UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 1999

                                       OR

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

                        Commission file number 000-22171

                            KOS PHARMACEUTICALS, INC.
               (Exact Name of Company as Specified in Its Charter)

              FLORIDA                                   65-0670898
              -------                                   ----------
  (State or Other Jurisdiction of           (I.R.S. Employer Identification No.)
  Incorporation or Organization)

            1001 BRICKELL BAY DRIVE, 25TH FLOOR, MIAMI, FLORIDA 33131
            ---------------------------------------------------------
               (Address of Principal Executive Offices, Zip Code)

Company's Telephone Number, Including Area Code: (305) 577-3464

           Securities registered pursuant to section 12(g) of the Act:

                          Common Stock, $.01 par value

     Indicate by check mark whether the Company (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 Company
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 disclosures of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ ]

     The aggregate market value of Kos Pharmaceuticals, Inc. Common Stock, $.01
par value, held by non-affiliates, computed by reference to the price at which
the stock was sold as of February 25, 2000: $150,318,771.

     Number of shares of Common Stock of Kos Pharmaceuticals, Inc. issued and
outstanding as of February 25, 2000: 18,162,217.

                       DOCUMENTS INCORPORATED BY REFERENCE

Definitive Proxy Statement for the Company's 2000 Annual Meeting of Shareholders
(incorporated in Part III to the extent provided in Items 10, 11, 12 and 13
                                    hereof).

<PAGE>

                                TABLE OF CONTENTS

PART I                                                                      PAGE
                                                                            ----

Item 1.     Business.......................................................... 1

Item 2.     Properties........................................................12

Item 3.     Legal Proceedings.................................................12

Item 4.     Submission of Matters to a Vote of Securities Holders.............12



PART II

Item 5.     Market for the Company's Common Stock and Related Shareholder
            Matters...........................................................13

Item 6.     Selected Consolidated Financial Data..............................14

Item 7.     Management's Discussion and Analysis of Financial Condition and
            Results of Operations.............................................15

            Forward-Looking Information: Certain Cautionary Statements........20

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk........29

Item 8.     Consolidated Financial Statements and Supplementary Data..........29

Item 9.     Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosures.............................................50



PART III    ..................................................................51



PART IV

Item 14.    Exhibits, Financial Schedules and Reports on Form 8-K.............52



Signatures  ..................................................................55



NIASPAN/registered mark/ and NICOSTATIN/trademark/ are trademarks of Kos
Pharmaceuticals, Inc. HEART ALLIANCE/service mark/ is a service mark of Kos
Pharmaceuticals, Inc.
MAVIK/registered mark/ and TARKA/registered mark/ are trademarks of Knoll
Pharmaceutical Company.


<PAGE>


                                     PART I

ITEM 1.  BUSINESS

     Kos Pharmaceuticals, Inc. ("Kos" or the "Company") is a fully-integrated
specialty pharmaceutical company engaged in the development of proprietary
prescription products for the treatment of chronic cardiovascular and
respiratory diseases. The Company manufactures its lead product,
NIASPAN/registered mark/, and markets such product directly through its own
specialty sales force. Additionally, the Company markets two complementary
anti-hypertensive products, MAVIK/registered mark/ AND TARKA/registered mark/,
through a co-promotion alliance with Knoll Pharmaceutical Company. The Company's
cardiovascular products under development consist of controlled-release,
once-a-day, oral dosage formulations. The Company's respiratory products under
development consist of aerosolized inhalation formulations to be used primarily
with the Company's proprietary inhalation devices.

     The Company believes that substantial market opportunities exist for
developing drugs that are reformulations of existing approved prescription
pharmaceutical products, but which offer certain safety advantages (such as
reduced harmful side effects) or patient compliance advantages (such as
once-a-day rather than multiple daily dosing regimens) over such currently
existing products. Kos believes that developing proprietary products based on
currently approved drugs, rather than new chemical entities ("NCEs"), may reduce
regulatory and development risks and, in addition, may facilitate the marketing
of such products because physicians are generally familiar with the safety and
efficacy of such products. All of the Company's products currently under
development require new drug application ("NDA") filings with the U.S. Food and
Drug Administration ("FDA"). Although such NDA filings are more expensive and
time consuming, developing products that require NDA approval offers several
advantages compared with generic products, including the potential for higher
gross margins, limited competition resulting from significant clinical and
formulation development challenges, and a three-year statutory barrier to
generic competition.

     The principal elements of the Company's business strategy are as follows:
(i) select products with unrealized commercial potential where safety or patient
compliance may be improved; (ii) focus on the large, rapidly growing
cardiovascular and respiratory markets, which include many chronic diseases
requiring long-term therapy; (iii) develop proprietary formulations of currently
approved pharmaceutical compounds; (iv) manage internally the clinical
development of its products; (v) manufacture its products internally; (vi)
market its products directly through the Company's specialty sales force; and
(vii) leverage its core competencies through corporate and academic alliances.

     The Company's predecessor, Kos Holdings, Inc. ("Holdings"), which was
previously named Kos Pharmaceuticals, Inc., was incorporated in Florida on July
1, 1988. On June 25, 1996, Kos (named for the Greek island where Hippocrates
founded the science of medicine) was incorporated in Florida as the successor to
the business of Holdings. On June 30, 1996, all of the assets (except for
certain net operating loss carry-forwards) and all of the liabilities of
Holdings were transferred to the Company in exchange for shares of Common Stock
of the Company (the "Reorganization"). The Reorganization was accomplished in
order to transfer the assets and operations of Holdings to the Company while
preserving Holdings' net operating loss carry-forwards and related tax benefits
for Holdings. As a result, the Company had no tax assets or liabilities as of
June 30, 1996. Kos Investments, Inc. ("Investments") is the sole shareholder of
Holdings. Investments is controlled by, and serves as an investment vehicle for,
Michael Jaharis, one of the Company's founders and its Chairman. All references
in this 10-K to the Company include its wholly owned subsidiaries, Aeropharm
Technology, Inc. ("Aeropharm"), IEP Pharmaceutical Devices, Inc. ("IEP"), and
the business and operations of Holdings until June 30, 1996. The Company's
principal executive offices are located at 1001 Brickell Bay Drive, 25th Floor,
Miami, Florida 33131, and its telephone number is (305) 577-3464.

                                       1
<PAGE>

NIASPAN

     On July 28, 1997, the Company received clearance from the FDA to market
NIASPAN for the treatment of mixed lipid disorders. NIASPAN is the only
once-a-day and the first extended-release formulation of any type of niacin
product ever approved by the FDA for the treatment of mixed lipid disorders. The
Company began shipping NIASPAN to wholesalers in mid-August 1997 and began
detailing NIASPAN to physicians during September 1997.

     Niacin, the active ingredient in NIASPAN, is a water soluble vitamin long
recognized by the National Institutes of Health ("NIH") and the American Heart
Association ("AHA") as an effective pharmacological agent for the treatment of
multiple lipid disorders, including elevated low-density lipoprotein ("LDL") or
"bad" cholesterol, total cholesterol, and triglycerides and depressed
high-density lipoprotein ("HDL") or "good" cholesterol. Based principally on the
results of Kos clinical studies evaluating NIASPAN, as well as other long-term
interventional studies evaluating niacin for the reduction of coronary events,
NIASPAN is indicated for the following: (i) reduce elevated total cholesterol,
LDL cholesterol, and apolipoprotein B, and increase low HDL cholesterol; (ii)
reduce very high serum triglycerides; (iii) reduce elevated total and LDL
cholesterol when used in combination with a bile-acid binding resin; (iv) reduce
recurrent nonfatal myocardial infarction; and (v) promote the regression or slow
the progression of atherosclerosis when combined with bile-binding resins. In
addition, NIASPAN'S prescribing information references NIASPAN'S ability to
significantly reduce lipoprotein (a) ["Lp(a)"], which is an independent risk
factor for coronary heart disease ("CHD").

     During the past five years, researchers have established through several
long-term clinical outcome studies that reducing LDL cholesterol results in
about a 30% reduction in nonfatal heart attacks and cardiac death. Such studies,
however, also have revealed that despite the significant reduction in LDL
cholesterol levels, about 70% of cardiac events were not avoided when compared
with placebo -- suggesting that there may be other lipid risk factors that
contribute to morbidity and mortality in such patients. Additionally, a landmark
long-term clinical outcome study known as the HDL Intervention Trial ("HIT"),
which was published in the August 5 issue of THE NEW ENGLAND JOURNAL OF
MEDICINE, showed that raising HDL cholesterol reduced significantly the
incidence of morbidity and mortality. Specifically, the HIT results showed that
even a 6% increase in HDL resulted in a 26% reduction in the incidence of
CHD-death and nonfatal heart attacks and a 26% reduction in stroke in patients
with CHD who had depressed levels of HDL, but normal levels of LDL and
triglycerides.

     The results from HIT are consistent with conclusions from previous
epidemiological studies demonstrating that for each 1% increase in HDL
cholesterol, the risk of developing CHD decreases by 2% to 3%, whereas a 1%
decrease in LDL cholesterol results in only a 1% decrease in CHD risk.
Consequently, agents that further increase HDL cholesterol could potentially
improve the benefits with respect to morbidity and mortality. NIASPAN is the
most potent new drug on the market for raising HDL cholesterol.

     NIASPAN's potency for raising HDL cholesterol was observed in a
double-blinded, well-controlled clinical study was conducted comparing the
effects of NIASPAN with gemfibrozil, the drug tested in the HIT study, in
patients having low HDL as their only lipid abnormality. The results from this
study showed that NIASPAN was twice as effective as gemfibrozil in raising HDL
cholesterol and four times more effective in raising LP-AI, a subfraction of HDL
that is thought to be cardio-protective. Additionally, NIASPAN significantly
reduced triglycerides and also lowered LDL cholesterol, while gemfibrozil
reduced triglycerides somewhat more than NIAPAN but significantly raised LDL
cholesterol by 9%. The Company believes that NIASPAN generates the optimal blend
of improving the major lipid components that contribute to coronary heart
disease.

                                       2
<PAGE>

     The Company markets NIASPAN directly to specialist physicians within the
cardiovascular market who specialize in treating patients with CHD and who are
among the leading prescribers of lipid-altering medications. Such
"lipid-management specialists," consist principally of cardiologists,
endocrinologists, and internists. Of the 14 million Americans who are estimated
by the AHA to have CHD, about 40% have low levels of HDL cholesterol as their
primary lipid abnormality. About 60% of patients with CHD have two or more lipid
disorders. The Company believes that patients with low HDL or multiple lipid
disorders would benefit from NIASPAN therapy. Many such patients are candidates
for combination therapy using principally an HMG-CoA reductase inhibitor, or
"statin," to reduce LDL combined with NIASPAN to raise HDL, lower triglycerides,
and enhance the statin's LDL efficacy. Since the launch of NIASPAN, Kos has
found that many lipid specialists are receptive to using combination therapy to
treat their refractory patients in order to address all of the lipids that may
contribute to a coronary event. More than 80% of the 10,000 cardiologists who
have been detailed on NIASPAN since its launch have begun to prescribe NIASPAN,
and more than 50,000 physicians have prescribed NIASPAN at least once.

     As a result of the stronger NIASPAN adoption rate by cardiologists and
other specialist physicians, in 1999, Kos refined its physician calling list to
include twice as many cardiologists and it increased the number of
endocrinologists, internists and generalists who specialize in cardiology. In
total, the list consists of about 27,000 physicians who treat patients who have
had a coronary event such as a myocardial infarction or angina. Such physicians
are receptive to prescribing NIASPAN because of NIASPAN's effectiveness in
modulating other critical lipid fractions in addition to LDL -- such as HDL,
triglycerides, and Lp(a) -- which typically afflict patients with CHD.

     In connection with the more focused physician calling list, Kos increased
the call frequency to this physician universe to about once a month. As a
result, the Company believes that physicians who may not have been frequently
detailed prior to 1999 will begin to understand the features and benefits of
NIASPAN and increasingly prescribe the product. An analysis of prescribing
patterns reveals that physicians typically require at least 12 calls before they
begin to adopt NIASPAN broadly in their practice. Consequently, Kos expects
prescribing activity from the newly refined physician list to show dividends in
2000 and beyond.

     In addition to the improved call plan, the Company implemented several
other marketing initiatives that are expected to contribute to steady growth of
NIASPAN. Specifically, during the first half of 1999, Kos implemented its
innovative HEART ALLIANCE/trademark/ patient compliance program. The program is
designed to educate patients about the importance of managing cholesterol levels
through NIASPAN therapy and ultimately improve patient compliance. The program
has yielded strong results not only for improving patient persistency, but also
for increasing prescribing frequency among physicians participating in Heart
Alliance. For example, initial data from a sample from the greater than 13,000
patients enrolled during 1999, show that 82% of the patients were still taking
NIASPAN after six months. These data compare favorably with other published
reports of patient persistency for chronic use medications treating asymptomatic
diseases, such as lipid disorders. Additionally, physicians who participate in
Heart Alliance prescribe 64% more frequently than non-participating physicians.
Based on these promising initial results, Kos is expanding the program in 2000
with the objective of enrolling more than 25,000 patients by year-end 2000.

     The Company also began employing a streamlined dosing regimen that includes
a 3-day sample pack to initiate NIASPAN therapy. Such samples, which do not
require a prescription, were approved by the FDA during the fourth quarter of
1999 and offer a simplified titration schedule. The improved regimen enables
patients to continue to take a one-tablet dose for one month as their first
prescription dose, followed by two tablets taken for the following month.
Previously, three-week NIASPAN sample

                                       3
<PAGE>

     titration starter packs were given to physicians as a promotional item to
start their patients on NIASPAN, which required patients to titrate across three
doses during a three-week period. In addition to be being simpler, the 3-day
sample pack yields a prescription sooner and costs 67% less than the previously
used 21-day sample pack.

     In addition to promoting NIASPAN as the drug of choice to treat low HDL
cholesterol and multiple lipid disorders, the Company informs physicians as to
the manner in which NIASPAN achieves its safety and efficacy profile. This
marketing program is implemented through direct office visits with selected
physicians, medical journal reprints, medical seminars, and clinical discussion
groups. The Company also educates patients on the benefits and proper use of
NIASPAN through brochures and the product sample pack. Information delivered by
the Company to physicians and patients includes a discussion about the flushing
side effects of NIASPAN, including the importance of proper dose titration and
adherence to the prescribed dosing regimen to reduce this side effect. Although
most patients taking NIASPAN will flush occasionally, the Company believes that
the combination of NIASPAN'S formulation, its dosing regimen, and proper dose
titration should result in an incidence of flushing episodes that are tolerable
for most patients. NIASPAN'S dosing regimen provides for the drug to be taken
once-a-day at night; therefore, any flushing episodes will normally occur while
the patient is sleeping. The Company believes that flushing during the night
will not cause the discomfort or embarrassment that often accompanies the
multiple daytime flushing episodes that occur with immediate-release niacin.

CO-PROMOTION OF MAVIK/REGISTERED MARK/ AND TARKA/REGISTERED MARK/

     In the second half of 1999, Kos entered into an alliance with Knoll
Pharmaceutical Company, the U.S. pharmaceutical unit of BASF Corporation, to
co-promote Mavik and Tarka, two anti-hypertensive drugs originally launched by
Knoll in 1996. The two products complement NIASPAN because of the high degree of
physician overlap that exists for prescribers of cholesterol and
anti-hypertensive medications. In this manner, Kos is able leverage its sales
force to generate incremental revenue from two additional products without
compromising the growth of NIASPAN.

     Under the terms of the arrangement, Kos contributes essentially all of the
sales calls and a portion of the promotional spending, while receiving an
increasing percentage of revenue based on sales thresholds. The Company began
co-promoting Mavik and Tarka in September and recorded $2.7 million of
co-promotion revenue in 1999, which was accretive for the year. Since Kos began
promoting Knoll's anti-hypertensive products, market share for new prescriptions
has increased 13%, reversing a trend of steady market share declines immediately
prior to Kos involvement. For the remainder of the five-year term of the
co-promotion agreement, Kos expects increasing contributions to operating
results as sales for the products continue to grow. Kos and Knoll may elect to
continue the arrangement following completion of the term in mid-2004. The
patents for Mavik and Tarka expire in 2007 and 2012, respectively.

PRODUCTS UNDER DEVELOPMENT

     Although the Company has obtained clearance from the FDA to market NIASPAN,
each of its other products under development is at an earlier stage of
development. The drug development and approval process takes many years and
requires the expenditure of substantial resources. There can be no assurance
that the Company will be able to successfully formulate any of its products
under development as planned, or that the Company will be successful in
demonstrating the safety and efficacy of such products under development in
human clinical trials. These trials may be costly and time-consuming. The
Company may not be able to obtain the regulatory approvals necessary to continue
testing or to market any or all of the Company's products under development.
Thus, there can be no assurances that any of the Company's products under
development will be developed and commercialized in a timely manner, or in
accordance with the Company's plans or projections, or at all. The Company may
determine to discontinue the development of any or all of its products under
development at any time.

