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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549




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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, 2002

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | 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 Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

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   þ  No  o

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.   o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes   þ  No  o

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 21, 2003: $197,945,425.

Number of shares of Common Stock of Kos Pharmaceuticals, Inc. issued and
outstanding as of February 21, 2003: 20,817,354.

Documents Incorporated by Reference

Definitive Proxy Statement for the Companys 2003 Annual Meeting of Shareholders
(incorporated in Part III to the extent provided in Items 10, 11, 12 and 13 hereof).





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TABLE OF CONTENTS



|                                                   |                                                                                                |  |  |  |  |  |  | 
|-------------------------------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | ITEM 1. BUSINESS                                                                              
|                                                   | ITEM 2. PROPERTIES                                                                            
|                                                   | ITEM 3. LEGAL PROCEEDINGS                                                                     
|                                                   | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS                                 
|PART II                                           
|                                                   | ITEM 5. MARKET FOR THE COMPANYS COMMON STOCK AND RELATED SHAREHOLDER MATTERS.                
|                                                   | ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                  
|                                                   | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
|                                                   | FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS                                    
|                                                   | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                          
|                                                   | ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                             
|                                                   | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
|PART III                                          
|                                                   | ITEM 14. CONTROLS AND PROCEDURES.                                                             
|PART IV                                           
|                                                   | ITEM 15. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K.                               
|SIGNATURES                                        
|EXHIBIT INDEX                                     
|EX-10.16 3rd Amend. & Restated Regi. Rights Agree.
|EX-10.19 Revolving Credit & Loan Agreement        
|EX-10.20 Revolving Credit Promissory Note         
|EX-10.21 Non-Detachable Stock Purchase Warrant    
|EX-10.22 2nd Amend. Restated Security Agreement   
|EX-21 Subsidiaries of the Company                 
|EX-23.1 Consent of Ernst & Young LLP              
|EX-23.2 Notice Re: Consent of Arthur Andersen LLP 
|EX-99.1 Certification of Chief Executive Officer  
|EX-99.2 Certification of Chief Financial Officer  



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TABLE OF CONTENTS

|           |  |                                                                                       |  |     
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                       |  | Page
|           |  |                                                                                       |  |     
|PART I     |  |                                                                                       |  |     
|Item 1.    |  | Business                                                                              |  | 1   
|Item 2.    |  | Properties                                                                            |  | 14  
|Item 3.    |  | Legal Proceedings                                                                     |  | 14  
|Item 4.    |  | Submission of Matters to a Vote of Securities Holders                                 |  | 15  
|PART II    |  |                                                                                       |  |     
|Item 5.    |  | Market for the Companys Common Stock and Related Shareholder Matters                 |  | 16  
|Item 6.    |  | Selected Consolidated Financial Data                                                  |  | 17  
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 18  
|           |  | Forward-Looking Information: Certain Cautionary Statements                            |  | 26  
|Item 7A.   |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 41  
|Item 8.    |  | Consolidated Financial Statements and Supplementary Data                              |  | 41  
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |  | 70  
|PART III   |  |                                                                                       |  |     
|Item 14.   |  | Controls and Procedures                                                               |  | 71  
|PART IV    |  |                                                                                       |  |     
|Item 15.   |  | Exhibits, Financial Schedules and Reports on Form 8-K                                 |  | 72  
|Signatures |  |                                                                                       |  | 76  

Niaspan® and Advicor are trademarks of Kos Pharmaceuticals, Inc. Heart
AllianceSM is a service mark of Kos Pharmaceuticals, Inc.

Mavik® and
Tarka® are trademarks of Abbott Laboratories Inc.






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PART I




ITEM 1. BUSINESS

Kos Pharmaceuticals, Inc. (Kos or the Company) is a fully-integrated
specialty pharmaceutical company engaged in the development and
commercialization of proprietary prescription products for the treatment of
chronic cardiovascular and respiratory diseases. The Company manufactures its
currently marketed products, Niaspan®and
AdvicorTM, and markets such products
directly through its own specialty sales force and through a sales force
provided by a contract sales organization. The Companys cardio-metabolic
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 side effects) or patient compliance advantages (such as once-a-day
rather than multiple daily dosing regimens) compared with existing formulations
of such 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 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 than Abbreviated New Drug Applications (ANDA) for generic
products, 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
potential 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
therapeutic 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 after 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 carryforwards) 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 carryforwards 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 Emeritus. All
references in this 10-K to the Company include its wholly owned subsidiaries,
Kos Life Sciences, Inc. and Aeropharm Technology, Inc. (Aeropharm)  which in
turn wholly owns 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.

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Marketed Products

Niaspan

On July 28, 1997, the Company received clearance from the FDA to market
Niaspanfor the treatment of mixed lipid disorders. Niaspanis the only
once-a-day formulation of a niacin product ever approved by the FDA for the
treatment of mixed lipid disorders. The Company began commercializing Niaspan
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, Niaspanis approved by the FDA for the following treatment
indications: (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, the
FDA-approved prescribing information for Niaspanreferences its ability to
significantly reduce lipoprotein (a) [Lp(a)], which is an independent risk
factor for coronary heart disease (CHD), although no studies have been
conducted showing the clinical benefits of exclusively lowering levels of
Lp(a).

During the past eight years, researchers have established through several
long-term clinical outcome studies that reducing LDL cholesterol results in
about a 30% reduction in cardiac events, such as 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. Accordingly, throughout this period, considerable scientific
evidence has continued to emerge showing that many lipid risk factors
contribute to CHD disease and, in particular, that niacin has powerful utility
in addressing such multiple cholesterol disorders.

A few years ago, a study, published in the August 1999 issue of The New
England Journal of Medicine,conducted by the Department of Veteran Affairs and
known as HDL Intervention Trial (HIT), 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 22%
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. More recently, the HDL Atherosclerosis
Treatment Study (HATS), which was published in the November 2001 issue of The
New England Journal of Medicine, concluded that the combination of statin and
niacin therapy was strikingly favorable in treating CHD patients, virtually
halting atherosclerosis progression and reducing cardiac events up to 90%.

The results from HIT and HATS 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. Niaspanis the
most potent drug on the market for raising HDL cholesterol.

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In addition to the HATS trials, during 2001, the Assessment of Diabetics
Control and Evaluation of the Efficacy of NiaspanTrial (ADVENT), which was
sponsored by Kos, evaluated the effects of Niaspanon lipids and blood sugar
levels in 148 diabetic patients. Kos sponsored this trial because previous
reports had shown that niacin can raise blood sugar levels in diabetic
patients; thus, blunting the use of niacin in diabetics despite these patients
having low HDL and abnormal triglycerides. The results of this study, which
was published in the July 22, 2002, issue of the Archives of Internal Medicine,
showed that Niaspanincreased HDL up to 24% and decreased triglycerides by as
much as 30%, with minimal effect on glucose control. Based on these study
results, in 2002 Kos submitted a Supplemental New Drug Application (sNDA) to
the FDA to expand the current Niaspan label to include the treatment of
dyslipidemia in patients with type 2 diabetes.

In 2002, Kos submitted another sNDA to the FDA for Niaspanto expand the
current label to include reducing the risk of stroke or transient ischemic
attack (TIA: sometimes referred to as ministrokes) in patients with a
previous heart attack and elevated cholesterol levels. The sNDA for Niaspanis
based on results from the landmark Coronary Drug Project (CDP), a
double-blinded, placebo-controlled, long-term secondary prevention study. This
morbidity/mortality study, sponsored by the National Heart, Lung, and Blood
Institute of the NIH, showed that people taking niacin had significantly fewer
strokes and TIAs compared with patients taking a placebo.

During 2002, Kos continued to benefit from the revised guidelines
established by the expert panel of the National Cholesterol Education Program
(NCEP), published in the May 2001 edition of the Journal of the American
Medical Association. These revised guidelines not only emphasize the
importance of aggressively treating LDL cholesterol, but also advocate treating
lipid abnormalities beyond LDL cholesterol. Specifically, the revised NCEP
guidelines increase the threshold for defining low HDL cholesterol from 35 to
40 mg/dL, and lower the thresholds for triglyceride classifications to give
more attention to moderate disorders. Moreover, the latest NCEP parameters
raise the cardiac risk levels for people with diabetes to the equivalent of
people with CHD. Finally, the expert panel increased its recommendation of the
number of patients who should be taking cholesterol modifiers to 36 million
patients (of which only 13 million patients are currently taking such
medications), an almost three-fold increase since the previous guidelines were
first published in 1993.

The Company markets Niaspandirectly 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, who largely focus on treating the 14 million
Americans who have CHD, 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. The Company believes that patients with low HDL or multiple lipid
disorders would benefit from Niaspantherapy. Many such patients are
candidates for combination therapy using principally an HMG-CoA reductase
inhibitor, or statin, to reduce LDL combined with Niaspanto 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. During 2002, over 70%
of the approximately 15,000 cardiologists present in the U.S. cardiovascular
market prescribed Niaspanand since 1997 more than 140,000 physicians have
prescribed Niaspanat least once.

Niaspanwill also benefit from an expanded field sales force in 2003,
consisting of 450 Kos sales representatives by year-end 2003, and 150
under the terms of a contract sales agreement entered into on December 17, 2001
(the Contract Sales Force Agreement). As of March 14, 2003, Kos had 364 sales
representatives and the contract sales organization had 145 representatives
promoting the Niaspanand Advicorproducts. The representatives provided under
the Contract Sales Force Agreement complement the Companys existing sales
force. Under the terms of the Contract Sales Force Agreement, the contract sales organization

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will provide the Company with an approximately 150-person field sales
force for a two-year term ending December 31, 2003. The Company pays the contract sales organization a royalty based
on net sales of the Companys Niaspanand Advicorproducts during a five-year
period beginning January 1, 2002. The royalty amounts payable to the contract
sales organization are subject to a cumulative minimum of $45 million over the
term of the Contract Sales Force Agreement, not to exceed $75 million over such
contract term.

In addition to a larger field sales force, Kos intends to increase its
promotional commitment to Niaspanduring 2003. Such promotional efforts will
consist of investments in medical education grants, symposia, and expert
advisory boards to establish the importance of modulating multiple lipid risk
factors in an effort to thwart CHD. Such continued investment in the product
is expected to add awareness and expand usage by targeted physicians.

In addition to promoting Niaspanas the drug of choice to treat low HDL
cholesterol and multiple lipid disorders, the Company informs physicians as to
the manner in which Niaspanachieves its safety and efficacy profile. This
marketing initiative 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
Niaspanthrough 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 Niaspanwill flush occasionally, the Company
believes that the combination of Niaspansformulation, its patented dosing
regimen, and proper dose titration should result in an incidence of flushing
episodes that are tolerable for most patients. Niaspanspatented 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.

Advicor

On December 17, 2001, the Company received clearance from the FDA to
market Advicor(extended-release niacin/lovastatin) tablets. The approval of
Advicor marks the first time that the FDA has approved a combination product
for the safe and efficacious treatment of cholesterol disorders. The Company
began detailing Advicorto physicians on January 28, 2002. Advicoris a single
tablet formulation containing Niaspanand lovastatin (a statin drug which was
marketed by Merck under the brand name Mevacor, prior to its patent expiration,
which occurred on December 17, 2001). The Company believes that a once-a-night
tablet with the combined complementary properties of Niaspanand lovastatin
represents an effective method for treating patients with mixed lipid
disorders.

Advicoris indicated for the treatment of primary hypercholesterolemia and
mixed dyslipidemia in patients previously treated with either component and who
require additional lipid modification for LDL and HDL cholesterol, and
triglycerides beyond that achieved by the individual components. Advicoris not
indicated for initial therapy. In multicenter clinical trials, Advicorwas
generally well-tolerated with a safety profile comparable to that of Niaspan
and lovastatin alone. The most frequently reported adverse events included
flushing, upset stomach, and rash. As with other lipid-altering drugs, periodic
monitoring of liver enzymes is recommended as is observation for rare but
serious adverse events such as myopathy. Advicoris contraindicated for
pregnant or nursing women or for patients with liver problems or active peptic
ulcer.

The launch of Advicorin January 2002 was not only supported by the
significant inroads made by Kos in educating the medical community about the
importance of treating multiple lipid disorders, but also by the increasing
scientific evidence showing that many lipid risk factors contribute to CHD.
During 2001, Kos contributed to the advancement of such scientific data by
sponsoring a Phase IV

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clinical study that compared the potency of Advicorwith the two
best-selling statins in modulating multiple lipid risk factors. The results of
this 316-patient study, known as ADVOCATE, were presented at the March 2002
meeting of the American College of Cardiology and published in the March 15,
2003 issue of the American Journal of Cardiology, and showed that Advicors LDL
efficacy is comparable to the leading statin drugs while its efficacy in all
other lipid parameters is far superior. Specifically, patients receiving
1000mg/40mg of Advicor(the projected workhorse dose) showed reductions in
LDL, triglycerides and Lp(a) of 39%, 30% and 16% respectively, while increasing
HDL by 20%. In comparison, patients receiving 10mg of atorvastatin, the
workhorse dose of Lipitor, revealed a 38% and 15% reduction in LDL
cholesterol and triglycerides, while increasing HDL only 3% and producing an
undesirable increase in Lp(a) of 5%. During 2002, Kos completed another Phase
IV study with a focus on safety, known as IMPACT, which included about 5,000
patients and 1,000 doctors. The results of this study showed less than 0.5%
incidence in elevated liver functions tests and no drug-related myopathy events
were reported. The data from these two studies provide compelling evidence of
the potency of Advicorto offer physicians a convenient single tablet therapy
when the individual components have not achieved the desired therapeutic
response for treating patients with multiple lipid disorders.

Similar to Niaspan, the Company markets Advicordirectly to specialist and
primary care physicians within the cardiovascular market who specialize in
treating patients with CHD and who are among the leading prescribers of
lipid-altering medications. The Company believes that patients requiring
treatment for primary hypercholesterolemia or mixed dyslipidemia who require
additional lipid modification for LDL and HDL cholesterol and triglycerides,
beyond that achieved by the individual drug components, would benefit from
Advicortherapy. The Company also believes that this patented once-a-night
product will offer significant improvements in patient compliance compared with
taking each component of the drug independently under its recommend dosing
regimen. Moreover, based on market research and on historical Niaspan
prescribing trends, 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.

Because Niaspanis one of the two active ingredients in Advicor, most
patients taking Advicorwill flush occasionally. Similar to its promotional
and educational efforts for Niaspan, the Company also strives to educate
patients and physicians about the benefits and proper use of Advicor. These
efforts are mostly conducted through office visits with selected physicians,
medical journal reprints, medical seminars and clinical discussion groups. The
Company also educates patients on the benefits of and proper use of Advicor
through brochures and product samples. Consequently, the Company believes that
its patented dosing regimen and proper dose titration should result in
tolerable flushing incidents for most patients. Further, because Advicor, like
Niaspan, is also taken once-daily at night, any flushing episode should occur
while the patient is sleeping; thus, not causing the discomfort and
embarrassment that accompanies the multiple daytime flushing episodes that
occur with other niacin preparations.

Through late 2001, the Company was subject to the terms of a co-promotion
agreement with DuPont Pharmaceuticals Company (DuPont), to co-promote
Advicor. Under the terms of the agreement, Kos received from DuPont a
$20-million equity investment during 2000. DuPont was to share half of the
cost of medical education, clinical studies, and promotion programs, and it was
to match the Companys field force detailing efforts with physicians, which
is when Kos sales representatives meet with physicians to educate them about
the therapeutic benefits of the Companys products. In return, DuPont was to
receive essentially half of the gross profit on the sale of Advicor. On
October 1, 2001, DuPonts parent company, E. I. du Pont Nemours sold DuPont to
Bristol-Myers Squibb Company (BMS). On December 17, 2001, the Company
entered into an agreement with BMS pursuant to which the DuPont Agreement was
terminated and BMS paid Kos a one-time, $45 million settlement. Moreover, in
connection with this settlement, Kos also regained full marketing rights to the
Advicorproduct, including the right to all product profits and the ability to
enter into partnership arrangements with other parties.

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International Commercialization Agreement with Merck KGaA

On October 23, 2002, the Company signed an exclusive international
commercialization agreement with Merck KGaA (Merck) to market the Niaspanand
Advicorproducts outside the United States, Canada and Japan. Under terms of
the agreement, Merck will provide Kos up to $61 million in licensing, milestone
and reimbursement payments, including $15 million of upfront payments, of which
$12.5 million are reimbursable by Kos if it fails to achieve certain regulatory
milestones. The milestone payments are dependent on the achievement of certain
regulatory approvals and sales thresholds. Kos will also receive 25% of net
sales of the products in the territory, which includes the cost of goods sold.
Merck will be responsible for conducting Phase IV clinical studies and
commercialization activities while Kos is responsible for obtaining initial
marketing authorization in all European countries and the supply and
manufacturing of the products. On November 5, 2002, Kos received $9.2 million
as an upfront payment from Merck. This upfront payment will be recognized as
revenue in future periods upon Kos achieving certain regulatory milestones.

In 1999,
Kos received marketing approval for Niaspan in the United Kingdom,
and in 2002 submitted Advicor for marketing approval in the United
Kingdom.

Co-promotion of Mavik® and Tarka®

Through December 31, 2001, the Company was subject to the terms of a
co-promotion collaboration agreement with Knoll Pharmaceutical Company
(Knoll), for the promotion and marketing of Knolls Mavikand Tarkaproducts
(Mavik® and Tarka® are registered trademarks of Abbott Laboratories) within the
United States (the Knoll Agreement). The Company and Abbott agreed to
terminate the Knoll Agreement effective January 1, 2002. Under the terms of
the Knoll Agreement, the Company was to receive an increasing percentage of
revenue based on sales thresholds. The Company recorded $7.2 million, $5.0
million, and $2.7 million of co-promotion revenue as a result of the Knoll
Agreement for the years ended December 31, 2001, 2000, and 1999, respectively.

Products Under Development

Although the Company has obtained clearance from the FDA to market Niaspan
and Advicor, the Companys other products under development are 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.

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Solid-Dose Drug Delivery Systems

The Company continues to conduct research on novel solid-dose drug
delivery systems. The Company has also initiated a variety of lifecycle
management projects consisting of product line extensions and clinical studies
to support additional uses of Niaspanand Advicorthrough label enhancements.
During 2002, utilizing the Companys considerable knowledge obtained from
formulating both Niaspanand Advicor, Kos also continued to make progress in
developing innovative solid-dose delivery systems that could be used to
formulate a variety of compounds, including the filing of three NDAs with the
FDA which are expected to produce new products after 2007, and a gastric
retention drug delivery platform. The first NDA product, known as KS 01-018,
is expected to reach the market in 2007 and is a product for peripheral
arterial disease. With this product, the Company expects to affect a disease that is mostly
under-treated because there are no highly effective products currently
available. The second NDA product, known as KS 01-019, is a dual component
therapy for dyslipidemia that is expected to be more potent than Advicor with
respect to lowering LDL cholesterol. The third NDA product, known as KS
01-017, is a dual regulator of glucose and lipids that is expected to be
equally potent to Niaspanin modulating multiple lipids, while also reducing
blood sugar levels on par with some widely utilized oral anti-diabetic
medications. The gastric retention platform encompasses technology in-licensed
from Purdue Research Foundation, an affiliate of Purdue University, which
grants the Company exclusive commercialization rights to technology invented at
Purdue for the development of gastric retention drug delivery systems for
pharmaceutical products. The licenses to the Purdue patents will enable Kos to
formulate both insoluble and soluble compounds for Kos to develop and market or
for Kos to develop and market with other parties on a collaborative basis. The
Company will continue to develop its solid-dose drug delivery system platform
in 2003, as well as it may seek one or multiple developmental partners to
further such efforts.

Advanced Inhalation Delivery Research

Leveraging its unique aerosol formulation expertise, Kos continues to
formulate several proteins and peptides, including recombinant insulin, for
delivery to the lungs using a Kos proprietary metered-dose inhaler (MDI)
device. During 2002, Kos completed proof-of-principle studies in humans
demonstrating that Kos recombinant insulin product is bioavailable in the
lungs (approximately 15%) while exhibiting excellent dose-to-dose
reproducibility. The Company believes that such compelling results may be
attractive to potential development partners for not only developing this
product, but also for other proteins/peptides, possibly on a contract
formulation basis. As the Company continues to generate cogent in vitroand
in vivodata demonstrating the performance and efficacy of delivering such
proteins via the lung through Kos MDI devices, Kos 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.

Kos also believes it has a leadership position in formulating proteins to
be delivered through MDI devices using non-CFC propellants. As such, Kos is
presently evaluating other macromolecules and specific inhalation steroids in
the HFA-134a propellant systems to position this technology in preparation for
the federally-mandated CFC phase-out of all ozone-depleting metered-dose
inhalers in 2005.

Metered-Dose Inhalation Devices and Other Device Products

Complementing Kos strong formulation capabilities, Kos has developed a
line of inhalation devices that are proprietary, state-of-the art and useful
for delivering small and large molecules. The principal features of the devices
are three-fold: 1) improved coordination of inhalation with actuation of
medication, thereby offering possible benefits in patient compliance and
uniform dose administration; 2) improved ergonomics, which leads to increased
patient compliance; and 3) reduced drug retention, due to

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improved design and mechanics of the devices. To date, the Company has
focused its development efforts on three MDI devices; a breath-coordinated
inhaler, a breath-actuated inhaler and a spacerless MDI device that generates
low plume force. Each of these devices offers distinct benefits and may be
deployed on an a la cartebasis depending on potential partners interest. 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. The Company is
also continuing efforts to develop a compact portable nebulizer earmarked for
products requiring large dosages to be administered into the respiratory
airwaves. In 2002, nine patents were issued supporting various elements of the
inhalation delivery technology. The Company currently intends to use the
inhalation dose-counter on all of its proprietary inhalation devices.

