previously approved brand-name
       drug.

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

       FDA policy and its stringent requirements have increased the time and
expense involved in obtaining ANDA approvals and in complying with FDA's cGMP
standards. The ANDA filing and approval process takes approximately 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 Drug Enforcement Agency ("DEA") conducts inspections bi-annually.
During the DEA's 1999 inspection of the Corporation, no items of noncompliance
were noted. Although management believes that the Corporation is in 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 Corporation underwent an FDA
inspection during 1999 at which time it received an FDA 483 (List of
Observations) from the investigators. The Corporation has responded to those
observations and met with the Detroit District Director of the FDA. No official
actions were taken by the FDA subsequent to the meeting and the adequacy of the
response was reviewed during a subsequent inspection. In March 2000, the
Corporation received another FDA 483 which it shall respond to in the coming
weeks. The evolving and complex nature of regulatory requirements, the broad
authority and discretion of the FDA and the 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

<PAGE>   10

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 DEA.

       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 compliance with 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.

       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.

       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


<PAGE>   11

typically decline.

EMPLOYEES

       As of December 31, 1999, the Corporation had 42 full-time employees, of
which nine are engaged in research and development, seven in quality assurance,
three in quality control, one in administration, three in sales and marketing,
two in materials management, one in facility management, and sixteen in
manufacturing. Most of the Corporation's scientific and engineering employees
have had prior experience with pharmaceutical or medical products companies. All
of the hourly employees of materials management, facility management and
manufacturing are represented by a union.

PRODUCT LIABILITY AND INSURANCE

       The Corporation currently has in force general and product liability
insurance, with coverage limits of $5 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.

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 corporate office. 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


<PAGE>   12

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, 1998 through
December 31, 1999, 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.

<TABLE>
<CAPTION>

PERIOD                                  HIGH BID                LOW BID
------                                  --------                -------
<S>                                     <C>                     <C>
Quarter Ended March 31, 1998               7/8                    17/20
Quarter Ended June 30, 1998                15/16                   9/10
Quarter Ended September 30, 1998           17/20                    4/5
Quarter Ended December 31, 1998            5/8                      3/5
Quarter Ended March 31, 1999             1 3/8                      1/2
Quarter Ended June 30, 1999              1 3/8                    1
Quarter Ended September 30, 1999         1 5/16                     5/8
Quarter Ended December 31, 1999          1                          5/8
</TABLE>

       As of March 15, 2000 there were approximately 177 holders of the
Corporation's Common Stock.

       During the year ended December 31, 1999, the Corporation issued 3,609,333
shares to Sun Pharma and its affiliates pursuant to an agreement under which Sun
Pharma agreed to sell to the Corporation the right to develop, manufacture and
sell 25 generic pharmaceutical products. (See Item 1 - "Sun Pharmaceutical
Industries, Ltd." below.) The shares of common stock were issued pursuant to
exemptions from registration under Section 4(2), Section 4(6) and Regulation D
under the Securities Act of 1933.

       Pursuant to a private placement, in 1999, the Corporation sold 412,362
shares of common stock to accredited investors. The shares of common stock were
issued pursuant to exemptions from registration under Section 4(2), Section 4(6)
and Regulation D under the Securities Act of 1933.

       During 1999, the Corporation issued 2,600 shares of common stock to
certain nonemployee directors for attending board meetings. The shares of common
stock were issued pursuant to exemptions from registration under Section 4(2),
Section 4(6) and Regulation D under the Securities Act of 1933.

       During 1999, the Corporation issued 4,000 shares of common stock to its
employees under its 1999 Equity Participation Plan. The shares of common stock
were issued pursuant to exemptions from registration under Section 4(2) and
Regulation D under the Securities Act of 1933.

        During 1999, the Corporation granted an option to Mr. Borkar, Chief
Executive Officer, for 200,000 shares of common stock at an exercise price of
$1.15 per share which vests over a five year period. The options must be
exercised within six years from date of grant. The options and the underlying
shares of common stock were issued pursuant to exemptions from registration
under Section 4(2), Section 4(6) and Regulation D under the Securities Act
of 1933.

<PAGE>   13
       During 1999, the Corporation granted options to Mr. Hagelstein for
250,000 and 100,000 shares of common stock at an exercise prices of $1.50 and
$.88 per share, respectively, which were vested upon grant. The options must be
exercised within six years from date of grant. The options and the underlying
shares of common stock were issued pursuant to exemptions from registration
under Section 4(2), Section 4(6) and Regulation D under the Securities Act of
1933.

       During 1999, the Corporation granted options to Mr. Joliat for 250,000
shares of common stock at an exercise price of $1.50 per share, which were
vested upon grant. The options must be exercised within six years from date of
grant. The options, and the underlying shares of common stock were issued
pursuant to exemptions from registration under Section 4(2), Section 4(6) and
Regulation D under the Securities Act of 1933.

DIVIDEND POLICY

         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 have been accrued, but not paid, on the
Series A Preferred Stock on a cumulative basis since January 1, 1997. In
addition the loan agreement with the EDC includes a covenant restricting the
payment of dividends during the Deferral Period (see "EDC Financing").


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

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

The discussion in this section contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. The
forward-looking statements include statements regarding the intent, belief and
current expectations of the Corporation and its management. Such forward-looking
statements are not guarantees of the future performance of the Corporation, and
involve a number of risks and uncertainties. Actual results could differ
materially from those indicated by such forward-looking statements. Among the
important factors that could cause actual results to differ materially from
those indicated by such forward-looking statements are: (i) that the information
is of a preliminary nature and may be subject to further adjustment; (ii)
variations in quantity results; (iii) success in obtaining additional financing;
(iv) success in amending the EDC Agreement; (v) governmental restrictions on the
sale of certain products; (vi) obtaining FDA approvals; (vii) successful
manufacturing and marketing of commercially viable products on a timely basis;
(viii) dependence on key personnel; (ix) development by competitors of new or
superior products or new technology for the production of products or the entry
into the market of new competitors; (x) integrity and reliability of the
Corporation's data; and (xi) other risks identified from time to time in the
Corporation's reports and registration statements filed with the Securities and
Exchange Commission.