                                       4
<PAGE>

NICOSTATIN

     In addition to NIASPAN, Kos is developing NICOSTATIN, a product that
consists of a combination of NIASPAN and a currently marketed statin; it will be
used to treat mixed lipid disorders. The NICOSTATIN product will require an NDA.
The Company believes that a once-a-night tablet with the combined complementary
properties of its NIASPAN product and a statin represents an effective modality
for treating patients with mixed lipid disorders. The Company also believes that
such a once-a-night product should offer significant improvement in patient
compliance compared with taking each product independently under its recommended
dosing regimen. The target market for the NICOSTATIN product consists of
patients with mixed lipid disorders, including high total and LDL cholesterol
with high triglycerides or low HDL cholesterol or both. As of March 1, 2000, the
Company completed dosing for all patients enrolled in an open label safety study
and two pivotal dosing studies. Additionally, Kos had completed 5 out of 6
bioavailability studies that are required for the NDA submission for Nicostatin.
The Company plans to complete the one remaining bioavailability study and begin
preparing the NDA for NICOSTATIN during the first half 2000. Kos intends to file
the NDA for NICOSTATIN during the second half of 2000.

     Initial results from the open label safety study reveal that NICOSTATIN was
well tolerated in patients with dyslipidemia and no cases of serious liver
enzyme elevations or myopathy were observed in over 800 patients dosed on the
drug. Additionally, for patients on therapy for 16 weeks, NICOSTATIN reduced, on
average, LDL cholesterol 47%, decreased triglycerides 42% and increased HDL
cholesterol 30%. Additional data for patients on therapy for one year will be
presented in March 2000 at the American College of Cardiology meeting in
Anaheim, California. The Company expects the one-year data to reveal similar
safety and efficacy results. The Company intends to submit several scientific
papers covering these and other data generated from its NICOSTATIN clinical
development program for publication before or around the time NICOSTATIN is
launched.

ISOSORBIDE-5-MONONITRATE

     Kos, in collaboration with Fuisz Technologies, Ltd., which was subsequently
acquired by Bioavail Corporation International, has developed a once-a-day,
controlled-release, oral, generic version of isosorbide-5-mononitrate
("IS-5-MN") for the prophylactic treatment of angina pectoris. During the first
half of 1998, the Company submitted an abbreviated new drug application ("ANDA")
to the FDA, which has not yet been approved. Because of the entry of several
approved generic equivalents of IS-5-MN, the market opportunity for the
Company's IS-5-MN is significantly reduced and does not support selling the
product through the Kos sales force. The Company is currently evaluating
alternatives for commercializing this product, which may include licensing the
product through generic distribution channels.

SOLID-DOSE DRUG DELIVERY SYSTEMS

     During 1999, the Company conducted research on novel solid-dose drug
delivery systems. Utilizing the Company's considerable knowledge obtained from
formulating both NIASPAN and NICOSTATIN, Kos made progress in developing three
innovative solid-dose delivery systems that could be used to formulate a variety
of compounds. Kos is currently negotiating to obtain the intellectual property
rights to this technology. If obtained, such delivery systems, for which
licenses to the patents are currently being negotiated, will enable Kos to
formulate both insoluble and soluble compounds for Kos to develop and market or
for other parties on a collaborative basis. The Company intends to further
refine the solid-dose platforms through formulating several candidate drugs
during 2000.

                                       5
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TRIAMCINOLONE AND BUDESONIDE

     Kos is developing a proprietary non-CFC, or environmentally friendly,
formulation of triamcinolone to be used with the Company's proprietary breath
coordinated inhaler ("BCI"). Triamcinolone is a corticosteroid that is used to
treat the underlying inflammation of asthma. This product will require the
submission of an NDA. The Company believes that its BCI may improve the
coordination of inhalation with actuation of medication, thereby offering
possible benefits in patient compliance and uniform dose administration. During
1999, the Company continued to accumulate stability data and intends to begin a
clinical development of the product upon the establishment of a suitable
development partner.

     Kos is also developing a non-CFC formulation of budesonide to be used with
one of its two proprietary inhalation devices. Budesonide is a long-acting
inhaled steroid for the treatment of asthma. The Kos formulation of budesonide,
for which an NDA is required, is currently in development. The Company has
decided to pursue the development of budesonide because of its potency and
because of favorable market conditions. During 1999, Kos completed formulation
development of budesonide and commenced a long-term stability program. Kos
intends to complete the development of budesonide through a strategic alliance
with a development partner.

PROTEINS AND PEPTIDES

     Leveraging its unique expertise in the area of pressurized metered-dose
inhalation ("MDI") devices, Kos has began a protein/peptide formulation
development program during 1999. The program consists of formulating several
unnamed proteins and delivering such compounds within Kos proprietary,
innovative MDI's. The Company expects to generate IN VITRO and IN VIVO
pre-clinical data demonstrating the performance and efficacy of delivering such
proteins via the lung through Kos MDI's. The Company expects to attract
development partners skilled in developing biotherapeutic compounds to complete
the clinical development of the products for certain diseases. The Company also
intends to offer to formulate other peptides for other partners on a contract
basis.

METERED-DOSE INHALATION DEVICES AND OTHER DEVICE PRODUCTS

     Another of the Company's proprietary MDI devices, a breath actuated inhaler
("BAI"), operates automatically and is being developed principally to address
the difficulties often faced by children and the elderly in taking inhaled
medication. The Company also is developing a proprietary inhalation dose counter
designed to indicate when sufficient doses no longer remain in the aerosol
canister, thereby alerting the patient to obtain a refill prescription. At
present, the Company intends to use the inhalation dose counter on all of its
proprietary inhalation devices.

IEP PHARMACEUTICAL DEVICES, INC.

     In November 1999, Kos acquired substantially all of the assets and
intellectual property of IEP Group, Inc. (the "IEP Acquisition") for total
consideration of $1.1 million. In connection with this transaction, the Company
established IEP Pharmaceutical Devices, Inc. ("IEP") as a wholly-owned
subsidiary of Aeropharm and contributed to IEP all of the assets obtained
through the IEP Acquisition. IEP is a provider of device engineering and
consultation services, principally for the medical device and pharmaceutical
industries. Prior to this acquisition, IEP Group, Inc. had contributed to the
development of several of Kos MDI devices. Kos completed the IEP acquisition to
solidify its position as a full-scale aerosol development source -- with
expertise in device engineering, development and device manufacturing. Kos
expects to leverage this full range of capabilities to establish future
licensing, contract development, or joint-venture opportunities.

                                       6
<PAGE>

LICENSING AND OTHER ACTIVITIES

     The Company is aggressively pursuing collaborative opportunities, including
acquiring or licensing the use of selected products and technologies from third
parties ("in-licensing"); product co-marketing arrangements; joint ventures; and
other strategic alliances. Many existing pharmaceutical products or products
currently under development, may be suitable candidates for specialty
promotional or co-marketing campaigns. Accordingly, Kos intends to attempt to
identify licensing, co-marketing and product acquisition opportunities that can
complement the Company's future product portfolio. In situations where
third-party drug delivery technologies are complementary to the Company's drug
development formulation capabilities, the Company may pursue licensing rights
for such technology.

     The Company is also pursuing strategic alliances to license certain of its
products and technologies to third parties ("out-licensing"). Specifically, the
Company is seeking a suitable co-promotion partner for NIASPAN in the United
States and one or more licensees to market NIASPAN for international markets.
The Company is also willing to establish one or more corporate alliances to
co-promote NICOSTATIN for the U.S. and international markets. Lastly, Kos
currently intends to establish strategic alliances with corporate partners with
respect to its respiratory products. There can be no assurance, however, that
any of the collaborative opportunities can be established on terms acceptable to
the Company or at all. Further, the Company's inability to enter into any
strategic alliance or other collaborative opportunity may have a material
adverse effect on the Company's financial position.

PATENTS AND PROPRIETARY RIGHTS

     The Company actively seeks, when appropriate and available, protection for
its products and proprietary information by means of United States and foreign
patents, trademarks, trade secrets and contractual arrangements. Patent
protection in the pharmaceutical field, however, can involve complex legal and
factual issues. Moreover, broad patent protection for new formulations or new
methods of use of existing chemical entities is sometimes difficult to obtain
and often of limited usefulness, primarily because the active ingredient and
many of the formulation techniques have been known for some time. Consequently,
some patents claiming new formulations or new methods of use for old drugs may
not provide meaningful protection against competition. Nevertheless, the Company
intends to seek patent protection when appropriate and available and otherwise
to rely on regulatory-related exclusivity and trade secrets to protect certain
of its products, technologies and other scientific information. There can be no
assurance, however, that any steps taken to protect such proprietary information
will be effective.

     The Company has a patent application pending in the U.S. Patent and
Trademark Office ("PTO") with claims covering NIASPAN's method of use consistent
with its recommended once-a-day dosing regimen. The Company has been notified by
the PTO that certain of these claims have been allowed, but none of the claims
have yet been issued as a patent. The Company has paid the issue fees for those
claims that have been allowed and now awaits to receive from the PTO the
assigned patent numbers and dates on which the patents for those allowed claims
will issue. The patent examiner has also indicated that it may submit certain
claims to the PTO's Board of Interference to determine whether it should declare
an interference between such Kos application and a method-of-use patent issued
to a privately owned generic manufacturer allegedly claiming the same dosing
regimen invention.

     On February 7, 1997, the Company and such generic manufacturer entered into
an agreement pursuant to which the parties agreed to resolve, as between
themselves, the effects of such potential interference by granting each other
licenses under their respective patent application and patent, regardless of
whether such licenses would be required. Accordingly, under the agreement, the
generic manufacturer granted the Company a license to sell products under the
generic manufacturer's above referenced patent, under a formulation patent owned
by such generic manufacturer, and under corresponding foreign patents owned by
such generic manufacturer, and the Company granted the generic manufacturer the
right to sell such

                                       7
<PAGE>

generic manufacturer's products that are covered by the claims in the Company's
patent application and corresponding foreign applications owned by the Company.
As consideration for entering into the agreement, the Company agreed to pay the
generic manufacturer certain license fees and royalties on the net sales of
NIASPAN subject to a cap on such royalty payments in the United States and a
separate cap on such payments outside the United States. Neither the license
fees nor the royalty payments are material to the financial condition of the
Company. The Company may sublicense its rights under the agreement to third
parties to make, use, or sell products developed by or for the Company. The
generic manufacturer may not sublicense or transfer the license granted to it by
the Company, although the generic manufacturer may sublicense to third parties
the right to supply to the generic manufacturer or market with or on behalf of
the generic manufacturer, products that are covered by the generic
manufacturer's patents but which are not covered by the Company's patent
application. The Company may terminate the agreement after February 7, 2001.

     Various inhalation devices, technologies, and methods of use licensed from,
or assigned to Kos by, researchers and engineers engaged in development projects
or sponsored research on behalf of Kos are the subject of issued or allowed U.S.
patents, as well as various foreign patents or patent applications. In addition,
patent applications on certain of the Company's products under development or
relating to certain sponsored research activities are pending at the PTO.

     There can be no assurance that the patents owned and licensed by the
Company, or any future patents, will prevent other companies from developing
similar or therapeutically equivalent products or that others will not be issued
patents that may prevent the sale of Company products or require licensing and
the payment of significant fees or royalties by the Company. Furthermore, there
can be no assurance that any of the Company's future products or methods will be
patentable, that such products or methods will not infringe upon the patents of
third parties, or that the Company's patents or future patents will give the
Company an exclusive position in the subject matter claimed by those patents.

     The Company is aware that certain European and U.S. patents have been
issued with claims covering products that contain certain propellant-driven
aerosol formulations. The European patents are currently subject to an
opposition proceeding in Europe, and certain claims in such patents have been
held invalid in the United Kingdom. In the event that the Company develops
aerosol products that use a formulation covered by such European or U.S.
patents, the Company may be prevented from making, using or selling such
products unless the Company obtains a license under such patents, which license
may not be available on commercially reasonable terms, or at all, or unless such
patents are determined to be invalid or unenforceable in Europe or the United
States, respectively. The Company's development of products that are covered by
such patents and its failure to obtain licenses under such patents in the event
such patents are determined to be valid and enforceable could have an adverse
effect on the Company's business.

     NIASPAN and "Kos" are the Company's principal registered trademarks,
although other applications for registration of trademarks and service marks are
currently pending in the PTO and additional applications are in the process of
being filed.

                                       8
<PAGE>

MARKETING

     Kos intends to market its branded proprietary products through its own
specialty sales force. A fundamental element of the Company's product selection
strategy is to focus on products where a relatively concentrated group of
specialist physicians account for a significant portion of the prescriptions for
the therapeutic indication addressed by the Company's products. The Company
believes that such specialist physicians will be the most receptive to the
patient compliance, safety, or other therapeutic advantages that the Company's
products will seek to offer. Accordingly, the Company believes that significant
market gains can be achieved with such products through the use of a relatively
small, well-trained sales force concentrating its detailing efforts on informing
such specialist physicians about the scientific basis for the therapeutic
advantages of the Company's products.

     As of February 11, 2000, the Company had a 242-person sales and marketing
organization, including in excess of 200 field sales personnel. The majority of
the sales and marketing personnel have considerable previous experience with
major pharmaceutical companies detailing products to cardiovascular physicians.
Kos began actively detailing NIASPAN during September 1997. During 1999, Kos
streamlined its sales force to increase the focus on high opportunity
territories. Additionally, the Company improved its field force management's
span of control. The Company intends to leverage its sales force by marketing
its future cardiovascular products, if and as they are approved, along with
Mavik and Tarka through the co-promotion with Knoll.

MANUFACTURING

     In order to maximize the quality of developed products, assure compliance
with regulatory requirements, and minimize costs, the Company intends to
manufacture all of its Kos-developed products internally. The Company currently
produces NIASPAN at its Hollywood, Florida facility. The Company's Edison, New
Jersey, facility will be used to produce NICOSTATIN and is currently configured,
and largely equipped, to manufacture both solid-dose and aerosol inhalation
products. Although the Company believes that its Edison facility currently
operates using current good manufacturing practices as required by the FDA for
the manufacture of product to be used in clinical trials, the facility requires
inspection and approval by the FDA before the commercial sale of product
manufactured at Edison can commence. This approval for the Edison, New Jersey
site is expected in 2000. The Company believes that it has sufficient capacity,
with limited additional capital outlays, to accommodate sales volume for both
solid-dose and aerosol products for the foreseeable future.

     The Company intends to continue to contract the packaging of its solid-dose
and anticipated aerosol products to third parties. The Company may begin
in-house packaging operations once product sales volumes justify the capital
expenditures required to establish such capabilities. Certain of the Company's
raw materials, including the active ingredients in NIASPAN and NICOSTATIN, are
currently obtained from single sources of supply. The Company does not have a
contractual supply arrangement with the sole supplier of the active ingredient
in Niaspan. The Company intends, to the extent possible, to identify multiple
sources for all of its key raw materials, including the active ingredient in
NIASPAN, although an alternate source for at least one such material will not be
available because of the supplier's patent rights.

     In 1999, Kos steadily improved its efficiency in manufacturing NIASPAN.
Specifically, gross margins increased six percentage points, reaching 85% of net
sales by year-end 1999. The Company expects additional improvements in gross
margins for NIASPAN as sales volumes increase and more efficient higher yielding
manufacturing equipment becomes operational.

                                       9
<PAGE>

COMPETITION

     The Company's product competes with currently existing or future
prescription pharmaceuticals and vitamins in the United States, Europe and
elsewhere. The Company estimates that its existing NIASPAN prescriptions account
for less than 1.5% of the total prescriptions currently being written in the
United States for cholesterol-lowering pharmaceutical compounds. Competition
among these products is based on, among other things, efficacy, safety,
reliability, availability, price and patent position. In addition, academic
institutions, government agencies and other public and private organizations
conducting research may seek patent protection, discover new drugs or establish
collaborative arrangements for drug research. Most of the Company's competitors
have substantially greater financial, technical and human resources than the
Company, including combined field sales forces exceeding 12,000 representatives
compared with the Company's 200-person field sales force and may be better
equipped to develop, manufacture and market products.

     The Company's cardiovascular and respiratory products, when developed and
marketed, will compete in most cases with well established products containing
the same active ingredient already being marketed by medium-sized and large
pharmaceutical companies in the United States. For example, the Company's
triamcinolone and budesonide formulations, if successfully commercialized, each
will compete with another triamcinolone and budesonide product, respectively,
already being marketed in the United States by much larger companies.

     Moreover, there are numerous manufacturers of niacin preparations indicated
for use as vitamin supplements or, in immediate-release form, for treatment of
hyperlipidemia. The Company believes that a generic manufacturer has performed
at least one early-stage clinical study using niacin as a once-a-day treatment
for lipid-altering, and such manufacturer may be pursuing an NDA for such
product. Further, the Company's NIASPAN product will compete with many existing
lipid-altering medications, which currently account for more than 90% of the
lipid-altering market.

GOVERNMENT REGULATION

     The development, manufacture and potential sales of prescription
pharmaceutical products are subject to extensive regulation by U.S. and foreign
governmental authorities. In particular, pharmaceutical products are subject to
rigorous pre-clinical and clinical testing and to other approval and
post-approval requirements by the FDA in the United States under the Federal
Food, Drug and Cosmetic Act and the Public Health Service Act and by comparable
agencies in most foreign countries. The FDA regulates all aspects of a product's
testing, labeling, promotion, and manufacture, and can impose substantial
restrictions on these activities before or after approval of such product.

     Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. The
requirements governing the conduct of clinical trials and product approvals vary
widely from country to country, and the time required for approval may be longer
or shorter than that required for FDA approval. Although there are some
procedures for unified filing for certain European countries, in general, each
country at this time has its own procedures and requirements. Further, the FDA
regulates the export of products produced in the United States and may prohibit
their export even if such products are approved for sale in other countries.