Licensing and Other Activities

The Company continues to aggressively pursue collaborative opportunities,
including acquiring or licensing the use of selected products and technologies
from third parties (known as 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 (known as
out-licensing).
Specifically, having established Kos important international commercialization
agreement with Merck KGaA, which enables Kos to leverage Merck KGaAs strong
presence in over 100 countries, the Company continues to be receptive to
forging co-promotion alliances for these products in the United States, Canada
and Japan. 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.

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.

In the United States, the Company owns 45 patents, filed 57 additional
patent applications, and has been licensed 4 patents. In addition, the Company
has received patents and filed patent applications in foreign jurisdictions.

In general, the U.S. patents and patent applications owned by or licensed
to Kos are directed to compositions and methods of using those compositions to
treat specified conditions. Patent protection is not available for the
chemical entity that comprises the active ingredient in Niaspan, or either of
the two

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active ingredients in Advicor. The active ingredient in Niaspan, niacin,
is currently sold in the United States and other markets for lipid altering and
for other uses. The additional active ingredient in Advicor, lovastatin, is
also currently sold in the United States and other markets for lipid altering
indications. Even in jurisdictions where the use of the active ingredients in
Niaspanand Advicorfor lipid altering and other indications may be covered by
the claims of a composition or method-of-use patent owned by or licensed to
Kos, off-label sales might occur, especially if another company markets the
active ingredient at a price that is less than the price of Niaspanor Advicor,
thereby potentially reducing the sales of such products.

The U.S. Patent and Trademark Office has issued U.S. Patents 6,129,930,
6,080,428 and 6,406,715 to the Company with claims covering Niaspans
composition and method-of-use consistent with its recommended once-a-day dosing
regimen. On February 7, 1997, the Company entered into a cross-licensing
agreement with a generic manufacturer pursuant to which the Company has agreed
to resolve, as between themselves, the effects of a potential interference by
granting licenses under the Companys respective patents. The Company has
purchased the patents that were the subject of such original agreement and
agreed to continue paying a royalty to the generic manufacturer on terms
similar to those contained in the original agreement.

The Company has received patents and has filed patent applications
covering technologies pertaining to propellant-driven aerosol formulations that
do not contain chlorofluorocarbons. 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 that do not contain
chlorofluorocarbons. 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. 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 Kos 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
might be 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.

On January 23, 2002, the Company received notice from Barr Laboratories,
Inc. (Barr) that it had filed with the FDA an Abbreviated New Drug
Application (ANDA) that would, if approved, allow Barr to market a generic
version of the Companys 1000 mg Niaspanproduct. Under the patent laws of the
United States, the filing of an ANDA for a pharmaceutical composition or method
of use that is currently protected by a patent, such as Niaspan, constitutes an
act of infringement. As a result, on March 4, 2002, the Company filed a patent
infringement lawsuit against Barr in the Southern District of New York
(SDNY). On March 11, 2002, the Company filed an amended complaint (the
Amended Complaint). In this lawsuit, the Company asserts that Barr has
infringed Kos 6,080,428 and 6,129,930 patents. Under the FDA statute, the
filing of a patent infringement suit by the Company suspends the ANDA approval
process for the earlier of 30 months or until the infringement suit is
resolved. On March 25, 2002, Barr answered the Amended Complaint (the
Answer) by denying that the 428 and 930 patents are valid and infringed,
and seeking a declaratory judgment to that effect. On August 19, 2002, Barr
amended its Answer to add counterclaims requesting a declaratory judgment that
two other patents owned by Kos, U.S. patent number 5,126,145 and 5,268,181, are
not infringed, and that the 181 patent is invalid.

On July 9, 2002, the Company received notice from Barr that it had filed
an ANDA with the FDA that would, if approved, allow Barr to market generic
versions of the Companys 500 mg and 750 mg Niaspanproducts. On August 13,
2002, the Company filed a second patent infringement lawsuit against Barr also
in the SDNY. Again, the Company asserted that Barr has infringed the 428 and
930 patents.

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On September 3, 2002, Barr answered the complaint by denying infringement
and alleging that the patents are invalid. Barr also sought
a declaratory judgment that the 428, 930, 145, and 181 patents are not
infringed, and that the 428, 930, and 181 patents are invalid. The two
cases were consolidated on September 23, 2002.

On September 30, 2002, the Company received notice from Barr that it had
filed a Supplemental Paragraph IV Certification relating to Kos 6,406,715
patent. The Company filed a third lawsuit on November 12, 2002, against Barr
in the SDNY asserting infringement of this patent. On December 3, 2002, Barr
answered the complaint by denying that the 715 patent is valid and infringed,
and enforceable, and seeking a declaratory judgment of invalidity. Barr also
sought a declaratory judgment that the 428, 930, 145, and 181 patents are
not infringed, and that the 428, 930 and 181 patents are invalid. The third
case was consolidated with the first two on January 23, 2003. On March 4,
2003, Kos replied to Barrs declaratory judgment counterclaims by denying that
Kos patents are invalid or not infringed. Kos also sought a declaratory
judgment that one or more of Barrs products will infringe the 145 and 181
patents.

The outcome of this litigation with Barr cannot yet be determined. 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.

Because the patent positions of pharmaceutical and biotechnology companies
are highly uncertain and involve complex legal and factual questions, the
patents owned and licensed by Kos, or any future patents, may not prevent other
companies from developing similar or therapeutically equivalent products or
ensure that others will not be issued patents that may prevent the sale of the
Companys products or require licensing and the payment of significant fees or
royalties. Furthermore, to the extent that any of the Companys future products
or methods are not patentable, that such products or methods infringe upon the
patents of third parties, or that the Companys patents or future patents fail
to give Kos an exclusive position in the subject matter claimed by those
patents, the Company will be adversely affected. 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. A license may be unavailable on terms and conditions acceptable to the
Company, if at all. Patent litigation is costly and time consuming, and the
Company may be unable to prevail in any such patent litigation or devote
sufficient resources to even pursue such litigation. If the Company does not
obtain a license under such patents, if it is found liable for infringement, or
if it 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 maintains a competitive technological position, by relying on trade
secrets and unpatented know-how, such competitive technological position may be
compromised if others 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 Kos
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

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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 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.

Niaspan, Advicorand 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.

Marketing

Kos markets its branded proprietary products through its own specialty
sales force and through a sales force provided by a contract sales
organization. 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 March 14, 2003, the Company had a 399-person sales and marketing
organization, excluding 145 sales representatives being provided by the
contract sales organization. During 2002, in connection with the commercial
launch of Advicor, Kos significantly increased the size of its sale force. The
majority of the Kos sales and marketing personnel have considerable previous
experience with major pharmaceutical companies detailing products to
cardiovascular physicians. Kos began actively detailing Niaspanduring
September 1997 and Advicoron January 28, 2002. The Company believes that the
sizable increase in sales force personnel, including the effect of those
provided by the contract sales organization, will allow Kos to reach a greater
physician audience while, at the same time, increase the amount of repeat
visits made to its physician target list.

Manufacturing

The Company currently manufactures the Niaspanand Advicorproducts in one
manufacturing plant in Edison, New Jersey that has been inspected and approved
by the FDA for both products. Kos began manufacturing Niaspanin the Edison
facility during the second quarter of 2001. Although both products have been
approved for manufacture in the Edison facility and are produced in substantial
compliance with current good manufacturing practice regulations as required by
the FDA for the manufacture of pharmaceutical products, Kos has limited
experience in manufacturing products for commercial sale in the Edison facility
and inefficiencies may exist in the manufacturing process. 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 current good manufacturing practices regulations
and other regulations prescribed by

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various regulatory agencies including the Occupational Safety and Health
Administration and the Environmental Protection Agency. The Companys failure
to successfully further scale-up, expand in connection with manufacture for
commercial sale, or modify its manufacturing process, or to comply with current
good manufacturing practices regulations and other regulations could delay the
approval of Kos products under development or limit its ability to meet the
demand for our products, any of which would have a material adverse effect on
Kos. 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.

The Company intends to continue to contract the packaging of its
manufactured 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 Niaspanand Advicorare
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 Niaspanor with the supplier of the lovastatin component of Advicor. The
Company intends, to the extent possible, to identify multiple sources for all
of its key raw materials, including the active ingredients in Niaspanand
Advicor, although an alternate source for at least one such material will not
be available because of the suppliers patent rights.

In 2002, Kos steadily improved its efficiency in manufacturing Niaspanand
achieved its budgeted gross margin estimate for Advicor. Specifically, Niaspan
gross margins increased almost three percentage points for 2002, reaching over
93% of net sales, while Advicorgross margins reached almost 80% for the year.
Consequently, Kos combined gross margins for these products reached 91%.
The Company expects improvements in gross margins going forward, mostly as a
result of increased Advicorsales volumes and as more efficient higher-yielding
manufacturing equipment becomes operational.

Competition

The Companys products compete with currently existing or future
prescription pharmaceuticals and vitamins in the United States, Europe, and
elsewhere. The Company estimates that its existing Niaspanand Advicor
prescriptions account for approximately 3.1% 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 approximating 17,000 representatives currently active within
the dyslipidemia market, compared with the Companys approximately 364-person
field sales force and may be better equipped to develop, manufacture, and
market products. 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s cardiovascular and respiratory products, when developed and
marketed, will also 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.

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

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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 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 March 14, 2003, the Company had 726 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.

Available Information

The
Companys Internet address is www.kospharm.com. The Company
makes available free of charge on or through its Internet website its
annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as
soon as reasonably practicable after such material was electronically
filed with, or furnished to, the SEC.

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ITEM 2. PROPERTIES

The Company leased the following properties as of December 31, 2002:

|                |  |                                             |  |        |        |                    |  |                  |  |         |           | 
|--------------- |  | ------------------------------------------- |  | ------ | ------ | ------------------ |  | ---------------- |  | ------- | --------- | 
|                |  |                                             |  |        |        |                    |  | Lease Expiration |  | Minimum
|                |  |                                             |  | Square |        | (Including Renewal |  | Annual          
|Location        |  | Use                                         |  | Feet   |        | Options)           |  | Rent            
|                |  |                                             |  |        |        |                    |  |                 
|Miami, FL       |  | Corporate offices                           |  |        | 13,400 |                    |  | December 2004    |  | $       | 510,000   | 
|Miami Lakes, FL |  | Research and admin. offices                 |  |        | 21,000 |                    |  | December 2003    |  |         | 440,000   | 
|Hollywood, FL   |  | Manufacturing, research and admin. offices  |  |        | 23,500 |                    |  | November 2004    |  |         | 360,000   | 
|Weston, FL      |  | Research and admin. Offices                 |  |        | 50,000 |                    |  | August 2008      |  |         | 1,400,000 | 
|Edison, NJ      |  | Manufacturing, research,
and admin. offices |  |        | 54,200 |                    |  | October 2006     |  |         | 540,000   | 
|Raleigh, NC     |  | Device engineering offices                  |  |        | 6,000  |                    |  | August 2009      |  |         | 65,000    | 

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 Kos, 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 Niaspanproduct. The complaint sought unspecified damages and
costs, including attorneys fees and costs and expenses. Upon Kos motion, the
case was transferred to the United States District Court for the Southern
District of Florida. The Company filed a motion to dismiss the complaint
against the Company and the individual Kos defendants 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. On July 16, 2002, the 11th Circuit Court of Appeals affirmed the
District Courts dismissal of the plaintiffs claims with prejudice. The
plaintiffs have petitioned the Court of Appeals for a rehearing of the appeal,
which has not yet been ruled upon by the court.

On January 23, 2002, the Company received notice from Barr Laboratories,
Inc. (Barr) that it had filed with the FDA an Abbreviated New Drug
Application (ANDA) that would, if approved, allow Barr to market a generic
version of the Companys 1000 mg Niaspanproduct. Under the patent laws of the
United States, the filing of an ANDA for a pharmaceutical composition or method
of use that is currently protected by a patent, such as Niaspan, constitutes an
act of infringement. As a result, on March 4, 2002, the Company filed a patent
infringement lawsuit against Barr in the Southern District of New York
(SDNY). On March 11, 2002, the Company filed an amended complaint (the
Amended Complaint). In this lawsuit, the Company asserts that Barr has
infringed Kos 6,080,428 and 6,129,930 patents. Under the FDA statute, the
filing of a patent infringement suit by the Company suspends the ANDA approval
process for the earlier of 30 months or until the infringement suit is
resolved. On March 25, 2002, Barr answered the Amended Complaint (the
Answer) by denying that the 428 and 930 patents are valid and infringed,
and seeking a declaratory judgment to that effect. On August 19, 2002, Barr
amended its Answer to add counterclaims requesting a declaratory judgment that
two other patents owned by Kos, U.S. patent number 5,126,145 and 5,268,181, are
not infringed, and that the 181 patent is invalid.

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On July 9, 2002, the Company received notice from Barr that it had filed
an ANDA with the FDA that would, if approved, allow Barr to market generic
versions of the Companys 500 mg and 750 mg Niaspanproducts. On August 13,
2002, the Company filed a second patent infringement lawsuit against Barr also
in the SDNY. Again, the Company asserted that Barr has infringed the 428 and
930 patents. On September 3, 2002, Barr answered the complaint by denying
infringement and alleging that the patents are invalid. Barr also sought a
declaratory judgment that the 428, 930, 145, and 181 patents are not
infringed, and that the 428, 930, and 181 patents are invalid. The two
cases were consolidated on September 23, 2002.

On September 30, 2002, the Company received notice from Barr that it had
filed a Supplemental Paragraph IV Certification relating to Kos 6,406,715
patent. The Company filed a third lawsuit on November 12, 2002, against Barr
in the SDNY asserting infringement of this patent. On December 3, 2002, Barr
answered the complaint by denying that the 715 patent is valid and infringed,
and enforceable, and seeking a declaratory judgment of invalidity. Barr also
sought a declaratory judgment that the 428, 930, 145, and 181 patents are
not infringed, and that the 428, 930 and 181 patents are invalid. The third
case was consolidated with the first two on January 23, 2003. On March 4,
2003, Kos replied to Barrs declaratory judgment counterclaims by denying that
Kos patents are invalid or not infringed. Kos also sought a declaratory
judgment that one or more of Barrs products will infringe the 145 and 181
patents.

From time to time, the Company is a party to other legal proceedings in
the course of its business. The Company, however, does not expect such other
legal proceedings to have a material adverse effect on its business or
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, 2002.

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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 10, 2003, there were 420 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, 2002 |  | High |       | Low
|                             |  |      |       |    
|First Quarter                |  | $    | 35.27 |     |  | $ | 19.30 | 
|Second Quarter               |  |      | 29.16 |     |  |   | 15.50 | 
|Third Quarter                |  |      | 20.70 |     |  |   | 10.03 | 
|Fourth Quarter               |  |      | 24.16 |     |  |   | 10.38 | 

|                             |  |      |       |     |  |   |       | 
|---------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|Year Ended December 31, 2001 |  | High |       | Low
|                             |  |      |       |    
|First Quarter                |  | $    | 21.13 |     |  | $ | 14.31 | 
|Second Quarter               |  |      | 38.00 |     |  |   | 16.75 | 
|Third Quarter                |  |      | 40.69 |     |  |   | 23.45 | 
|Fourth Quarter               |  |      | 36.90 |     |  |   | 23.45 | 

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.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following consolidated selected financial data of the Company for the
five years ended December 31, 2002, 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.

|                                                                                                             |                                     |                             |         |                                       |         |      |         |            |         |      |         |            |         |   |         |            |         |   |         |            |         |  
|------------------------------------------------------------------------------------------------------------ | ----------------------------------- | --------------------------- | ------- | ------------------------------------- | ------- | ---- | ------- | ---------- | ------- | ---- | ------- | ---------- | ------- | - | ------- | ---------- | ------- | - | ------- | ---------- | ------- | -
|                                                                                                             |                                     |                             |         | Year Ended December 31,              
|                                                                                                             |                                     |                             |         |                                      
|                                                                                                             |                                     |                             |         | 2002                                  |         | 2001 |         | 2000       |         | 1999 |         | 1998      
|                                                                                                             |                                     |                             |         |                                       |         |      |         |            |         |      |         |           
|                                                                                                             |                                     |                             |         | (in thousands, except per share data)
|Statement of Operations:                                                                                     |                                     |                             |         |                                       |         |      |         |            |         |      |         |            |         |   |         |            |         |   |         |           
|Revenues, net                                                                                                |                                     | $                           | 172,693 |                                       |         | $    | 91,447  |            |         | $    | 60,174  |            |         | $ | 36,340  |            |         | $ | 13,038  |           
|Cost of sales                                                                                                |                                     |                             | 15,362  |                                       |         |      | 7,646   |            |         |      | 5,932   |            |         |   | 5,406   |            |         |   | 3,276   |           
|                                                                                                             |                                     |                             |         |                                       |         |      |         |            |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                                                             |                                     |                             | 157,331 |                                       |         |      | 83,801  |            |         |      | 54,242  |            |         |   | 30,934  |            |         |   | 9,762   |           
|                                                                                                             |                                     |                             |         |                                       |         |      |         |            |         |      |         |            |         |   |         |            |         |   |         |           
|Operating expenses:                                                                                          |                                     |                             |         |                                       |         |      |         |            |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                                                             | Research and development            |                             |         | 43,981                                |         |      |         | 30,974     |         |      |         | 26,459     |         |   |         | 25,619     |         |   |         | 29,144     |        
|                                                                                                             | Selling, general and administrative |                             |         | 130,145                               |         |      |         | 83,587     |         |      |         | 56,831     |         |   |         | 56,843     |         |   |         | 61,519     |        
|                                                                                                             |                                     |                             |         |                                       |         |      |         |            |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                                                             |                                     | Total operating expenses(1) |         |                                       | 174,126 |      |         |            | 114,561 |      |         |            | 83,290  |   |         |            | 82,462  |   |         |            | 90,663  |  
|                                                                                                             |                                     |                             |         |                                       |         |      |         |            |         |      |         |            |         |   |         |            |         |   |         |           
|Loss from operations                                                                                         |                                     |                             | (16,795 | )                                     |         |      | (30,760 | )          |         |      | (29,048 | )          |         |   | (51,528 | )          |         |   | (80,901 | )         
|Other:                                                                                                       |                                     |                             |         |                                       |         |      |         |            |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                                                             | Interest income, net                |                             |         | 160                                   |         |      |         | 242        |         |      |         | 323        |         |   |         | 169        |         |   |         | 1,793      |        
|                                                                                                             | Interest expense-related parties    |                             |         | (4,039                                | )       |      |         | (6,081     | )       |      |         | (6,560     | )       |   |         | (3,207     | )       |   |         | (68        | )      
|                                                                                                             | Other income (expense)(1)           |                             |         | (142                                  | )       |      |         | 38,985     |         |      |         | 20         |         |   |         | 14         |         |   |         | 15         |        
|                                                                                                             |                                     |                             |         |                                       |         |      |         |            |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                                                             |                                     | Net income (loss)           |         | $                                     | (20,816 | )    |         | $          | 2,386   |      |         | $          | (35,265 | ) |         | $          | (54,552 | ) |         | $          | (79,161 | )
|                                                                                                             |                                     |                             |         |                                       |         |      |         |            |         |      |         |            |         |   |         |            |         |   |         |           
|Net income (loss) per share(2):                                                                              |                                     |                             |         |                                       |         |      |         |            |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                                                             | Basic                               |                             | $       | (1.01                                 | )       |      | $       | 0.12       |         |      | $       | (1.84      | )       |   | $       | (3.06      | )       |   | $       | (4.50      | )      
|                                                                                                             | Diluted                             |                             |         | (1.01                                 | )       |      |         | 0.10       |         |      |         | (1.84      | )       |   |         | (3.06      | )       |   |         | (4.50      | )      
|Weighted average common stock and common
stock equivalents used in computing
net income (loss) per share(2): |                                     |                             |         |                                       |         |      |         |            |         |      |         |            |         |   |         |            |         |   |         |           
|                                                                                                             | Basic                               |                             |         | 20,582,205                            |         |      |         | 20,221,089 |         |      |         | 19,202,877 |         |   |         | 17,842,879 |         |   |         | 17,589,767 |        
|                                                                                                             | Diluted                             |                             |         | 20,582,205                            |         |      |         | 22,798,632 |         |      |         | 19,202,877 |         |   |         | 17,842,879 |         |   |         | 17,589,767 |        

|                               |  |                |          |      |  |      |          |      |  |      |          |   |  |   |          |   |  |   |          |  
|------------------------------ |  | -------------- | -------- | ---- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | - |  | - | -------- | -
|                               |  | December 31,  
|                               |  |               
|                               |  | 2002           |          | 2001 |  | 2000 |          | 1999 |  | 1998
|                               |  |                |          |      |  |      |          |      |  |     
|                               |  | (in thousands)
|Balance Sheet:                 |  |                |          |      |  |      |          |      |  |      |          |   |  |   |          |   |  |   |          |  
|Cash and marketable securities |  | $              | 19,572   |      |  | $    | 45,319   |      |  | $    | 6,125    |   |  | $ | 4,336    |   |  | $ | 4,879    |  
|Working capital (deficit)      |  |                | (54,644  | )    |  |      | 27,160   |      |  |      | (1,911   | ) |  |   | (2,354   | ) |  |   | (3,136   | )
|Total assets                   |  |                | 69,441   |      |  |      | 82,941   |      |  |      | 29,648   |   |  |   | 26,258   |   |  |   | 21,570   |  
|Total long-term debt(3)        |  |                | 34,025   |      |  |      | 95,082   |      |  |      | 72,000   |   |  |   | 62,089   |   |  |   | 9,239    |  
|Accumulated deficit(4)         |  |                | (293,361 | )    |  |      | (272,545 | )    |  |      | (274,931 | ) |  |   | (239,666 | ) |  |   | (185,114 | )
|Shareholders deficit          |  |                | (74,709  | )    |  |      | (58,439  | )    |  |      | (65,090  | ) |  |   | (53,195  | ) |  |   | (338     | )



---

|(1) |  | For 2001, includes the effect of a $45 million settlement received from
Bristol Myers Squibb Company, of which $6 million was recorded as reimbursement
of operating expenses and $39 million as other income. See Note 2 of Notes to
Consolidated Financial Statements for information concerning this settlement
payment.                                                                                                                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of net loss per share.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(3) |  | For 2002, excludes $50 million of debt due to Michael Jaharis, Chairman
Emeritus of the Companys Board of Directors and its principal shareholder, as
such debt matures on December 31, 2003.                                                                                                                                                                                                                                                                                                                                                             
|   
|(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 $234 million
as of December 31, 2002), to offset future taxable income, if any. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

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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, dispensed in metered-dosed
inhalers, 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 Form 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. From inception through the IPO, the Company had
not recorded any significant revenues; and the Company had funded its
operations exclusively through equity contributions and a loan from its
majority shareholder. Through December 31, 2002, the Company had accumulated a
deficit from operations of approximately $293 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 $234 million as of
December 31, 2002, to offset future taxable net income, if any.