OVERVIEW

The Corporation has historically experienced limited sales, operating losses and
cash flow difficulties. During 1999, Sun Pharma loaned the Corporation
approximately $5 million to support operations and to continue the research and
development of new products.

As a result of ongoing research and development efforts and products received
from Sun Pharma the Corporation presently has submitted five (5) ANDAs to the
U.S. Federal Drug Administration for approval and has completed three (3)
bio-equivalence studies awaiting the expiration of exclusivity for submission.
In addition, four (4) more products are in advanced stages of development. All
together the Corporation has twenty-one (21) products under development,
including the products mentioned above.

During 1999 and 1998, Sun Pharma has earned 3,626,666 shares of Caraco common
stock for 6 ANDAs and 2 DESI products delivered to Caraco. Substantially all of
these shares were issued in 1999 and the remainder are expected to be issued
during the second quarter of 2000.

The EDC loaned approximately $9.1 million to the Corporation in 1990 to acquire
land and construct the Corporation's current manufacturing and executive offices
(see "EDC Financing"). During 1999, the Corporation had not made any of the
scheduled payments related to the agreement. The Corporation is currently
renegotiating the repayment terms with the EDC. On February 22, 2000 and March
1, 2000, the Corporation made payments of $600,000 and $200,000, respectively,
to the EDC. Such payments have not brought the Corporation current in its
obligations to the EDC, and such payments were made without prejudice to the
rights of the EDC to exercise all remedies available to the EDC for failure to
make the scheduled payments. While the terms of the restructured loan are being
negotiated, the Corporation intends to continue to make payments to the EDC,
again without prejudice to the rights of the EDC.

<PAGE>   14

Upon a final agreement of the restructured terms of the loan, of which there can
be no assurance, the Corporation expects to then commence making the requisite
agreed upon payments.

In 1996 and 1997, three shareholder directors and Sun Pharma Global (a
wholly-owned subsidiary of Sun Pharma) loaned approximately $2 million to the
Corporation on an unsecured basis for working capital purposes. The directors
have agreed to convert interest totaling $533,366, due August 1999, into payment
in common shares of the Corporation's stock, at the rate of $1.50 per share.
Effective April 1, 2000, $1,290,000 of  director loans will be converted into
1,290,000 shares of common stock plus related accrued interest at the rate of
10% for the period covering August 1999 thru March 2000 will also be converted
into common stock at the rate of $1.00 per share.

In addition to financing activities, principal management efforts in 1999
focused on compliance with regulatory matters, sales and marketing, research and
development, and operational improvements specifically in manufacturing, quality
control, and quality assurance.

NET SALES

Net sales for the years ended December 31, 1999 and 1998 were $2,895,022 and
$2,663,633, respectively. The increase in Caraco product sales was primarily the
result of new product introduction along with the availability of funds leading
to better product availability; improved sales and marketing; favorable market
conditions for generic drugs in general and the Corporation's mix of generic
drugs, in particular, and sales to new customers including new distributors and
retail drug store chains.

While the overall net sales increase in 1999 was approximately 9%,
Caraco-produced products increased approximately $600,000 or 30% and
contract-manufactured product sales decreased approximately $400,000 or 60%.

COST OF SALES

While net sales increased by 9% in 1999 over 1998, cost of sales for 1999 rose
by 38% over 1998 levels. Cost of sales for the years ended December 31, 1999 and
1998 were $3,091,245, or 107% of net sales, compared to $2,244,932, or 84% of
net sales, in 1998. The increase in cost of sales as a percentage of net sales
in 1999 was primarily related to the decline in contract manufacturing sales as
these sales represented the highest gross profit margin products.

GROSS PROFIT (DIFFERENTIAL)

In 1999, the Corporation posted a gross profit differential of ($196,223)
compared with a gross profit of $418,701 for 1998. The decrease in 1999 was due
to changes in product mix, reduction in plant utilization and other factors as
mentioned above.

RESULTS OF OPERATIONS

Net losses for the years ended December 31, 1999 and 1998 were ($9,739,984) and
($4,791,574), respectively. The net losses were principally related to
inadequacy of sales volume to absorb fixed operating expenses, and significantly
higher research and development costs, particularly costs associated with new
product development and bio-equivalence studies. Research and development
personnel at the Corporation's headquarters complex totaled 12 at year end 1999
and 1998.

<PAGE>   15

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)

SG&A expenses were $2,159,116 in 1999 as compared to $1,778,866 in 1998. This
increase was the result of employee severance costs, legal fees, and consulting
charges to comply with regulatory requirements.

RESEARCH AND DEVELOPMENT (R&D) EXPENSES

Research and Development Expenses for 1999 rose 122% to $6,332,390, from
$2,850,301 in 1998. The increase reflects the availability of funds and the
Corporation's commitment to new product development as a means to increase and
diversify its product offerings. Included in the research and development
expenses were those for staff comprising 12 drug researchers, noted above, and
direct expenses for the development of generic drugs and preparation of drug
applications to the FDA. In 1999, the Corporation introduced four DESI products
into the marketplace, and to date the Corporation completed five ANDA
submissions to the FDA with an additional three bio-equivalence studies
completed.

INTEREST INCOME

Interest income for 1999 was $32,764, compared with $42,209 for 1998. Interest
income results from short-term interest earning deposits.

INTEREST EXPENSE

Interest expense of $1,085,019 and $803,317 for the years ended December 31,
1999 and 1998, respectively, which was incurred primarily in connection with the
Corporation's mortgage obligation to the EDC and loans from shareholders and
directors, reflects the increased level of borrowings from shareholders.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1999, the Corporation's working capital (deficit) was
$12,291,880 compared with working capital of $405,818 at December 31, 1998. The
decrease principally reflects the classification of EDC and certain stockholder
debt to short-term, as such debt was previously classified as long-term. As
noted previously, on April 1, 2000 $1,290,000 of shareholder director loans and
the related interest will be satisfied by issuing common stock of the
Corporation at a rate of $1.00 per share. As such, there will be no cash
requirements with respect to this debt in the year 2000.