     The Company's research and development involves the controlled use of
hazardous materials, chemicals, and various radioactive compounds. Although the
Company believes that its procedures for handling and disposing of those
materials comply with state and federal regulations, the risk of contamination
or injury from these materials cannot be eliminated. In the event of such
contamination or injury, the Company could be held liable for resulting damages,
which could be material to the Company's

                                       10
<PAGE>

business, financial condition and results of operations. The Company is also
subject to numerous environmental, health and workplace safety laws and
regulations, including those governing laboratory procedures, exposure to
blood-borne pathogens, and the handling of biohazardous materials. Additional
federal, state and local laws and regulations affecting the Company may be
adopted in the future. Any violation of, and the cost of compliance with, these
laws and regulations could materially and adversely affect the Company.

     Completing the multitude of steps necessary prior to the commencement of
marketing requires the expenditure of considerable resources and a lengthy
period of time. There can be no assurance of approval within any particular
period, if ever; or if approval is granted, of continued approval thereafter.
Delay or failure in obtaining, or the withdrawal of, the required approvals,
clearances, permits or inclusions by the Company or its future corporate
partners or licensees, if any, would have a material adverse effect on the
ability of the Company to generate sales or royalty revenue. Further, the
passage and implementation of new or changed laws or regulations or the
potential impact on the Company of such actions cannot be anticipated.

EMPLOYEES

     As of February 11, 2000, the Company had 425 full-time employees. No
employee is represented by a union. The Company believes its employee relations
are good. The Company also regularly employs the services of outside consultants
with respect to regulatory, scientific, and certain administrative and
commercial matters. The Company expects to continue to require the services of
such outside consultants.

                                       11
<PAGE>

ITEM 2.  PROPERTIES

     The Company leased the following properties as of December 31, 1999:

<TABLE>
<CAPTION>
                                                                                  LEASE EXPIRATION          MINIMUM
                                                                                 (INCLUDING RENEWAL          ANNUAL
     LOCATION                      USE                      SQUARE FEET               OPTIONS)                RENT
     --------                      ---                      -----------               --------                ----

<S>                     <C>                                     <C>                  <C>                    <C>
Miami, FL               Corporate offices                       15,000               December 2000          $336,000
Miami Lakes, FL         Research and admin. offices             13,000               December 2000           246,000
Hollywood, FL           Manufacturing, research and
                        admin. offices                          23,500               November 2002           302,000
Edison, NJ              Manufacturing, research, and
                        admin. offices                          32,500                October 2003           193,000
Raleigh, NC             Engineering offices                      6,000                 August 2002            47,000
</TABLE>

     The Company believes that its existing facilities are adequate to meet its
current needs and that there is sufficient additional space at or in close
proximity to its present facilities to accommodate its near-term requirements.

ITEM 3.  LEGAL PROCEEDINGS

     On August 5, 1998, a purported class action lawsuit was filed in the United
States District Court for the Northern District of Illinois, Eastern Division,
against the Company, the members of the Company's Board of Directors, certain
officers of the Company, and the underwriters of the Company's October 1997
offering of shares of Common Stock. In its complaint, the plaintiff asserts, on
behalf of itself and a putative class of purchasers of the Company's Common
Stock during the period from July 29, 1997, through November 13, 1997, claims
under: (i) sections 11, 12(a)(2) and 15 of the Securities Act of 1933; (ii)
sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated thereunder; and (iii) for common law fraud, negligent
misrepresentation and breach of fiduciary duty. The claims in the lawsuit relate
principally to certain statements made by the Company, or certain of its
representatives, concerning the efficacy, safety, sales volume and commercial
viability of the Company's NIASPAN product. The complaint sought unspecified
damages and costs, including attorneys' fees and costs and expenses. Upon motion
by the Company, the case was transferred to the United States District Court for
the Southern District of Florida. The Company and the individual Kos defendants
filed a motion to dismiss the complaint on January 7, 1999. On May 24, 1999, the
United States District Court for the Southern District of Florida dismissed the
lawsuit with prejudice. The plaintiffs filed an appeal on June 7, 1999, with the
United States Circuit Court of Appeals for the 11th Circuit. The outcome of the
litigation cannot yet be determined. Accordingly, no provision for any liability
that may result from these matters has been recognized in the accompanying
consolidated financial statements. There can be no assurance, however, that the
outcome of this litigation will not have a material adverse effect on the
Company's business, results of operations, and financial condition.

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

     No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1999.

                                       12
<PAGE>

PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.

     The Company's Common Stock, par value $.01 per share, commenced trading on
March 7, 1997, on the Nasdaq National Market under the symbol "KOSP". As of
March 1, 2000, there were 401 registered shareholders of record of the Company's
Common Stock.

     The following table sets forth, for the fiscal periods indicated, the range
of high and low prices for trades of the Company's Common Stock on the Nasdaq
National Market System.

YEAR ENDED DECEMBER 31, 1999                           HIGH              LOW
                                                   -------------   -------------

First Quarter.....................................      $ 7.00         $ 4.00
Second Quarter....................................        5.75           4.13
Third Quarter.....................................        7.75           4.38
Fourth Quarter....................................        6.38           4.38

YEAR ENDED DECEMBER 31, 1998

First Quarter.....................................      $15.56          $7.50
Second Quarter....................................       13.94           8.38
Third Quarter.....................................       12.69           4.31
Fourth Quarter....................................        8.00           3.50


     The Company has not declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain future earnings, if
any, to fund the development and growth of its business and does not intend to
pay dividends on its Common Stock in the foreseeable future.

                                       13
<PAGE>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

     The following consolidated selected financial data of the Company for the
five years ended December 31, 1999, should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes thereto.
See "Item 8. Consolidated Financial Statements and Supplementary Data".


<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                          ------------------------------------------------------------
                                                              1999       1998        1997        1996         1995
                                                          ----------- ----------- ----------- ----------- ------------
                                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS:
<S>                                                       <C>         <C>          <C>         <C>          <C>
Revenues, net............................................ $   36,340  $   13,038   $   2,892   $       -    $       3
Cost of sales............................................      5,406       3,276         792           -            -
                                                          ----------- ----------- ----------- ----------- ------------
                                                              30,934       9,762       2,100           -            3
                                                          ----------- ----------- ----------- ----------- ------------
OPERATING EXPENSES:

   Research and development..............................     25,619      29,144      24,130      13,679       11,681
   Selling, general and administrative...................     56,843      61,519      20,509       2,881        1,655
   Expense recognized on modification of stock
       option  grants(1).................................          -           -           -       5,436            -
                                                          ----------- ----------- ----------- ----------- ------------
       Total operating expenses..........................     82,462      90,663      44,639      21,996       13,336
                                                          ----------- ----------- ----------- ----------- ------------

Loss from operations.....................................    (51,528)    (80,901)    (42,539)    (21,996)     (13,333)
Other:
   Interest income, net..................................        169       1,793       2,787          11            6
   Interest expense-related parties......................     (3,207)        (68)       (868)       (136)           -
   Other income (expense)................................         14          15         (10)          -            -
                                                          ----------- ----------- ----------- ----------- ------------
     Loss before minority interest.......................    (54,552)    (79,161)    (40,630)    (22,121)     (13,327)
Minority interest(2).....................................           -         -           -           15            4
                                                          ----------- ----------- ----------- ----------- ------------
     Net loss............................................ $  (54,552) $  (79,161)  $ (40,630)  $ (22,106)   $ (13,323)
                                                          =========== =========== =========== =========== ============
Net loss per share, basic and diluted(3)................. $    (3.06) $    (4.50)  $   (2.79)  $   (1.95)   $   (1.17)
Weighted average common shares in computing
    net loss per share(3)................................ 17,842,879  17,589,767  14,569,474  11,340,000   11,340,000
</TABLE>
<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                          ------------------------------------------------------------
                                                              1999       1998        1997        1996         1995
                                                          ----------- ----------- ----------- ----------- ------------
                                                                                 (IN THOUSANDS)
BALANCE SHEET:
<S>                                                       <C>         <C>          <C>         <C>          <C>
Cash and marketable securities........................... $    4,336  $    4,879   $  70,396   $     358    $     229
Working capital (deficit).................................    (2,354)     (3,136)     70,939      (9,355)        (445)
Total assets.............................................     26,258      21,570      84,403       3,197        2,380
Total long-term debt......................................    62,089       9,239           -       8,355            -
Accumulated deficit(4)....................................  (239,666)   (185,114)   (105,952)    (65,322)     (43,217)
Shareholders' equity (deficit)(5).........................   (53,195)       (338)     77,870      (6,750)       1,390
</TABLE>

----------
(1)  Reflects a non-cash charge associated with an extension of the exercise
     period for stock options granted during 1988 to 1990 to the Company's Chief
     Executive Officer and two independent consultants; no other material
     economic terms of these options were changed.
(2)  Represents the minority shareholder's interest in Aeropharm Technology,
     Inc., which interest was acquired by the Company in June 1996.
(3)  See Note 2. of Notes to Consolidated Financial Statements for information
     concerning the computation of net loss per share.
(4)  In connection with the transfer on June 30, 1996, of assets and liabilities
     from Kos Holdings, Inc. to the Company, net operating loss carryforwards
     amounting to approximately $51.0 million and related tax benefits, were not
     transferred to the Company. The Company can only utilize net operating loss
     carryforwards sustained subsequent to June 30, 1996 (amounting to $190.7
     million as of December 31, 1999), to offset future taxable income, if any.
     See "Management's Discussion and Analysis of Financial Condition and
     Results of Operations".
(5)  In March 1995, Kos Investments, Inc. assumed repayment of a note payable to
     a bank in the principal amount of $30,372,000. This assumption was
     accounted for as a transfer to Kos Investments, Inc. and as an increase in
     additional paid-in capital for the Company.

                                       14
<PAGE>

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

GENERAL

     A predecessor corporation to the Company was formed in July 1988 under the
name of Kos Pharmaceuticals, Inc. principally to conduct research and
development on new formulations of existing prescription pharmaceutical
products. In June 1993, Aeropharm Technology, Inc. ("Aeropharm"), a then
majority-owned subsidiary of the Company, was formed to conduct research and
development activities on aerosolized products for the treatment of respiratory
diseases. During June 1996, this predecessor corporation acquired the
outstanding minority interest in Aeropharm; changed its name to Kos Holdings,
Inc. ("Holdings"); established the Company as a wholly-owned subsidiary under
the name of Kos Pharmaceuticals, Inc.; and, effective as of June 30, 1996,
transferred all of its existing assets, liabilities and intellectual property,
other than certain net operating loss carryforwards, to the Company.
Accordingly, all references in this 10-K filing to the Company's business
include the business and operations of Holdings until June 30, 1996.

     On March 12, 1997, the Company completed an initial public offering ("IPO")
of its Common Stock. Through December 31, 1999, the Company had accumulated a
deficit from operations of approximately $239.7 million. In connection with the
transfer of operations from Holdings to the Company on June 30, 1996, net
operating loss carryforwards amounting to approximately $51.0 million and
related tax benefits were retained by Holdings and not transferred to the
Company. Consequently, the Company may utilize net operating losses sustained
subsequent to June 30, 1996, amounting to approximately $190.7 million as of
December 31, 1999, to offset future taxable net income, if any.

     From inception through its June 30, 1997, reporting period, the Company was
a development stage company engaged primarily in the development of
cardiovascular and respiratory pharmaceutical products. On July 28, 1997, the
Company was granted clearance by the FDA to market its lead product, NIASPAN.
The Company began shipping NIASPAN to wholesalers in mid-August 1997 and began
detailing NIASPAN to physicians in September 1997. The Company's Board of
Directors changed the end of the Company's fiscal year from June 30 to December
31 effective with its December 31, 1997, reporting period. Fiscal years
presented and referred to in the Company's consolidated financial statements,
along with all other financial data, have been restated to conform with a
December 31 fiscal year basis.

RESULTS OF OPERATIONS

   YEARS ENDED DECEMBER 31, 1999 AND 1998

     The Company's revenue increased to $36.3 million for the year ended
December 31, 1999, from $13.0 million for the year ended December 31, 1998. This
increase was attributable to a growth of $20.6 million in net sales of the
Company's NIASPAN product and to $2.7 million in co-promotion revenue resulting
from the Company's July 22, 1999, co-promotion collaboration agreement with
Knoll Pharmaceutical Company (hereinafter "Knoll"), for the promotion and
marketing of Knoll's MAVIK and TARKA products within the United States (the
"Knoll Agreement"). Under the terms of the Knoll Agreement, the Company receives
an increasing percentage of revenue based on sales thresholds.

                                       15
<PAGE>

     During the fourth quarter of 1999, certain of the Company's customers
purchased abnormally high levels of the Company's NIASPAN product. The Company
believes that this higher than expected NIASPAN demand was primarily due to
these customers protecting themselves against complications associated with year
2000 date change issues. As a result, at December 31, 1999, the amount of the
Company's NIASPAN product being warehoused by these customers increased above
normal levels. The Company has deferred the recognition of $2.8 million in
revenues and related expenses associated with these sales until the first
quarter of 2000, when the level of the Company's NIASPAN product warehoused by
these customers is expected to return to normal levels.

     Cost of sales was $5.4 million and $3.3 million for the year ended December
31, 1999 and 1998, respectively. The higher cost of sales in 1999 was
attributable to higher sales of the NIASPAN product during the period, partially
offset by efficiencies attained in the production of NIASPAN.

     The Company's research and development expenses decreased to $25.6 million
for the year ended December 31, 1999, from $29.1 million for the year ended
December 31, 1998. The reduced expenses related primarily to decreases of $2.5
million in formulation development costs of the Company's NICOSTATIN product and
other products under development, of $2.1 million in medical education programs
in support of the NIASPAN product, and of $1.1 million in development costs paid
to other parties. These decreases were partially offset by increases of $2.3
million in the costs of clinical trials principally associated with the
Company's NICOSTATIN product.

     Selling, general and administrative expenses decreased to $56.8 million for
the year ended December 31, 1999, from $61.5 million for the year ended December
31, 1998. Selling expenses decreased $5.7 million, primarily as a result of a
$7.8-million reduction in marketing program costs and other costs associated
with the NIASPAN product; the reduction principally reflects the absence of
launch expenses incurred in 1998. This reduction was partially offset by $2.0
million in MAVIK and TARKA marketing expenses, and by an increase of $0.3
million in personnel and personnel related costs as a result of the full impact
of the presence, during the 1999 period, of the Company's expanded sales and
marketing organization. General and administrative costs increased to $11.5
million for the 1999 period, from $10.5 million during the preceding period,
primarily as a result of an increase of $1.2 million in royalty expenses
associated with the increase in net sales of the NIASPAN product.

     During 1997, the Company received $65.9 million in net proceeds from its
March IPO and $43.3 million in net proceeds from an October follow-on offering
of its Common Stock. During 1998, the remaining net proceeds from these
offerings, along with other cash balances, were invested primarily in U.S.
Treasury and highly-rated corporate debt securities. The Company recorded $1.8
million of interest income for the year ended December 31, 1998, as a result of
these investments.

     On July 1, 1998, the Company entered into a $30 million credit facility
(the "Credit Facility") with Michael Jaharis, Chairman of the Company's Board of
Directors. Borrowings under the Credit Facility totaled $30 million and $9
million as of December 31, 1999 and 1998, respectively, and bear interest at the
prime rate (8.5% as of December 31, 1999). On December 21, 1999, Mr. Jaharis
agreed to modify the terms of the Credit Facility by extending its due date from
December 31, 2000 to December 31, 2002.

                                       16
<PAGE>

     On September 1, 1999, the Company formally agreed to the terms of an
additional $50 million funding arrangement initially committed to by Mr. Jaharis
on October 7, 1998 (the "Supplemental Credit Facility"). Borrowings under the
Supplemental Credit Facility totaled $32 million as of December 31, 1999, bear
interest at the prime rate, are convertible (at $4.91 per share) into shares of
the Company's Common Stock, and will be due December 31, 2003.

     Interest expense under the Credit Facility and Supplemental Credit Facility
totaled $3.2 million and $68,000 for the years ended December 31, 1999 and 1998,
respectively.

     The Company incurred a net loss of $54.6 million for the year ended
December 31, 1999, compared with a net loss of $79.2 million for the year ended
December 31, 1998.

   YEARS ENDED DECEMBER 31, 1998 AND 1997

     The Company's revenue increased to $13.0 million for the year ended
December 31, 1998, from $2.9 million for the year ended December 31, 1997. The
Company began sales of its NIASPAN product to wholesalers during August 1997.
Cost of sales was $3.3 million and $0.8 million for the years ended December 31,
1998 and 1997, respectively. The higher cost of sales in 1998 was attributable
to higher sales of the NIASPAN product during the period.

     The Company's research and development expenses increased to $29.1 million
for the year ended December 31, 1998, from $24.1 million for the same period in
1997. The change related primarily to increases of $5.4 million during the 1998
period in connection with formulation development of the Company's NICOSTATIN
product and other products under development, $4.6 million in medical education
programs in support of NIASPAN, and $2.1 million in personnel and
personnel related costs in support of the Company's expanded research and
development activities. These increases in research and development expenses
were partially offset by a $1 million fee received by the Company in 1998
related to the exchange of certain technology rights with another unaffiliated
company. The 1998 increases were also partially offset by the absence of a $3
million charge attributable to entering into an agreement, in February 1997,
with an unaffiliated generic drug manufacturer to resolve, as between
themselves, the effects of a potential patent interference proceeding, of $1.7
million of licensing fees associated with obtaining access to certain aerosol
safety and toxicology data, and of $1.2 million of development costs paid to
third parties in 1997.