On July 28, 1997, the Company was granted clearance by the FDA to market
its lead product, Niaspan. The Company began shipping Niaspanto wholesalers
in mid-August 1997 and began detailing Niaspanto physicians in September 1997.
On December 17, 2001, the Company received approval from the FDA to market its
new Niaspan/lovastatin combination product, Advicor.The Company began
marketing Advicorat the end of January 2002.

Results of Operations

Critical Accounting Policies

The Companys significant accounting policies are described in Note 2 to
the consolidated financial statements. The Company believes that its most
critical accounting policies include revenue recognition and the estimation of
product returns, rebates, and other allowances. The impact of these estimates
on results of operations for the years ended December 31, 2002 and 2001, are
described below. The Companys management periodically reviews these policies
and estimates, the effect of which is reflected as a component of net revenue
in the period in which the change is known. Such changes to these estimates
have not been material to the Companys results of operations during the
three-year period ended December 31, 2002.

Similar to most other pharmaceutical companies, Kos has at times been
subject to significant forward buy-in from pharmaceutical wholesalers.
Forward buy-in is a practice whereby pharmaceutical wholesalers, relying on
their ability to predict manufacturer price increases, augment product
purchases just prior to such anticipated increases, as a mechanism to bolster
operating profits. Thus, depending on when a particular wholesalers
forecasting model predicts the possibility of a price increase, product demand
by wholesalers during a given period may not correlate with prescription demand
for such product in that period. As a result, the Company periodically
evaluates the inventory position of its customers to determine whether
increased risk of product return exists because abnormally

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high inventory levels of its products are present throughout the product
distribution channel. If such abnormally high inventory levels are identified,
the Companys policy is to not recognize the revenue and related expenses
associated with the excess inventory held by customers until such return risk
is mitigated. Accordingly, the Company did not recognize $11.1 million in net
revenues and related expenses associated with product shipments made during the
year ended December 31, 2002 and will not recognize such gross revenues and
related expenses until the level of Niaspanand Advicorproducts warehoused by
customers returns to normal levels.

A key variable used by the Company to assess the level of product return
risk entails a determination of an appropriate or normal measurement of the
inventory level throughout the product distribution channel, in terms of
months-on-hand, necessary to meet normal demand for its products without an
excessive risk of product return. As of December 31, 2002, the Company, based
on the latest available market data and on its internal analysis, believes the
appropriate industry level to be 1.9 months-on-hand, which is consistent with
the Companys determination of appropriate inventory levels for periods prior
to the December 31, 2002 year. If, however, the Company had utilized during the
year ended December 31, 2002, a lower number of months-on-hand to estimate
whether increased risk of product return existed because abnormally high
inventory levels of such products were present throughout the product
distribution channel, reported net revenue for the year ended December 31, 2002
would have been reduced and the amount of net revenue that would not have been
recognized would have increased.

Years Ended December 31, 2002 and 2001

The Companys reported revenue, including the effect of Niaspanand
Advicorrevenue not recognized during the period, increased to $172.7 million
for the year ended December 31, 2002, from $91.4 million for 2001. This
increase in revenue was mostly related to increases in prescription volume for
the Companys Niaspanproduct during 2002 as compared to 2001, as well as to
the market introduction, during late January 2002, of the Companys Advicor
product. More specifically, Niaspanand Advicorrevenue for the years ended
December 31, 2002 and 2001, were as follows:

|                                                                 |                        |   |               |       |      |   |      |      | 
|---------------------------------------------------------------- | ---------------------- | - | ------------- | ----- | ---- | - | ---- | ---- | 
|                                                                 |                        |   | Year Ended   
|                                                                 |                        |   | December 31, 
|                                                                 |                        |   |              
|                                                                 |                        |   | 2002          |       | 2001
|                                                                 |                        |   |               |       |     
|                                                                 |                        |   | (in millions)
|Product shipments                                                |                        | $ | 176.8         |       |      | $ | 87.4 |     
|Prior period product shipments
recorded as revenue during period |                        |   | 7.0           |       |      |   | 3.8  |     
|Current period product shipments
not recognized as revenue       |                        |   | (11.1         | )     |      |   | (7.0 | )   
|                                                                 |                        |   |               |       |      |   |      |     
|                                                                 | Reported product sales |   | $             | 172.7 |      |   | $    | 84.2 | 
|                                                                 |                        |   |               |       |      |   |      |     

The increase in Niaspanand Advicorproduct sales during the year ended
December 31, 2002, were partially offset by the absence, during the 2002
period, of $7.2 million in co-promotion revenue associated with the terms of a
co-promotion agreement with Abbott Laboratories, Inc. (Abbott), for the
promotion and marketing of Abbotts Mavikand Tarkaproducts within the United
States (the Abbott Agreement). Under the terms of the Abbott Agreement, the
Company received an increasing percentage of revenue based on sales thresholds.
Kos and Abbott agreed to terminate the Abbott Agreement effective January 1,
2002. Accordingly, revenue for the year ended December 31, 2002, does not
reflect co-promotion revenue associated with the Abbott Agreement.

Gross profit (reported product sales less cost of product sold) for the
year ended December 31, 2002, was $157.3 million, compared with $76.6 million
for the 2001 period.

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Through December 17, 2001, the Company was subject to an agreement with
DuPont Pharmaceuticals Company (DuPont) for the purpose of co-promoting the
Companys Advicorproduct in the United States and Canada (the DuPont
Agreement). Under the terms of the DuPont Agreement, the Company and DuPont
would have shared in the future development and commercialization of the
Advicorproduct. Specifically, DuPont had agreed (i) to make equity
investments in the Company up to $30 million through the date of FDA approval
of the Advicorproduct; (ii) to pay the Company $17.5 million in milestone
payments upon FDA approval of the Advicorproduct; (iii) to fund up to $32.5
million for future clinical development of the Advicorproduct; and (iv) to
share equally in the costs associated with promoting the Advicorproduct and
share equally in product profits after deducting a royalty to the Company. On
May 31, 2000, DuPont made a $20-million equity investment in the Company in
exchange for 1,250,000 shares of the Companys Common Stock. On June 7, 2001,
DuPonts parent company, E.I. du Pont Nemours, announced that it had entered
into an agreement to sell DuPont to Bristol-Myers Squibb Company (BMS) and on
October 1, 2001, BMS completed its acquisition of DuPont. On December 17,
2001, the Company entered into an agreement with BMS pursuant to which the
DuPont Agreement was terminated and BMS paid Kos $45 million (the BMS
Payment). Of the total settlement received from BMS, approximately $6 million
pertained to copromotion expenses due and unpaid by DuPont prior to the
termination of the DuPont Agreement. The remaining settlement amount, or
approximately $39 million, was recorded as other income for the year ended
December 31, 2001.

On January 28, 2002, following the termination of the DuPont Agreement,
the Company began commercializing its Advicorproduct. Accordingly, results of
operations for the year ended December 31, 2002, reflect the Companys
significant efforts in connection with the commercial launch of this new
product.

On October 23, 2002, the Company signed an exclusive international
commercialization agreement with Merck KGaA (Merck) to market the Niaspanand
Advicorproducts outside the United States, Canada and Japan. Under terms of
the agreement, Merck will provide Kos up to $61 million in licensing, milestone
and reimbursement payments, including $15 million of upfront payments, of which
$12.5 million are reimbursable by Kos if it fails to achieve certain regulatory
milestones. The milestone payments are dependent on the achievement of certain
regulatory approvals and sales thresholds. Kos will also receive 25% of net
sales of the products in the territory, which includes the cost of goods sold.
Merck will be responsible for conducting Phase IV clinical studies and
commercialization activities while Kos is responsible for obtaining initial
marketing authorization in all European countries and the supply and
manufacturing of the products. On November 5, 2002, Kos received $9.2 million
as an upfront payment from Merck. This upfront payment will be recognized as
revenue in future periods upon Kos achieving certain regulatory milestones.

The Companys research and development expenses increased to $44.0 million
for the year ended December 31, 2002, from $31.0 million for the year ended
December 31, 2001. The increased expense related primarily to increases of
$3.6 million in personnel and personnel related costs, $3.3 million in medical
education costs in support of the Niaspanand Advicorproducts, and of $2.5
million in formulation development costs for products under development.
Research and development expenses were also affected by the absence, during the
2002 period, of a $3.9 million contribution made by DuPont during the 2001
period pursuant to the DuPont Agreement, which agreement was terminated on
December 17, 2001. Under the terms of the DuPont Agreement, DuPont shared
equally with the Company in costs associated with the clinical development,
medical education, and promotional efforts of the Companys Advicorproduct.
This growth in research and development expenses was partially offset by a
decrease of $1.5 million in clinical study costs as a result of the substantial
completion, during the 2002 period, of an Advicorclinical trial.

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Selling, general and administrative expenses increased to $130.1 million
for the year ended December 31, 2002, from $83.6 million for the year ended
December 31, 2001. Within this category, selling expenses increased to $108.5
million for the 2002 period from $69.6 million for the comparable 2001 period.
The growth in selling expenses was primarily related to increases of $21.2
million in sales force operating costs, of $13.5 million in marketing costs, of
$4.1 million in royalty expenses, of $1.5 million in fees associated with a
contract sales organizations assistance in the promotion of the Companys
Niaspanand Advicorproducts, of $0.8 million in medical education grants, and
by the absence, during the 2002 period, of a $4.2 million contribution made by
DuPont during the 2001 period pursuant to the DuPont Agreement. Because of the
termination of the Abbott Agreement, selling expenses for the year ended
December 31, 2002, also exclude the effect of co-promotion expenses associated
with such co-promotion arrangement, which totaled $7.0 million for the year
ended December 31, 2001. General and administrative expenses increased to
$21.6 million for the 2002 period, from $14.0 million for the 2001 period.
This increase in general and administrative expenses related primarily to an
increase of $2.7 million in personnel and personnel related costs, of $2.2
million in patent costs, and $2.7 million in other costs associated with the
expanded activities of the Company.

The Company is subject to the terms of the December 19, 2002, $30 million
credit facility (the Additional Standby Facility), and the December 21, 1999,
$50 million credit facility (the Standby Facility), with Michael Jaharis,
Chairman Emeritus of the Companys Board of Directors and its principal
shareholder. The Company is also subject to the terms of the September 1,
1999, $50 million credit facility (the Supplemental Credit Facility) with Mr.
Jaharis and with a transferee of Mr. Jaharis wife. Borrowings under these
credit facilities totaled $84 million as of December 31, 2002, and bear
interest at the prime rate (4.25% as of December 31, 2002). Interest expense
under these credit facilities totaled $4.0 million and $6.1 million for the
years ended December 31, 2002 and 2001, respectively.

The Company incurred a net loss of $20.8 million for the year ended
December 31, 2002, compared with net income of $2.4 million for the year ended
December 31, 2001.

21



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Years Ended December 31, 2001 and 2000

The Companys reported revenue, including the effect of Niaspanrevenue
not recognized during the period, increased to $91.4 million for the year ended
December 31, 2001, from $60.2 million for 2000. This $31.2 million increase in
revenue reflects a $29.1 million increase in recorded sales of the Companys
Niaspanproduct. The increase in Niaspanrevenue is best explained as follows:

|                                                                 |                        |   |               |      |      |   |      |      | 
|---------------------------------------------------------------- | ---------------------- | - | ------------- | ---- | ---- | - | ---- | ---- | 
|                                                                 |                        |   | Year Ended   
|                                                                 |                        |   | December 31, 
|                                                                 |                        |   |              
|                                                                 |                        |   | 2001          |      | 2000
|                                                                 |                        |   |               |      |     
|                                                                 |                        |   | (in millions)
|Product shipments                                                |                        | $ | 87.4          |      |      | $ | 56.6 |     
|Prior period product shipments
recorded as revenue during period |                        |   | 3.8           |      |      |   | 2.3  |     
|Current period product shipments
not recognized as revenue       |                        |   | (7.0          | )    |      |   | (3.8 | )   
|                                                                 |                        |   |               |      |      |   |      |     
|                                                                 | Reported product sales |   | $             | 84.2 |      |   | $    | 55.1 | 
|                                                                 |                        |   |               |      |      |   |      |     

Revenue for the year ended December 31, 2001, also included $7.2 million,
or an increase of $2.2 million, in co-promotion revenue associated with the
Abbott Agreement.

Cost of sales was $7.6 million and $5.9 million for the years ended
December 31, 2001 and 2000, respectively. The higher cost of sales in 2001 was
attributable to higher Niaspanvolume during the period, partially offset by
efficiencies attained in the production of Niaspan.

On December 17, 2001, the FDA issued to the Company an approval letter
granting marketing clearance for the Companys Advicorproduct. Accordingly,
results of operations for the year ended December 31, 2001, reflect the
Companys significant preparations in anticipation of the commercial launch of
this new product.

The Companys research and development expenses increased to $31.0 million
for the year ended December 31, 2001, from $26.5 million for the year ended
December 31, 2000. The increased expense related primarily to increases of
$3.4 million in medical education costs in support of the Niaspanproduct and
the anticipated launch of the Advicorproduct, of $2.0 million in personnel and
personnel related costs, and of $2.8 million in clinical study costs mostly
associated with an Advicorsafety study. These increases in research and
development expenses were partially offset by a $3.9 million contribution
received from DuPont under the terms of the DuPont Agreement.

Selling, general and administrative expenses increased to $83.6 million
for the year ended December 31, 2001, from $56.8 million for the year ended
December 31, 2000. Within this category selling expenses increased $23.6
million to $69.6 million for the year ended December 31, 2001, primarily as a
result of an increase of $13.0 million in sales force operating expenses, of
$11.4 million in marketing programs in support of Niaspanand Advicor,of $2.5
million in marketing costs associated with Mavikand Tarkapromotional efforts,
and of $0.3 million in royalty expenses associated with the increase in net
sales of the Niaspanproduct. These increases in sales and marketing expenses
were partially offset by a $4.2 million contribution received from DuPont under
the terms of the DuPont Agreement. General and administrative expenses
increased to $14.0 million for the year ended December 31, 2001, from $10.8
million for the preceding period, primarily as a result of an increase of $2.1
million in personnel and personnel-related costs.

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Results of operations for the year ended December 31, 2001, also include
the effect of termination of the DuPont Agreement on December 17, 2001. Such
termination, which concluded with the DuPont Payment, resulted in the Company
recording approximately $39 million as other income for the year ended December
31, 2001.

Interest expense under the Companys credit facilities totaled $6.1
million and $6.6 million for the years ended December 31, 2001 and 2000,
respectively.

The Company recorded net income of $2.4 million for the year ended
December 31, 2001, compared with a net loss of $35.3 million for the year ended
December 31, 2000.

Liquidity and Capital Resources

At December 31, 2002, the Company had cash and cash equivalents totaling
$19.6 million (of which $17.1 million was pledged as collateral for the
Companys letter of credit facility with a local bank) and a working capital
deficiency of $54.6 million. The Companys primary uses of cash to date have
been to fund selling, general and administrative expenses, and research and
development expenses, including clinical trials. As of December 31, 2002, the
Companys investment in equipment and leasehold improvements, net of
depreciation and amortization, was $12.5 million. During the year ended
December 31, 2002, the Company spent $6.7 million in capital expenditures and
deposits on fixed assets to be acquired. The Company expects to increase the
level of capital expenditures during 2003 mostly to provide increased
production capacity for the Advicorproduct. Accordingly, 2003 capital
expenditures are expected to be significantly higher than those incurred during
the year ended December 31, 2002.

On December 19, 2002, the Company and Michael Jaharis, Chairman Emeritus
of the Companys Board of Directors and its principal shareholder, entered into
an agreement whereby Mr. Jaharis agreed to replace the previous $30-million
credit facility extended to the Company by Mr. Jaharis on July 1, 1998, with a
new facility expiring on June 30, 2008 (the Additional Standby Facility). In
connection with this new credit arrangement, the Company granted to Mr. Jaharis
non-detachable warrants to purchase 1,000,000 shares of the Companys Common
Stock at an exercise price based on the market price of the Companys Common
Stock on the date that the first draw under this facility occurs. The Company
had no borrowings outstanding under the Additional Standby Facility as of
December 31, 2002. Borrowings, when outstanding, will bear interest at the
prime rate (4.25% as of December 31, 2002), and are subject to the terms and
conditions of borrowings made under the Supplemental Credit Facility.

On September 1, 1999, the Company formally agreed to the terms of an
additional $50-million funding arrangement initially entered into with Michael
Jaharis on October 7, 1998 (the Supplemental Credit Facility). On July 21,
2001, the Company replaced its existing $50 million promissory note payable to
Mr. Jaharis with two, $25 million, promissory notes, one payable in the name of
Mr. Jaharis and the other payable in the name of Mr. Jaharis wife. With this
promissory note replacement, all of Mr. Jaharis existing rights and
obligations under the Supplemental Credit Facility, with respect to one-half of
the outstanding amount, have been transferred to Mrs. Jaharis, and were
subsequently transferred by Mrs. Jaharis to a limited partnership that she
controls. All other terms and conditions of the Supplemental Credit Facility
remain unchanged. Borrowings under the Supplemental Credit Facility totaled
$50 million as of December 31, 2002, 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. Although no amounts borrowed under the
Supplemental Credit Facility have been converted as of December 31, 2002, the
conversion of amounts borrowed under the Supplemental Credit Facility into
shares of the Companys Common Stock would have resulted in the issuance of
10,183,299 additional shares of the Companys Common Stock, thus causing
material dilution to existing shareholders of the Company. The Company
believes that on or prior to the maturity date, it will have sufficient cash,
available credit, and access to capital from third parties to be able to repay
the Supplemental Credit Facility on a timely basis

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in the event that it is not converted into shares of the Companys Common
Stock. However, the Company believes that, if the market price of the
Companys Common Stock continues to significantly exceed the conversion price
established under the Supplemental Credit Facility, which is $4.91 per share,
through the maturity date, Mr. Jaharis and the other lenders will elect to
convert the borrowings outstanding under this facility into shares of Kos
Common Stock prior to the maturity date, thereby relieving the Company of the
obligation to repay such facility. If such debt conversion were not to take
place for any reason, the Company would be required to utilize its cash flow
from operations and its then remaining borrowing capacity under its two other
facilities with Mr. Jaharis, if such borrowing capacity is available at all, to
repay borrowings due under the Supplemental Credit Facility. In addition, the
Company could also be required to seek to raise additional capital to repay the
Supplemental Credit Facility to the extent that its cash and available credit
are insufficient to repay the Supplemental Credit Facility in full prior to its
maturity date. The Companys decision to issue additional debt or equity, or
to sell some or all of its assets, in order generate additional capital would
require the consent of Mr. Jaharis and the other lenders. It is possible that
the Company could seek to extend the maturity date of the Supplemental Credit
Facility or enter into a new financing arrangement with Mr. Jaharis and the
other lenders that would replace the Supplemental Credit Facility; however, the
Company has not sought any such extension or replacement facility and Mr.
Jaharis and the other lenders would be under no obligation to the Company to
provide any such extension or replacement. There can be no assurance that
additional capital will be available to the Company on acceptable terms, or at
all, or that the lenders under the Supplemental Credit Facility will convert
the Companys borrowings under such facility into shares of the Companys
Common Stock.

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 totaled $34 million as of December 31, 2002, are due June 30,
2005, and are also subject to most of the terms and conditions of borrowings
made under the Supplemental Credit Facility, including the condition that the
death of lender shall not have occurred. 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
non-detachable warrants to purchase 6,000,000 shares of the Companys Common
Stock at $5.00 per share, which approximated the market value of the Companys
Common Stock on the effective date of the Standby Facility. The warrants are
exercisable at any time until June 30, 2006. The exercise of a significant
number of the warrants issued under the Standby Facility will cause material
dilution to existing shareholders of the Company.