FUTURE OUTLOOK

Management's plan with regard to improving profitability, cash flows and
operations include infusion of additional funding from Sun Pharma and obtaining
additional bank lines of credit. Management's plan for 2000 include:

-      Focusing on compliance with FDA regulations.

-      Focusing on research and development with their staff of 12 scientists.
       Additionally, continued support from Sun Pharma having 26 researchers
       working in India supporting Caraco's research and development efforts.
       These personnel have a proven background in pharmaceutical development.



<PAGE>   16



-      The research and development team has already established bio-equivalence
       of eight ANDA products, out of which five have been filed with the FDA
       for approval. Further, seven DESI products have been developed and are
       being marketed. The team is presently working on 21 ANDA products which
       are in different stages of development including the products mentioned
       above. There is no assurance, however, that any of the ANDA products will
       be developed and marketed. The Corporation expects to complete the
       development of four to six products each year.

-      The Corporation intends to increase the width and depth of product
       portfolio to serve the customers effectively.

-      With the increase in the number of products, as well as anticipated
       volume increases for existing products, it is expected that manufacturing
       capacity utilization will improve, resulting in better cost absorption
       and improved margins.

-      The Corporation is committed to continuing R&D efforts and expects to
       spend approximately the same in 2000 as in 1999.

-      The Corporation will strive to enhance customer reach and achieve
       customer satisfaction through reliable product deliveries.

-      The Corporation is presently evaluating alliances with leading companies
       for manufacturing and marketing of new pharmaceutical products.


The Corporation uses computer hardware and financial and manufacturing software
that it purchased from third party suppliers. The Corporation has not and does
not expect to incur any significant costs to become Year 2000 compliant. The
Corporation has no information concerning the Year 2000 compliance status of its
suppliers or customers. If any of the Corporation's significant suppliers or
customers do not successfully and timely become Year 2000 compliant, the
Corporation's business or operations could be adversely affected. The
Corporation has not yet generated any disaster contingency plans related to the
Year 2000 compliance issue.


                                    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 "Information About Nominees and Incumbent Directors", "Committees
and Meetings of Directors", Executive Officers and "Section 16(a) Beneficial
Ownership Reporting Compliance", which are incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION.

       The information regarding executive compensation is included in the
Corporation's definitive Proxy Statement under the section "Compensation of
Executive Officers", 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 sections "Security Ownership of Certain Beneficial
Owners" and "Security Ownership of Management and Directors", which are
incorporated herein by reference.


<PAGE>   17

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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



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

      (a)

       3.01     Registrant's Amended and Restated Articles of Incorporation, as
                amended**

       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.*

      10.07     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.*


<PAGE>   18

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

      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.**

      10.20     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.**

      10.27     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.***

      10.32     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.*****

      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.*****

      10.42     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.*****

<PAGE>   19

      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.*****

      10.46     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.*****

      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.******


<PAGE>   20

      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.*******

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

      10.71     Employment Agreement dated September 22, 1998 with Narendra N.
                Borkar.********

      10.72     1999 Equity Participation Plan *********

      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.

      *******   Incorporated by reference from Exhibits to Registrant's
                Form 10-KSB which was originally field on or about March 30,
                1998, as Commission File No. 0-24676.

      ********  Incorporated by reference from Exhibits to Registrant's
                Form 10-QSB dated as of November 13, 1998.


<PAGE>   21

      ********* Incorporated by reference from Exhibit A to Registrants Proxy
                Statement dated April 28, 1999.

(b)  Reports on Form 8-K

             None




<PAGE>   22



                                   SIGNATURES

             Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on the
28th day of March, 2000

                                       CARACO PHARMACEUTICAL LABORATORIES, LTD.

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

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

Narendra N. Borkar*
--------------------------    Director and Chief Executive Officer (Principal
Narendra N. Borkar            Executive Officer and Principal Financial Officer)

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

Sailesh T. Desai*
--------------------------
Sailesh T. Desai              Director

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

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

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

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

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



*Signed power of attorney

<PAGE>   23



                       SECURITIES AND EXCHANGE COMMISSION


                                Washington, D. C.



                                   Form 10-KSB

                                For Corporations



                                  ANNUAL REPORT



                      FOR THE YEAR ENDED DECEMBER 31, 1999





                    CARACO PHARMACEUTICAL LABORATORIES, LTD.





                              FINANCIAL STATEMENTS

                                       AND

                          INDEPENDENT AUDITORS' REPORT




<PAGE>   24


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          INDEX TO FINANCIAL STATEMENTS

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

                              FINANCIAL STATEMENTS

<TABLE>

<S>                                                                                  <C>
INDEPENDENT AUDITORS' REPORT                                                             F-1

Balance Sheet - December 31, 1999                                                        F-2

Statements of Operations for the years ended December 31, 1999 and 1998                  F-4

Statements of Stockholders' Deficit for the years ended December 31, 1999 and            F-5
  1998

Statements of Cash Flows for the years ended December 31, 1999 and 1998                  F-6

Notes to Financial Statements                                                            F-7
</TABLE>







<PAGE>   25





                          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, 1999, and the
related statements of operations, stockholders' deficit and cash flows for the
years ended December 31, 1999 and 1998. 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, 1999 and the results of its operations and
its cash flows for the years ended December 31, 1999 and 1998 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.

/s/ Rehman Robson, P.C.
--------------------------------------
Rehman Robson, P.C.