     Selling, general and administrative expenses increased to $61.5 million for
the year ended December 31, 1998, from $20.5 million for the year ended December
31, 1997. Selling expenses increased $36.0 million as a result of the continued
expansion of the Company's sales and marketing organization and the initiation
of a variety of marketing programs in connection with the NIASPAN product.
General and administrative costs also increased during the 1998 period, mostly
as a result of increases of $2.2 million in personnel and personnel related
costs, $0.6 million in royalty expenses for the Company's NIASPAN product, and
other expenses associated with the expanded activities of the Company.

                                       17
<PAGE>

     From July 1, 1996, to the completion of its IPO on March 12, 1997, the
Company funded its operations from the proceeds of a loan from Kos Investments,
Inc. (the "Convertible Note"), the sole shareholder of Holdings. The Convertible
Note and its accrued interest were convertible into shares of the Company's
Common Stock at a conversion price per share equal to the IPO price per share
($15.00). Interest expense under the Convertible Note totaled $0.9 million for
the year ended December 31, 1997. On October 25, 1997, the outstanding principal
and interest of the Convertible Note was converted into 960,069 shares of Common
Stock. At the time of conversion, the Convertible Note accrued interest at a
rate of 8.50% per year and had outstanding principal and interest of $13.4
million and $1.0 million, respectively.

     The Company recorded $1.8 million and $2.8 million of interest income for
the years ended December 31, 1998 and 1997, respectively, as a result of its
investment in marketable securities from the net proceeds of the IPO and the
follow-on offering. The Company also recorded, mostly as a result of the Credit
Facility during the 1998 period and of the Convertible Note during the 1997
period, $68,000 and $0.9 million of interest expense for the years ended
December 31, 1998 and 1997, respectively.

     The Company incurred a net loss of $79.2 million for the year ended
December 31, 1998, compared with a net loss of $40.6 million for the year ended
December 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1999, the Company had cash and cash equivalents totaling
$4.3 million and negative working capital of $2.4 million. The Company's primary
uses of cash to date have been in operating activities to fund research and
development, including clinical trials, and selling, general and administrative
expenses. As of December 31, 1999, the Company's investment in equipment and
leasehold improvements, net of depreciation and amortization, was $10.4 million.
During the year ended December 31, 1999, the Company spent $1.1 million in
capital expenditures. The Company expects 2000 capital expenditures to be higher
than those incurred during the year ended December 31, 1999.

     On July 1, 1998, the Company entered into a $30 million credit facility
(the "Credit Facility") with Michael Jaharis, Chairman of the Company's Board of
Directors. Borrowings under the Credit Facility totaled $30 million and $9
million as of December 31, 1999 and 1998, respectively, and bear interest at the
prime rate (8.5% as of December 31, 1999). On December 21, 1999, Mr. Jaharis
agreed to modify the terms of the Credit Facility by extending its due date from
December 31, 2000 to December 31, 2002.

     On September 1, 1999, the Company formally agreed to the terms of an
additional $50 million funding arrangement initially committed to by Mr. Jaharis
on October 7, 1998 (the "Supplemental Credit Facility"). Borrowings under the
Supplemental Credit Facility totaled $32 million as of December 31, 1999, bear
interest at the prime rate, are convertible (at $4.91 per share) into shares of
the Company's Common Stock, and will be due December 31, 2003. As of December
31, 1999, the conversion of amounts borrowed from Mr. Jaharis under the
Supplemental Funding Arrangement into shares of the Company's Common Stock would
have resulted in the issuance of 6,517,312 additional shares of the Company's
Common Stock, thus causing material dilution to existing shareholders of the
Company.

     On December 21, 1999, Mr. Jaharis agreed to extend another $50 million loan
to the Company (the "Standby Facility"). Borrowings made under the Standby
Facility will be due June 30, 2005, and are subject to most of the terms and
conditions of borrowings made under the Supplemental Credit Facility. Borrowings
made under the Standby Facility are not, however, convertible into shares of the
Company's Common Stock. In lieu of a conversion feature, the Company has granted
to Mr. Jaharis warrants to purchase 6,000,000 shares of the Company's Common
Stock at $5.00 per share, which approximates the market value of the Company's
Common Stock on the effective date of the Standby Facility. The warrants

                                       18
<PAGE>

contain a non-detachable feature and are exercisable at any time until June 30,
2006. The Company had no borrowings outstanding under the Standby Facility as of
December 31, 1999. The exercise of a significant number of the warrants issued
under the Standby Facility will cause material dilution to existing shareholders
of the Company.

     Although the Company currently anticipates that, including the capital
available to the Company under the Credit Facility, the Supplemental Funding
Arrangement and the Standby Facility, it has or has access to an amount of
working capital that will be sufficient to fund the Company's operations until
it has positive cash flows, the Company's cash requirements during this period
will be substantial and may exceed the amount of working capital available to
the Company. The Company's ability to fund its operating requirements and
maintain an adequate level of working capital until it achieves positive cash
flows will depend primarily on its ability to generate substantial growth in
sales of its NIASPAN product. Further, during this period, the Company's ability
to fund its operating requirements may, among other things, be affected by its
ability to reduce its operating expenses and license or co-market NIASPAN and
other cardiovascular products. The Company's failure to generate substantial
growth in the sales of NIASPAN, reduce operating expenses, enter into a license
or co-marketing agreement, or meet the conditions necessary for the Company to
obtain funding under the Supplemental Funding Arrangement and Standby Facility,
and other events -- including the progress of the Company's research and
development programs; the costs and timing of seeking regulatory approvals of
the Company's products under development; the Company's ability to obtain
regulatory approvals; the Company's ability to manufacture products at an
economically feasible cost; costs in filing, prosecuting, defending, and
enforcing patent claims and other intellectual property rights; the extent and
terms of any collaborative research, manufacturing, marketing, joint venture, or
other arrangements; and changes in economic, regulatory, or competitive
conditions or the Company's planned business -- could cause the Company to
require additional capital prior to achieving positive cash flows. In the event
that the Company must raise additional capital to fund its working capital
needs, it may seek to raise such capital through loans or the issuance of debt
securities that would require the consent of the Company's current lender, or
through the issuance of equity securities. To the extent the Company raises
additional capital by issuing equity securities or obtaining borrowings
convertible into equity, ownership dilution to existing shareholders will
result, and future investors may be granted rights superior to those of existing
shareholders. Moreover, there can be no assurance that any additional capital
will be available to the Company on acceptable terms, or at all.

                                       19
<PAGE>

           FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS

     Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this report that
are not related to historical results are forward-looking statements. Actual
results may differ materially from those projected or implied in the
forward-looking statements. Further, certain forward-looking statements are
based upon assumptions of future events, which may not prove to be accurate.
Subsequent written and oral forward looking-statements attributable to the
Company or to persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements set forth below and elsewhere in this
report and in other reports filed by the Company with the Securities and
Exchange Commission.

MARKET ACCEPTANCE AND SALES GROWTH OF NIASPAN

     The Company's success currently depends primarily upon its ability to
successfully market and sell increasing quantities of its NIASPAN product. The
Company's ability to successfully sell increasing quantities of the Niaspan
product will depend significantly on the increasing acceptance of the NIASPAN
product by physicians and their patients. The Company believes that intolerable
flushing and potential liver toxicity associated with currently available
formulations of niacin are the principal reasons why physicians generally have
been reluctant to prescribe or recommend such currently available formulations.
Flushing episodes are often characterized by facial redness, tingling or rash.
Although most patients taking the NIASPAN product will sometimes flush, the
formulation and dosing regimen for NIASPAN have been designed to maximize
patient acceptance and minimize the occurrence of flushing. There can be no
assurance, however, that patients using the NIASPAN product will not suffer
episodes of flushing that they consider intolerable. The failure of physicians
to prescribe the NIASPAN product or the failure of patients to continue taking
NIASPAN due to intolerable flushing or to other side effects would have a
material adverse effect on the Company.

     Unanticipated side effects or unfavorable publicity concerning the NIASPAN
product or any other product incorporating technology similar to that used in
the NIASPAN product also could have an adverse effect on the Company's ability
to obtain regulatory approvals, to achieve acceptance by prescribing physicians,
managed care providers, or patients; any of which would have a material adverse
effect on the Company.

HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY

     To date, the Company has dedicated most of its financial resources to the
development and commercialization of its NIASPAN product, the development of
other products, and general and administrative expenses. The Company expects to
incur significant operating losses for at least the next twelve months, due
primarily to continued manufacturing and marketing, sales and administrative
expenses associated with the commercial launch of the NIASPAN product and for
investments in its research and development programs. No assurance can be given
that additional significant losses will not continue thereafter. The Company's
ability to achieve and maintain profitability will depend, among other things,
on the commercial success of the NIASPAN product; on the Company's ability to
successfully exploit its manufacturing and sales and marketing capabilities; to
complete the development of, and obtain regulatory approvals for, and achieve
market acceptance for its products under development; and on its ability to
maintain sufficient funds to finance its activities. As of December 31, 1999,
the Company's accumulated deficit was $239.7 million. In connection with the
transfer of operations from Holdings to the Company on June 30, 1996, net
operating loss carryforwards amounting to approximately $51.0 million and
related tax benefits remained with Holdings and were not transferred to the
Company. Consequently, the Company may utilize net operating loss carryforwards
sustained subsequent to June 30, 1996, amounting to $190.7

                                       20
<PAGE>

million as of December 31, 1999, to offset future taxable net income, if any.
There can be no assurance, however, that the Company will be able to achieve
profitability to utilize such carryforwards or that profitability, if any, can
be sustained.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

     The Company has experienced negative cash flows from operations since its
inception. The Company has spent and will continue to be required to spend
substantial funds to continue research and development, including clinical
trials of its products under development, and to commercialize the NIASPAN
product and its products under development if regulatory approvals are obtained
for such products under development. The Company believes that it has sufficient
resources, including funds available to the Company under certain funding
arrangements, to fund the operations of the Company until the Company achieves
positive cash flows. The Company, however, may need or elect to raise additional
capital prior to such date. The Company's capital requirements will depend on
many factors, primarily relating to the near-term commercial success of NIASPAN;
the Company's ability to meet the conditions necessary to obtain funding under
the Supplemental Funding Arrangement and the Standby Facility; the problems,
delays, expenses and complications frequently encountered by companies at this
stage of development; the progress of the Company's research, development, and
clinical trial programs; the costs and timing of seeking regulatory approvals of
the Company's products under development; the Company's ability to obtain such
regulatory approvals; costs in filing, prosecuting, defending, and enforcing
patent claims and other intellectual property rights; the extent and terms of
any collaborative research, manufacturing, marketing, or other arrangements; and
changes in economic, regulatory, or competitive conditions or the Company's
planned business. Estimates about the adequacy of funding for the Company's
activities are based on certain assumptions, including assumptions regarding the
marketing and sales success of the Company's NIASPAN product, and that testing
and regulatory procedures relating to the Company's products under development
can be conducted at projected costs and within projected time frames. There can
be no assurances that any of these assumptions will prove to be accurate.

     To satisfy its capital requirements, the Company may seek to raise funds in
the public or private capital markets. The Company's ability to raise additional
funds in the public markets may be adversely affected if the Company's sales of
its NIASPAN product do not increase rapidly, if the results of the Company's
clinical trials for its products under development are not favorable, or if
regulatory approval for any of the Company's products under development is not
obtained. The Company may seek additional funding through corporate
collaborations and other financing vehicles. There can be no assurance that any
such funding will be available to the Company, or if available, that it will be
available on acceptable terms. If adequate funds are not available, the Company
may be required to curtail significantly one or more of its research or
development programs or it may be required to obtain funds through arrangements
with future collaborative partners or others that may require the Company to
relinquish rights to the NIASPAN product or to some or all of its technologies
or products under development or take significant cost-reducing actions or both.
If the Company is successful in obtaining additional financing, the terms of the
financing may have the effect of diluting or adversely affecting the holdings or
the rights of the holders of Common Stock.

                                       21
<PAGE>

LIMITED SALES AND MARKETING EXPERIENCE AND RESOURCES

     Although the Company markets its NIASPAN product and the MAVIK and TARKA
products and intends to market its other products under development through its
own specialty sales force, its current marketing resources are limited.
Substantial resources will continue to be required for the Company to promote
the sale of the NIASPAN, MAVIK and TARKA products and its products under
development. There can be no assurance that the Company will be able to devote
resources to the NIASPAN, MAVIK and TARKA products or to its other products
under development sufficient to achieve increasing market acceptance. The
Company's failure to expend the resources to adequately promote the NIASPAN,
MAVIK and TARKA products or its products under development would have a
material adverse effect on the Company.

     Moreover, the Company has fewer sales persons than many of its competitors
and there can be no assurance that the Company's sales force will be able to
detail successfully physicians who prescribe lipid-altering medications. There
can be no assurance that the Company will be able to retain its current sales
representatives, that any additional representatives hired by the Company will
be immediately effective in promoting the sale of the NIASPAN, MAVIK and TARKA
products, or that the Company's sales representatives will be able to generate
significantly increased sales of the NIASPAN, MAVIK and TARKA products. The
failure of the Company's sales representatives to generate increased sales of
the NIASPAN product would have a material adverse effect on the Company.

CONTROL BY EXISTING SHAREHOLDER

     Michael Jaharis, the Chairman of the Board of Directors of the Company and
one of its founders, owns, directly or indirectly, approximately 51.5% of the
Common Stock outstanding as of December 31, 1999. Accordingly, this shareholder
can control the outcome of certain shareholder votes, including votes concerning
the election of directors, the adoption or amendment of provisions in the
Company's Articles of Incorporation, and the approval of mergers and other
significant corporate transactions. This level of concentrated ownership by one
person, along with the factors described in a subsequent section, "Anti-Takeover
Provisions," may have the effect of delaying or preventing a change in the
management or voting control of the Company. In addition, the Supplemental
Funding Arrangement gives Mr. Jaharis the right to convert (at $4.91 per share)
amounts owed to Mr. Jaharis by the Company into shares of the Company's Common
Stock and the Standby Facility gives Mr. Jaharis the right to exercise warrants
to purchase 6 million shares of the Company's Common Stock. If this conversion
option or warrant exercise were to occur, Mr. Jaharis would own a significantly
greater percentage of the Company's outstanding Common Stock thus resulting in
substantial dilution to existing shareholders.

COMPETITION AND TECHNOLOGICAL CHANGE

     Many products are commercially available for the treatment of elevated LDL
cholesterol, and the manufacturers of such products, individually and
collectively, have significantly greater financial resources and sales and
manufacturing capabilities than the Company, including a combined field sales
force exceeding 12,000 representatives compared with the Company's 200-person
field sales force. The Company estimates that its existing NIASPAN prescriptions
account for less than 1.5% of the total prescriptions currently being written in
the United States for cholesterol-lowering pharmaceutical compounds. There can
be no assurance that NIASPAN or any other product developed by the Company will
be able to compete successfully with any of those products or that the Company
will be able to overcome such competition and achieve increasing sales of its
NIASPAN product. Moreover, the active ingredient in NIASPAN, niacin, is
available in several other formulations, most of which do not require a
prescription. Although the Company believes that there are no other currently
available niacin formulations that have been approved by the FDA specifically
for once-a-day dosing, there can be no assurance that physicians will not
prescribe or recommend some of these unapproved niacin formulations, using the
NIASPAN

                                       22
<PAGE>

product's dosing regimen, to try to achieve the same results as NIASPAN.
Substitution of other niacin formulations for the NIASPAN product could have a
material adverse effect on the Company. Moreover, manufacturers of other niacin
formulations could promote their products using the NIASPAN product's dosing
regimen and could promote the sale of their products to treat the indications
for which the Company has received clearance to market NIASPAN. Although such
promotion would be a violation of FDA regulations, the occurrence of such
practices would have a material adverse effect on the Company. Moreover, many
established pharmaceutical and biotechnology companies, universities, and other
research institutions with resources significantly greater than the Company's
may develop products that directly compete with the Company's products. Even if
the Company's products under development prove to be more effective than those
developed by other entities, such other entities may be more successful in
marketing their products than the Company because of greater financial
resources, stronger sales and marketing efforts, and other factors. These
entities may succeed in developing products that are safer, more effective or
less costly than the products developed by the Company. There can be no
assurance that any products developed by the Company will be able to compete
successfully with any of those products.

NO ASSURANCE OF ADEQUATE THIRD-PARTY REIMBURSEMENT

     The Company's ability to commercialize successfully its products under
development is dependent in part on the extent to which appropriate levels of
reimbursement for the NIASPAN product or for the Company's products under
development are obtained from government authorities, private health insurers,
and managed care organizations such as health maintenance organizations
("HMOs"). Managed care organizations and other third-party payors are
increasingly challenging the pricing of pharmaceutical products. The trend
toward managed healthcare in the United States, the growth of organizations such
as HMOs, and legislative proposals to reform healthcare and government insurance
programs could significantly influence the purchase of pharmaceutical products,
resulting in lower prices and reduced demand for NIASPAN or the Company's
products under development. Such cost containment measures and potential
legislative reform could affect the Company's ability to sell Niaspan or its
products under development and may have a material adverse effect on the
Company. Significant uncertainty exists about the reimbursement status of newly
approved pharmaceutical products. Although the Company has obtained approvals
for reimbursement for the cost of NIASPAN from many third-party payers, there
can be no assurance that the Company will be able to maintain such approvals.
There can be no assurance that reimbursement in the United States or foreign
countries will be available for NIASPAN or any of the Company's products under
development, that any reimbursement granted will be maintained, or that limits
on reimbursement available from third-party payors will not reduce the demand
for, or negatively affect the price of, NIASPAN or the Company's products under
development. The unavailability or inadequacy of third-party reimbursement for
NIASPAN or the Company's products under development would have a material
adverse effect on the Company.