The Company recorded $4.0 million and $6.1 million of interest expense for
the years ended December 31, 2002 and 2001, respectively, related to its credit
facilities with Mr. Jaharis and his transferees.

In January 2002, the Securities and Exchange Commission declared effective
a shelf registration statement filed by the Company for the sale, from time to
time, of up to $200 million of its Common Stock, Preferred Stock, stock
options, warrants and other rights to purchase Common Stock or Preferred Stock.
Proceeds from any offerings are expected to be used to fund expanded selling
efforts for the Companys Niaspanand Advicorproducts, and for research and
development and general corporate purposes. At December 31, 2002, the Company
had not issued any securities under this registration statement.

Although the Company currently anticipates that, including the capital
available to the Company under the Additional Standby Facility, the
Supplemental Credit Facility, 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 for the next twelve months, 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

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operating requirements and maintain an adequate level of working capital
will depend primarily on its ability to continue to generate substantial growth
in sales of its Niaspanand Advicorproducts, its ability to continue to access
its credit facilities, and on its ability to control operating expenses. The
Companys failure to generate substantial growth in the sales of Niaspanand
Advicor, control operating expenses, or meet the conditions necessary for the
Company to obtain funding under the Additional Standby Facility, the
Supplemental Credit Facility, and the 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 in the
United States and abroad; 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. 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,
additional capital may not be available to the Company on acceptable terms, or
at all.

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FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS

Statements
contained in this Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this report
may contain information that includes or is based upon
forward-looking statements within the meaning of the Securities
Litigation Reform Act of 1995. Forward-looking statements present the
Companys expectations or forecasts of future events. These
statements can be identified by the fact that they do not relate
strictly to historical or current facts. They frequently are
accompanied by words such as anticipate,
estimate, expect, project,
intend, plan, believe, and other words and terms of similar meaning. In
particular, these include statements relating to the Companys
ability to: increase the size of its sales force and the amount of
the sales of its products; successfully develop and commercialize new
products under development and within expected timeframes; continue
its strong financial performance and that of its products; increase
its stock price; protect the strength of its patents; commercialize its
products outside the United States and the success of its relationship
with Merck KGaA; achieve its goals for future sales levels, operating
margins, earnings growth, and shareholder value; and meet its
expectations regarding future capital needs. These forward-looking
statements are subject to risks and uncertainties which may cause
actual results to differ materially from those projected in a
forward-looking statement. 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 and Advicor

The Companys success depends primarily upon its ability to successfully
market and sell increasing quantities of the Niaspanand Advicorproducts. The
Companys ability to successfully sell increasing quantities of the Niaspanand
Advicorproducts will depend significantly on the continued acceptance of the
Niaspanproduct by physicians and their patients despite the introduction of
Advicor. As a consequence of the on-going commercialization of the Advicor
product, which is a combination product including Niaspanand a statin,
prescription levels for Niaspanmay be adversely affected to the extent a
significant number of physicians prescribe Advicoras a substitute product for
their patients who are currently taking Niaspan. Such substitution could have
an adverse effect on the growth of the combined revenue generated from the sale
of the Companys products. The Company believes that intolerable flushing and
potential liver toxicity associated with other currently available formulations
of niacin are the principal reasons why physicians generally have been
reluctant to prescribe or recommend such formulations. Flushing episodes are
often characterized by facial redness, tingling or rash, and are a side effect
that often occurs when humans ingest niacin. Currently available formulations
of niacin generally either require, in the case of immediate-release niacin,
the patient to take niacin several times per day, resulting in multiple
flushing episodes, or result, in the case of sustained-release niacin, in liver
toxicity. Although most patients taking the Niaspanand Advicorproducts will
sometimes flush, the formulation and dosing regimen for Niaspanand Advicor
have been designed to maximize patient acceptance and minimize the occurrence
of flushing and liver toxicity. If, however, a significant number of patients
using the Niaspanand Advicorproducts were to suffer episodes of flushing that
they consider intolerable or to suffer other side effects, physicians may
discontinue prescribing the Niaspanand Advicorproducts or patients may stop
taking Niaspanand Advicor, which would have a material adverse effect on the
Company. Unanticipated side effects or unfavorable publicity concerning the
Niaspanor Advicorproducts or any other product incorporating technology
similar to that used in the Niaspanor Advicorproducts also could have an
adverse effect on the Companys ability to obtain regulatory approvals or to
achieve acceptance by prescribing physicians, managed care providers, or
patients, any of which would have a material adverse effect on the Company.

On January 28, 2002, the Company began commercializing the Advicor
product. The Companys ability to successfully sell increasing quantities of
the Advicorproduct will depend significantly on the increasing acceptance of
the Advicorproduct by physicians and their patients. If a significant number
of patients using the Advicorproduct were to suffer episodes of flushing that
they consider intolerable or to suffer more serious side effects, such as
rhabdomyolysis or myopathy, physicians may discontinue prescribing the Advicor
product or patients may stop taking Advicor, which would have a material
adverse effect on the Company. Rhabdomyolysis is a rare disease in which
serious muscle damage results in release of muscle cell contents into the
bloodstream, which may be fatal. Myopathy is a disorder of muscle tissue or
muscles that can result from endocrine disorders, metabolic disorders,
infection or inflammation of the muscles, and from certain drugs. The Company
is not aware of any reported cases of rhabdomyolysis or myopathy that were
determined to be caused by patients taking Advicoralthough there have been
several cases where Niaspan(one of the principal ingredients in

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Advicor) or Advicorhave been identified as possible causes of myopathy.
Unanticipated side effects or unfavorable publicity concerning the Advicor
product or any other product incorporating technology similar to that used in
the Advicorproduct also could have an adverse effect on the Companys ability
to maintain regulatory approvals or to achieve acceptance by prescribing
physicians, managed care providers, or patients, any of which would have a
material adverse effect on the Company.

In addition, Advicormay prove to be difficult to successfully sell
because the cholesterol market is dominated by competitors with significantly
larger sales forces and with significantly greater marketing resources than
those available to the Company. Further, Advicoris a combination of two
well-known cholesterol drugs, niacin and lovastatin, that have been available
for a significant period of time. Although the combination of these drugs is
highly effective in improving all of the major components of cholesterol, it is
possible that physicians may not prescribe Advicorbecause it is not as new as
more recently introduced compounds, such as the potent statin products marketed
by the Companys competitors. Also, because Advicoris a combination of two
currently available drugs, Advicorhas been approved by the FDA for the
improvement of cholesterol disorders in patients who were not able to achieve
desired cholesterol improvements by taking either Niaspanor lovastatin alone.
Consequently, although such an approved treatment indication is standard for
combination drugs such as Advicor, it is possible that physicians will not
prescribe Advicoruntil they have first prescribed either Niaspan, lovastatin,
or another statin alone and subsequently determined that their patients need
Advicorto achieve desired cholesterol improvements. Similarly the Companys
ability to successfully sell increasing quantities of the Advicorproduct may
be adversely affected by the November 2002 release of Zetia, part of a new
class of cholesterol-lowering agents, and by the possible 2003 release of
Crestor, a new, highly powerful statin product. Zetia is being marketed by
Merck/Schering-Plough Pharmaceuticals, which is a joint venture between Merck &
Co., Inc. and Schering-Plough Corporation, and Crestor will be marketed by
AstraZeneca. Merck/Schering-Plough Pharmaceuticals and AstraZeneca are both
competitors with substantially greater resources than Kos. Zetia is part of a
new class of cholesterol-lowering agents that inhibit the intestinal absorption
of cholesterol. Crestor is a type of statin drug that is highly effective in
reducing LDL cholesterol, but is less effective in modifying HDL cholesterol,
triglycerides and other forms of cholesterol. The Companys future sales of
Advicormay also be affected by the potential release of several other new
combination statin drugs in the future. Further, there are eight versions of
generic lovastatin, one of the components of Advicor, that have been launched
into the cholesterol market, which could adversely affect demand for Advicor.
Consequently, the Companys effort to sell increasing quantities of the Advicor
product may be unsuccessful.

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 the Niaspanand Advicorproducts, the
development of other products, and general and administrative expenses. The
Company expects to incur significant operating losses for at least the first
half of 2003, due primarily to continued manufacturing and marketing, sales and
administrative expenses associated with the Niaspanand Advicorproducts, and
for investments in the Companys research and development programs. However,
additional significant losses may continue thereafter. The Companys ability
to achieve and maintain profitability will depend, among other things, on the
commercial success of the Niaspanand Advicorproducts; on the Companys
ability to successfully exploit the Companys manufacturing and sales and
marketing capabilities; on the Companys ability to complete the development
of, and obtain regulatory approvals for, and achieve market acceptance for the
Companys products under development; and on the Companys ability to maintain
sufficient funds to finance the Companys activities. Although the Company
recorded net income of $2.4 million for the year ended December 31, 2001, the
Companys net loss for the years ended December 31, 2002, 2000, and 1999 has
been $20.8 million, $35.3 million, and $54.6 million, respectively. As of
December 31, 2002, the Companys accumulated deficit was $293.0 million. In
connection with the transfer of operations from Kos Holdings, Inc. to the
Company on June 30, 1996, net operating loss carryforwards

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amounting to approximately $51.0 million and related tax benefits remained
with Kos Holdings, Inc. and were not transferred to the Company. Consequently,
the Company may utilize net operating loss carryforwards sustained subsequent
to June 30, 1996, amounting to approximately $234 million as of December 31,
2002, to offset future taxable net income, if any. If the Company is unable to
achieve or sustain profitability, however, such carryforwards may not be
utilized.

Barr Litigation

On January 23, 2002, the Company received notice from Barr Laboratories,
Inc. (Barr) that it had filed with the FDA an Abbreviated New Drug
Application (ANDA) that would, if approved, allow Barr to market a generic
version of the Companys 1000 mg Niaspan product. Under the patent laws of the
United States, the filing of an ANDA for a pharmaceutical composition or method
of use that is currently protected by a patent, such as Niaspan, constitutes an
act of infringement. As a result, on March 4, 2002, the Company filed a patent
infringement lawsuit against Barr in the Southern District of New York
(SDNY). On March 11, 2002, the Company filed an amended complaint (the
Amended Complaint). In this lawsuit, the Company asserts that Barr has
infringed the 428 and 930 patents. Under the FDA statute, the filing of a
patent infringement suit by the Company suspends the ANDA approval process for
30 months or until the infringement suit is resolved. On March 25, 2002, Barr
answered the Amended Complaint by denying that the 428 and 930 patents are
valid and infringed, and seeking a declaratory judgment to that effect. On
August 19, 2002, Barr amended its answer to add counterclaims requesting a
declaratory judgment that two other patents owned by Kos, U.S. patent number
5,126,145 and 5,268,181, are not infringed, and that the 181 patent is
invalid.

On July 9, 2002, the Company received notice from Barr that it had filed
an ANDA with the FDA that would, if approved, allow Barr to market generic
versions of the Companys 500 mg and 750 mg Niaspan products. On August 13,
2002, the Company filed a second patent infringement lawsuit against Barr also
in the SDNY. Again, the Company asserted that Barr has infringed the 428 and
930 patents. On September 3, 2002, Barr answered the complaint by denying
infringement and alleging that the patents are invalid. Barr also sought a
declaratory judgment that the 428, 930, 145, and 181 patents are not
infringed, and that the 428, 930, and 181 patents are invalid. The two
cases were consolidated on September 23, 2002.

On September 30, 2002, the Company received notice from Barr that it had
filed a Supplemental Paragraph IV Certification relating to Kos 715 patent.
The Company filed a third lawsuit on November 12, 2002, against Barr in the
SDNY asserting infringement of this patent. On December 3, 2002, Barr answered
the complaint by denying that the 715 patent is valid and infringed, and
enforceable, and seeking a declaratory judgment of invalidity. Barr also
sought a declaratory judgment that the 428, 930, 145, and 181 patents are
not infringed, and that the 428, 930 and 181 patents are invalid. The third
case was consolidated with the first two on January 23, 2003. On March 4,
2003, Kos replied to Barrs declaratory judgment counterclaims by denying that
Kos patents are invalid or not infringed. Kos also sought a declaratory
judgment that one or more of Barrs products will infringe the 145 and 181
patents.

This current litigation is costly and time consuming, and we cannot assure
you that we will be successful. In addition, such litigation may result in
financial losses or harm to our reputation, and may divert management resources
and attention from our operations. If Barr is successful in this litigation,
the Companys 428, 930 and 181 and 715 patents could be found to be invalid
and unenforceable. If such patents are invalid and unenforceable, the Company
would be unable to prevent Barr from marketing a generic version of the Niaspan
product, which would have a material adverse effect on the Company. The
Company would also be unable to prevent other companies from introducing
generic and other competing products into the market place. Furthermore, there
could be an increased risk that other companies would challenge the Companys
proprietary rights or claim that the Companys products infringe on their
patents.

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Future Capital Needs; Uncertainty of Additional Funding

In order to finance the Companys operations, as of December 31, 2002, the
Company has borrowed a total of $84 million from Michael Jaharis, the Companys
principal shareholder and a director. The Company can borrow up to an
additional $46 million from Mr. Jaharis under agreements currently in place; provided that the conditions of borrowings have been
satisfied including, without limitation, that the death of lender shall not have occurred.
The repayment of funds borrowed from Mr. Jaharis are secured by the pledge of
all of the Companys assets to him. As a result, if the Company is unable to
repay the loans as they become due, the Company could be forced to liquidate
the Companys assets or transfer all of such assets to Mr. Jaharis. Although
the Company experienced positive cash flows from operations during its third
and fourth quarters of 2002, the Company has mostly experienced negative cash
flows from operations since inception. The Company has spent and will continue
to be required to spend substantial funds to continue research and development
activities, including clinical trials of the Companys products under
development, and to commercialize the Niaspanand Advicorproducts and its
other 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 it under loans from Mr. Jaharis, to
fund its operations through at least the next twelve months. Even with the
proceeds from these sources, however, the Company may need or elect to raise
additional capital prior to such date. The Companys ability to fund its
operating requirements and maintain an adequate level of working capital for
the next twelve months will depend primarily on: the near-term commercial
success of Niaspanand Advicor; the Companys ability to meet the conditions
necessary to obtain funding under its lines of credit, including, without limitation, that the death of lender shall not have occurred; 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 Niaspanand Advicorproducts, the
regulatory and commercial success of the Advicorproduct, and that testing and
regulatory procedures relating to the Companys other products under
development can be conducted at projected costs and within projected time
frames. To the extent these assumptions prove to be inaccurate, the Company
may have insufficient resources to fund its operations as currently planned.

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 sales of
the Niaspanand Advicorproducts do not increase rapidly; if the results of the
clinical trials for the Companys products under development are not favorable;
or if regulatory approval for any of its products under development is not
obtained. The Company may seek additional funding through corporate
collaborations and other financing vehicles. If adequate funds are not
available to the Company, or if available, their terms are unacceptable, Kos
may be required to significantly reduce its marketing activities for the
Niaspanand Advicorproducts or curtail significantly one or more of its
research or development programs or the Company may be required to obtain funds
through arrangements with future collaborative partners or others that may
require Kos to relinquish rights to the Niaspanor Advicorproducts 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
the Companys securities.

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Limited Sales and Marketing Experience and Resources

Although the Company markets the Niaspanand Advicorproducts and it
intends to market its products under development through the Companys own
specialty sales force, including sales representatives available exclusively to
Kos under a contract sales force arrangement, substantial resources will
continue to be required for Kos to promote the sale of its products. Because
its current marketing resources are limited, the Company may be unable to
devote sufficient resources to the Niaspanand Advicorproducts, or to the
Companys products under development to achieve increasing market acceptance of
such products. The Companys failure to expend the resources to adequately
promote the Niaspanand Advicorproducts or its other products under
development would have a material adverse effect on the Companys business and
results of operations.

Moreover, because the Company has fewer sales persons than its
competitors, the Companys sales force may be unable to detail successfully
physicians who prescribe lipid-altering medications. The Company may not be
able to retain its current sales representatives. Even if the Company hires
additional representatives, they may not be immediately effective in promoting
the sale of the Niaspanand Advicorproducts. As a result, Kos may be unable
to generate significantly increased sales of the Niaspanor Advicorproducts.
The failure of the Companys sales representatives to generate increased sales
of the Niaspanand Advicorproducts would have a material adverse effect on
operating results.

Control by Existing Shareholder

Michael Jaharis, the Companys principal shareholder and a director, owns,
directly or indirectly, 8,570,070 shares of the Companys Common Stock as of
December 31, 2002, or approximately 41% of the common stock outstanding.
Accordingly, Mr. Jaharis 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 may have the effect of delaying or
preventing a change in the management or voting control of Kos. In addition, a
line of credit totaling $50,000,000 between Kos, Mr. Jaharis and his spouse, or
her transferee, gives each of them the right to convert (at $4.91 per share)
amounts owed to them by Kos under such line of credit into shares of the
Companys Common Stock. Another line of credit gives Mr. Jaharis the right to
exercise warrants to purchase six million shares of the Companys Common Stock
at $5.00 per share. The warrants are non-detachable and can be exercised only
through the conversion of principal and interest accumulated under the line of
credit. If
this conversion option and warrant exercises were to occur, Mr. Jaharis direct
or indirect ownership of the Companys Common Stock would increase to
19,661,720 shares, or approximately 62% of the common stock outstanding, and
Mary Jaharis or her transferee would control 5,254,899 shares, or approximately
20% of the common stock outstanding, in each case assuming such conversion and
warrant exercises had occurred as of December 31, 2002.

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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 those available to Kos, including combined
field sales forces exceeding 12,000 persons, compared with the Companys
approximately 450 person field sales force, including approximately 150
contract sales force representatives. The Companys direct competitors and
their respective competitive products include, among others:



| |  |  | Abbott (Tricor)                 
| | - |  | --------------------------------
| |   |  |                                 
| |  |  | Bristol-Myers Squibb (Pravachol)
| |   |  |                                 
| |  |  | Merck (Zocor and Mevacor)       
| |   |  |                                 
| |  |  | Novartis (Lescol)               
| |   |  |                                 
| |  |  | Pfizer (Lipitor and Lopid)      
| |   |  |                                 
| |  |  | Sankyo (Welchol)                
| |   |  |                                 
| |  |  | Merck/Schering-Plough (Zetia)   
| |   |  |                                 
| |  |  | AstraZeneca (Crestor)           

The Company estimates that the existing Niaspanand Advicorprescriptions
account for slightly more than 3.1% of the total prescriptions currently being
written in the United States for cholesterol-lowering pharmaceutical compounds.
In addition, Zetia, part of a new class of cholesterol-lowering agents that
inhibit the intestinal absorption of cholesterol, was launched in November 2002
by Merck/Schering-Plough Pharmaceuticals, and Crestor, a new highly powerful
statin product, could be launched during 2003 by AstraZeneca. Both
Merck/Schering-Plough Pharmaceuticals and AstraZeneca are competitors who have
substantially greater resources than those available to Kos. Further, several
other new combination statin drugs may be marketed during succeeding years.
Finally, there are eight versions of generic lovastatin, one of the components
of Advicor, currently being marketed in the cholesterol market. The existence
of distributors of generic lovastatin and the competitive environment they
create may inhibit the Niaspanand Advicorproducts from competing successfully
or from achieving increased sales. 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, physicians may decide to prescribe or
recommend some of these unapproved niacin formulations, using the Niaspan
products dosing regimen, to try to achieve the same results as Niaspan.
Substitution of other niacin formulations for the Niaspanproduct could have a
material adverse effect on the Companys business and results of operations.
Moreover, manufacturers of other niacin formulations could promote their
products using the Niaspanproduct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 significant 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 Kos 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 Kos because of greater financial resources,
stronger sales and marketing efforts, and other factors. If these entities are
successful in developing products that are safer, more effective, or less
costly than the products developed by Kos, the Companys products may be unable
to compete successfully with any of those products.

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International Commercialization Agreement with Merck KGaA

On October 23, 2002, the Company signed an exclusive international
commercialization agreement with Merck KGaA (Merck) to market the Niaspanand
Advicorproducts outside the United States, Canada and Japan (the Merck
Agreement). Under terms of the Merck Agreement, Merck will provide Kos up to
$61 million in licensing, milestone and reimbursement payments, including $15
million in upfront payments. Kos is responsible for obtaining initial
marketing authorization in all European countries and the supply and
manufacturing of the products.

Pursuant to the Merck Agreement, if marketing authorization is not
obtained for Niaspanor Advicorin certain countries and within certain
timeframes, Merck will have the right to terminate the agreement, and Kos will
be required to reimburse Merck for up to $12.5 million of the upfront payments.
In addition, other milestone payments payable to Kos under the Merck Agreement
are dependent on the achievement of marketing authorization of Niaspanin
certain countries, the achievement of marketing authorization of Advicorin
certain countries, and achieving certain net sales thresholds of Niaspanand
Advicor.

In 1999, Kos received marketing approval for Niaspanin the United
Kingdom, and in 2002, submitted Advicorfor marketing approval in the United
Kingdom. There is no certainty that marketing authorizations for the Niaspan
and Advicorproducts will be obtained under the mutual recognition procedures,
or, with respect to Advicor, at all, and there could be delays in the granting
of such authorizations. Consequently, Kos may be required to reimburse Merck
for up to $12.5 million of the upfront payments and may not receive any of the
milestone payments under the Merck Agreement.