Farmington Hills, Michigan
March 10, 2000



                                      F-1



<PAGE>   26

                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                                  BALANCE SHEET

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


<TABLE>
<CAPTION>

                                          ASSETS                              DECEMBER 31
                                                                                 1999
                                                                             ------------
<S>                                                                          <C>
CURRENT ASSETS
     Cash and cash equivalents                                               $    445,519
     Accounts receivable, net of allowances of $107,000                           364,188
     Inventories                                                                1,705,092
     Prepaid expenses and deposits                                                 77,335
                                                                             ------------

TOTAL CURRENT ASSETS                                                            2,592,134
                                                                             ------------

PROPERTY, PLANT AND EQUIPMENT - AT COST
     Land                                                                         197,305
     Buildings and improvements                                                 6,720,414
     Equipment                                                                  4,225,506
     Furniture and fixtures                                                       174,544
                                                                             ------------

     Total                                                                     11,317,769
     Less accumulated depreciation                                              3,864,553
                                                                             ------------

NET PROPERTY, PLANT AND EQUIPMENT                                               7,453,216
                                                                             ------------



TOTAL ASSETS                                                                 $ 10,045,350
                                                                             ============
</TABLE>




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



                                      F-2


<PAGE>   27

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

<TABLE>
<CAPTION>

                           LIABILITIES AND STOCKHOLDERS' DEFICIT                                DECEMBER 31
                                                                                                   1999
                                                                                                -----------
<S>                                                                                             <C>
CURRENT LIABILITIES
     Accounts payable                                                                           $ 1,256,985
     Accounts payable, Sun Pharma                                                                   274,148
     Accrued expenses                                                                               275,831
     Accrued interest                                                                             2,732,050
     Notes payable to stockholders                                                                1,465,000
     Note payable                                                                                 8,880,000
                                                                                                -----------

TOTAL CURRENT LIABILITIES                                                                        14,884,014
                                                                                                -----------

LONG-TERM LIABILITIES
     Notes payable to stockholders                                                                6,150,000
     Preferred stock dividends payable                                                              180,000
                                                                                                -----------

TOTAL LONG-TERM LIABILITIES                                                                       6,330,000
                                                                                                -----------

TOTAL LIABILITIES                                                                                21,214,014
                                                                                                -----------

COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 10)

STOCKHOLDERS' DEFICIT
     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 (Note 11);
       issued and outstanding 18,556,295 shares                                                  31,232,465
     Preferred stock dividends                                                                     (180,000)
     Accumulated deficit                                                                        (43,221,129)
                                                                                                -----------

TOTAL STOCKHOLDERS' DEFICIT                                                                     (11,168,664)
                                                                                                -----------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                                     $10,045,350
                                                                                                ===========
</TABLE>


                                      F-3
<PAGE>   28



                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                            STATEMENTS OF OPERATIONS

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

<TABLE>
<CAPTION>

                                                                          YEAR ENDED DECEMBER 31
                                                                      -----------------------------
                                                                        1 9 9 9          1 9 9 8
                                                                      ------------     ------------
<S>                                                                   <C>              <C>
Net sales                                                             $  2,895,022     $  2,663,633

Cost of goods sold                                                       3,091,245        2,244,932
                                                                      ------------     ------------

GROSS PROFIT (DIFFERENTIAL)                                               (196,223)         418,701

Selling, general and administrative expenses                             2,159,116        1,778,866
Research and development costs                                           6,332,390        2,850,301
                                                                      ------------     ------------

OPERATING LOSS                                                          (8,687,729)      (4,210,466)
                                                                      ------------     ------------

OTHER INCOME (EXPENSE)
     Interest expense                                                   (1,085,019)        (803,317)
     Interest income                                                        32,764           42,209
                                                                      ------------     ------------

OTHER EXPENSE - NET                                                     (1,052,255)        (761,108)
                                                                      ------------     ------------

NET LOSS                                                              $ (9,739,984)    $ (4,971,574)
                                                                      ============     ============

Net loss per basic and diluted common share                           $      (0.58)    $      (0.40)
                                                                      ============     ============
</TABLE>

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






                                      F-4
<PAGE>   29


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                       STATEMENTS OF STOCKHOLDERS' DEFICIT

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

<TABLE>
<CAPTION>

                                  PREFERRED STOCK                  COMMON STOCK
                             ---------------------------    ---------------------------
                               SHARES          AMOUNT          SHARES          AMOUNT
                             ------------   ------------    ------------   ------------
<S>                          <C>            <C>             <C>            <C>
Balance at
  January 1, 1998                 285,714   $  1,000,000     13,507,083    $ 27,830,340
Preferred stock dividends              --             --             --              --
Issuances of shares via
  private placements                   --             --      1,319,317       1,161,000
Shares issued to directors
  in lieu of compensation              --             --          1,600           1,500
Shares issued to employees
  in lieu of compensation              --             --         50,000          33,000
Retirement of common stock             --             --       (350,000)             --
Net loss                               --             --             --              --
                             ------------   ------------   ------------    ------------

Balance at
  December 31, 1998               285,714      1,000,000     14,528,000      29,025,840
Preferred stock dividends              --             --             --              --
Issuances of shares via
  private placements                   --             --        412,362         396,000
Shares issued to directors
  in lieu of compensation              --             --          2,600           2,959
Shares issued to employees
  in lieu of compensation              --             --          4,000           3,000
Issuance of shares to
  Sun Pharma                           --             --      3,609,333       1,804,666
Net loss                               --             --             --              --
                             ------------   ------------   ------------    ------------

Balance at
  December 31, 1999               285,714   $  1,000,000     18,556,295    $ 31,232,465
                             ============   ============   ============    ============

<CAPTION>


                                COMMON
                                 STOCK         PREFERRED
                             SUBSCRIPTION        STOCK        ACCUMULATED
                              RECEIVABLE       DIVIDENDS        DEFICIT          TOTAL
                             -------------   -------------   -------------   -------------
<S>                          <C>             <C>             <C>             <C>
Balance at
  January 1, 1998            $ (4,220,000)   $    (60,000)   $(28,509,571)   $ (3,959,231)
Preferred stock dividends              --         (60,000)             --         (60,000)
Issuances of shares via
  private placements            4,220,000              --              --       5,381,000
Shares issued to directors
  in lieu of compensation              --              --              --           1,500
Shares issued to employees
  in lieu of compensation              --              --              --          33,000
Retirement of common stock             --              --              --              --
Net loss                               --              --      (4,971,574)     (4,971,574)
                             ------------    ------------    ------------    ------------