DEPENDENCE ON KEY PERSONNEL

     The success of the Company is dependent on its ability to attract and
retain highly qualified scientific, management and sales personnel. The Company
faces intense competition for personnel from other companies, academic
institutions, government entities, and other organizations. There can be no
assurance that the Company will be successful in attracting and retaining key
personnel. The loss of key personnel, or the inability to attract and retain the
additional, highly-skilled employees required for the expansion of the Company's
activities, could adversely affect the Company's results of operations and its
business.

PRODUCTS UNDER DEVELOPMENT

     Although the Company obtained clearance from the FDA to market the NIASPAN
product, there can be

                                       23
<PAGE>

no assurance that the Company will be able to successfully formulate any of its
other products as planned, or that the Company will be successful in
demonstrating the safety and efficacy of such products in human clinical trials.
These trials may be costly and time-consuming. The administration of any product
the Company develops may produce undesirable side effects that could result in
the interruption, delay or suspension of clinical trials, or the failure to
obtain FDA or other regulatory approval for any or all targeted indications.
Even if regulatory approval is secured, the Company's products under development
may later produce adverse effects that limit or prevent their widespread use or
that necessitate their withdrawal from the market. The Company may discontinue
the development of any of its products under development at any time.

PATENTS AND TRADEMARKS; INTERFERENCE

     The Company's ability to commercialize any of its products under
development will depend, in part, on its or its licensors' ability to obtain
patents, enforce those patents, preserve trade secrets, and operate without
infringing on the proprietary rights of third parties. In addition, the patents
for which the Company has applied relating to NIASPAN and certain other of the
Company's products under development are based on, among other things, the timed
administration of NIASPAN. If the indications treated by NIASPAN and such other
products under development could be treated using drugs without such timed
administration, the Company's patents, if issued, would not prevent the use of
such drugs for the treatment of such indications, which would have a material
adverse effect on the Company. There can be no assurance that the patent
applications licensed to or owned by the Company will result in issued patents,
that patent protection will be secured for any particular technology, that any
patents that have been or may be issued to the Company or its licensors will be
valid or enforceable or that any patents will provide meaningful protection to
the Company.

     In general, the U.S. patents and patent applications owned by or licensed
to the Company are method-of-use patents that cover the timed use of certain
compounds to treat specified conditions. Composition-of-matter protection is not
available for the active ingredient in NIASPAN. The active ingredient in
NIASPAN, niacin, is currently sold in the United States and other markets for
lipid altering and for other uses. Even in jurisdictions where the use of the
active ingredient in NIASPAN for lipid altering and other indications may be
covered by the claims of a use patent licensed to the Company, off-label sales
might occur, especially if another company markets the active ingredient at a
price that is less than the price of NIASPAN, thereby potentially reducing the
sales of NIASPAN.

     The Company has patent applications pending in the U.S. Patent and
Trademark Office ("PTO") with claims covering NIASPAN's method-of-use consistent
with its recommended once-a-day dosing regimen. The Company has been notified by
the PTO that certain of these claims have been allowed, but none of the claims
have yet been issued as a patent. The Company has paid the issue fees for those
claims that have been allowed and now awaits to receive from the PTO the
assigned patent numbers and dates on which the patents for those allowed claims
will issue. The patent examiner has also indicated that it may submit certain
claims to the PTO's Board of Interference to determine whether it should declare
an interference between such Kos application and a method-of-use patent issued
to a privately owned generic manufacturer allegedly claiming the same dosing
regimen invention. On February 7, 1997, the Company and such generic
manufacturer entered into a cross-licensing agreement (the "License Agreement")
pursuant to which the parties agreed to resolve, as between themselves, the
effects of such potential interference by granting licenses under their
respective patent application and patent.

     The Company is aware that certain European and U.S. patents have been
issued with claims covering products that contain certain non-CFC
propellant-driven aerosol formulations. The European patents are currently
subject to an opposition proceeding in Europe, and certain claims in such
patents have been held

                                       24
<PAGE>

invalid in the United Kingdom. Certain or all of the Company's aerosol products
under development may use a formulation covered by such European or U.S.
patents. In such event, the Company would be prevented from making, using or
selling such products unless the Company obtains a license under such patents,
which license may not be available on commercially reasonable terms, or at all,
or unless such patents are determined to be invalid or unenforceable in Europe
or the United States, respectively. The Company's development of products that
are covered by such patents and its failure to obtain licenses under such
patents in the event such patents are determined to be valid and enforceable
could have an adverse effect on the Company's business.

     The patent positions of pharmaceutical and biotechnology companies are
highly uncertain and involve complex legal and factual questions. There can be
no assurance that the patents owned and licensed by the Company, or any future
patents, will prevent other companies from developing similar or therapeutically
equivalent products or that others will not be issued patents that may prevent
the sale of Company products or require licensing and the payment of significant
fees or royalties by the Company. Furthermore, there can be no assurance that
any of the Company's future products or methods will be patentable, that such
products or methods will not infringe upon the patents of third parties, or that
the Company's patents or future patents will give the Company an exclusive
position in the subject matter claimed by those patents. The Company may be
unable to avoid infringement of third party patents and may have to obtain a
license, defend an infringement action, or challenge the validity of the patents
in court. There can be no assurance that a license will be available to the
Company, if at all, on terms and conditions acceptable to the Company, or that
the Company will prevail in any patent litigation. Patent litigation is costly
and time consuming, and there can be no assurance that the Company will have or
will devote sufficient resources to pursue such litigation. If the Company does
not obtain a license under such patents, is found liable for infringement or is
not able to have such patents declared invalid, the Company may be liable for
significant money damages, may encounter significant delays in bringing products
to market, or may be precluded from participating in the manufacture, use, or
sale of products or methods of treatment requiring such licenses.

     The Company also relies on trade secrets and other unpatented proprietary
information in its product development activities. To the extent that the
Company relies on trade secrets and unpatented know-how to maintain its
competitive technological position, there can be no assurance that others may
not independently develop the same or similar technologies. The Company seeks to
protect trade secrets and proprietary knowledge in part through confidentiality
agreements with its employees, consultants, advisors and collaborators.
Nevertheless, these agreements may not effectively prevent disclosure of the
Company's confidential information and may not provide the Company with an
adequate remedy in the event of unauthorized disclosure of such information. If
the Company's employees, scientific consultants or collaborators develop
inventions or processes independently that may be applicable to the Company's
products under development, disputes may arise about ownership of proprietary
rights to those inventions and processes. Such inventions and processes will not
necessarily become the Company's property, but may remain the property of those
persons or their employers. Protracted and costly litigation could be necessary
to enforce and determine the scope of the Company's proprietary rights. Failure
to obtain or maintain patent and trade secret protection, for any reason, would
have a material adverse effect on the Company.

     The Company engages in collaborations, sponsored research agreements, and
other arrangements with academic researchers and institutions that have received
and may receive funding from U.S. government agencies. As a result of these
arrangements, the U.S. government or certain third parties may have rights in
certain inventions developed during the course of the performance of such
collaborations and agreements as required by law or such agreements. Several
legislative bills affecting patent rights have been introduced in the United
States Congress. These bills address various aspects of patent law, including

                                       25
<PAGE>

publication, patent term, re-examination subject matter and enforceability. It
is not certain whether any of these bills will be enacted into law or what form
such new laws may take. Accordingly, the effect of such potential legislative
changes on the Company's intellectual property estate is uncertain.

GOVERNMENT REGULATION; NO ASSURANCES OF REGULATORY APPROVAL

     The Company's research and development activities, preclinical studies,
clinical trials, and the manufacturing and marketing of its products are
currently subject to extensive regulation by the FDA and may in the future be
subject to foreign regulations. The drug approval process takes many years and
requires the expenditure of substantial resources. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
that could delay, limit, or prevent regulatory approval. Although the Company
may consult the FDA for guidance in developing protocols for clinical trials,
that consultation provides no assurance that the FDA will accept the clinical
trials as adequate or well-controlled or accept the results of those trials. In
addition, delays or rejections of applications for regulatory approval may
result from changes in or additions to FDA regulations concerning the drug
approval process. Similar delays may also be encountered in foreign countries.
There can be no assurance that any regulatory review will be conducted in a
timely manner or that regulatory approvals will be obtained for any products
developed by the Company. Even if regulatory approval of a product is obtained,
the approval may be limited as to the indicated uses for which it may be
promoted or marketed. In addition, a marketed drug, its bulk chemical supplier,
its manufacturer and its manufacturing facilities are subject to continual
regulatory review and periodic inspections, and later discovery of previously
unknown problems with a product, supplier, manufacturer or facility may result
in restrictions on such products or manufacturers, which may require a
withdrawal of the product from the market. Failure to comply with the applicable
regulatory requirements can, among other things, result in fines, suspensions of
regulatory approvals, product recalls, operating restrictions and criminal
prosecution, any of which could have a material adverse effect on the Company.

     The Company's business is also subject to regulation under state, federal
and local laws, rules, regulations and policies relating to the protection of
the environment and health and safety, including those governing the use,
generation, manufacture, storage, air emission, effluent discharge, handling and
disposal of certain materials. The Company believes that it is in compliance in
all material respects with all such laws, rules, regulations and policies
applicable to the Company. There can be no assurance that the Company will not
be required to incur significant costs to comply with such environmental and
health and safety laws and regulations in the future. The Company's research and
development involves the controlled use of hazardous materials. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by applicable state, federal and
local regulations, the risk of contamination or injury from these materials
cannot be completely eliminated. In the event of such contamination or injury,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company and materially adversely
affect the Company's business, financial condition and results of operations.

DEPENDENCE ON COLLABORATORS

     The Company relies on various third parties for certain aspects of the
development of the Company's presently planned or future products. There can be
no assurance that the Company will be able to enter into future collaborative
arrangements on favorable terms, or at all. Even if the Company is successful in
entering into such collaborative agreements, there can be no assurance that any
such arrangement will be successful. The success of any such arrangement is
dependent on, among other things, the skills, experience and efforts of the
third party's employees responsible for the project, the third party's
commitment to the arrangement, and the financial condition of the third party,
all of which are beyond

                                       26
<PAGE>

the control of the Company.

LIMITED MANUFACTURING EXPERIENCE; RISK OF SCALE-UP

     The Company currently manufactures the NIASPAN product in one manufacturing
plant that has been inspected and approved by the FDA, and it manufactures
clinical materials for its products under development in another manufacturing
plant. The Company believes both plants operate in substantial compliance with
current Good Manufacturing Practices ("cGMP") regulations for the manufacture of
pharmaceutical products. The Company may need to further scale-up certain of its
current manufacturing processes to achieve production levels consistent with the
commercial sale of its products. Further, modifications to the facilities,
systems and procedures may be necessary to maintain capacity at a level
sufficient to meet market demand or to maintain compliance with cGMP regulations
and other regulations prescribed by various regulatory agencies including the
Occupational Safety and Health Administration and the Environmental Protection
Agency. Failure by the Company to successfully further scale-up, expand in
connection with manufacture for commercial sale, or modify its manufacturing
process or to comply with cGMP regulations and other regulations could delay the
approval of the Company's products under development or limit the Company's
ability to meet the demand for its products, either of which would have a
material adverse effect on the Company. Such occurrences may require the Company
to acquire alternative means of manufacturing its products, which may not be
available to the Company on a timely basis, on commercially practicable terms,
or at all.

DEPENDENCE ON SINGLE SOURCES OF SUPPLY

     Some materials used in the Company's products, including niacin, the active
ingredient in NIASPAN, are currently sourced from a single qualified supplier.
The Company does not have a contractual arrangement with its sole supplier of
niacin. Although the Company has not experienced difficulty to date in acquiring
niacin, or other materials for product development, no assurance can be given
that supply interruptions will not occur in the future or that the Company will
not have to obtain substitute materials, which would require additional product
validations and regulatory submissions. Any such interruption of supply could
have a material adverse effect on the Company's ability to manufacture its
products or to obtain or maintain regulatory approval of such products.

RISK OF PRODUCT LIABILITY CLAIMS; NO ASSURANCE OF ADEQUATE INSURANCE

     Manufacturing, marketing, selling, and testing NIASPAN and the Company's
products under development entails a risk of product liability. The Company
could be subject to product liability claims in the event the Company's products
or products under development fail to perform as intended. Even unsuccessful
claims could result in the expenditure of funds in litigation and the diversion
of management time and resources and could damage the Company's reputation and
impair the marketability of the Company's products. While the Company maintains
liability insurance, there can be no assurance that a successful claim could not
be made against the Company, that the amount of indemnification payments or
insurance would be adequate to cover the costs of defending against or paying
such a claim, or that damages payable by the Company would not have a material
adverse effect on the Company's business, financial condition, and results of
operations and on the price of the Company's Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

     The Company has granted certain registration rights to the Company's
controlling shareholder and to Kos Investments, which entitle such entities to
cause the Company to effect three registrations under the Securities Act of
sales of shares of the Company's Common Stock owned by such entities. These

                                       27
<PAGE>

registration rights generally would also permit the holders of such rights to
include shares in any registration statement otherwise filed by the Company. By
exercising these registration rights, these entities could cause a large number
of shares to be registered and become freely tradeable without restrictions
under the Securities Act (except for those purchased in the offering by
affiliates of the Company) immediately upon the effectiveness of such
registration. Such sales may have an adverse effect on the market price of the
Common Stock and could impair the Company's ability to raise additional capital.

POSSIBLE STOCK PRICE VOLATILITY

     The stock market, including the Nasdaq National Market, on which the
Company's shares are listed, has from time to time experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the Company's Common
Stock, like the stock prices of many publicly traded pharmaceutical and
biotechnology companies, has been and may continue to be highly volatile. The
sale by the Company's controlling shareholder or members of the Company's
management of shares of Common Stock, announcements of technological innovations
or new commercial products by the Company or its competitors, developments or
disputes concerning patent or proprietary rights, publicity regarding actual or
potential medical results relating to the NIASPAN product or to products under
development by the Company or its competitors, regulatory developments in either
the United States or foreign countries, public concern as to the safety of
pharmaceutical and biotechnology products and economic and other external
factors, as well as the trend of prescriptions for the NIASPAN product and the
period-to-period fluctuations in sales or other financial results, among other
factors, may have a significant impact on the market price of the Common Stock.

ANTI-TAKEOVER PROVISIONS

     Certain provisions of the Company's Articles of Incorporation and Bylaws,
as well as the Florida Business Corporation Act, could discourage a third party
from attempting to acquire, or make it more difficult for a third party to
acquire, control of the Company without approval of the Company's Board of
Directors. Such provisions could also limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. Certain of
such provisions allow the Board of Directors to authorize the issuance of
preferred stock with rights superior to those of the Common Stock. Moreover,
certain provisions of the Company's Articles of Incorporation or Bylaws
generally permit removal of directors only for cause by a 60% vote of the
shareholders of the Company, require a 60% vote of the shareholders to amend the
Company's Articles of Incorporation or Bylaws, require a demand of at least 50%
of the Company's shareholders to call a special meeting of shareholders, and
prohibit shareholder actions by written consent.

                                       28
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     The Company's exposure to market risk is limited primarily to fluctuating
interest rates associated with variable rate indebtedness that is subject to
interest rate changes in the U.S. The Company does not use, nor has it
historically used, derivative financial instruments to manage or reduce market
risk. At December 31, 1999, the Company had $62 million of variable rate
indebtedness bearing interest at the prime rate (8.5% at December 31, 1999).

ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     Consolidated financial statements and supplementary data required by this
item can be found at the pages listed in the following index.

                                                                            PAGE
                                                                            ----
     FINANCIAL STATEMENTS:

     Report of Independent Certified Public Accountants......................30

     Consolidated Balance Sheets at December 31, 1999 and 1998...............31

     Consolidated Statements of Operations for the year ended
         December 31, 1999, 1998 and 1997....................................32

     Consolidated Statements of Shareholders' Equity (Deficit) for
         the period December 31, 1996 to December 31, 1999...................33

     Consolidated Statements of Cash Flows for the year ended
         December 31, 1999, 1998 and 1997....................................34

     Notes to Consolidated Financial Statements..............................35

     FINANCIAL STATEMENT SCHEDULE:*

     Report of Independent Certified Public Accountants on Schedule II.......48

     Schedule II. Valuation and Qualifying Accounts..........................49

     -----

     *All other schedules for which provision is made in the applicable
      accounting regulations of the Securities and Exchange Commission are
      not required under the related instructions or are inapplicable, and
      therefore not included herein.

                                       29
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors of
    Kos Pharmaceuticals, Inc.:

     We have audited the accompanying consolidated balance sheets of Kos
Pharmaceuticals, Inc. (a Florida corporation) and subsidiary as of December 31,
1999 and 1998, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kos Pharmaceuticals, Inc.
and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.

ARTHUR ANDERSEN LLP

Miami, Florida,
    February 4, 2000.