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 Niaspanand Advicorproducts, or for the other products
it sells are obtained from government authorities, private health insurers, and
managed care organizations such as health maintenance organizations or HMOs.
The Company estimates that, through December 31, 2002, approximately $263.2
million, or 72.8%, of the Companys cumulative Niaspanand Advicorrevenue has
been subjected to the reimbursement rules of such organizations. 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,the Advicorproduct,or the
Companys products under development. Such cost containment measures and
potential legislative reform could affect the Companys ability to sell
Niaspan, Advicor,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 Niaspanand
Advicorfrom many third-party payors, such approvals, in the United States and
in foreign countries, may be discontinued for Niaspan, or unavailable for
Advicoror any of the Companys products under development. The unavailability
or inadequacy of third-party reimbursement for Niaspan, Advicor, or the
Companys products under development may reduce the demand for, or negatively
affect the price of, these products, which would have a material adverse effect
on the Company.

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Dependence on Key Personnel

The Companys success is dependent on the Companys ability to attract and
retain highly qualified scientific, management, and sales personnel. In April
2001, the Company hired its current President and Chief Executive Officer,
Adrian Adams. Mr. Adams succeeded Daniel M. Bell, Kos current Chairman of the
Board of Directors, as the Chief Executive Officer of the Company in January
2002. The loss of Mr. Adams as the Companys President and Chief Executive
Officer could have a material adverse effect on its operations and business.
Similarly, the loss of Mr. Bell as the Chairman of Kos Board of Directors
could have a material adverse effect on the Companys operations and business.
Due to intense competition for personnel from other companies, academic
institutions, government entities, and other organizations, the Company may be
unsuccessful 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 Kos activities, could
adversely affect its business and operating results.

Products Under Development

Although the Company has obtained clearance from the FDA to market the
Niaspanand Advicorproducts, the Company may be unsuccessful in effectively
formulating any of its other products as planned. Further, the Company may not
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 the Companys or on 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 that the Company has been issued or for which Kos has applied relating
to Niaspan, Advicorand certain of the Companys products under development are
based on, among other things, the extended-release nature of the niacin active
ingredient. If the indications treated by Niaspan, Advicorand such other
products under development could be treated using drugs without such
extended-release properties, such patents and patent applications may not
prevent the use of other niacin-based drugs for the treatment of such
indications, which would have a material adverse effect on the Company.
Further, the Company would be adversely affected if:



| |  |  | The patent applications licensed to or owned by Kos do not result in issued patents;                                                                                     
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Meaningful patent protection is not secured for any particular technology; or                                                                                            
|
| |  |  | Any patents that have been or may be issued to Kos or the
Companys licensors, including the patents covering the Companys
Niaspanproduct, are invalid or unenforceable.

In general, the U.S. patents and patent applications owned by or licensed
to Kos relate to certain extended-release niacin compositions and their methods
of use. Protection of the chemical entity is not available for the active
ingredient in Niaspan, or either of the active ingredients in Advicor.
Moreover, the active ingredient in Niaspan, niacin, is currently sold in the
United States and other markets for lipid altering and for other uses. The
additional active ingredient in Advicor, lovastatin, is also currently sold in
the United States and other markets for lipid altering. Even in jurisdictions
where the use of the active ingredients in Niaspanand Advicorfor lipid
altering and other indications may be covered by the claims

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of method-of-use and composition patents owned by or licensed to Kos,
off-label sales might occur that would be difficult to prevent through
enforcement of Kos patents, especially if another company markets the active
ingredient at a price that is less than the price of Niaspanor Advicor,
thereby potentially reducing the sales of such products.

The U.S. Patent and Trademark Office (the PTO) has issued U.S. Patent
numbers 6,129,930 and 6,080,428 to the Company with claims related to Niaspans
composition and method-of-use. In addition, on June 18, 2002, the PTO issued
U.S. Patent number 6,406,715 related to certain unique pharmacokinetic features
of Kos inventive extended-release niacin compositions, including Niaspanand
Advicor. On February 7, 1997, the Company entered into an agreement with a
generic manufacturer pursuant to which the Company and the manufacturer granted
cross-licenses to each other under their respective patents. The Company has
purchased the patents that were the subject of the cross-license agreement and
agreed to continue paying a royalty to the manufacturer on terms similar to
those contained in the cross-license agreement.

The Company has received patents and has filed patent applications
covering technologies pertaining to propellant-driven aerosol formulations that
do not contain chlorofluorocarbons. 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 that do not contain
chlorofluorocarbons. It may be argued that certain or all of the Companys
aerosol products under development may use a formulation covered by such
European or U.S. patents. If that is shown to be the case, the Company would
be prevented from making, using or selling such products unless Kos 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 in Europe or invalid or unenforceable in the United States. The
Companys development of products that may be 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.

On January 23, 2002, the Company received notice from Barr Laboratories,
Inc. (Barr) that it had filed with the FDA an Abbreviated New Drug
Application (ANDA) that would, if approved, allow Barr to market a generic
version of the Companys 1000 mg Niaspanproduct. Under the patent laws of the
United States, the filing of an ANDA for a pharmaceutical composition or method
of use that is currently protected by a patent, such as Niaspan, constitutes an
act of infringement. As a result, on March 4, 2002, the Company filed a patent
infringement lawsuit against Barr in the Southern District of New York
(SDNY). On March 11, 2002, the Company filed an amended complaint (the
Amended Complaint). In this lawsuit, the Company asserts that Barr has
infringed the 428 and 930 patents. Under the FDA statute, the filing of a
patent infringement suit by the Company suspends the ANDA approval process for
30 months or until the infringement suit is resolved. On March 25, 2002, Barr
answered the Amended Complaint by denying that the 428 and 930 patents are
valid and infringed, and seeking a declaratory judgment to that effect. On
August 19, 2002, Barr amended its answer to add counterclaims requesting a
declaratory judgment that two other patents owned by Kos, U.S. patent number
5,126,145 and 5,268,181, are not infringed, and that the 181 patent is
invalid.

On July 9, 2002, the Company received notice from Barr that it had filed
an ANDA with the FDA that would, if approved, allow Barr to market generic
versions of the Companys 500 mg and 750 mg Niaspanproducts. On August 13,
2002, the Company filed a second patent infringement lawsuit against Barr also
in the SDNY. Again, the Company asserted that Barr has infringed the 428 and
930 patents. On September 3, 2002, Barr answered the complaint by denying
infringement and alleging that the patents are invalid. Barr
also sought a declaratory judgment that the 428, 930, 145, and 181 patents
are not infringed, and that the 428, 930, and 181 patents are invalid. The
two cases were consolidated on September 23, 2002.

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On September 30, 2002, the Company received notice from Barr that it had
filed a Supplemental Paragraph IV Certification relating to Kos 715 patent.
The Company filed a third lawsuit on November 12, 2002, against Barr in the
SDNY asserting infringement of this patent. On December 3, 2002, Barr answered
the complaint by denying that the 715 patent is valid and infringed, and
enforceable, and seeking a declaratory judgment of invalidity. Barr also
sought a declaratory judgment that the 428, 930, 145, and 181 patents are
not infringed, and that the 428, 930 and 181 patents are invalid. The third
case was consolidated with the first two on January 23, 2003. On March 4,
2003, Kos replied to Barrs declaratory judgment counterclaims by denying that
Kos patents are invalid or not infringed. Kos also sought a declaratory
judgment that one or more of Barrs products will infringe the 145 and 181
patents.

Because the patent positions of pharmaceutical and biotechnology companies
are highly uncertain and involve complex legal and factual questions, the
patents owned and licensed by Kos, or any future patents, may not prevent other
companies from developing competing products or ensure that others will not be
issued patents that may prevent the sale of the Companys products or require
licensing and the payment of significant fees or royalties. Furthermore, to the
extent that (1) any of the Companys future products or methods are not
patentable, (2) such products or methods infringe upon the patents of third
parties, or (3) the Companys patents or future patents fail to give Kos an
exclusive position in the subject matter to which those patents relate, the
Company will be adversely affected. The Company may be unable to avoid
infringement of third party patents and may have to obtain a license, or defend
an infringement action and challenge the validity of the patents in court. A
license may be unavailable on terms and conditions acceptable to the Company,
if at all. Patent litigation is costly and time consuming, and the Company may
be unable to prevail in any such patent litigation or devote sufficient
resources to even pursue such litigation. If the Company does not obtain a
license under such patents, or if it is found liable for infringement and if it
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.

Government Regulation; No Assurances of Regulatory Approval

The Companys research and development activities, preclinical studies,
clinical trials, and the manufacturing and marketing of the Companys products
are subject to extensive regulation by the FDA. The drug development and
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, despite such consultation, the FDA
may find the clinical trials inadequate or not well-controlled. They may also
reject the results of those trials altogether. 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. Thus,
regulatory reviews may be untimely and regulatory approvals could be denied for
products developed by the Company. Even if regulatory approval of a product is
obtained, the approval will 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 in the United States or abroad can, among
other things, result in fines, suspensions of regulatory approvals, seizure of
products, product recalls, operating restrictions, and criminal prosecution,
any of which could have a material adverse effect on Kos.

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Outside the United States, the Companys research and development
activities, preclinical studies, clinical trials, and the manufacturing and
marketing of the Companys products are subject to extensive foreign
regulation. In the European Union, the approval of new drugs is governed by
the central approval or mutual recognition procedures of the European Medicines
Evaluation Agency (EMEA). In 1999, the Company received marketing approval
for Niaspanin the United Kingdom, and in 2002, submitted Advicorfor marketing
approval in the United Kingdom. Pursuant to the Merck Agreement, the Company
is responsible for obtaining initial marketing authorization for the Niaspanor
Advicorproducts in all countries in the European Union. There could be delays
or rejections in applications for regulatory approval in Europe and in other
countries, as well a requirement of completion of additional preclinical and
clinical studies. The process of obtaining regulatory approval could be
costly. In addition, competitors of the Company may obtain regulatory approval
for similar products. Even if regulatory approval of a product is obtained,
the approval will be limited as to the indicated uses for which it may be
promoted or marketed, and the product will be subject to a continual regulatory
review and inspections, which, if previously unknown problems are discovered,
may result in restrictions on the products and manufacturers, which may require
a withdrawal of the product from the market. In addition, individual countries
will have pricing, third party reimbursement and labeling approvals necessary
for the manufacture, distribution, use and sale of products with which the
Company must comply. Moreover, because the legislative and regulatory
environment continues to evolve in the U.S. and abroad, it is difficult to
predict the impact of legislation and regulations on the Company and its
products.

In July 2001, the Division of Drug Marketing, Advertising, and
Communication at the FDA issued a warning letter to Kos related to an
advertisement the Company ran in a healthcare section of TIME magazine. The
advertisement, which the Company intended to run only one time, was designed to
increase awareness of the Companys Niaspanproduct. In its warning letter,
the FDA objected to the advertisement on the grounds that the advertisement
failed to reflect a fair balance of the contraindications, warnings,
precautions, and side effects of the Companys Niaspanproduct. The FDA also
objected to the advertisement on the grounds that the advertisement overstated
the efficacy of the Niaspanproduct in light of its approved labeling.
Subsequent to this event, the Company reached agreement with the FDA to remedy
their objections by placing a new advertisement with content that adequately
characterizes the risks and other safety implications for the product.

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 Kos. However, non-compliance with such environmental
and health and safety laws and regulations in the future would require Kos to
incur significant costs to comply. 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 its resources and materially adversely affect the
Companys business, financial condition and results of operations.

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Limited Manufacturing Experience; Risk of Scale-Up

The Company currently manufactures the Niaspanand Advicorproducts in one
manufacturing plant in Edison, New Jersey that has been inspected and approved
by the FDA for both Niaspanand Advicor. Although both products have been
approved for manufacture in the Edison facility and are produced in substantial
compliance with current good manufacturing practice regulations as required by
the FDA for the manufacture of pharmaceutical products, the Company has limited
experience in manufacturing products for commercial sale in the Edison facility
and inefficiencies may exist in the manufacturing process. The Company may need
to further scale-up certain of the Companys current manufacturing processes to
achieve production levels consistent with the commercial sale of its products
for both the U.S. and international use. 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 current
good manufacturing practices regulations and other regulations prescribed by
various regulatory agencies including the Occupational Safety and Health
Administration and the Environmental Protection Agency. The Companys failure
to successfully further scale-up, expand in connection with manufacture for
commercial sale, or modify the Companys manufacturing process or to comply
with current good manufacturing practices regulations and other regulations
could delay the approval of its products under development or limit its ability
to meet the demand for its products, any of which would have a material adverse
effect on Kos. Such occurrences may require Kos to acquire alternative means
of manufacturing the Companys products, which may not be available 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 the active
ingredients in Niaspanand Advicor, are currently sourced from single qualified
suppliers. The Company has not established arrangements with alternative
suppliers for these ingredients, although the Company believes that it can
obtain an alternative supply of lovastatin, one of the two active ingredients
in Advicor, if necessary. Although the Company has maintained a business
relationship with its niacin supplier since 1993, and has not experienced
difficulty to date in acquiring niacin, or other materials for product
development, additional product validations and regulatory submissions would be
required if supply interruptions were to occur in the future or if the Company
had to obtain substitute materials. Similarly, the Companys source for
lovastatin is relatively inexperienced as a supplier of such ingredient.
Although the Company has maintained a business relationship with its lovastatin
supplier since 1997, and this supplier is experienced as a supplier of other
pharmaceutical grade active ingredients, this supplier may be unable to meet
the Companys requirements for lovastatin on a sustained basis, at an
acceptable quality standard, or at a commercially viable price. In such an
event, the Company would be forced to obtain an alternative supplier of
lovastatin. Any interruption of raw material supply, for any reason, in any of
the required ingredients for the Companys products could have a material
adverse effect on Kos ability to manufacture its products or to obtain or
maintain regulatory approval of such products.

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Risk of Product Liability Claims; No Assurance of Adequate Insurance

Manufacturing, marketing, selling, and testing Niaspan, Advicor, and the
Companys products under development entails a risk of product liability. On
August 8, 2001, Bayer AG, removed its statin product, Baycol, from the market
because of multiple deaths attributed to a rare form of a muscle disorder
called rhabdomyolysis. As a result of the removal of Baycol from the market,
however, the side affects of statin products have been subject to increased
scrutiny. Although the statin component of Advicorhas been approved by the
FDA and marketed for nearly 15 years and is a different drug compound than that
which was used in Baycol, to the extent that patients who take Advicordevelop
serious adverse side affects, such as rhabdomyolysis, or associate the adverse
events experienced by some Baycol patients with all other statin products,
including the Companys Advicorproduct, it would have a material adverse
effect on the Companys business. The Company could be subject to product
liability claims in the event that its 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 its products. While the Company currently maintains liability
insurance, the Company may not be able to maintain such insurance at a
commercially reasonable cost. If a successful claim were made against the
Company, and the amount of insurance were inadequate to cover the costs of
defending against or paying such a claim, or the damages payable by Kos, the
Company would experience a material adverse effect on its business, financial
condition, and results of operations and on the price of the Companys Common
Stock.

Certain Registration Rights

The Company has granted certain registration rights to the Companys
controlling shareholder, Mr. Jaharis, his spouse, and their transferees, and to
Kos Investments, Inc. and Kos Holdings, Inc., which entitle such persons and
entities to cause the Company to effect an unlimited number of registrations
under the Securities Act of 1933 of sales of up to an aggregate of 24,753,369
shares of the Companys Common Stock owned or controlled by such persons or
entities or that could be acquired by such person or entities upon exercise or
conversion of securities they currently hold. These registration rights
generally would also permit the holders of such rights to include shares in any
registration statement otherwise filed by Kos. By exercising these
registration rights, these persons and 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 the Companys
affiliates) 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.

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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 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, 2000 |  |   |       |  |  |   |       | 
|                             |  |   |       |  |  |   |       | 
|First Quarter                |  | $ | 22.13 |  |  | $ | 5.30  | 
|Second Quarter               |  |   | 18.56 |  |  |   | 10.00 | 
|Third Quarter                |  |   | 17.88 |  |  |   | 10.75 | 
|Fourth Quarter               |  |   | 25.13 |  |  |   | 13.63 | 

|                             |  |   |       |  |  |   |       | 
|---------------------------- |  | - | ----- |  |  | - | ----- | 
|Year Ended December 31, 2001 |  |   |       |  |  |   |       | 
|                             |  |   |       |  |  |   |       | 
|First Quarter                |  | $ | 21.13 |  |  | $ | 14.31 | 
|Second Quarter               |  |   | 38.00 |  |  |   | 16.75 | 
|Third Quarter                |  |   | 40.69 |  |  |   | 23.45 | 
|Fourth Quarter               |  |   | 36.90 |  |  |   | 23.45 | 

|                             |  |   |       |  |  |   |       | 
|---------------------------- |  | - | ----- |  |  | - | ----- | 
|Year Ended December 31, 2002 |  |   |       |  |  |   |       | 
|                             |  |   |       |  |  |   |       | 
|First Quarter                |  | $ | 35.27 |  |  | $ | 19.30 | 
|Second Quarter               |  |   | 29.16 |  |  |   | 15.50 | 
|Third Quarter                |  |   | 20.70 |  |  |   | 10.03 | 
|Fourth Quarter               |  |   | 24.16 |  |  |   | 10.38 | 

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 Niaspanand
Advicorproducts or to products under development by Kos 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 Niaspanproduct and the Advicorproduct after its launch 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 Companys
Common Stock.

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Anti-Takeover Provisions

Certain provisions of the Companys Articles of Incorporation and Bylaws
generally permit removal of directors only for cause by a 60% vote of the
shareholders, require a 60% vote of the shareholders to amend the Companys
Articles of Incorporation and 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. Certain of such provisions also allow
the Board of Directors to authorize the issuance of Preferred Stock with rights
superior to those of the Common Stock. Moreover, provisions of the Florida
Business Corporation Act, to which the Company is subject, prohibit the voting
of shares that are acquired in certain takeovers without the approval of the
Board of Directors or the approval by a majority of the corporations voting
shares. Accordingly, the forgoing provisions could prevent the removal of the
Companys current directors and management, or discourage a third party from
attempting to acquire, or make it more difficult for a third party to acquire,
control of Kos.

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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 United States. The Company does not use, nor has
it historically used, derivative financial instruments to manage or reduce
market risk. At December 31, 2002, the Company had $84 million of variable
rate indebtedness bearing interest at the prime rate (4.25% at December 31,
2002).




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                                                     |  |      | 42 | 
|Report of Predecessor Independent Certified Public Accountants                                         |  |      | 43 | 
|Consolidated Balance Sheets at December 31, 2002 and 2001                                              |  |      | 44 | 
|Consolidated Statements of Operations for the years ended
December 31, 2002, 2001, and 2000            |  |      | 45 | 
|Consolidated Statements of Shareholders Deficit for
the years ended December 31, 2002, 2001, and 2000 |  |      | 46 | 
|Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000            |  |      | 47 | 
|Notes to Consolidated Financial Statements                                                             |  |      | 48 | 
|Financial Statement Schedule:*                                                                         |  |      |    | 
|Report of Independent Certified Public Accountants on Schedule II                                      |  |      | 68 | 
|Report of Predecessor Independent Certified Public Accountants on Schedule II                          |  |      | 69 | 
|Schedule II. Valuation and Qualifying Accounts                                                         |  |      | 70 | 



---

|* |  | 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.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Shareholders of Kos Pharmaceuticals, Inc.:

We have audited the consolidated balance sheet of Kos Pharmaceuticals,
Inc. (a Florida corporation) and subsidiaries as of December 31, 2002, and the
related consolidated statements of operations, shareholders deficit and cash
flows for the year then ended. 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 audit. The financial
statements of Kos Pharmaceuticals, Inc. as of December 31, 2001, and for the
years ended December 31, 2001 and 2000, were audited by other auditors who have
ceased operations and whose report dated February 7, 2002, expressed an
unqualified opinion on those statements.

We conducted our audit 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kos
Pharmaceuticals, Inc. and subsidiaries as of December 31, 2002, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the
United States.

/s/ Ernst & Young LLP

Miami, Florida,
February 12, 2003, except with respect to the matter discussed in the fourth
paragraph of Note 13, as to which the date is March 4, 2003

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The following audit report of Arthur Andersen LLP is a copy of the original
report dated February 7, 2002 included in our Annual Report on Form 10-K for
the year ended December 31, 2001, and has not been reissued by Arthur Andersen
LLP. We are including this copy of the Arthur Andersen LLP audit report
pursuant to Rule 2-02(e) of Regulation S-X under the Securities Act of 1933.

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Shareholders 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,
2001 and 2000, and the related consolidated statements of operations,
shareholders deficit and cash flows for each of the three years in the period
ended December 31, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

ARTHUR ANDERSEN LLP

Miami, Florida,
February 7, 2002.