Balance at
  December 31, 1998                    --        (120,000)    (33,481,145)     (3,575,305)
Preferred stock dividends              --         (60,000)             --         (60,000)
Issuances of shares via
  private placements                   --              --              --         396,000
Shares issued to directors
  in lieu of compensation              --              --              --           2,959
Shares issued to employees
  in lieu of compensation              --              --              --           3,000
Issuance of shares to
  Sun Pharma                           --              --              --       1,804,666
Net loss                               --              --      (9,739,984)     (9,739,984)
                             ------------    ------------    ------------    ------------

Balance at
  December 31, 1999          $         --    $   (180,000)   $(43,221,129)   $(11,168,664)
                             ============    ============    ============    ============
</TABLE>




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



                                      F-5


<PAGE>   30


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                            STATEMENTS OF CASH FLOWS

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

<TABLE>
<CAPTION>

                                                                                  YEAR ENDED DECEMBER 31
                                                                                ---------------------------
                                                                                  1 9 9 9        1 9 9 8
                                                                                ------------   ------------
<S>                                                                             <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                                   $(9,739,984)   $(4,971,574)
     Adjustments to reconcile net loss to
       net cash used in operating activities
        Depreciation                                                                576,182        551,969
        Common shares issued for interest expense                                   119,043        204,000
        Common shares issued for product formula                                  1,804,666              -
        Common shares issued for compensation                                         5,959         34,500
        Changes in operating assets and liabilities
          which provided (used) cash:
           Accounts receivable                                                      109,002       (323,543)
           Inventories                                                             (435,549)      (728,560)
           Prepaid expenses and deposits                                             (7,603)        51,875
           Accounts payable                                                         682,817       (310,829)
           Accrued interest and other expenses                                    1,196,858        544,519
                                                                                -----------    -----------
NET CASH USED IN OPERATING ACTIVITIES                                            (5,688,609)    (4,947,643)
                                                                                -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES
     Purchases of property, plant and equipment                                    (360,448)      (332,637)
                                                                                -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from issuances of common stock                                        396,000      5,381,000
     Borrowings from stockholders                                                 5,300,000        300,000
     Repayment of loans from stockholders                                           (25,000)             -
                                                                                -----------    -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                         5,671,000      5,681,000
                                                                                -----------    -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                               (378,057)       400,720
Cash and cash equivalents, beginning of year                                        823,576        422,856
                                                                                -----------    -----------
CASH AND CASH EQUIVALENTS, END OF YEAR                                          $   445,519    $   823,576
                                                                                ===========    ===========
</TABLE>


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



                                      F-6






<PAGE>   31


                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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

1.       ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Organization and Nature of Business

         Caraco Pharmaceutical Laboratories, Ltd. ("Caraco" or the
         "Corporation") was established 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,
         1999.

         A significant source of funding for the Corporation has been from
         private placement offerings, stockholder notes and from the Economic
         Development Corporation of the City of Detroit (the "EDC"), which
         loaned approximately $9.1 million to the Corporation in accordance with
         a Development and Loan Agreement dated August 10, 1990 (see Note 5).

         The Corporation and an Indian specialty pharmaceutical company, Sun
         Pharmaceutical Industries, Ltd. ("Sun Pharma") completed an agreement,
         in 1997, whereby Sun Pharma has invested $7,500,000 into common stock
         of the Corporation, and is required to exchange the formula for 25
         products over a period of five years to the Corporation 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). At December 31, 1999, Sun Pharma has delivered the formula
         for 6 products, and holds approximately 41% of the outstanding common
         stock of the Corporation.

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

         Net sales in 1999 and 1998 included approximately $195,000 and
         $600,000, respectively, related to contracted manufacturing activities.

         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.

         The Corporation has never achieved sales necessary to support
         operations. The Corporation has, as of December 31, 1999, a
         stockholders' deficit of $11,168,664. 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.

                                      F-7




<PAGE>   32
                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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

         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 plan with regard to improving profitability, cash flows
         and operations include infusion of additional funding from Sun Pharma
         and obtaining additional bank lines of credit. Management's plan for
         2000 includes:

         -     Focusing on compliance with FDA regulations.

         -     Focusing on research and development with their staff of 12
               scientists. Additionally, continued support from Sun Pharma
               having 26 researchers working in India supporting Caraco's
               research and development efforts. These personnel have a proven
               background in pharmaceutical development.

         -     The research and development team has already established
               bio-equivalence of eight ANDA products, out of which five have
               been filed with the FDA for approval. Further, seven DESI
               products have been developed and are being marketed. The team is
               presently working on 21 products which are in different stages of
               development including the products mentioned above. There is no
               assurance, however, that any of these products will be developed
               and marketed. The Corporation expects to complete the development
               of four to six products each year.

         -     The Corporation intends to increase the width and depth of
               product portfolio to serve the customers effectively.

         -     With the increase in the number of products, as well as
               anticipated volume increases for existing products, it is
               expected that manufacturing capacity utilization will improve,
               resulting in better cost absorption and improved margins.

         -     The Corporation is committed to continuing R&D efforts and
               expects to spend approximately the same in 2000 as in 1999.

         -     The Corporation will strive to enhance customer reach and achieve
               customer satisfaction through reliable product deliveries.

         -     The Corporation is presently evaluating alliances with leading
               companies for manufacturing and marketing of new pharmaceutical
               products.



                                      F-8



<PAGE>   33
                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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

         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.

         Cash and Cash Equivalents

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

         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 manufacturing or 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. During the second quarter of 1999, the
         Corporation determined that production had reached sufficient levels
         such that labor and overhead should be capitalized into inventory
         costs. The ending inventory in 1999 takes into account capitalized cost
         of labor and overhead of bulk tablets and finished goods amounting to
         approximately $145,000. During 1998, direct labor and indirect
         manufacturing overhead costs had not been capitalized and inventoried
         due to the relatively low levels of production volume and plant
         capacity utilization.