                                       30
<PAGE>

                    KOS PHARMACEUTICALS, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                        --------------------------------
                                                                            1999               1998
                                                                        -------------      -------------
<S>                                                                     <C>                <C>
ASSETS
Current Assets:
   Cash and cash equivalents                                            $   4,336,326      $   4,878,641
   Trade accounts receivable, net                                           6,976,972          2,017,151
   Inventories                                                              1,085,849          1,312,556
   Prepaid expenses and other current assets                                2,610,412          1,325,689
                                                                        -------------      -------------
       Total current assets                                                15,009,559          9,534,037
Fixed Assets, net                                                          10,430,043         12,019,579
Goodwill and Other Intangible Assets, net                                     803,182                 -
Other Assets                                                                   15,323             16,747
                                                                        -------------      -------------

       Total assets                                                     $  26,258,107      $  21,570,363
                                                                        =============      =============

LIABILITIES AND SHAREHOLDERS'

  DEFICIT
Current Liabilities:
   Accounts payable                                                     $   2,820,840      $   4,333,003
   Accrued expenses                                                        12,450,035          8,195,586
   Deferred revenue                                                         1,980,000                 -
   Capital lease obligations                                                  112,641            141,028
                                                                        -------------      -------------
       Total current liabilities                                           17,363,516         12,669,617
                                                                        -------------      -------------

Notes Payable to Shareholder                                               62,000,000          9,000,000
Capital Lease Obligations, net of current portion                              89,145            238,503

Commitments and Contingencies (Notes 12 and 14)

Shareholders' Deficit:
   Preferred stock, $.01 par value, 10,000,000 shares authorized,
       none issued and outstanding                                                 -                  -
   Common stock, $.01 par value, 50,000,000 shares authorized,
      18,026,024 and 17,720,270 shares issued and outstanding as of
      December 31, 1999 and 1998, respectively                                180,260            177,203
   Additional paid-in capital                                             186,291,218        184,598,845
   Accumulated deficit                                                   (239,666,032)      (185,113,805)
                                                                        -------------      -------------
       Total shareholders' deficit                                        (53,194,554)          (337,757)
                                                                        -------------      -------------

       Total liabilities and shareholders' deficit                      $  26,258,107      $  21,570,363
                                                                        =============      =============
</TABLE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       31
<PAGE>

                    KOS PHARMACEUTICALS, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                FOR THE YEAR ENDED DECEMBER 31,
                                                                        ----------------------------------------------
                                                                            1999             1998             1997
                                                                        ------------     ------------     ------------
<S>                                                                     <C>              <C>              <C>
Revenues, net                                                           $ 36,339,514     $ 13,038,241     $  2,892,065
Cost of sales                                                              5,405,960        3,276,153          792,230
                                                                        ------------     ------------     ------------
                                                                          30,933,554        9,762,088        2,099,835
                                                                        ------------     ------------     ------------

Operating expenses:
   Research and development                                               25,618,870       29,143,527       24,130,216
   Selling, general and administrative                                    56,843,187       61,519,514       20,508,654
                                                                        ------------     ------------     ------------
      Total operating expenses                                            82,462,057       90,663,041       44,638,870
                                                                        ------------     ------------     ------------

Loss from operations                                                     (51,528,503)     (80,900,953)     (42,539,035)
                                                                        ------------     ------------     ------------
Other:
   Interest income, net                                                      169,326        1,792,796        2,786,946
   Interest expense-related parties                                       (3,206,521)         (68,466)        (867,652)
   Other income (expense)                                                     13,471           15,181          (10,240)
                                                                        ------------     ------------     ------------
       Total other income (expense)                                       (3,023,724)       1,739,511        1,909,054
                                                                        ------------     ------------     ------------

       Net loss                                                         $(54,552,227)    $(79,161,442)    $(40,629,981)
                                                                        ============     ============     ============

Net loss per share, basic and diluted                                   $      (3.06)    $      (4.50)    $      (2.79)
Weighted average shares of Common

  Stock outstanding, basic and diluted                                    17,842,879       17,589,767       14,569,474

Common Stock options outstanding (not included in the calculation of
  diluted loss per share as their impact would be antidilutive)            3,077,840        2,857,215        2,446,790
</TABLE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       32
<PAGE>

                    KOS PHARMACEUTICALS, INC. AND SUBSIDIARY

            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                    ADDITIONAL
                                                    COMMON           PAID-IN         ACCUMULATED
                                                    STOCK            CAPITAL           DEFICIT             TOTAL
                                                -------------     -------------     -------------      -------------
<S>                                             <C>               <C>               <C>                <C>
BALANCE AT DECEMBER 31, 1996                    $     100,000     $  58,472,323     $ (65,322,382)     $  (6,750,059)

Issuance of Common Stock                               58,577       109,167,409                --        109,225,986
Conversion of Convertible Note and accrued
   interest to Common Stock                             9,601        14,391,435                --         14,401,036
Exercise of stock options                               3,479         1,226,562                --          1,230,041
Stock options issued to non-employees                      --           392,835                --            392,835
Net loss                                                   --                --       (40,629,981)       (40,629,981)
                                                -------------     -------------     -------------      -------------

BALANCE AT DECEMBER 31, 1997                          171,657       183,650,564      (105,952,363)        77,869,858

Issuance of Common Stock                                   29            33,872                --             33,901
Exercise of stock options                               5,517           533,594                --            539,111
Stock options issued to non-employees                      --           380,815                --            380,815
Net loss                                                   --                --       (79,161,442)       (79,161,442)
                                                -------------     -------------     -------------      -------------

BALANCE AT DECEMBER 31, 1998                          177,203       184,598,845      (185,113,805)          (337,757)

Common Stock granted to employees under
   Kos Savings Plan                                     1,071           572,484                --            573,555
Issuance of Common Stock in connection with
   acquisition of assets of IEP Group, Inc.               750           392,250                --            393,000
Issuance of Common Stock to employees under
   Stock Purchase Plan                                    688           301,369                --            302,057
Stock options issued to non-employees                      --           300,000                --            300,000
Exercise of stock options                                 548           126,270                --            126,818
Net loss                                                   --                --       (54,552,227)       (54,552,227)
                                                -------------     -------------     -------------      -------------

BALANCE AT DECEMBER 31, 1999                    $     180,260     $ 186,291,218     $(239,666,032)     $ (53,194,554)
                                                =============     =============     =============      =============
</TABLE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       33
<PAGE>

                    KOS PHARMACEUTICALS, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                  FOR THE YEAR ENDED DECEMBER 31,
                                                                    ---------------------------------------------------
                                                                               1999             1998            1997
                                                                    -------------      -------------      -------------
<S>                                                                 <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                          $ (54,552,227)     $ (79,161,442)     $ (40,629,981)
  Adjustments to reconcile net loss to net cash used
    in operating activities -
    Provision for doubtful accounts                                       160,100             20,000             80,000
    Depreciation and amortization                                       3,010,462          2,202,251            921,271
    Provision for inventory obsolescence                                  640,737            259,500            246,987
    Gains from disposals of fixed assets                                  (13,471)           (15,181)                --
    Common stock issued to employees                                      573,555             33,901                 --
    Stock options issued to non-employees                                 300,000            380,815            392,835
    Changes in operating assets and liabilities:
      Trade accounts receivable                                        (5,119,921)          (217,140)        (1,900,011)
      Prepaid expenses and other current assets                        (1,284,723)           547,173         (1,639,021)
      Inventories                                                        (414,030)         1,810,812         (3,629,855)
      Other assets                                                          1,424             14,289            (31,036)
      Accounts payable                                                 (1,512,163)         1,173,318          2,104,270
      Accrued expenses                                                  4,254,449          4,821,699          3,843,514
    Deferred revenue                                                    1,980,000                 --                 --
                                                                    -------------      -------------      -------------
       Net cash used in operating activities                          (51,975,808)       (68,130,005)       (40,241,027)
                                                                    -------------      -------------      -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Sales (Purchases) of marketable securities                                   --         30,894,009        (30,894,009)
  Acquisition of assets of IEP Group, Inc.                               (700,000)                --                 --
  Capital expenditures                                                 (1,117,637)        (6,876,341)        (5,216,027)
                                                                    -------------      -------------      -------------
       Net cash provided by (used in) investing activities             (1,817,637)        24,017,668        (36,110,036)
                                                                    -------------      -------------      -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuance of Common Stock                              302,057                 --        109,225,986
  Net proceeds from exercise of stock options                             126,818            539,111          1,230,041
  Borrowings under Convertible Note                                            --                 --          5,040,000
  Borrowings under Notes Payable to Shareholder                        53,000,000          9,000,000                 --
  Payments under capital lease obligations                               (177,745)           (50,617)                --
                                                                    -------------      -------------      -------------
       Net cash provided by financing activities                       53,251,130          9,488,494        115,496,027
                                                                    -------------      -------------      -------------
          Net (decrease) increase in cash and cash equivalents           (542,315)       (34,623,843)        39,144,964

Cash and Cash Equivalents, beginning of period                          4,878,641         39,502,484            357,520
                                                                    -------------      -------------      -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                            $   4,336,326      $   4,878,641      $  39,502,484
                                                                    =============      =============      =============

Supplemental Disclosure of Cash Flow Information:
  Interest paid                                                     $   3,309,299      $      14,819      $          --

Supplemental Disclosure of Non-cash Information:
  Acquisition of equipment under capital lease obligations          $          --      $     430,148      $          --

  Conversion of Convertible Note and accrued interest
   payable to Common Stock                                          $          --      $          --      $  14,401,036

   Common Stock issued in connection with acquisition of assets
      of IEP Group, Inc.                                            $     393,000      $          --      $          --

</TABLE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                       34
<PAGE>
                    KOS PHARMACEUTICALS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

     The predecessor to Kos Pharmaceuticals, Inc. (the "Company"), Kos Holdings,
Inc. ("Holdings"), was incorporated in Florida on July 1, 1988, to develop
prescription pharmaceutical products principally for the cardiovascular and
respiratory markets. On June 25, 1996, the Company was incorporated in Florida
as the successor to the business of Holdings. On June 30, 1996, all of the
assets and liabilities of Holdings, other than its net operating loss
carryforwards, were transferred to the Company in exchange for shares of Common
Stock of the Company (the "Reorganization"). The Reorganization was accomplished
in order to transfer the assets and operations of Holdings to the Company while
preserving Holdings' net operating losses and related federal tax benefits for
Holdings and its sole shareholder and one of its founders. Kos Investments, Inc.
("Investments") is the sole shareholder of Holdings. As this transaction was
between entities under common control, the transaction was accounted for on a
historical cost basis, in a manner similar to a pooling of interests.

     On June 22, 1993, Holdings and Aeropharm Technology, Inc. ("Aeropharm")
entered into a letter of intent for Holdings' purchase of a controlling interest
in Aeropharm. On February 14, 1995, the transaction was completed through a
stock purchase agreement that gave control (80% ownership) of Aeropharm to
Holdings. Holdings accounted for its investment in Aeropharm as a consolidated
subsidiary from June 22, 1993. On June 20, 1996, Holdings acquired the minority
interest in Aeropharm, held by an employee of Aeropharm, in exchange for options
to purchase 50,000 shares of Holdings' common stock at $7.00 per share, the
estimated fair value of the underlying shares at the date of grant. The
acquisition of the minority interest in Aeropharm was accounted for under the
purchase method and the fair value of the options granted approximated the
carrying value ($147,690) of the minority interest.

     On July 28, 1997, the Company obtained clearance from the U.S. Food and
Drug Administration to market Niaspan, its first product (NIASPAN/registered
mark/ is a registered trademark of the Company). The Company began sales of the
NIASPAN product during August 1997. NIASPAN is a once-a-day, oral, solid dose
extended-release formulation of niacin for the treatment of hyperlipidemia, a
multiple lipid disorder that is a primary risk factor for coronary heart
disease. Niacin is a water soluble vitamin that has long been recognized as an
effective pharmacological agent for the treatment of multiple lipid disorders
including elevated LDL and low HDL cholesterol.

     The Company expects to incur additional losses in the near-term due
primarily to its sales and marketing efforts associated with NIASPAN and to
research and development activities in connection with its products under
development. No assurance can be given that the Company's products can be
successfully marketed, that products under development can be successfully
formulated or manufactured at acceptable cost and with appropriate quality, or
that required regulatory approvals will be obtained. The Company is subject to a
number of other risks including, but not limited to, uncertainties related to
market acceptance, future capital needs and uncertainty of additional funding,
uncertainties related to limited sales and marketing experience, uncertainties
related to patents and trademarks, interference and risk of infringement,
uncertainties related to competition and technological changes, government
regulation, dependence on product development collaborators, limited
manufacturing experience and risk of scale-up, dependence on single sources of
supply, and no assurances of adequate third party reimbursement. The likelihood
of the success of the Company must be considered in light of the uncertainty
caused by problems, expenses, complications and delays frequently encountered in
connection with the development of new business ventures.

                                       35
<PAGE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   BASIS OF PRESENTATION

     The consolidated financial statements include the results of Holdings
(prior to July 1, 1996), the Company and its subsidiary, Aeropharm. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

   CASH AND CASH EQUIVALENTS

     The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents.

   INVENTORIES

     Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Components of inventory cost include
materials, labor, and manufacturing overhead. The Company considers factors such
as the amount of inventory on hand, estimated time required to sell such
inventories, remaining shelf life, and current market conditions to determine
whether inventories are stated at the lower of cost or market. Reserves are
provided as appropriate.

   LONG-LIVED ASSETS

     The Company evaluates the recoverability of long-lived assets not held for
sale by measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their fair values. Based on these
evaluations, there were no adjustments to the carrying value of long-lived
assets in 1999, 1998 or 1997.

     The Company evaluates the recoverability of long-lived assets held for sale
by comparing the asset's carrying amount with its fair value less cost to sell.
No assets were held for sale as of December 31, 1999 or 1998.

   GOODWILL AND OTHER INTANGIBLE ASSETS

     Goodwill and other intangible assets consists of the excess of cost over
the fair value of the net assets acquired. The Company amortizes goodwill on a
straight-line basis over ten years. The Company continually evaluates the
carrying value of goodwill and other intangible assets. Any impairment would be
recognized when the expected future operating cash flows derived from such
intangible assets is less than their carrying value.

   FAIR VALUE OF FINANCIAL INSTRUMENTS

     As of December 31, 1999 and 1998, the carrying amount of cash and cash
equivalents, trade accounts receivable, and accounts payable approximates fair
value due to the short term nature of these accounts. The fair value of notes
payable is determined using interest rates in effect as of the balance sheet
date and, because interest expense is payable utilizing variable rates that
re-price frequently, the carrying value approximates fair value.

                                       36
<PAGE>

   CONCENTRATION OF CREDIT RISK

     The Company has no significant off-balance-sheet concentrations of credit
risk.

   REVENUE RECOGNITION

     Sales and the related cost of sales are recognized at the time product is
shipped. The Company's customers are distributors who warehouse product and, in
turn, sell that product to retailers and others. Net sales consist of gross
sales to the Company's customers less provisions for expected rebates and
chargebacks, discounts, and customer returns. These provisions totaled
$6,626,243 and $1,347,000 in the years ended December 31, 1999 and 1998,
respectively. Included in "Accrued expenses" in the accompanying consolidated
balance sheets are $3,235,576 and $722,000 at December 31, 1999 and 1998,
respectively, related to these provisions.

   CO-PROMOTION REVENUE

     The Company has a co-promotion collaboration agreement with Knoll
Pharmaceutical Company ("Knoll"), for the promotion and marketing of Knoll's
MAVIK and TARKA (MAVIK/registered mark/ and TARKA/registered mark/ are
registered trademarks of Knoll Pharmaceutical Company) products within the
United States (the "Knoll Agreement"). Under the terms of the Knoll Agreement,
the Company receives co-promotion revenue from Knoll upon the achievement of
specific MAVIK and TARKA sales levels. The Company recorded $2.7 million of
co-promotion revenue as a result of the Knoll Agreement for the year ended
December 31, 1999.

   DEFERRED REVENUE

     During the fourth quarter of 1999, certain of the Company's customers
purchased abnormally high levels of the Company's NIASPAN product. The Company
believes that this higher than expected NIASPAN demand was primarily due to
these customers protecting themselves against complications associated with year
2000 date change issues. As a result, at December 31, 1999, the level of the
Company's NIASPAN product warehoused by these customers increased above normal
levels. The Company has deferred the recognition of $2,800,000 in revenues and
related expenses associated with these sales until the first quarter of 2000,
when the level of the Company's NIASPAN product warehoused by these customers is
expected to return returns to normal levels. Included in "Deferred revenue" in
the accompanying consolidated balance sheets is $1,980,000 representing payments
received by the Company in excess of revenue recognized during the year ended
December 31, 1999.

   DEPRECIATION AND AMORTIZATION

     Fixed assets are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets or lease term as follows:

                                                                       YEARS

     Furniture and equipment..................................          3-7
     Computer software and hardware...........................          3-5
     Laboratory and manufacturing equipment...................          3-5
     Leasehold improvements...................................     Life of lease

                                       37
<PAGE>

   RESEARCH AND DEVELOPMENT EXPENSES

     All research and development expenses are reflected in the Company's
consolidated statements of operations as incurred.

   NET LOSS PER SHARE

     Basic loss per share is determined by dividing the Company's net loss by
the weighted average number of shares of Common Stock outstanding. Diluted loss
per share also includes dilutive Common Stock equivalents outstanding after
applying the "treasury stock" method.

     In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". SFAS No. 128 simplifies the methodology of computing earnings per share
and requires the presentation of basic and diluted earnings per share. The
Company's basic and diluted earnings per share are the same, because the
Company's Common Stock equivalents are antidilutive.