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KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                     |                                                                                                                                                                    |                                             |            |              |             |      |            |              |             |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------- | ---------- | ------------ | ----------- | ---- | ---------- | ------------ | ----------- | -
|                                                     |                                                                                                                                                                    |                                             |            | December 31,
|                                                     |                                                                                                                                                                    |                                             |            |             
|                                                     |                                                                                                                                                                    |                                             |            | 2002         |             | 2001
|                                                     |                                                                                                                                                                    |                                             |            |              |             |     
|ASSETS                                               |                                                                                                                                                                    |                                             |            |              |             |      |            |             
|Current Assets:                                      |                                                                                                                                                                    |                                             |            |              |             |      |            |             
|                                                     | Cash and cash equivalents                                                                                                                                          |                                             | $          | 19,572,046   |             |      | $          | 45,318,551   |            
|                                                     | Trade accounts receivable, net                                                                                                                                     |                                             |            | 24,087,997   |             |      |            | 12,441,002   |            
|                                                     | Inventories                                                                                                                                                        |                                             |            | 5,927,014    |             |      |            | 7,732,169    |            
|                                                     | Prepaid expenses and other current assets                                                                                                                          |                                             |            | 5,894,293    |             |      |            | 7,966,458    |            
|                                                     |                                                                                                                                                                    |                                             |            |              |             |      |            |              |            
|                                                     |                                                                                                                                                                    | Total current assets                        |            |              | 55,481,350  |      |            |              | 73,458,180  |  
|Fixed Assets, net                                    |                                                                                                                                                                    |                                             | 12,527,801 |              |             |      | 6,878,752  |             
|Other Assets                                         |                                                                                                                                                                    |                                             | 1,431,636  |              |             |      | 2,603,871  |             
|                                                     |                                                                                                                                                                    |                                             |            |              |             |      |            |              |            
|                                                     |                                                                                                                                                                    | Total assets                                |            | $            | 69,440,787  |      |            | $            | 82,940,803  |  
|                                                     |                                                                                                                                                                    |                                             |            |              |             |      |            |              |            
|LIABILITIES AND SHAREHOLDERS                        |                                                                                                                                                                    |                                             |            |              |             |      |            |             
|                                                     | DEFICIT                                                                                                                                                            |                                             |            |              |             |      |            |              |            
|Current Liabilities:                                 |                                                                                                                                                                    |                                             |            |              |             |      |            |             
|                                                     | Accounts payable                                                                                                                                                   |                                             | $          | 7,187,521    |             |      | $          | 4,697,354    |            
|                                                     | Accrued expenses                                                                                                                                                   |                                             |            | 34,548,708   |             |      |            | 24,856,426   |            
|                                                     | Advance payments from customers                                                                                                                                    |                                             |            | 9,128,668    |             |      |            | 6,691,192    |            
|                                                     | Advance payment received on license agreement                                                                                                                      |                                             |            | 9,203,125    |             |      |            |             |            
|                                                     | Current portion of notes payable to Shareholder                                                                                                                    |                                             |            | 50,000,000   |             |      |            | 10,000,000   |            
|                                                     | Current portion of capital lease obligations                                                                                                                       |                                             |            | 56,989       |             |      |            | 53,253       |            
|                                                     |                                                                                                                                                                    |                                             |            |              |             |      |            |              |            
|                                                     |                                                                                                                                                                    | Total current liabilities                   |            |              | 110,125,011 |      |            |              | 46,298,225  |  
|                                                     |                                                                                                                                                                    |                                             |            |              |             |      |            |              |            
|Notes Payable to Shareholder, net of current portion |                                                                                                                                                                    |                                             | 34,000,000 |              |             |      | 95,000,000 |             
|Capital Lease Obligations, net of current portion    |                                                                                                                                                                    |                                             | 24,910     |              |             |      | 81,899     |             
|                                                    
|Commitments and Contingencies (Notes 1, 11 and 13)   |                                                                                                                                                                    |                                             |            |              |             |      |            |             
|                                                    
|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,
20,807,859 and 20,492,371 shares issued and outstanding as of
December 31, 2002 and 2001, respectively |                                             |            | 208,079      |             |      |            | 204,924      |            
|                                                     | Additional paid-in capital                                                                                                                                         |                                             |            | 219,138,285  |             |      |            | 214,895,089  |            
|                                                     | Restricted stock grant                                                                                                                                             |                                             |            | (694,521     | )           |      |            | (994,521     | )          
|                                                     | Accumulated deficit                                                                                                                                                |                                             |            | (293,360,977 | )           |      |            | (272,544,813 | )          
|                                                     |                                                                                                                                                                    |                                             |            |              |             |      |            |              |            
|                                                     |                                                                                                                                                                    | Total shareholders deficit                 |            |              | (74,709,134 | )    |            |              | (58,439,321 | )
|                                                     |                                                                                                                                                                    |                                             |            |              |             |      |            |              |            
|                                                     |                                                                                                                                                                    | Total liabilities and shareholders deficit |            | $            | 69,440,787  |      |            | $            | 82,940,803  |  
|                                                     |                                                                                                                                                                    |                                             |            |              |             |      |            |              |            

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

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KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                  |                                     |                              |             |                                 |             |      |             |            |             |   |             |            |             |  
|--------------------------------------------------------------------------------- | ----------------------------------- | ---------------------------- | ----------- | ------------------------------- | ----------- | ---- | ----------- | ---------- | ----------- | - | ----------- | ---------- | ----------- | -
|                                                                                  |                                     |                              |             | For the Year Ended December 31,
|                                                                                  |                                     |                              |             |                                
|                                                                                  |                                     |                              |             | 2002                            |             | 2001 |             | 2000      
|                                                                                  |                                     |                              |             |                                 |             |      |             |           
|Revenues, net                                                                     |                                     | $                            | 172,692,718 |                                 |             | $    | 91,447,043  |            |             | $ | 60,173,940  |           
|Cost of sales                                                                     |                                     |                              | 15,361,756  |                                 |             |      | 7,645,600   |            |             |   | 5,931,637   |           
|                                                                                  |                                     |                              |             |                                 |             |      |             |            |             |   |             |           
|                                                                                  |                                     |                              | 157,330,962 |                                 |             |      | 83,801,443  |            |             |   | 54,242,303  |           
|                                                                                  |                                     |                              |             |                                 |             |      |             |            |             |   |             |           
|Operating expenses:                                                               |                                     |                              |             |                                 |             |      |             |            |             |   |             |           
|                                                                                  | Research and development            |                              |             | 43,980,867                      |             |      |             | 30,974,279 |             |   |             | 26,458,963 |            
|                                                                                  | Selling, general and administrative |                              |             | 130,144,643                     |             |      |             | 83,587,439 |             |   |             | 56,831,657 |            
|                                                                                  |                                     |                              |             |                                 |             |      |             |            |             |   |             |           
|                                                                                  |                                     | Total operating expenses     |             |                                 | 174,125,510 |      |             |            | 114,561,718 |   |             |            | 83,290,620  |  
|                                                                                  |                                     |                              |             |                                 |             |      |             |            |             |   |             |           
|Loss from operations                                                              |                                     |                              | (16,794,548 | )                               |             |      | (30,760,275 | )          |             |   | (29,048,317 | )         
|                                                                                  |                                     |                              |             |                                 |             |      |             |            |             |   |             |           
|Other:                                                                            |                                     |                              |             |                                 |             |      |             |            |             |   |             |           
|                                                                                  | Interest income, net                |                              |             | 160,274                         |             |      |             | 241,748    |             |   |             | 323,400    |            
|                                                                                  | Interest expense-related parties    |                              |             | (4,039,550                      | )           |      |             | (6,080,572 | )           |   |             | (6,560,288 | )          
|                                                                                  | Other income (expense)              |                              |             | (142,340                        | )           |      |             | 38,985,340 |             |   |             | 20,183     |            
|                                                                                  |                                     |                              |             |                                 |             |      |             |            |             |   |             |           
|                                                                                  |                                     | Total other income (expense) |             |                                 | (4,021,616  | )    |             |            | 33,146,516  |   |             |            | (6,216,705  | )
|                                                                                  |                                     |                              |             |                                 |             |      |             |            |             |   |             |           
|                                                                                  |                                     | Net income (loss)            |             | $                               | (20,816,164 | )    |             | $          | 2,386,241   |   |             | $          | (35,265,022 | )
|                                                                                  |                                     |                              |             |                                 |             |      |             |            |             |   |             |           
|Basic earnings (loss) per share of Common Stock                                   |                                     | $                            | (1.01       | )                               |             | $    | 0.12        |            |             | $ | (1.84       | )         
|Diluted earnings (loss) per share of Common Stock                                 |                                     | $                            | (1.01       | )                               |             | $    | 0.10        |            |             | $ | (1.84       | )         
|                                                                                 
|Weighted average shares of Common Stock and
Common Stock equivalents outstanding: |                                     |                              |             |                                 |             |      |             |            |             |   |             |           
|                                                                                  |                                     | Basic                        |             |                                 | 20,582,205  |      |             |            | 20,221,089  |   |             |            | 19,202,877  |  
|                                                                                  |                                     | Diluted                      |             |                                 | 20,582,205  |      |             |            | 22,798,632  |   |             |            | 19,202,877  |  

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

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KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIT

|                                                                |  |        |         |         |  |             |             |             |  |       |            |   |  |   |              |   |  |   |             |  
|--------------------------------------------------------------- |  | ------ | ------- | ------- |  | ----------- | ----------- | ----------- |  | ----- | ---------- | - |  | - | ------------ | - |  | - | ----------- | -
|                                                                |  |        |         |         |  | Additional  |             |             |  |       |            |   |  |   |              |   |  |  
|                                                                |  | Common |         | Paid-in |  | Restricted  |             | Accumulated |  |       |            |  
|                                                                |  | Stock  |         | Capital |  | Stock Grant |             | Deficit     |  | Total
|                                                                |  |        |         |         |  |             |             |             |  |      
|Balance at December 31, 1999                                    |  | $      | 180,260 |         |  | $           | 186,291,218 |             |  | $     |           |   |  | $ | (239,666,032 | ) |  | $ | (53,194,554 | )
|                                                               
|Common Stock issued to employees
under Kos Savings Plan         |  |        | 390     |         |  |             | 535,884     |             |  |       |           |   |  |   |             |   |  |   | 536,274     |  
|Issuance of Common Stock to a
third party                       |  |        | 12,500  |         |  |             | 19,987,500  |             |  |       |           |   |  |   |             |   |  |   | 20,000,000  |  
|Issuance of Common Stock to employees
under Stock Purchase Plan |  |        | 1,591   |         |  |             | 717,447     |             |  |       |           |   |  |   |             |   |  |   | 719,038     |  
|Exercise of stock options                                       |  |        | 4,730   |         |  |             | 2,109,672   |             |  |       |           |   |  |   |             |   |  |   | 2,114,402   |  
|Net loss                                                        |  |        |        |         |  |             |            |             |  |       |           |   |  |   | (35,265,022  | ) |  |   | (35,265,022 | )
|                                                                |  |        |         |         |  |             |             |             |  |       |            |   |  |   |              |   |  |   |             |  
|Balance at December 31, 2000                                    |  |        | 199,471 |         |  |             | 209,641,721 |             |  |       |           |   |  |   | (274,931,054 | ) |  |   | (65,089,862 | )
|                                                               
|Common Stock issued to employees
under Kos Savings Plan         |  |        | 245     |         |  |             | 586,627     |             |  |       |           |   |  |   |             |   |  |   | 586,872     |  
|Issuance of Common Stock to employees
under Stock Purchase Plan |  |        | 795     |         |  |             | 1,149,941   |             |  |       |           |   |  |   |             |   |  |   | 1,150,736   |  
|Exercise of stock options                                       |  |        | 3,746   |         |  |             | 2,319,443   |             |  |       |           |   |  |   |             |   |  |   | 2,323,189   |  
|Restricted stock grant                                          |  |        | 667     |         |  |             | 1,197,357   |             |  |       | (1,198,024 | ) |  |   |             |   |  |   |            |  
|Compensation expense on restricted
Common Stock grant           |  |        |        |         |  |             |            |             |  |       | 203,503    |   |  |   |             |   |  |   | 203,503     |  
|Net income                                                      |  |        |        |         |  |             |            |             |  |       |           |   |  |   | 2,386,241    |   |  |   | 2,386,241   |  
|                                                                |  |        |         |         |  |             |             |             |  |       |            |   |  |   |              |   |  |   |             |  
|Balance at December 31, 2001                                    |  |        | 204,924 |         |  |             | 214,895,089 |             |  |       | (994,521   | ) |  |   | (272,544,813 | ) |  |   | (58,439,321 | )
|                                                               
|Common Stock issued to employees
under Kos Savings Plan         |  |        | 424     |         |  |             | 760,891     |             |  |       |           |   |  |   |             |   |  |   | 761,315     |  
|Issuance of Common Stock to employees
under Stock Purchase Plan |  |        | 770     |         |  |             | 1,624,184   |             |  |       |           |   |  |   |             |   |  |   | 1,624,954   |  
|Exercise of stock options                                       |  |        | 1,961   |         |  |             | 1,646,621   |             |  |       |           |   |  |   |             |   |  |   | 1,648,582   |  
|Compensation expense on restricted
Common Stock grant           |  |        |        |         |  |             |            |             |  |       | 300,000    |   |  |   |             |   |  |   | 300,000     |  
|Compensation cost on Common
Stock warrants award                |  |        |        |         |  |             | 211,500     |             |  |       |           |   |  |   |             |   |  |   | 211,500     |  
|Net loss                                                        |  |        |        |         |  |             |            |             |  |       |           |   |  |   | (20,816,164  | ) |  |   | (20,816,164 | )
|                                                                |  |        |         |         |  |             |             |             |  |       |            |   |  |   |              |   |  |   |             |  
|Balance at December 31, 2002                                    |  | $      | 208,079 |         |  | $           | 219,138,285 |             |  | $     | (694,521   | ) |  | $ | (293,360,977 | ) |  | $ | (74,709,134 | )
|                                                                |  |        |         |         |  |             |             |             |  |       |            |   |  |   |              |   |  |   |             |  

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

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KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                  |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |            |            |             |           |            |             |  
|------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | --------------------------------------------- | ---------------------------------------------------- | --------- | ------------------------------- | ----------- | ---------- | --------- | ---------- | ---------- | ----------- | --------- | ---------- | ----------- | -
|                                                  |                                                                                                                                     |                                                  |                                               |                                                      |           | For the Year Ended December 31,
|                                                  |                                                                                                                                     |                                                  |                                               |                                                      |           |                                
|                                                  |                                                                                                                                     |                                                  |                                               |                                                      |           | 2002                            |             | 2001       |           | 2000      
|                                                  |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |           
|Cash Flows from Operating Activities:             |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |            |            |            
|                                                  | Net Income (Loss)                                                                                                                   |                                                  | $                                             | (20,816,164                                          | )         |                                 | $           | 2,386,241  |           |            | $          | (35,265,022 | )        
|                                                  | Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities -
Provision for doubtful accounts |                                                  |                                               | 150,000                                              |           |                                 |             | 75,000     |           |            |            | 50,000      |          
|                                                  |                                                                                                                                     | Depreciation and amortization                    |                                               |                                                      | 2,110,538 |                                 |             |            | 3,489,113 |            |            |             | 3,254,338 |           
|                                                  |                                                                                                                                     | Provision for inventory obsolescence             |                                               |                                                      | 480,000   |                                 |             |            | 1,050,000 |            |            |             | 420,000   |           
|                                                  |                                                                                                                                     | Loss (Gain) from disposals of fixed assets       |                                               |                                                      | 131,806   |                                 |             |            | 140,560   |            |            |             | (20,183   | )         
|                                                  |                                                                                                                                     | Common Stock issued to employees                 |                                               |                                                      | 761,315   |                                 |             |            | 586,872   |            |            |             | 536,274   |           
|                                                  |                                                                                                                                     | Compensation expense on restricted stock grant   |                                               |                                                      | 300,000   |                                 |             |            | 203,503   |            |            |             |          |           
|                                                  |                                                                                                                                     | Compensation cost on Common Stock warrants award |                                               |                                                      | 211,500   |                                 |             |            |          |            |            |             |          |           
|                                                  |                                                                                                                                     | Changes in operating assets and liabilities:     |                                               |                                                      |           |                                 |             |            |           |            |            |             |           |           
|                                                  |                                                                                                                                     |                                                  | Trade accounts receivable                     |                                                      |           | (11,796,995                     | )           |            |           | (2,913,268 | )          |             |           | (2,675,762 | )          
|                                                  |                                                                                                                                     |                                                  | Inventories                                   |                                                      |           | 1,325,155                       |             |            |           | (6,956,116 | )          |             |           | (1,160,204 | )          
|                                                  |                                                                                                                                     |                                                  | Prepaid expenses and other current assets     |                                                      |           | 2,072,165                       |             |            |           | (4,693,732 | )          |             |           | (662,314   | )          
|                                                  |                                                                                                                                     |                                                  | Other assets                                  |                                                      |           | 10,592                          |             |            |           | 178,150    |            |             |           | (168,728   | )          
|                                                  |                                                                                                                                     |                                                  | Accounts payable                              |                                                      |           | 2,490,167                       |             |            |           | 1,684,493  |            |             |           | 192,021    |            
|                                                  |                                                                                                                                     |                                                  | Accrued expenses                              |                                                      |           | 9,692,282                       |             |            |           | 9,502,707  |            |             |           | 2,903,684  |            
|                                                  |                                                                                                                                     |                                                  | Advance payments from customers               |                                                      |           | 2,437,476                       |             |            |           | 2,368,732  |            |             |           | 2,342,460  |            
|                                                  |                                                                                                                                     |                                                  | Advance payment received on license agreement |                                                      |           | 9,203,125                       |             |            |           |           |            |             |           |           |            
|                                                  |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |            |            |             |          
|                                                  |                                                                                                                                     |                                                  |                                               | Net cash provided by (used in) operating activities  |           |                                 | (1,237,038  | )          |           |            | 7,102,255  |             |           |            | (30,253,436 | )
|                                                  |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |            |            |             |          
|Cash Flows from Investing Activities:             |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |            |            |            
|                                                  | Capital expenditures and deposits on fixed
assets to be acquired                                                                    |                                                  |                                               | (6,729,750                                           | )         |                                 |             | (4,302,309 | )         |            |            | (638,252    | )        
|                                                  |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |            |            |             |          
|                                                  |                                                                                                                                     |                                                  |                                               | Net cash used in investing activities                |           |                                 | (6,729,750  | )          |           |            | (4,302,309 | )           |           |            | (638,252    | )
|                                                  |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |            |            |             |          
|Cash Flows from Financing Activities:             |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |            |            |            
|                                                  | Proceeds from issuance of Common Stock to employees
under Stock Purchase Plan                                                       |                                                  |                                               | 1,624,954                                            |           |                                 |             | 1,150,736  |           |            |            | 719,038     |          
|                                                  | Net proceeds from issuance of Common Stock
to a third party                                                                         |                                                  |                                               |                                                     |           |                                 |             |           |           |            |            | 20,000,000  |          
|                                                  | Net proceeds from exercise of stock options                                                                                         |                                                  |                                               | 1,648,582                                            |           |                                 |             | 2,323,189  |           |            |            | 2,114,402   |          
|                                                  | Borrowings under Notes Payable to Shareholder                                                                                       |                                                  |                                               | 18,000,000                                           |           |                                 |             | 33,000,000 |           |            |            | 30,000,000  |          
|                                                  | Payments of Note Payable to Shareholder                                                                                             |                                                  |                                               | (39,000,000                                          | )         |                                 |             |           |           |            |            | (20,000,000 | )        
|                                                  | Payments under capital lease obligations                                                                                            |                                                  |                                               | (53,253                                              | )         |                                 |             | (80,757    | )         |            |            | (152,641    | )        
|                                                  |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |            |            |             |          
|                                                  |                                                                                                                                     |                                                  |                                               | Net cash provided by (used in) financing activities  |           |                                 | (17,779,717 | )          |           |            | 36,393,168 |             |           |            | 32,680,799  |  
|                                                  |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |            |            |             |          
|                                                  |                                                                                                                                     |                                                  |                                               | Net increase (decrease) in cash and cash equivalents |           |                                 | (25,746,505 | )          |           |            | 39,193,114 |             |           |            | 1,789,111   |  
|Cash and Cash Equivalents, beginning of period    |                                                                                                                                     |                                                  | 45,318,551                                    |                                                      |           |                                 | 6,125,437   |            |           |            | 4,336,326  |            
|                                                  |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |            |            |             |          
|Cash and Cash Equivalents, end of period          |                                                                                                                                     | $                                                | 19,572,046                                    |                                                      |           | $                               | 45,318,551  |            |           | $          | 6,125,437  |            
|                                                  |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |            |            |             |          
|Supplemental Disclosure of Cash Flow Information: |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |            |            |            
|                                                  | Interest paid                                                                                                                       |                                                  | $                                             | 3,833,472                                            |           |                                 | $           | 6,050,458  |           |            | $          | 6,524,688   |          
|                                                  | Income taxes paid                                                                                                                   |                                                  |                                               | 130,702                                              |           |                                 |             |           |           |            |            |            |          
|Supplemental Disclosure of Non-cash Information:  |                                                                                                                                     |                                                  |                                               |                                                      |           |                                 |             |            |           |            |            |            
|                                                  | Acquisition of equipment under capital lease obligations                                                                            |                                                  | $                                             |                                                     |           |                                 | $           | 166,764    |           |            | $          |            |          

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

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KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   General

Kos Pharmaceuticals, Inc. (Kos or the Company) develops prescription
pharmaceutical products principally for the cardiovascular and respiratory
markets.