         Loss Per Share

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

         At December 31, 1999 and 1998, options to purchase 2,569,355 and
         2,807,545 shares, respectively, were excluded from the computation of
         earnings per share because the options' exercise prices were greater
         than the average market price of the common shares. A reconciliation of
         the denominators used in the basic and diluted share calculation
         follows for the years ended December 31:

<TABLE>
<CAPTION>
                                                             1999               1998
                                                         ---------------    --------------
<S>                                                      <C>                <C>
         Denominator:
           Weighted average shares outstanding, basic        16,725,271        12,852,708
           Incremental shares from assumed conversion
             of options                                          76,861             4,500
                                                         ---------------    --------------
         Weighted average shares outstanding, diluted        16,802,132        12,856,608
                                                         ===============    ==============
</TABLE>

         Property, Plant and Equipment and Depreciation

         Depreciation is computed using the straight line method over the
         estimated useful lives of the related assets, which range from 5 to 40
         years. Management annually reviews these assets for impairment and
         reasonably believes the carrying value of these assets will be
         recovered through cash flow from operations, assuming the Corporation
         is successful in continuing to operate as a going concern.

                                      F-9



<PAGE>   34
                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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

         Federal Income Taxes

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

         Research and Development Costs

         Research and development costs are charged to expense as incurred.

         Fair Values of Financial Instruments

         The carrying values of cash equivalents, accounts receivable, and
         accounts payable approximate their values due to the short-term
         maturities of these financial instruments.

         The 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 the fair value on the
         date of issuance.

                                      F-10




<PAGE>   35

                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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

         Common Stock Issued to Sun Pharma

         Common stock is issued to Sun Pharma in exchange for the formula for
         products delivered to the Corporation. Shares are recorded as research
         and development costs on the date of issuance.


2.       SUPPLEMENTAL CASH FLOWS INFORMATION

         Non-cash Investing and Financing Activities

         The Corporation issued 355,577 shares of common stock, during 1997, in
         exchange for the satisfaction of interest incurred and to be incurred
         on loans from stockholders from August 1, 1997 through August 1, 1999.
         Interest expense satisfied in exchange for these shares, was $119,043
         and $204,000 for the years ended December 31, 1999 and 1998,
         respectively.


3.       ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE

         The Corporation sells its products using customary trade terms; the
         resulting accounts receivable are unsecured. Accounts receivable and
         related allowances, as of December 31, 1999, are summarized as follows:

<TABLE>
<S>                                                        <C>
           Accounts receivable                             $       471,188
                                                           ---------------
           Allowances:
             Doubtful accounts                                       4,500
             Sales returns and allowances                            7,500
             Price adjustments                                      95,000
                                                           ---------------
           Total allowances                                        107,000
                                                           ---------------
           Accounts receivable, net of allowances          $       364,188
                                                           ===============
</TABLE>




4.       INVENTORIES

         Inventories consist of the following amounts at December 31, 1999:

<TABLE>
<S>                                                        <C>
           Raw materials                                   $         955,391
           Work in process                                           497,787
           Finished goods                                            251,914
                                                           -----------------
           Total                                           $       1,705,092
                                                           =================
</TABLE>

                                      F-11


<PAGE>   36

                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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

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

         During 1999, the Corporation purchased approximately $397,000 of its
         raw materials from Sun Pharma.


5.       DEBT INCLUDING RELATED PARTIES

         EDC Loan

         Debt at December 31, 1999 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.

         Effective April 2, 1993, and subsequently on August 5, 1997, the
         Corporation and the EDC of the City of Detroit restructured the
         Agreement discussed above. The amendment included the deferral of
         scheduled principal and interest payments until February 1, 1999, at
         which time additional deferred principal and interest due under the
         terms of the original agreement were required in amounts sufficient to
         amortize the total deferred amount through July 2002. Additionally the
         amendment included a reduction in the stipulated interest rate from the
         inception of the loan through 1993 from 10% to 8.5%. The interest rates
         from 1994 through July 2002 vary from 5% to 6.3%, as described in the
         amendments (effective rate of 5.93% at December 31, 1999.)

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

         During 1999, the Corporation had not made any of the scheduled payments
         related to the agreement. The Corporation is currently renegotiating
         the repayment terms with the EDC. On February 22, 2000 and March 1,
         2000, the Corporation made payments of $600,000 and $200,000,
         respectively, to the EDC. Such payments have not brought the
         Corporation current in its obligations to the EDC, and such payments
         were made without prejudice to the rights of the EDC to exercise all
         remedies available to the EDC for failure to make the scheduled
         payments. While the terms of the restructured loan are being
         negotiated, the Corporation intends to continue to make payments to the
         EDC, again without prejudice to the rights of the EDC. Upon a final

                                      F-12
<PAGE>   37

                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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

         agreement of the restructured terms of the loan, of which there can be
         no assurance, the Corporation expects to then commence making the
         requisite agreed upon payments.

         Stockholder Notes Payable

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

<TABLE>
<CAPTION>
                                                                           1999                 1998
                                                                      --------------        -------------
<S>                                                                   <C>                   <C>
            10% Promissory note payable to Sun Pharma, principal
            balance payable in full in October 2003, with
            interest payable semi-annually, subject to the
            provisions of an Inter-Creditor agreement.                $    5,300,000        $     300,000

            10% Promissory notes payable to two stockholder
            directors, with principal which was due August 1999
            and is subject to the provisions of an
            Inter-Creditor agreement.  These notes will be
            converted into an equivalent number of common shares
            of the Corporation on April 1, 2000.                           1,290,000            1,290,000

            10% Promissory note payable to Sun Pharma Global,
            Inc., a wholly-owned subsidiary of Sun Pharma,
            subject to the provisions of an Inter-Creditor
            agreement.                                                       850,000              550,000

            10% Promissory note payable to stockholder director,
            payable in quarterly installments of $25,000 through
            2000, with a final payment due December 2000 in the
            form of common shares of the Corporation equal to
            $100,000.                                                        175,000              200,000
                                                                      --------------        -------------

            Total shareholder notes payable                                7,615,000            2,340,000

            Less amounts due within one year                               1,465,000               25,000
                                                                      --------------        -------------
            Shareholder notes due after one year                      $    6,150,000        $   2,315,000
                                                                      ==============        =============
</TABLE>

         Notes payable to Sun Pharma and Sun Pharma Global, Inc. are
         subordinated to the EDC loan, these parties currently have no intent of
         demanding payment within the upcoming year; therefore, such notes have
         been classified as long-term.