   INCOME TAXES

     The Company follows SFAS No. 109, "Accounting for Income Taxes", which
requires, among other things, recognition of future tax benefits measured at
enacted rates attributable to deductible temporary differences between financial
statement and income tax bases of assets and liabilities and to tax net
operating loss carryforwards to the extent that realization of said benefits is
more likely than not. The net operating loss carryforwards as of the
Reorganization, amounting to approximately $51 million, were not transferred to
the Company. As of December 31, 1999, the Company had available approximately
$190.7 million of net operating loss carryforwards. Due to the uncertainty of
the Company's ability to generate sufficient taxable income in the future to
utilize such loss carryforwards, the net deferred tax asset has been fully
reserved.

   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, the
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.

   RECENT ACCOUNTING PRONOUNCEMENTS

     SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", was issued by FASB in June 1997. This statement establishes
standards for reporting information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company believes that it operates
within one segment. See Note 10. for information regarding major customers.

                                       38
<PAGE>

3. TRADE ACCOUNTS RECEIVABLE, NET

   Trade accounts receivable consist of the following:
<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                                 ------------------------------
                                                                                     1999              1998
                                                                                 ------------      ------------
<S>                                                                              <C>               <C>
         Trade accounts receivable .........................................     $  7,215,072      $  2,117,151
         Less allowance for doubtful accounts ..............................         (238,100)         (100,000)
                                                                                 ------------      ------------
            Trade accounts receivable, net .................................     $  6,976,972      $  2,017,151
                                                                                 ============      ============
</TABLE>

4. INVENTORIES

   Inventories consist of the following:
<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                                 ------------------------------
                                                                                     1999              1998
                                                                                 ------------      ------------
<S>                                                                              <C>               <C>
         Raw materials .....................................................     $    205,533      $    251,039
         Work in process ...................................................          269,379           847,024
         Finished goods ....................................................          610,937           214,493
                                                                                 ------------      ------------
           Total inventories ...............................................     $  1,085,849      $  1,312,556
                                                                                 ============      ============
</TABLE>

5. FIXED ASSETS, NET

   Fixed assets consist of the following:
<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                                 ------------------------------
                                                                                     1999              1998
                                                                                 ------------      ------------
<S>                                                                              <C>               <C>
         Furniture and equipment ...........................................     $  1,628,011      $  1,581,573
         Computer software and hardware ....................................        2,665,213         2,596,069
         Laboratory and manufacturing equipment ............................        8,549,958         7,674,443
         Leasehold improvements ............................................        5,283,291         5,160,043
                                                                                 ------------      ------------
           Fixed assets, gross .............................................       18,126,473        17,012,128
         Less accumulated depreciation and amortization ....................       (7,696,430)       (4,992,549)
                                                                                 ------------      ------------
           Fixed assets, net ...............................................     $ 10,430,043      $ 12,019,579
                                                                                 ============      ============
</TABLE>

6. GOODWILL AND OTHER INTANGIBLE ASSETS

     On November 24, 1999, the Company acquired, for total consideration of $1.1
million, substantially all of the assets and intellectual property of IEP Group,
Inc. (the "IEP Acquisition"). In connection with this transaction, the Company
established IEP Pharmaceutical Devices, Inc. ("IEP") as a wholly-owned
subsidiary of Aeropharm and contributed to IEP all of the assets obtained
through the IEP Acquisition. The Company has recorded goodwill of $803,182
representing the excess of the cost of the assets acquired through the IEP
Acquisition in excess of their estimated fair value.

                                       39
<PAGE>

7. ACCRUED EXPENSES

     Major components of accrued expenses were as follows:

<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                                 ------------------------------
                                                                                     1999              1998
                                                                                 ------------      ------------
<S>                                                                              <C>               <C>
Employee commissions and bonuses............................................     $ 2,169,912       $ 1,956,986
Employee vacations .........................................................       1,126,105         1,094,609
Clinical studies ...........................................................       1,226,878           646,118
Managed care rebates .......................................................       3,044,246           623,585
All other ..................................................................       4,882,894         3,874,288
                                                                                 -----------       -----------
  Total accrued expenses ...................................................     $12,450,035       $ 8,195,586
                                                                                 ===========       ===========
</TABLE>

8. CONVERSION OF NOTE PAYABLE

     On October 25, 1997, the outstanding principal and interest of a
convertible note payable to Michael Jaharis (the "Convertible Note"), Chairman
of the Company's Board of Directors, were converted into 960,069 shares of
Common Stock. At the time of conversion, the Convertible Note accrued interest
at a rate of 8.50% per year and had outstanding principal and interest of
$13,395,000 and $1,006,036, respectively.

9. NOTES PAYABLE TO SHAREHOLDER

     On July 1, 1998, the Company entered into a $30 million credit facility
(the "Credit Facility") with Michael Jaharis. Borrowings under the Credit
Facility, which totaled $30 million at December 31, 1999, bear interest at the
prime rate (8.5% as of December 31, 1999). On December 21, 1999, Mr. Jaharis
agreed to extend the maturity date of the Credit Facility from December 31, 2000
to December 31, 2002. The Company incurred $2,181,000 and $68,000 of interest
expense under the Credit Facility for the years ended December 31, 1999 and
1998, respectively.

     On September 1, 1999, the Company formally agreed to the terms of an
additional $50 million funding arrangement initially committed to by Mr. Jaharis
on October 7, 1998 (the "Supplemental Credit Facility"). Borrowings under the
Supplemental Credit Facility totaled $32 million as of December 31, 1999, bear
interest at the prime rate, are convertible (at $4.91 per share) into shares of
the Company's Common Stock, and will be due December 31, 2003. The Company
incurred $1,025,000 of interest expense under the Supplemental Credit Facility
for the year ended December 31, 1999.

     On December 21, 1999, Mr. Jaharis agreed to extend another $50 million loan
to the Company (the "Standby Facility"). Borrowings made under the Standby
Facility will be due June 30, 2005 and are subject to most of the terms and
conditions of borrowings made under the Supplemental Credit Facility. Borrowings
made under the Standby Facility are not, however, convertible into shares of the
Company's Common Stock. In lieu of a conversion feature, the Company has granted
to Mr. Jaharis warrants to purchase 6,000,000 shares of the Company's Common
Stock at $5.00 per share, which approximates the market value of the Company's
Common Stock on the effective date of the Standby Facility. The warrants contain
a non-detachable feature and are exercisable at any time until June 30, 2006.
The Company had no borrowings outstanding under the Standby Facility as of
December 31, 1999.

                                       40
<PAGE>

10. MAJOR CUSTOMERS

     Sales to customers that were at least 10% of the Company's gross sales are
as follows:

     CUSTOMER NAME                                       DECEMBER 31,
                                             -----------------------------------
                                                 1999        1998        1997
                                             -----------  ----------  ----------

     McKesson Drug Co. ....................  $12,376,801  $4,186,863  $  649,611
     Bergen Brunswig Corp. ................    7,781,733   2,610,655     233,297
     Cardinal Health, Inc. ................    7,233,560   1,860,512     412,929
                                             -----------  ----------  ----------
     Total ................................  $27,392,094  $8,658,030  $1,295,837
                                             ===========  ==========  ==========


11.      QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     The following table summarizes selected quarterly financial data of the
Company for the year ended December 31, 1999 and 1998 (IN THOUSANDS, EXCEPT PER
SHARE DATA):

<TABLE>
<CAPTION>
                                            FIRST        SECOND         THIRD        FOURTH         FULL
                                           QUARTER       QUARTER       QUARTER       QUARTER        YEAR
                                          ---------     ---------     ---------     ---------    ----------
<S>                                       <C>           <C>           <C>           <C>           <C>
     1999
     ----
     Revenues, net                        $  5,469      $  7,288      $ 10,249      $ 13,334      $ 36,340
     Cost of sales                           1,039         1,202         1,386         1,779         5,406
     Operating expenses                     19,359        21,550        20,807        20,746        82,462
     Loss from operations                  (14,929)      (15,464)      (11,944)       (9,191)      (51,528)
     Net Loss                              (15,214)      (16,097)      (12,862)      (10,379)      (54,552)
     Basic and diluted loss per share     $  (0.86)     $  (0.90)     $  (0.72)     $  (0.58)     $  (3.06)
     Market prices per common
       share:
          High                            $   7.00      $   5.75      $   7.75      $   6.38      $   7.75
          Low                             $   4.00      $   4.13      $   4.38      $   4.38      $   4.00

     1998
     ----
     Revenues, net                        $  1,000      $  2,807      $  4,266      $  4,965      $ 13,038
     Cost of sales                             210           843         1,172         1,051         3,276
     Operating expenses                     18,884        24,629        22,731        24,419        90,663
     Loss from operations                  (18,094)      (22,665)      (19,637)      (20,505)      (80,901)
     Net Loss                              (17,307)      (22,054)      (19,309)      (20,491)      (79,161)
     Basic and diluted loss per share     $  (1.00)     $  (1.25)     $  (1.09)     $  (1.16)     $  (4.50)
     Market prices per common
       share:
          High                            $  15.56      $  13.94      $  12.69      $   8.00      $  15.56
          Low                             $   7.50      $   8.38      $   4.31      $   3.50      $   3.50
</TABLE>

12. COMMITMENTS AND CONTINGENCIES

   LETTER OF CREDIT FACILITY

     On September 17, 1998, the Company entered into a $3 million letter of
credit facility with a bank (the "Letter of Credit Facility"). Under the terms
of the Letter of Credit Facility, letters of credit outstanding must not exceed
90% of the Company's cash balance kept at such bank. As of December 31, 1999 and
December 31, 1998, letters of credit outstanding totaled $1,492,000 and
$1,528,000, respectively.

                                       41
<PAGE>

   PURCHASE COMMITMENTS

     The Company enters, during the normal course of its business, into short
term purchase commitments for the acquisition of goods and services needed to
run its operations. As of December 31, 1999, the Company had open purchase
commitments totaling $6,200,000.

   EMPLOYMENT AND ROYALTY AGREEMENTS

     As of December 31, 1999, the Company had employment and/or royalty
agreements with three of its officers. Salary and benefits expense recorded
under the employment agreements totaled $698,000, $833,000 and $708,000 during
the years ended December 31, 1999, 1998 and 1997, respectively. The royalty
agreements entitle two of these officers to royalties on sales of the Company's
products, the aggregate amounts of which may not exceed $5,500,000. Royalty
expense from these agreements during the years ended December 31, 1999, 1998 and
1997 was approximately $336,000, $65,000 and $29,000, respectively. Future
minimum payments under the employment agreements are as follows:

     YEAR ENDING DECEMBER 31,                                   AMOUNT
     ------------------------                              ---------------

     2000..................................................   $   525,000
     2001..................................................       525,000
     2002..................................................       175,000
                                                           ---------------
                                                               $1,225,000
                                                           ===============

   LEASE COMMITMENTS

     The Company has various operating leases that expire through 2002 for the
rental of office space, laboratory facilities, and sales force vehicles. Future
minimum commitments under these agreements are as follows:

     YEAR ENDING DECEMBER 31,                                   AMOUNT
     ------------------------                              ---------------

     2000..................................................    $2,441,000
     2001..................................................     1,300,000
     2002..................................................       501,000
                                                           ---------------
                                                               $4,242,000
                                                           ===============

     As of December 31, 1999 and 1998, standby letters of credit of
approximately $1,200,000 and $1,236,000, respectively, were outstanding under
the Letter of Credit Facility in favor of the lessors as collateral for these
leases provided to the Company.

     Rent and other expenses incurred under the operating leases were
$3,493,964, $3,061,000 and $823,000, during the years ended December 31, 1999,
1998 and 1997, respectively.

   LICENSING AGREEMENTS

     The Company has certain license agreements (the "License Agreements") with
third parties (the "Licensees") for the development of future products. Under
the License Agreements, the Company is required to make payments to the
Licensees in order to secure exclusive rights to develop, manufacture, sell
and/or sublicense future products developed through the License Agreements. In
connection with the License Agreements, the Company recorded licensing expense
of approximately $135,000, $490,000 and $5,638,000 for the years ended December
31, 1999, 1998 and 1997 respectively, which is reflected in "Research and
development" in the accompanying consolidated statements of operations.

                                       42
<PAGE>

     In order to maintain its rights under the License Agreements, the Company
is required to pay certain future milestone payments and licensing fees. In the
event that no milestone event occurs, the Company generally would not be
required to make any milestone payment. The Company anticipates, based on the
development efforts that have been conducted to date, that it will be required
to make future milestone payments of $125,000 during 2000.

     On February 7, 1997, the Company entered into an agreement with an
unaffiliated generic drug manufacturer pursuant to which the parties agreed to
resolve the effects, as between themselves, of a potential interference
proceeding by the United States Patent and Trademark Office by granting cross
licenses under their respective patent applications and patents, regardless of
whether such licenses would be required. In connection with this licensing
agreement, the Company recognized $3,000,000 as a licensing expense; such
expense is included in "Research and development" in the accompanying
consolidated statement of operations for the year ended December 31, 1997. As
further consideration for entering into the agreement, the Company agreed to pay
the generic manufacturer certain royalties on the net sales of NIASPAN subject
to a cap on such royalty payments in the United States and a separate cap on
such payments for sales outside the United States. The Company recorded
$1,682,000, $652,000 and $148,000 of royalty expense from this agreement for the
years ended December 31, 1999, 1998 and 1997, respectively, and are included in
"Selling, general and administrative" in the accompanying consolidated
statements of operations.

   SPONSORED RESEARCH

     The Company has on-going research agreements with two universities and a
research center. The Company is primarily responsible for funding the projects,
and the university or research center is responsible for providing personnel,
equipment, and facilities to conduct the research activities. The Company
anticipates that it will be required to make minimum future payments of $330,000
during 2000 under these research agreements.

     The Company also funds, from time to time and at its sole discretion, other
research programs conducted at other universities and research centers. Expenses
recorded under the Company's sponsored research programs totaled approximately
$408,000, $383,000 and $380,000 during the years ended December 31, 1999, 1998
and 1997, respectively, and are reflected in "Research and development" in the
accompanying consolidated statements of operations.

   DEVELOPMENT AGREEMENTS

     The Company has development agreements with various third parties (the
"Development Agreements"). As dictated by the Development Agreements, the
Company is responsible for funding all required development activities. In order
to maintain its rights under the Development Agreements, the Company is required
to pay certain future milestone payments and development fees. In the event that
no milestone event occurs, the Company generally would not be required to make
any milestone payment.

     Expenses recorded under these and other development agreements totaled
approximately $380,000, $1,470,000 and $2,688,000 during the years ended
December 31, 1999, 1998 and 1997, respectively, and are reflected in "Research
and development" in the accompanying consolidated statements of operations.

                                       43
<PAGE>

   EMPLOYEE BENEFIT PLANS

     The Company's Internal Revenue Code Section 401(k) Plan, known as the Kos
Savings Plan, became effective on January 1, 1994. Each employee who has
completed at least 90 days of service with the Company and has attained age 21
is eligible to make pre-tax elective deferral contributions each year not
exceeding the lesser of a specified statutory amount or 15% of the employee's
compensation for the year. Beginning on January 1, 1999, the Company began
matching employee contributions to the Kos Savings Plan. The Company's matching
contribution to the Kos Savings Plan is made in the form of previously unissued
Common Stock. The Company matches employee contributions up to 50% of an
employee's 401(k) contribution, and not to exceed 3% of such employee's
compensation or $5,000 per employee for any given year. An employee is always
100% percent vested in the employee's elective deferral contributions to the Kos
Savings Plan and is vested up to 100% in the Company matching contribution
portion of such plan at 25% vesting per year of employment. The Company recorded
$574,000 in expense related to its match of employee contributions to the Kos
Savings Plan for the year ended December 31, 1999, and is included in "Selling,
general and administrative" in the accompanying consolidated statements of
operations.

     On February 15, 1999, the Company implemented the Kos Pharmaceuticals, Inc.
1999 Employee Stock Purchase Plan (the "Stock Purchase Plan"). Under the Stock
Purchase Plan, an eligible employee may purchase Common Stock at a 15% discount
by contributing to the Stock Purchase Plan, through payroll deductions, up to
10% of such employee's annual compensation. Each employee's total contributions
are limited to $25,000 per year. Employee payroll deductions are accumulated for
six-month periods at the end of which shares of the Company's Common Stock are
purchased under the Stock Purchase Plan. All employees of the Company with at
least 90 days of continuous service at the beginning of each six-month offering
period are eligible to participate in that offering period. The Company has
reserved 1,000,000 shares of Common Stock for future purchase by employees under
the Stock Purchase Plan.

13. SHAREHOLDERS' EQUITY (DEFICIT)

   COMMON STOCK

     In March 1997, the Company completed an initial public offering of
4,772,500 shares of Common Stock. Net proceeds to the Company were approximately
$65,900,000 after deducting expenses of the offering.

     In October 1997, the Company completed a follow-on public offering of
1,085,000 shares of Common Stock. Net proceeds to the Company were approximately
$43,330,000 after deducting expenses of the offering.

   PREFERRED STOCK

     The Company is authorized to issue 10,000,000 shares of undesignated
preferred stock. Such shares of preferred stock may be issued by the Company in
the future, without shareholder approval, upon such terms as the Company's Board
of Directors may determine.