On July 28, 1997, the Company received clearance from the U.S. Food and
Drug Administration (FDA) to market Niaspanfor the treatment of mixed lipid
disorders, a condition in which a patient is observed to have several
abnormalities in the levels of the fatlike substances, called lipids, that
contribute to heart disease. Niaspanis the only once-a-day and the first
extended-release formulation of any type of product with niacin as the active
ingredient ever approved by the FDA for the treatment of mixed lipid disorders.
Niaspanis indicated for the following: (i) reduce elevated total cholesterol,
low-density lipoprotein cholesterol, commonly referred to as LDL or bad
cholesterol, and apolipoprotein B, another lipid particle, and increase low
high-density lipoprotein cholesterol, commonly referred to as HDL or good
cholesterol; (ii) reduce very high serum triglycerides, which are fatty
substances in the blood that contribute to heart disease; (iii) reduce elevated
total and LDL cholesterol when used in combination with a bile-binding resin,
which is a different class of drugs that reduces bad cholesterol; (iv) reduce
recurrent nonfatal myocardial infarction, or the recurrence of nonfatal heart
attacks; and (v) promote the regression or slow the progression of
atherosclerosis, which is a medical condition involving the narrowing of the
arteries to the heart, when combined with bile-binding resins. Additionally,
Niaspansprescribing information references its ability to significantly
reduce lipoprotein (a), which is referred to as the very bad cholesterol and
is an independent risk factor for coronary heart disease.

The Company is currently developing several other products in solid-dose
and inhaled dosage forms. On January 28, 2002, the Company launched Advicor, a
new solid-dose drug containing Niaspanand lovastatin, which is a currently
marketed cholesterol-lowering drug, that will be used to treat mixed lipid
disorders. The Company believes that a once-a-night tablet with the combined
complementary properties of its Niaspanproduct and lovastatin represents an
effective method for treating patients with mixed lipid disorders. The Company
received approval from the FDA to market Advicoron December 17, 2001, and
began shipments to customers in January 2002.

The Company might incur additional losses in the first half of 2003 due
primarily to its sales and marketing efforts associated with Niaspanand
Advicor, and to its 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, including its ability to meet all of the
conditions necessary to obtain funding under its credit facilities with Michael
Jaharis; uncertainties related to the protection afforded by the Companys
patents and patent applications; uncertainties related to foreign regulatory
approvals; uncertainties related to patents and trademarks, including
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 also 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.

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|2. |  | Summary of Significant Accounting Policies
|-- |  | ------------------------------------------

Basis of Presentation

The consolidated financial statements include the results of the Company
and its subsidiaries, Aeropharm Technology, Inc. and Kos Life Sciences, Inc.
All intercompany accounts and transactions have been eliminated in
consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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. Significant estimates and assumptions made by
management in the preparation of the accompanying financial statements include
the allowance for doubtful accounts; reserves for inventory obsolescence,
product returns, chargebacks, rebates and discounts; estimation of customer
inventory levels; and valuation allowance on deferred income taxes. Actual
results could differ from those estimates.

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. As of December
31, 2002, $17,100,000 of cash and cash equivalents were pledged as collateral
on outstanding letters of credit.

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 raw
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.

Long-Lived Assets

The Company evaluates the recoverability of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by the comparison of 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.

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, 2002 or 2001.

Fair Value of Financial Instruments

As of December 31, 2002 and 2001, 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 to shareholder 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.

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Concentration of Credit Risk

The Company maintains its cash and cash equivalents with a major financial
institution. The Company performs periodic evaluations of the relative credit
standing of this institution to limit its credit risk exposure.

The Company conducts a significant amount of its sales with a limited
number of large pharmaceutical wholesalers and warehousing chains.
Accordingly, 62% of the trade accounts receivable before allowances at December
31, 2002, were represented by five of these customers. The Company performs
periodic evaluations of the financial condition of all customers to limit its
credit risk exposure, but does not obtain collateral. 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 largest 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
returns to customers, discounts, and rebates and chargebacks to managed care
organizations with whom the Company has contracts. These provisions totaled
$44,369,000, $19,542,000, and $13,149,000 for the years ended December 31,
2002, 2001, and 2000, respectively. Included in Accrued expenses in the
accompanying consolidated balance sheets are $11,632,000 and $5,171,000, at
December 31, 2002 and 2001, respectively, related to these provisions.

Advance Payments from Customers

Similar to most other pharmaceutical companies, Kos has at times been
subject to significant forward buy-in from pharmaceutical wholesalers.
Forward buy-in is a practice whereby pharmaceutical wholesalers, relying on
their ability to predict manufacturer price increases, augment product
purchases just prior to such anticipated increases, as a mechanism to bolster
operating profits. Thus, depending on when a particular wholesalers
forecasting model predicts the possibility of a price increase, product demand
by wholesalers during a given period may not correlate with prescription demand
for such product in that period. As a result, the Company periodically
evaluates the inventory position of its customers to determine whether
increased risk of product return exists because abnormally high inventory
levels of its products are present throughout the product distribution channel.
If such inventory levels are identified, the Companys policy is to not
recognize the revenue and related expenses associated with the excess inventory
held by customers until such return risk is mitigated. During the second half
of 2002 and 2001, certain of the Companys customers purchased abnormally high
levels of the Niaspanand Advicorproducts. As a result, as of December 31,
2002 and 2001, the level of the Niaspanand Advicorproducts warehoused by
these customers was well above normal levels. Accordingly, the Company did not
recognize $13.2 million in gross revenues (or $11.1 million in net revenues)
and related expenses associated with 2002 product shipments, and of $8.7
million in gross revenues (or $7.0 million in net revenues) and related
expenses associated with 2001 product shipments and will not recognize such
revenues and related expenses until the level of Niaspanand Advicorproducts
warehoused by such customers returns to normal.

A key variable used by the Company to assess the level of product return
risk entails a determination of an appropriate or normal measurement of the
inventory level throughout the product distribution channel, in terms of
months-on-hand, necessary to meet normal demand for its products without an
excessive risk of product return. As of December 31, 2002, the Company, based
on the latest available market data and on its internal analysis, believes the
appropriate industry level to be 1.9 months-on-hand, which is consistent with
the Companys determination of appropriate inventory levels for periods prior
to the December 31, 2002 year. If, however, the Company had utilized during the
year ended December 31, 2002, a lower number of months-on-hand to estimate
whether increased risk of product return existed because abnormally high
inventory levels of such products were present throughout the product

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distribution channel, reported net revenue for the year ended December 31,
2002 would have been reduced and the amount of net revenue that would not have
been recognized would have increased.

Included in Advance payments from customers in the accompanying
consolidated balance sheets are $9,129,000 and $6,691,000, as of December 31,
2002 and 2001, respectively, representing payments received on Niaspanand
Advicorproduct shipments for which revenue has not been recognized.

Advance Payment Received on License Agreement

On October 23, 2002, the Company signed an exclusive international
commercialization agreement with Merck KGaA (Merck) to market the Niaspanand
Advicorproducts outside the United States, Canada and Japan. Under terms of
the agreement, Merck will provide Kos up to $61 million in licensing, milestone
and reimbursement payments, including $15 million of upfront payments, of which
$12.5 million are reimbursable by Kos if it fails to achieve certain regulatory
milestones. The milestone payments are dependent on the achievement of certain
regulatory approvals and sales thresholds. Kos will also receive 25% of net
sales of the products in the territory, which includes the cost of goods sold.
Merck will be responsible for conducting Phase IV clinical studies and
commercialization activities while Kos is responsible for obtaining initial
marketing authorization in all European countries and the supply and
manufacturing of the products. On November 5, 2002, Kos received $9.2 million
as an upfront payment from Merck. This upfront payment will be recognized as
revenue in future periods upon Kos achieving certain regulatory milestones.
Consequently, this upfront payment has been recorded as Advance Payment
Received on License Agreement as of December 31, 2002, until those regulatory
milestones are achieved.

Co-Promotion and Strategic Alliance Arrangement

During 1999, the Company entered into a co-promotion collaboration
agreement with Knoll Pharmaceutical Company (Knoll), for the promotion and
marketing of Knolls Mavikand Tarkaproducts (Mavik® and Tarka® are registered
trademarks of Abbott Laboratories) within the United States (the Knoll
Agreement). Under the terms of the Knoll Agreement, the Company was to receive
an increasing percentage of revenue based on sales thresholds. The Company
recorded $7.2 million, and $5.0 million of co-promotion revenue as a result of
the Knoll Agreement for the years ended December 31, 2001 and 2000,
respectively. On March 2, 2001, Abbott Laboratories (Abbott) announced that
it had finalized its acquisition of BASFs pharmaceutical business, which
included the global operations of Knoll. The Company and Abbott agreed to
terminate the Knoll Agreement effective January 1, 2002.

The Company entered into an agreement, effective May 3, 2000, with DuPont
Pharmaceuticals Company (DuPont) to form a strategic alliance for the purpose
of co-promoting the Companys Advicorproduct in the United States and Canada
(the DuPont Agreement). Under the terms of the DuPont Agreement, the Company
and DuPont would have shared in the future development and commercialization of
the Advicorproduct. Specifically, DuPont had agreed (i) to make equity
investments in the Company up to $30 million through the date of FDA approval
of the Advicorproduct; (ii) to pay the Company $17.5 million in milestone
payments upon FDA approval of the Advicorproduct; (iii) to fund up to $32.5
million for future clinical development of the Advicorproduct; and (iv) to
share equally in the costs associated with promoting the Advicorproduct and
share equally in product profits after deducting a royalty to the Company. On
May 31, 2000, DuPont made a $20-million equity investment in the Company in
exchange for 1,250,000 shares of the Companys Common Stock. On June 7, 2001,
DuPonts parent company, E.I. du Pont Nemours, announced that it had entered
into an agreement to sell DuPont to Bristol-Myers Squibb Company (BMS) and on
October 1, 2001, BMS completed its acquisition of DuPont. On December 17,
2001, the Company entered into an agreement with BMS pursuant to which the
DuPont Agreement was terminated and BMS paid Kos $45 million (the BMS
Payment). The BMS Payment, offset by approximately $6 million of promotional
expenses due

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to Kos by BMS at the time of termination, was recorded as Other Income
in the accompanying consolidated statements of operations for the year ended
December 31, 2001.

Fixed Assets

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
terms as follows:

|                                       |  |                   |    | 
|-------------------------------------- |  | ----------------- | -- | 
|                                       |  | Years            
|                                       |  |                  
|Furniture and equipment                |  |                   | 5  | 
|Computer software and hardware         |  | 3-5               |   
|Laboratory and manufacturing equipment |  |                   | 10 | 
|Leasehold improvements                 |  | Shorter of 7-10  
|                                       |  | years or lives of
|                                       |  | leases           

Effective January 1, 2002, the Company made certain prospective changes in
the estimated useful lives of most of its fixed assets. This change was made
to better reflect how the assets are expected to be used over time and to
provide a better matching of revenues and expenses. The effect of this change
on net loss for 2002 was not material.

Research and Development Expenses

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

Advertising Expense

The Company records the cost of its advertising efforts when services are
performed or goods are delivered. The Company recorded $7,279,000, $6,781,000,
and $1,075,000 in advertising expense for the years ended December 31, 2002,
2001, and 2000, respectively.

Net Income (Loss) Per Share

Basic income (loss) per share is determined by dividing the Companys net
income (loss) by the weighted average number of shares of Common Stock
outstanding. Diluted income (loss) per share also includes dilutive Common
Stock equivalents outstanding after applying the treasury stock method. A
reconciliation of the denominator of the basic and diluted earnings per share
computation is as follows:

|                                                    |                                                       |  |              |            |      |  |            |            |  |  |            |            | 
|--------------------------------------------------- | ----------------------------------------------------- |  | ------------ | ---------- | ---- |  | ---------- | ---------- |  |  | ---------- | ---------- | 
|                                                    |                                                       |  | December 31,
|                                                    |                                                       |  |             
|                                                    |                                                       |  | 2002         |            | 2001 |  | 2000      
|                                                    |                                                       |  |              |            |      |  |           
|Basic weighted average number of
shares outstanding |                                                       |  | 20,582,205   |            |      |  | 20,221,089 |            |  |  | 19,202,877 |           
|Effect of dilutive securities  stock options       |                                                       |  |             |            |      |  | 2,577,543  |            |  |  |           |           
|                                                    |                                                       |  |              |            |      |  |            |            |  |  |            |           
|                                                    | Diluted weighted average number of
shares outstanding |  |              | 20,582,205 |      |  |            | 22,798,632 |  |  |            | 19,202,877 | 
|                                                    |                                                       |  |              |            |      |  |            |            |  |  |            |           

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The following Common Stock equivalents have been excluded from the
calculation of weighted average shares outstanding as they are antidilutive:

|                                                               |       |  |              |            |      |  |            |            |  |  |            |            | 
|-------------------------------------------------------------- | ----- |  | ------------ | ---------- | ---- |  | ---------- | ---------- |  |  | ---------- | ---------- | 
|                                                               |       |  | December 31,
|                                                               |       |  |             
|                                                               |       |  | 2002         |            | 2001 |  | 2000      
|                                                               |       |  |              |            |      |  |           
|Stock options outstanding                                      |       |  | 6,544,822    |            |      |  |           |            |  |  | 4,360,587  |           
|Convertible debt ($50 million at $4.91
per share  See Note 8) |       |  | 10,183,299   |            |      |  | 10,183,299 |            |  |  | 10,183,299 |           
|Non-detachable warrants (at $5.00
per share  See Note 8)      |       |  | 6,000,000    |            |      |  | 6,000,000  |            |  |  | 2,400,000  |           
|                                                               |       |  |              |            |      |  |            |            |  |  |            |           
|                                                               | Total |  |              | 22,728,121 |      |  |            | 16,183,299 |  |  |            | 16,943,886 | 
|                                                               |       |  |              |            |      |  |            |            |  |  |            |           

Income Taxes

The Company follows Statement of Financial Accounting Standards (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 attributable to a predecessor of the Company,
amounting to approximately $51 million, were not transferred to the Company.
As of December 31, 2002, the Company had available approximately $234 million
of net operating loss carryforwards that expire between 2006 and 2022.

The composition of the net deferred tax assets (liability) is as follows:

|                                                        |  |              |             |      |  |   |             |  
|------------------------------------------------------- |  | ------------ | ----------- | ---- |  | - | ----------- | -
|                                                        |  | December 31,
|                                                        |  |             
|                                                        |  | 2002         |             | 2001
|                                                        |  |              |             |     
|Tax net operating loss carryforwards                    |  | $            | 88,368,824  |      |  | $ | 82,692,275  |  
|Reserves and accruals                                   |  |              | 6,240,490   |      |  |   | 3,442,524   |  
|Intangible assets                                       |  |              | 1,679,393   |      |  |   | 1,433,118   |  
|Property and equipment, principally
due to depreciation |  |              | (148,495    | )    |  |   | 345,533     |  
|Other                                                   |  |              | 3,527,680   |      |  |   | 2,676,480   |  
|                                                        |  |              |             |      |  |   |             |  
|                                                        |  |              | 99,667,892  |      |  |   | 90,589,930  |  
|Valuation allowance                                     |  |              | (99,667,892 | )    |  |   | (90,589,930 | )
|                                                        |  |              |             |      |  |   |             |  
|                                                        |  | $            |            |      |  | $ |            |  
|                                                        |  |              |             |      |  |   |             |  

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.

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There was no provision for income taxes for the years ended December 31,
2002, 2001, and 2000. reconciliation between the statutory federal income tax
expense and the income tax expense at the Companys effective rate for the
years ended December 31, 2002 and 2001 is set forth below:

|                                                                        |                            |   |              |   |      |   |            |   |  |   |             |   | 
|----------------------------------------------------------------------- | -------------------------- | - | ------------ | - | ---- | - | ---------- | - |  | - | ----------- | - | 
|                                                                        |                            |   | December 31,
|                                                                        |                            |   |             
|                                                                        |                            |   | 2002         |   | 2001 |   | 2000      
|                                                                        |                            |   |              |   |      |   |           
|Computed expected income tax based
On statutory federal income tax rate |                            | $ | (7,285,657   | ) |      | $ | 835,184    |   |  | $ | (12,342,758 | )
|State income taxes, net of federal benefit                              |                            |   | (749,384     | ) |      |   | 85,905     |   |  |   | (1,269,541  | )
|Non deductible expenses                                                 |                            |   | 1,133,120    |   |      |   | 434,417    |   |  |   | 417,972     |  
|Change in valuation allowance                                           |                            |   | 6,901,921    |   |      |   | (1,355,506 | ) |  |   | 13,277,391  |  
|Other                                                                   |                            |   |             |   |      |   |           |   |  |   | (83,064     | )
|                                                                        |                            |   |              |   |      |   |            |   |  |   |             |  
|                                                                        | Provision for income taxes |   | $            |  |      |   | $          |  |  |   | $           |  | 
|                                                                        |                            |   |              |   |      |   |            |   |  |   |             |  

Reporting of Comprehensive Income or Loss

Statement of Financial Accounting Standards (SFAS) No. 130 Reporting
Comprehensive Income, establishes standards of reporting and display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income or loss refers to revenues, expenses, gains and losses
that are not included in net income or loss but rather are recorded directly in
stockholders equity, such as certain unrealized gain or loss items. The
Companys reported loss equals comprehensive loss for all periods presented.

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Recent Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141, Business Combinations (SFAS
141). SFAS 141 addresses financial accounting and reporting for business
combinations and supercedes Accounting Principles Board Opinion No. 16,
Business Combinations and SFAS No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. As established by SFAS 141, all
business combinations are to be accounted for under the purchase method. SFAS
141 was effective June 30, 2001. The adoption of SFAS 141 did not have an
impact on the Companys financial position, results of operations or cash
flows.

In July 2001, the FASB also issued SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 142 addresses financial accounting and
reporting for intangible assets acquired individually or with a group of other
assets (but not those acquired in a business combination) at acquisition. SFAS
142 also addresses financial accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. With the adoption of SFAS
142, goodwill is no longer subject to amortization. Rather, goodwill will be
subject to at least an annual assessment for impairment by applying a
fair-value based test. The impairment loss is the amount, if any, by which the
implied fair value of goodwill is less than the carrying or book value. SFAS
142 is effective for fiscal years beginning after December 15, 2001.
Impairment loss for goodwill arising from the initial application of SFAS 142
is to be reported as resulting from a change in accounting principle. The
adoption of SFAS 142 did not have a significant impact on the Companys
financial position, results of operations or cash flows.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs and is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
The adoption of SFAS No. 143 did not have a material impact on the Companys
financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-lived Assets to be Disposed of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations  Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business (as previously
defined in that opinion). SFAS No. 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years, with early application encouraged. The adoption of
SFAS No. 144 did not have a material impact on the Companys financial position
or results of operations.

In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of SFAS 13, and Technical Corrections (SFAS
145). SFAS 145 rescinds previous accounting guidance, which required all
gains and losses from extinguishment of debt be classified as an extraordinary
item. Under SFAS 145 classification of debt extinguishment depends on the
facts and circumstances of the transaction. SFAS 145 is effective for fiscal
years beginning after May 15, 2002. The Company believes that the adoption of
SFAS 145 will not have a material impact on its financial position or results
of operations.

In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies the Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity including Certain Costs Incurred in a Restructuring, (Issue
94-3). The principal difference between Statement

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146 and Issue 94-3 relates to Statement 146s requirements for recognition
of a liability for a cost associated with an exit or disposal activity.
Statement 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost was recognized at the date of an entitys
commitment to an exit plan. A fundamental conclusion reached by the FASB in
this Statement is that an entitys commitment to a plan, by itself, does not
create an obligation that meets the definition of a liability. Therefore, this
Statement eliminates the definition and requirements for recognition of exit
costs in Issue 94-3. This Statement also establishes that fair value is the
objective for initial measurement of the liability. SFAS 146 is effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company believes that the adoption of SFAS 146 will not have a material impact
on its financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). The interpretation
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair value, or market value, of the obligations it
assumes under the guarantee and must disclose that information in its interim
and annual financial statements. The provisions related to recognizing a
liability at inception of the guarantee for the fair value of the guarantors
obligations does not apply to product warranties or to guarantees accounted for
as derivatives. The initial recognition and initial measurement provisions
apply on a prospective basis to guarantees issued or modified after December
31, 2002. The disclosure requirements are effective for financial statements of
periods ending after December 15, 2002. The Company believes that adoption of
the recognition and measurement provisions of FIN No. 45 will not have a
material impact on its financial position or results of operations.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation (SFAS 148). SFAS 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure provisions of SFAS
123 to require disclosure in the summary of significant accounting policies of
the effects of an entitys accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in annual
and interim financial statements. SFAS 148s amendment of the transition and
annual disclosure provisions of SFAS 123 are effective for fiscal years ending
after December 15, 2002, with earlier application permitted for entities with
fiscal years ending prior to December 15, 2002, provided that financial
statements for the 2002 fiscal year were not issued prior to the issuance of
Statement 148 (December 31, 2002). The adoption of SFAS 148 did not have a
material impact on the Companys financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN No. 46), to expand upon and strengthen
existing accounting guidance that addresses when a company should include in
its financial statements the assets, liabilities and activities of another
entity. Until now, one company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN No. 46 changes that by requiring a variable interest
entity, as defined, to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entitys
activities or entitled to receive a majority of the entitys residual returns
or both. FIN No. 46 also requires disclosures about variable interest entities
that the company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN No. 46
apply immediately to variable interest entities created after January 31, 2003
and to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company does not believe the
adoption of FIN No. 46 will have a material impact on its financial position or
results of operations.