         On December 24, 1999, Sun Pharma provided an additional line-of-credit
         to the Corporation of up to $2,000,000 at an annual interest rate of
         10% on any outstanding borrowings, which matures no later than December
         2001.

                                      F-13
<PAGE>   38
                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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

         Interest incurred on stockholder notes amounted to $477,212 and
         $210,411 in 1999 and 1998, respectively.

         Letter of Credit

         The Corporation has a $250,000 letter of credit agreement with Bank One
         to support purchases of inventories. At December 31, 1999 there was
         $52,800 outstanding under this agreement. Amounts outstanding under
         this letter of credit are included in accounts payable.


6.       INCOME TAXES

         At December 31, 1999 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
         $13,400,000 has been established. Changes in the valuation allowance
         were approximately $3,300,000 and $1,700,000 in 1999 and 1998,
         respectively

         At December 31, 1999, net operating loss carryforwards of approximately
         $38,000,000 are available to offset future federal taxable income, if
         any, through future years. The Corporation's ability to utilize the net
         operating loss carryforwards may be limited due to ownership changes.


7.       STOCKHOLDERS' DEFICIT

         Sun Pharma

         The Corporation issued 5,300,000 shares of common stock to Sun Pharma
         in exchange for $7,500,000 which was received by the Corporation in
         installments during 1997 and 1998. During 1998 and 1997, cash proceeds
         of $4,220,000 and $3,200,000 were received from Sun Pharma in
         consideration for 3,886,667 and 1,413,333 shares, respectively, of
         common stock.

         Private Placement

         In connection with private placement offerings in 1999 and 1998, the
         Corporation sold 412,362 shares of common stock netting $396,000 and
         1,319,317 shares netting $1,161,000, respectively. The shares were sold
         at prices ranging from $0.88 to $1.00 per share.

         Other Common Stock Issuances

         During 1999, the Corporation issued 3,609,333 shares of common stock to
         Sun Pharma in exchange for the formula for six ANDA and two DESI
         products delivered to Caraco. Sun Pharma has also earned the right to
         receive 17,333 common shares, which will be issued in 2000. Such shares
         have been recorded as

                                      F-14
<PAGE>   39
                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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

         research and development expense, and have been included in the
         calculation of the weighted average number of common shares outstanding
         in the year the respective formula has been delivered.

         During 1999, the Corporation issued 4,000 shares of common stock to
         various employees.

         In connection with an employment agreement entered into in 1998 with
         its Chief Executive Officer, the Corporation awarded a common stock
         bonus of 50,000 shares. Compensation expense of $3,000 and $33,000 was
         recorded during 1999 and 1998, respectively, based on the fair value
         per share on the date of issuance.

         During 1999 and 1998, the Corporation issued 2,600 and 1,600 shares,
         respectively, of common stock to non-employee directors in exchange for
         services rendered. The Corporation recorded compensation expense of
         $2,959 and $1,500 in 1999 and 1998, respectively, based on the fair
         values of such shares on their issuance dates.

         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, at the
         option of the holder, into one share of common stock through January 1,
         2004. The preferred shares require annual dividends of $.21 per share
         on a cumulative basis. Accrued dividends on preferred stock at December
         31, 1999 were $180,000. It is not expected that such dividends will be
         paid in 2000 and, accordingly, the related liability is not classified
         as current on the accompanying balance sheet.


8.       COMMON STOCK OPTIONS AND WARRANTS

         Stock Option Plans

         During 1999, shareholders approved the 1999 Equity Participation Plan
         (the "1999 Plan"), for Caraco employees, consultants and non-employee
         directors, and reserved for issuance thereunder 3,000,000 shares of
         common stock.

         The Corporation maintains the 1999 Plan and the 1993 Stock Option Plan
         in which the Corporation may grant options to employees and
         non-employee-directors for the purchase of up to 3,450,000 shares of
         common stock. The exercise price of options granted may not be less
         than the fair value of the common stock on the date of grant. Options
         granted under this plan vest in annual installments, from the date of
         grant, over a five year period, and expire within six years from the
         date of the grant. Activity with respect to these options is summarized
         as follows:

                                      F-15
<PAGE>   40

                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                               1999                    1998
                                                    -------------------------  ---------------------------
                                                                   Weighted                     Weighted
                                                                    Average                     Average
                                                                   Exercise                     Exercise
                                                     Shares          Price       Shares          Price
                                                    ----------  -------------  -----------  --------------
<S>                                                 <C>         <C>            <C>         <C>
               Outstanding, beginning of year         406,721     $     2.15     251,021     $    3.10
               Granted                                200,000           1.15     231,500          0.94
               Terminated                             (60,252)          1.24     (75,800)         1.62
                                                      -------     ----------     -------     ---------
               Outstanding, end of year               546,469     $     1.88     406,721     $    2.15
                                                      =======     ==========     =======     =========
               Options exercisable, end of year       187,700     $     3.25     129,534     $    3.71
                                                      =======     ==========     =======     =========
</TABLE>