                                       44
<PAGE>

   STOCK OPTION PLAN

     During 1996, the Board of Directors of the Company adopted the Kos
Pharmaceuticals, Inc. 1996 Stock Option Plan (the "Plan"). As of December 31,
1999, a maximum of 4,000,000 shares of Common Stock may be issued pursuant to
stock options granted or to be granted under the Plan. All directors, officers,
employees and certain related parties of the Company designated by the Board are
eligible to receive options under the Plan. The maximum term of any option is
ten years from the date of grant. All options expire within 30 days of
termination of employment. The Plan is administered by a committee appointed by
the Board of Directors of the Company.

     On February 19, 1998, the Company's Board of Directors authorized the
re-pricing of options to acquire shares of Common Stock granted to employees at
exercise prices ranging from $15.00 to $43.44 per share (the "February
Re-Pricing"). As a result of the February Re-Pricing, the exercise price for
these options was reduced to $11.16 per share, the average of the high and low
price of the Company's Common Stock on February 19, 1998. No options granted to
members of the Board of Directors were re-priced under the February Re-Pricing.

     Effective October 1, 1998, the Board of Directors authorized a second
re-pricing of options to acquire shares of Common Stock granted to employees at
exercise prices ranging from $7.00 to $13.28 (the "October Re-Pricing"). As a
result of the October Re-Pricing, the exercise price of certain options was
reduced to $5.06 per share, the closing price of the Company's Common Stock on
October 1, 1998. No options granted to members of the Board of Directors or to
the Company's officers were re-priced under the October Re-Pricing. Each outside
director of the Company is granted an option to purchase 15,000 shares of Common
Stock upon election to the Board, receives options to purchase 15,000 shares
effective on each director's anniversary date and 3,000 shares effective on the
date of the Company's Annual Shareholders' Meeting. The exercise price of such
options will be the fair market value of the underlying Common Stock on the date
the option is granted. The Company considered the provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") using the Black Scholes
method to approximate the related charge to expense. Assumptions for the
calculation of charges associated with SFAS 123 include:

                                            RISK-FREE                   EXPECTED
           GRANT          VOLATILITY      INTEREST       EXPECTED         TERM
            DATE             RATE           RATE        DIVIDENDS       (YEARS)
     ------------------  -------------  -------------  ------------- -----------
       1996 and prior          0%            6.63%     $    -            5
            1997              57.6           6.25           -            5
            1998              66.4           4.77           -            5
            1999              60.0           5.03           -            5

                                       45
<PAGE>

     As of December 31, 1999, the Company had outstanding options to purchase
3,077,840 shares of Common Stock to employees, consultants, management and
directors, including options granted prior to the implementation of the Plan.
Detail of option activity is as follows:

<TABLE>
<CAPTION>
                                                               EXERCISE PRICES
                                                        ---------------------------
                                         NUMBER OF                         WEIGHTED
                                           SHARES            RANGE         AVERAGE
                                        -----------     ---------------   ---------
<S>                                      <C>            <C>                  <C>
     Outstanding, December 31, 1995      1,185,000      $ 0.60 - $ 3.33      $ 0.81
     Granted                             1,110,500        7.00 -  15.00        7.99
                                        -----------

     Outstanding, December 31, 1996      2,295,500        0.60 -  15.00        4.28
     Granted                               539,700       15.00 -  43.44       33.14
     Exercised                            (347,910)       0.60 -  15.00        3.52
     Canceled                              (40,500)       7.00 -  38.69       11.11
                                        -----------

     Outstanding, December 31, 1997      2,446,790        0.60 -  43.44       10.64
     Granted(*)                          2,955,265        5.06 -  13.28        8.15
     Exercised                            (551,675)       0.60 -   7.00        0.98
     Canceled(*)                        (1,993,165)       5.06 -  43.44       16.67
                                        -----------

     Outstanding December 31, 1998       2,857,215        0.60 -  27.25        5.93
     Granted                               670,000        4.28 -   7.25        5.39
     Exercised                             (56,375)       0.75 -   5.06        2.21
     Canceled                             (393,000)       5.06 -  11.16        6.78
                                        -----------

     Outstanding December 31, 1999       3,077,840      $ 0.60 - $27.25      $ 5.76
                                        ===========
</TABLE>
--------------------------------------------------------------------------------
          (*)Includes effect of re-priced options (1,880,565 options, which had
          original exercise prices ranging from $7.00 to $43.44, and an original
          weighted average exercise price of $16.94, were re-priced in February
          and October 1998).
<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING                                     OPTIONS EXERCISABLE
         ------------------------------------------------------------------------------- ------------------------------
                                        NUMBER              WEIGHTED         WEIGHTED        NUMBER         WEIGHTED
                                    OUTSTANDING AT          AVERAGE          AVERAGE       EXERCISABLE      AVERAGE
                 RANGE OF            DECEMBER 31,          REMAINING         EXERCISE     DECEMBER 31,      EXERCISE
             EXERCISE PRICES             1999           CONTRACTUAL LIFE      PRICE           1999           PRICE
         ------------------------- -----------------   ------------------- ------------- ---------------- -------------
<S>                                       <C>              <C>                    <C>          <C>              <C>
             $ 0.60 to  $ 0.75              390,000        5.5 years              $0.63          390,000        $ 0.63
               3.33 to    4.97              100,000        7.8 years               4.15           25,000          3.33
               5.06 to    7.16            2,194,640        8.0 years               5.66          823,836          5.84
               7.20 to   11.16              370,200        7.9 years              11.01          117,300         11.07
              24.69 to   27.25               23,000        7.3 years              25.02           11,500         25.02
                                          ---------                                            ---------
                                          3,077,840                                            1,367,636
                                          =========                                            =========
</TABLE>

     At December 31, 1999, 291,200 shares remain authorized and unissued, and
options to purchase 1,367,636 shares of Common Stock were exercisable, including
options granted outside the Plan.

                                       46
<PAGE>


     As permitted by SFAS No. 123, the Company accounts for options issued to
employees under Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees". Consequently, except for options issued to non-employees,
no compensation cost has been recognized on options issued to employees because
the exercise price of such options was not less than the market value of the
Common Stock on the date of grant. Compensation costs of $300,000, $380,815 and
$392,835 were recorded for the years ended December 31, 1999, 1998 and 1997,
respectively, to reflect the cost associated with stock options granted to
non-employees.

     Had compensation cost for options issued to employees been determined
consistent with SFAS No. 123, the Company's net loss and net loss per share
would have been the "Pro Forma" amounts shown in the following table:

<TABLE>
<CAPTION>
                                                                    FOR THE YEAR ENDED DECEMBER 31,
                                                         -----------------------------------------------
                                                               1999           1998           1997
                                                         -------------    -------------   --------------
<S>                                                      <C>              <C>              <C>
      Net loss:
          As reported................................    $(54,552,227)    $(79,161,442)    $(40,629,981)
          Pro Forma..................................     (57,537,053)    $(81,638,296)    $(43,113,692)

      Net loss per share, basic and diluted:

          As reported................................    $      (3.06)    $      (4.50)   $       (2.79)
          Pro Forma..................................    $      (3.22)    $      (4.64)   $       (2.96)
</TABLE>

14. LEGAL PROCEEDING

     On August 5, 1998, a purported class action lawsuit was filed in the United
States District Court for the Northern District of Illinois, Eastern Division,
against the Company, the members of the Company's Board of Directors, certain
officers of the Company, and the underwriters of the Company's October 1997
offering of shares of Common Stock. In its complaint, the plaintiff asserts, on
behalf of itself and a putative class of purchasers of the Company's Common
Stock during the period from July 29, 1997, through November 13, 1997, claims
under: (i) sections 11, 12(a)(2) and 15 of the Securities Act of 1933; (ii)
sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated thereunder; and (iii) for common law fraud, negligent
misrepresentation and breach of fiduciary duty. The claims in the lawsuit relate
principally to certain statements made by the Company, or certain of its
representatives, concerning the efficacy, safety, sales volume and commercial
viability of the Company's NIASPAN product. The complaint sought unspecified
damages and costs, including attorneys' fees and costs and expenses. Upon motion
by the Company, the case was transferred to the United States District Court for
the Southern District of Florida. The Company and the individual Kos defendants
filed a motion to dismiss the complaint on January 7, 1999. On May 24, 1999, the
United States District Court for the Southern District of Florida dismissed the
lawsuit with prejudice. The plaintiffs filed an appeal, on June 7, 1999, with
the United States Circuit Court of Appeals for the 11th Circuit. The outcome of
the litigation cannot yet be determined. Accordingly, no provision for any
liability that may result from these matters has been recognized in the
accompanying consolidated financial statements. There can be no assurance,
however, that the outcome of this litigation will not have a material adverse
effect on the Company's business, results of operations, and financial
condition.

                                       47
<PAGE>

        REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II

To the Board of Directors of
    Kos Pharmaceuticals, Inc.:

     We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements included in this Form 10-K, and have
issued our report thereon dated February 4, 2000. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The accompanying Schedule II is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states, in
all material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Miami, Florida,
    February 4, 2000.

                                       48
<PAGE>

                    KOS PHARMACEUTICALS, INC. AND SUBSIDIARY

                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                             BALANCE AT        CHARGED TO                        BALANCE AT
                                                            BEGINNING OF        COSTS AND                            END
                     DESCRIPTION                              PERIOD            EXPENSES         DEDUCTIONS       OF PERIOD
------------------------------------------------------     --------------    --------------    -------------    --------------

ALLOWANCE FOR DOUBTFUL ACCOUNTS:

<S>                                                        <C>               <C>                <C>               <C>
Fiscal year ended December 31, 1998...............         $      80         $    20            $      -          $    100
Fiscal year ended December 31, 1999...............               100             160                  22               238
</TABLE>

                                       49
<PAGE>

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

     None.

                                       50
<PAGE>

                                    PART III

     The information required in Item 10 (Directors and Executive Officers of
the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership
of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships
and Related Transactions) is incorporated by reference to the Company's
definitive proxy statement for the 2000 Annual Meeting of Shareholders filed
with the Securities and Exchange Commission on March 2, 2000.

                                       51
<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K.

(a)            1.   The Financial Statements filed as part of this report are
                    listed separately in the index to Financial Statements
                    beginning on page 29 of this report.

               2.   The following Financial Statement Schedules are filed
                    herewith:

               SCHEDULE                      DESCRIPTION
               --------                      -----------

               II             Valuation and Qualifying Accounts for the Year
                              Ended December 31, 1999.

               3.   The following exhibits are filed herewith:

               EXHIBIT
               NUMBER                        EXHIBIT DESCRIPTION
               ------                        -------------------

               3.1(1)         Amended and Restated Articles of Incorporation of
                              the Company.

               3.2(1)         Amended and Restated Bylaws of the Company.

               4.1            See Exhibits 3.1 and 3.2 for provisions of the
                              Amended and Restated Articles of Incorporation and
                              Amended and Restated Bylaws of the Company
                              defining the rights of holders of Common Stock of
                              the Company.

               4.2(2)         Form of Common Stock certificate of the Company.

               10.1(1)        Employment Agreement dated as of July 1, 1996,
                              between Daniel M. Bell and the Company.

               10.2(1)        Nonqualified Stock Option Agreement by and between
                              the Company and Daniel M. Bell dated as of June
                              20, 1996.

               10.3(1)        Employment Agreement dated as of June 15, 1996,
                              between David J. Bova and the Company.

               10.4(1)        Kos Pharmaceuticals, Inc. 1996 Stock Option Plan.

               10.5(3)        Kos Phamaceuticals, Inc. 1999 Employee Stock
                              Purchase Plan.

               10.6(1)+       Development Agreement by and between the Company
                              and Fuisz Technologies, Ltd.

               10.7(1)+       Option/Licensing Agreement by and between the
                              Company and Fuisz Technologies, Ltd.

               10.8(1)+       Development Agreement by and between the Company
                              and Fuisz Technologies, Ltd.

               10.9(1)+       Option/Licensing Agreement by and between the
                              Company and Fuisz Technologies, Ltd.

                                       52
<PAGE>

               10.10(1)+      License Agreement by and between the Company and
                              Upsher-Smith Laboratories, Inc., dated February 7,
                              1997.

               10.11(4)       Revolving Credit and Loan Agreement dated July 1,
                              1998, between Kos Pharmaceuticals, Inc. and
                              Michael Jaharis.

               10.12(4)       Promissory Note dated July 1, 1998, in favor of
                              Michael Jaharis.

               10.13(5)+      Co-promotion Collaboration Agreement dated July
                              22, 1999, between the Company and Knoll
                              Pharmaceutical Company.

               10.14(5)       Revolving Credit and Loan Agreement dated
                              September 1, 1999, between the Company and Michael
                              Jaharis.

               10.15          Promissory Note dated September 1, 1998, in favor
                              of Michael Jaharis.

               10.16          Revolving Credit and Loan Agreement dated December
                              21, 1999, between the Company and Michael Jaharis.

               10.17          Second Amended and Restated Registration Rights
                              Agreement effective as of December 21, 1999, by
                              and between the Company, Kos Holdings, Inc., Kos
                              Investments, Inc., and Michael Jaharis.

               10.18          Amended and Restated Security Agreement dated
                              December 21, 1999, by and between the Company and
                              Michael Jaharis.

               10.19          Promissory Note dated December 21, 1999, in favor
                              of Michael Jaharis.

               10.20          Non-Detachable Common Stock Purchase Warrant.

               21(1)          Subsidiaries of the Company.

               23             Consent of Arthur Andersen LLP.

               24             Powers of Attorney (included on signature page
                              hereto).

               27             Financial Data Schedule.

----------
        (1)     Filed with the Company's Registration Statement on Form S-1
                (File No. 333-17991), as amended, filed with the Securities and
                Exchange Commission on December 17, 1996, and incorporated
                herein by reference.

        (2)     Filed with the Company's Registration Statement on Form 8-A
                filed with the Securities and Exchange Commission on February
                25, 1997, and incorporated herein by reference.

        (3)     Filed with the Company's Registration Statement on Form S-8
                (File No. 333-70317), filed with the Securities and Exchange
                Commission on January 8, 1999 and incorporated herein by
                reference.

                                       53
<PAGE>

        (4)     Filed with the Company's Quarterly Report on Form 10-Q filed
                with the Securities and Exchange Commission for the Company's
                three-month period ended September 30, 1998, and incorporated
                herein by reference.

        (5)     Filed with the Company's Quarterly Report on Form 10-Q filed
                with the Securities and Exchange Commission for the Company's
                three-month period ended September 30, 1999, and incorporated
                herein by reference.

         +      Certain confidential material contained in the document has been
                omitted and filed separately with the Securities and Exchange
                Commission pursuant to Rule 406 of the Securities Act of 1933,
                as amended.

(b)      The Company did not file any Reports on Form 8-K during its last fiscal
         quarter.

                                       54
<PAGE>

                                   SIGNATURES

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

                                    KOS PHARMACEUTICALS, INC.

                                    By:   /s/ Daniel M. Bell
                                          ---------------------------
                                          Daniel M. Bell
                                          President and Chief Executive Officer

                                POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Daniel M. Bell and Juan F. Rodriguez and each of
them, his true and lawful attorney-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Report on Form 10-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorneys-in-fact
or his substitute or substitutes, any lawfully do or cause to be done by virtue
hereof.

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

<TABLE>
<CAPTION>
                  SIGNATURE                                   TITLE                              DATE
                  ---------                                   -----                              ----
<S>                                              <C>                                         <C>
/S/ Michael Jaharis                              Chairman of the Board                       March 16, 2000
--------------------------------------------
Michael Jaharis                                    of Directors


/S/ Daniel M. Bell                               President, Chief Executive                  March 16, 2000
--------------------------------------------
Daniel M. Bell                                     Officer, and Director
                                                 (Principal Executive Officer)


/S/ Robert E. Baldini                            Vice Chairman of the Board and              March 16, 2000
--------------------------------------------
Robert E. Baldini                                Chief Sales and Marketing Officer


/S/ Juan F. Rodriguez                            Vice President, Controller                  March 16, 2000
--------------------------------------------
Juan F. Rodriguez                                (Principal Accounting Officer)


/S/ John Brademas                                Director                                    March 16, 2000
--------------------------------------------
John Brademas


/S/ Steven Jaharis                               Director                                    March 16, 2000
--------------------------------------------
Steven Jaharis


/S/ Louis C. Lasagna                             Director                                    March 16, 2000
--------------------------------------------
Louis C. Lasagna


/S/ Mark Novitch                                 Director                                    March 16, 2000
--------------------------------------------
Mark Novitch


/S/ Frederick B. Whittemore                      Director                                    March 16, 2000
--------------------------------------------
Frederick B. Whittemore
</TABLE>

                                       55
<PAGE>

                                  EXHIBIT INDEX

EXHIBIT
NUMBER                     DESCRIPTION
------                     -----------

10.15           Promissory Note dated September 1, 1999, in favor of Michael
                Jaharis.

10.16           Revolving Credit and Loan Agreement dated December 21, 1999,
                between the Company and Michael Jaharis.

10.17           Second Amended and Restated Registration Rights Agreement
                effective as of December 21, 1999, by and between the Company,
                Kos Holdings, Inc., Kos Investments, Inc., and Michael Jaharis.

10.18           Amended and Restated Security Agreement dated December 21, 1999,
                by and between the Company and Michael Jaharis.

10.19           Promissory Note dated December 21, 1999, in favor of Michael
                Jaharis.

10.20           Non-Detachable Common Stock Purchase Warrant.

23              Consent of Arthur Andersen LLP.

27              Financial Data Schedule.

                                       56