         Options at December 31, 1999
<TABLE>
<CAPTION>
                                                          Options Outstanding                   Options Exercisable
                                                   -------------------------------------       ----------------------
                                                                Remaining
                                                                Contractual   Exercise                      Exercise
                  Range of Exercise Prices           Shares       Life *      Price *           Shares      Price *
                  --------------------------       -----------  -----------  -----------       ----------   ---------
<S>                                                <C>         <C>           <C>              <C>           <C>
                     $0.94 to $1.00                   177,938   4.4 years        $ 0.94           36,675      $ 0.94
                     $1.01 to $2.00                   262,000   4.5 years          1.23           56,000        1.49
                     $2.01 to $3.00                     6,000   2.7 years          2.50            3,600        2.50
                     $3.01 to $4.00                    25,000   1.7 years          4.00           21,000        4.00
                     $4.01 to $5.00                    31,531   1.5 years          4.83           26,425        4.80
                     $6.01 to $7.00                    44,000   0.1 years          6.16           44,000        6.16
                                                   -----------  -----------  -----------       ----------   ---------
                  Total                               546,469   3.92 years       $ 1.88          187,700      $ 3.25
                                                   ===========  ===========  ===========       ==========   =========
</TABLE>

                  *Weighted average

         Other Common Stock Option Agreements

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

<TABLE>
<CAPTION>
                                                                1999                           1998
                                                     ----------------------------  ----------------------------
                                                                       Weighted                      Weighted
                                                                       Average                       Average
                                                                       Exercise                      Exercise
                                                        Shares          Price        Shares           Price
                                                     -------------  -------------  ------------  --------------
<S>                                                  <C>            <C>            <C>           <C>
                 Outstanding, beginning of year        2,550,824    $       3.38    2,651,089     $       3.58
                 Granted                                 600,000            1.40      150,000             0.66
                 Terminated                             (700,000)          (6.50)    (250,265)            3.80
                                                     -------------  -------------  ------------  --------------
                 Outstanding, end of year              2,450,824    $       2.00    2,550,824     $       3.38
                                                     =============  =============  ============  ==============

                 Options exercisable, end of year      2,330,824    $       2.07    2,400,824     $       3.55
                                                     =============  =============  ============  ==============
</TABLE>


                                      F-16

<PAGE>   41
                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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


         Options at December 31, 1999
<TABLE>
<CAPTION>
                                            Options Outstanding                  Options Exercisable
                                           --------------------------------------      -----------------------
                                                          Remaining
                                                         Contractual   Exercise                       Exercise
               Range of Exercise Prices      Shares        Life *       Price *          Shares       Price *
               --------------------------- ------------  ------------  ----------      ------------   --------
<S>                                        <C>           <C>           <C>             <C>            <C>
                  $0.66 to $1.00               250,000     4.8 years      $ 0.75           130,000     $ 0.83
                  $1.01 to $2.00             1,149,158     3.3 years        1.42         1,149,158       1.42
                  $2.01 to $3.00               681,666     6.2 years        2.63           681,666       2.63
                  $3.01 to $4.00               370,000     3.8 years        3.50           370,000       3.50
                                           ------------  ------------  ----------      ------------   --------
               Total                         2,450,824    4.34 years      $ 2.00         2,330,824     $ 2.07
                                           ============  ============  ==========      ============   ========
</TABLE>


               *Weighted average

         The Corporation follows the disclosure aspects of Statement of
         Financial Accounting Standards (SFAS) No. 123, "Accounting for
         Stock-Based Compensation". The Corporation continues to apply
         Accounting Principles Board (APB) Opinion No. 25 in accounting for its
         plans and, accordingly, no compensation cost has been recognized in the
         financial statements for its outstanding stock options. Had stock
         compensation expense been determined pursuant to the methodology
         provided in SFAS No. 123, using the Black-Scholes option pricing model
         for grants made in 1999 and 1998. The pro-forma effect on operations
         would have been an increase in the 1999 and 1998 net loss of $304,000
         and $89,000, respectively. The proforma effect includes the following
         weighted average assumptions:

<TABLE>
<CAPTION>
                                                                         1999                 1998
                                                                    ---------------      ---------------
<S>                                                                 <C>                  <C>
                    Expected volatility                                     95%                  80%
                    Risk free interest rate                                5.5%                 5.5%
                    Expected lines of options (in years)                    6                    6
</TABLE>

         Strategic Alliance Stock Option Arrangement

         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. Hexal subsequently decided to proceed with the
         development of only one product. To date, there have been limited sales
         of the introduced product, but no options have been exercised. At
         December 31, 1999, royalties payable to Hexal, which are included in
         accrued expenses amount to approximately $102,000.

                                      F-17

<PAGE>   42
                    CARACO PHARMACEUTICAL LABORATORIES, LTD.

                          NOTES TO FINANCIAL STATEMENTS

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


         Employment Agreement Stock Options

         In connection with an employment agreement entered into in 1998, the
         Corporation granted to its Chief Executive Officer options for the
         purchase of 150,000 shares of common stock at an exercise price of
         $0.66 per share. The options vest ratably over a five-year period.


9.       MAJOR CUSTOMERS

         Shipments to one wholesale customer accounted for approximately 15% and
         13% of net sales in 1999 and 1998, respectively. Balances due from this
         customer represented approximately 10% and 13% of accounts receivable
         at December 31, 1999 and 1998, respectively.

         Shipments to another wholesale customer accounted for approximately 11%
         and 17% of net sales in 1999 and 1998, respectively. Balances due from
         this customer represented approximately 3% and 2% of accounts
         receivable at December 31, 1999 and 1998, respectively.


10.      OTHER MATTERS

         The Corporation is involved in routine litigation incidental to its
         business. Management believes the resolution of these matters will not
         materially affect the financial statements.


11.      SUBSEQUENT EVENTS

         Effective February 10, 2000, the articles of incorporation of the
         Corporation were amended to increase the authorized number of common
         shares from 20,000,000 to 30,000,000.

         Subsequent to year end, the Corporation received proceeds of $1,600,000
         on a $2,000,000 line of credit from Sun Pharma.



                                    * * * * *



                                      F-18

<PAGE>   43


                                 Exhibit Index
                                 -------------
<TABLE>
<CAPTION>
Exhibit No.                    Description
-----------                    -----------
<S>                            <C>
   24                          Power of Attorney
   27                          Financial Data Schedule
</TABLE>