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|3. |  | Trade Accounts Receivable, net
|-- |  | ------------------------------

Trade accounts receivable consist of the following:

|                                     |                                |   |              |            |      |   |            |            | 
|------------------------------------ | ------------------------------ | - | ------------ | ---------- | ---- | - | ---------- | ---------- | 
|                                     |                                |   | December 31,
|                                     |                                |   |             
|                                     |                                |   | 2002         |            | 2001
|                                     |                                |   |              |            |     
|Trade accounts receivable            |                                | $ | 24,393,954   |            |      | $ | 12,635,194 |           
|Less allowance for doubtful accounts |                                |   | (305,957     | )          |      |   | (194,192   | )         
|                                     |                                |   |              |            |      |   |            |           
|                                     | Trade accounts receivable, net |   | $            | 24,087,997 |      |   | $          | 12,441,002 | 
|                                     |                                |   |              |            |      |   |            |           



|4. |  | Inventories
|-- |  | -----------

Inventories consist of the following:

|                |                   |   |              |           |      |   |           |           | 
|--------------- | ----------------- | - | ------------ | --------- | ---- | - | --------- | --------- | 
|                |                   |   | December 31,
|                |                   |   |             
|                |                   |   | 2002         |           | 2001
|                |                   |   |              |           |     
|Raw materials   |                   | $ | 1,433,004    |           |      | $ | 936,356   |          
|Work in process |                   |   | 1,619,223    |           |      |   | 2,499,440 |          
|Finished goods  |                   |   | 2,874,787    |           |      |   | 4,296,373 |          
|                |                   |   |              |           |      |   |           |          
|                | Total inventories |   | $            | 5,927,014 |      |   | $         | 7,732,169 | 
|                |                   |   |              |           |      |   |           |          



|5. |  | Fixed Assets, net
|-- |  | -----------------

Fixed assets consist of the following:

|                                               |                     |   |              |            |      |   |             |            | 
|---------------------------------------------- | ------------------- | - | ------------ | ---------- | ---- | - | ----------- | ---------- | 
|                                               |                     |   | December 31,
|                                               |                     |   |             
|                                               |                     |   | 2002         |            | 2001
|                                               |                     |   |              |            |     
|Furniture and equipment                        |                     | $ | 1,449,187    |            |      | $ | 1,531,102   |           
|Computer software and hardware                 |                     |   | 4,128,678    |            |      |   | 3,019,103   |           
|Laboratory and manufacturing equipment         |                     |   | 10,963,445   |            |      |   | 8,616,639   |           
|Leasehold improvements                         |                     |   | 9,353,818    |            |      |   | 5,358,062   |           
|                                               |                     |   |              |            |      |   |             |           
|                                               | Fixed assets, gross |   |              | 25,895,128 |      |   |             | 18,524,906 | 
|Less accumulated depreciation and amortization |                     |   | (13,367,327  | )          |      |   | (11,646,154 | )         
|                                               |                     |   |              |            |      |   |             |           
|                                               | Fixed assets, net   |   | $            | 12,527,801 |      |   | $           | 6,878,752  | 
|                                               |                     |   |              |            |      |   |             |           

The Company recorded depreciation and amortization expense of $2,110,538,
$3,409,113, and $3,174,338 for the years ended December 31, 2002, 2001, and
2000, respectively.

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|6. |  | Goodwill
|-- |  | --------

In late 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 recorded goodwill of $803,000 representing the excess of the cost of
the assets acquired over their estimated fair value. The pre-acquisition
results of IEP were not material to the Companys results of operations.
During the fourth quarter of 2001, in accordance with the provisions of SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of, the Company recorded a goodwill impairment loss of
$643,000, based on its determination of fair-value of such goodwill. Prior to
recording such impairment loss, the Company had recognized amortization expense
of $80,000, for each of the years ended December 31, 2001 and 2000.



|7. |  | Accrued Expenses
|-- |  | ----------------

The components of accrued expenses are as follows:

|                                          |                        |   |              |            |      |   |           |            | 
|----------------------------------------- | ---------------------- | - | ------------ | ---------- | ---- | - | --------- | ---------- | 
|                                          |                        |   | December 31,
|                                          |                        |   |             
|                                          |                        |   | 2002         |            | 2001
|                                          |                        |   |              |            |     
|Managed care rebates and chargebacks      |                        | $ | 8,681,834    |            |      | $ | 4,018,897 |           
|Employee commissions and bonuses          |                        |   | 6,650,500    |            |      |   | 4,086,003 |           
|Royalties                                 |                        |   | 2,817,476    |            |      |   | 1,858,563 |           
|Sales return and allowances               |                        |   | 2,387,986    |            |      |   | 1,151,911 |           
|Employee vacations                        |                        |   | 2,033,998    |            |      |   | 1,401,836 |           
|Clinical studies                          |                        |   | 709,100      |            |      |   | 2,199,250 |           
|Expenses due under co-promotion agreement |                        |   |             |            |      |   | 3,600,000 |           
|All other                                 |                        |   | 11,267,814   |            |      |   | 6,539,966 |           
|                                          |                        |   |              |            |      |   |           |           
|                                          | Total accrued expenses |   | $            | 34,548,708 |      |   | $         | 24,856,426 | 
|                                          |                        |   |              |            |      |   |           |           



|8. |  | Notes Payable to Shareholder
|-- |  | ----------------------------

On December 19, 2002, the Company and Michael Jaharis, Chairman Emeritus
of the Companys Board of Directors and its principal shareholder, entered into
an agreement whereby Mr. Jaharis agreed to replace the previous $30-million
credit facility extended to the Company by Mr. Jaharis on July 1, 1998, with a
new facility expiring on June 30, 2008 (the Additional Standby Facility). In
connection with this new credit arrangement, the Company granted to Mr. Jaharis
non-detachable warrants to purchase 1,000,000 shares of the Companys Common
Stock at an exercise price based on the market price of the Companys Common
Stock on the date that the first draw under this facility occurs. The Company
had no borrowings outstanding under the Additional Standby Facility as of
December 31, 2002. Borrowings, when outstanding, will bear interest at the
prime rate (4.25% as of December 31, 2002), and are subject to the terms and
conditions of borrowings made under the Supplemental Credit Facility.

On September 1, 1999, the Company formally agreed to the terms of an
additional $50-million funding arrangement initially entered into with Michael
Jaharis on October 7, 1998 (the Supplemental Credit Facility). On July 21,
2001, the Company replaced its existing $50 million promissory note payable to
Mr. Jaharis with two, $25 million, promissory notes, one payable in the name of
Mr. Jaharis and the other payable in the name of Mr. Jaharis wife. With this
promissory note replacement, all of Mr. Jaharis existing rights and
obligations under the Supplemental Credit Facility, with respect to one-half of
the outstanding amount, have been transferred to Mrs. Jaharis, and subsequently
to her transferee. All other terms and conditions of the Supplemental Credit
Facility remain unchanged. Borrowings under the Supplemental Credit Facility
totaled $50 million as of December 31, 2002, bear interest at the prime

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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 believes that on
or prior to the maturity date, it will have sufficient cash, available credit,
and access to capital from third parties to be able to repay the Supplemental
Credit Facility on a timely basis in the event that it is not converted into
shares of the Companys Common Stock. However, the Company believes that, if
the market price of the Companys Common Stock continues to significantly
exceed the conversion price established under the Supplemental Credit Facility,
which is $4.91 per share, through the maturity date, Mr. Jaharis and the other
lenders will elect to convert the borrowings outstanding under this facility
into shares of Kos Common Stock prior to the maturity date, thereby relieving
the Company of the obligation to repay such facility. If such debt conversion
were not to take place for any reason, the Company would be required to utilize
its cash flow from operations and its then remaining borrowing capacity under
its two other facilities with Mr. Jaharis, if such borrowing capacity is
available at all, to repay borrowings due under the Supplemental Credit
Facility. In addition, the Company could also be required to seek to raise
additional capital to repay the Supplemental Credit Facility to the extent that
its cash and available credit are insufficient to repay the Supplemental Credit
Facility in full prior to its maturity date. The Companys decision to issue
additional debt or equity, or to sell some or all of its assets, in order
generate additional capital would require the consent of Mr. Jaharis and the
other lenders. It is possible that the Company could seek to extend the
maturity date of the Supplemental Credit Facility or enter into a new financing
arrangement with Mr. Jaharis and the other lenders that would replace the
Supplemental Credit Facility; however, the Company has not sought any such
extension or replacement facility and Mr. Jaharis and the other lenders would
be under no obligation to the Company to provide any such extension or
replacement. There can be no assurance that additional capital will be
available to the Company on acceptable terms, or at all, or that the lenders
under the Supplemental Credit Facility will convert the Companys borrowings
under such facility into shares of the Companys Common Stock.

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 totaled $34 million as of December 31, 2002, are due June 20,
2005, and are also subject to most of the terms and conditions of borrowings
made under the Supplemental Credit Facility, including the condition that the
death of lender shall not have occurred. 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 granted to Mr. Jaharis
non-detachable warrants to purchase up to 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 this Standby Facility. The
warrants are exercisable at any time until June 30, 2006.

The Company recorded $4,039,000, $6,081,000, and $6,560,000 of interest
expense for the years ended December 31, 2002, 2001 and 2000, respectively,
related to its credit facilities with Mr. Jaharis.



|9. |  | Major Customers
|-- |  | ---------------

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

|           |       |   |              |             |      |   |            |            |  |   |            |            | 
|---------- | ----- | - | ------------ | ----------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|           |       |   | December 31,
|           |       |   |             
|           |       |   | 2002         |             | 2001 |   | 2000      
|           |       |   |              |             |      |   |           
|Customer A |       | $ | 71,260,693   |             |      | $ | 30,014,553 |            |  | $ | 13,113,597 |           
|Customer B |       |   | 48,396,828   |             |      |   | 17,635,530 |            |  |   | 6,693,483  |           
|Customer C |       |   | 40,868,120   |             |      |   | 24,230,472 |            |  |   | 17,611,515 |           
|           |       |   |              |             |      |   |            |            |  |   |            |           
|           | Total |   | $            | 160,525,641 |      |   | $          | 71,880,555 |  |   | $          | 37,418,595 | 
|           |       |   |              |             |      |   |            |            |  |   |            |           

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|10. |  | Selected Quarterly Financial Information (Unaudited)
|--- |  | ----------------------------------------------------

The following table summarizes selected quarterly financial data of the
Company for the year ended December 31, 2002 and 2001 (in thousands, except per
share data):

|                                |      |   |         |       |         |   |         |       |         |   |        |       |  |   |         |       |  |   |         |       | 
|------------------------------- | ---- | - | ------- | ----- | ------- | - | ------- | ----- | ------- | - | ------ | ----- |  | - | ------- | ----- |  | - | ------- | ----- | 
|                                |      |   | First   |       | Second  |   | Third   |       | Fourth  |   | Full  
|                                |      |   | Quarter |       | Quarter |   | Quarter |       | Quarter |   | Year  
|                                |      |   |         |       |         |   |         |       |         |   |       
|2002                            |      |   |         |       |         |   |         |       |         |   |        |       |  |   |         |       |  |   |         |      
|Revenues, net                   |      | $ | 33,886  |       |         | $ | 38,254  |       |         | $ | 45,536 |       |  | $ | 55,017  |       |  | $ | 172,693 |      
|Cost of sales                   |      |   | 3,629   |       |         |   | 3,520   |       |         |   | 4,445  |       |  |   | 3,768   |       |  |   | 15,362  |      
|Operating expenses              |      |   | 45,537  |       |         |   | 44,093  |       |         |   | 40,359 |       |  |   | 44,136  |       |  |   | 174,125 |      
|Income (loss) from operations   |      |   | (15,280 | )     |         |   | (9,359  | )     |         |   | 732    |       |  |   | 7,113   |       |  |   | (16,794 | )    
|Net income (loss)               |      |   | (16,215 | )     |         |   | (10,343 | )     |         |   | (347   | )     |  |   | 6,089   |       |  |   | (20,816 | )    
|Basic income (loss) per share   |      | $ | (0.79   | )     |         | $ | (0.50   | )     |         | $ | (0.02  | )     |  | $ | 0.29    |       |  | $ | (1.01   | )    
|Diluted income (loss) per share |      |   | (0.79   | )     |         |   | (0.50   | )     |         |   | (0.02  | )     |  |   | 0.18    |       |  |   | (1.01   | )    
|Market prices per common
share: |      |   |         |       |         |   |         |       |         |   |        |       |  |   |         |       |  |   |         |      
|                                | High |   | $       | 35.27 |         |   | $       | 29.16 |         |   | $      | 20.70 |  |   | $       | 24.16 |  |   | $       | 35.27 | 
|                                | Low  |   | $       | 19.30 |         |   | $       | 15.50 |         |   | $      | 10.03 |  |   | $       | 10.38 |  |   | $       | 10.03 | 
|2001                            |      |   |         |       |         |   |         |       |         |   |        |       |  |   |         |       |  |   |         |      
|Revenues, net                   |      | $ | 14,383  |       |         | $ | 21,891  |       |         | $ | 25,877 |       |  | $ | 29,296  |       |  | $ | 91,447  |      
|Cost of sales                   |      |   | 1,411   |       |         |   | 1,991   |       |         |   | 1,955  |       |  |   | 2,288   |       |  |   | 7,646   |      
|Operating expenses              |      |   | 21,472  |       |         |   | 27,953  |       |         |   | 31,622 |       |  |   | 33,514* |       |  |   | 114,562 |      
|Loss from operations            |      |   | (8,500  | )     |         |   | (8,053  | )     |         |   | (7,700 | )     |  |   | (6,507  | )     |  |   | (30,760 | )    
|Net income (loss)               |      |   | (10,012 | )     |         |   | (9,596  | )     |         |   | (9,197 | )     |  |   | 31,191* |       |  |   | 2,386   |      
|Basic income (loss) per share   |      | $ | (0.50   | )     |         | $ | (0.48   | )     |         | $ | (0.45  | )     |  | $ | 1.53    |       |  | $ | 0.12    |      
|Diluted income (loss) per share |      |   | (0.50   | )     |         |   | (0.48   | )     |         |   | (0.45  | )     |  |   | 0.82    |       |  |   | 0.10    |      
|Market prices per common
share: |      |   |         |       |         |   |         |       |         |   |        |       |  |   |         |       |  |   |         |      
|                                | High |   | $       | 21.13 |         |   | $       | 38.00 |         |   | $      | 40.69 |  |   | $       | 36.90 |  |   | $       | 40.69 | 
|                                | Low  |   | $       | 14.31 |         |   | $       | 16.75 |         |   | $      | 23.45 |  |   | $       | 23.45 |  |   | $       | 14.31 | 



|11. |  | Commitments and Contingencies
|--- |  | -----------------------------

Letter of Credit Facility

The Company is subject to the terms of a $18-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, 2002 and
2001, letters of credit outstanding totaled $15,540,000 and $1,460,000,
respectively.

Purchase Commitments

During the normal course of its business, the Company enters into short
term purchase commitments for the acquisition of goods and services needed to
run its operations. As of December 31, 2002, the Company had open purchase
commitments totaling $7,614,000.

Employment and Royalty Agreements

As of December 31, 2002, the Company had employment and/or royalty
agreements with four of its current or former officers, including a deferred
compensation agreement with one of its current officers providing for annual
payments of not less than $400,000 per year for life upon the officers
retirement. The liability under this deferred compensation agreement is being
accrued over the officers remaining periods of employment so that, on the
expected date of the officers retirement, the then-present value of the annual
payments will have been accrued. Included in Accrued expenses as of December
31, 2002,

---

* Includes the effect of the BMS Payment, as more fully discussed in Note 2.


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in the accompanying consolidated balance sheets are $520,833 related to
this deferred compensation agreement. Salary and benefits expense recorded
under the employment agreements totaled $1,626,000, $1,326,000 and $749,000,
during the years ended December 31, 2002, 2001 and 2000, 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, 2002, 2001 and 2000 was $1,727,000, $842,000 and $551,000,
respectively, and are included in Selling, general and administrative in the
accompanying consolidated statements of operations.

Future minimum payments under the employment agreements are as follows:

|                         |       |        |         |           | 
|------------------------ | ----- | ------ | ------- | --------- | 
|Year Ending December 31, |       | Amount
|                         |       |       
|2003                     |       | $      | 935,000 |          
|2004                     |       |        | 750,000 |          
|2005                     |       |        | 750,000 |          
|2006                     |       |        | 537,500 |          
|2007                     |       |        | 325,000 |          
|                         |       |        |         |          
|                         | Total |        | $       | 3,297,500 | 
|                         |       |        |         |          

The Company, in connection with the IEP Acquisition, is also subject to a
royalty consideration on net sales of future products developed by IEP
utilizing technology acquired through such acquisition. In accordance with the
terms of the IEP Acquisition, the Company is required to make minimum annual
royalty payments of $50,000 from 2002 through 2009.

Lease Commitments

The Company has various operating leases that expire through 2009 for the
rental of office space, laboratory facilities, and vehicles. Future minimum
commitments under these agreements are as follows:

|                         |       |        |           |            | 
|------------------------ | ----- | ------ | --------- | ---------- | 
|Year Ending December 31, |       | Amount
|                         |       |       
|2003                     |       | $      | 4,390,000 |           
|2004                     |       |        | 4,409,000 |           
|2005                     |       |        | 2,797,000 |           
|2006                     |       |        | 2,067,000 |           
|2007                     |       |        | 1,637,000 |           
|Thereafter               |       |        | 1,029,000 |           
|                         |       |        |           |           
|                         | Total |        | $         | 16,329,000 | 
|                         |       |        |           |           

As of December 31, 2002 and 2001, standby letters of credit of $3,040,000
and $1,460,000, 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
$5,690,000, $4,234,000 and $3,655,000, during the years ended December 31,
2002, 2001 and 2000, respectively.

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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 $250,000, $275,000 and $250,000, for the years ended December
31, 2002, 2001 and 2000, respectively, and is reflected in Research and
development in the accompanying consolidated statements of operations.

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 minimum payments as follows:

|                         |       |        |         |         | 
|------------------------ | ----- | ------ | ------- | ------- | 
|Year Ending December 31, |       | Amount
|                         |       |       
|2003                     |       | $      | 305,000 |        
|2004                     |       |        | 275,000 |        
|2005                     |       |        | 75,000  |        
|2006                     |       |        | 75,000  |        
|2007                     |       |        | 75,000  |        
|                         |       |        |         |        
|                         | Total |        | $       | 805,000 | 
|                         |       |        |         |        

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 initially recognized $3,000,000 as a licensing expense
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 the Niaspanand Advicorproducts, 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 $2,500,000
of royalty expense from this agreement for each of the years ended December 31,
2002, 2001 and 2000, and are included in Selling, general and administrative
in the accompanying consolidated statements of operations. The Company has
purchased the patents that were the subject of such original agreement and
agreed to continue paying a royalty to the generic manufacturer on terms
similar to those contained in the original agreement.

Sponsored Research

The Company has on-going research agreements with various 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.
Future minimum payments under the sponsored research agreements are as follows:

|                         |       |        |         |         | 
|------------------------ | ----- | ------ | ------- | ------- | 
|Year Ending December 31, |       | Amount
|                         |       |       
|2003                     |       | $      | 684,000 |        
|2004                     |       |        | 50,000  |        
|                         |       |        |         |        
|                         | Total |        | $       | 734,000 | 
|                         |       |        |         |        

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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 $854,000, $536,000 and $381,000, during the years ended December
31, 2002, 2001 and 2000, 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 $800,000, $68,000 and $193,000, during the years ended December
31, 2002, 2001 and 2000, respectively, and are reflected in Research and
development in the accompanying consolidated statements of operations.

Contract Sales Organization

On December 17, 2001, the Company entered into an agreement with a
contract sales organization (the CSO), whereby the CSO will provide the
Company with an approximately 150-person field sales organization for a
two-year term beginning on January 1, 2002 (the Contract Sales Force
Agreement). The Contract Sales Force Agreement complements the Companys
existing sales force. Under the terms of the Contract Sales Force Agreement,
the Company will pay the CSO a royalty based on net sales of the Companys
Niaspanand Advicorproducts during a five-year period beginning January 1,
2002. The royalty amounts payable to the CSO are subject to a cumulative
minimum of $45 million over the term of the Contract Sales Force Agreement, not
to exceed $75 million over such contract term. The Company recorded $3,204,000
of royalty expense associated with the Contract Sales Force Agreement for the
year ended December 31, 2002, which is included in Selling, general and
administrative in the accompanying consolidated statements of operations.

Further, in 2002, the Company also granted the CSO warrants to purchase
150,000 shares of the Companys Common Stock at $32.79 per share, which
approximates the market value of the Companys Common Stock on the effective
date of the Contract Sales Force Agreement. The warrants will vest equally
over the two-year period during which the CSO will provide services to the
Company. In accordance with EITF Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, the compensation cost associated
with this warrant grant will initially be measured at date of issuance using
the Black Scholes pricing model. The compensation cost will be re-measured
subsequently, each reporting period, using the then applicable valuation
assumptions, for increases or decreases in the quoted market value of the
shares of the Companys Common Stock, until the last measurement date occurs
(December 31, 2003). The Company recorded $212,000 of compensation cost
associated with this warrant grant for the year ended December 31, 2002, and is
included in Selling, general and administrative in the accompanying
consolidated statements of operation.

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 full-time 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 in 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

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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 $5,500 per employee for any given year. An employee
is always 100% 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 $761,000, $587,000 and $536,000, in expenses related to its match of
employee contributions to the Kos Savings Plan for the years ended December 31,
2002, 2001 and 2000, respectively, and are 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
full-time 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.



|12. |  | Shareholders Deficit
|--- |  | ---------------------

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.

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,
2002, a maximum of 12,000,000 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.

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 30,000 shares effective on each directors anniversary date and 10,000
shares effective on the date of the Companys Annual Shareholders Meeting.
The exercise price of such options is 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 for all options granted to outside directors through June 30, 2000.
Subsequent to June 30, 2000, the Company adopted the provisions of FIN 44,
which allows grantors to account for options to outside directors under
Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to
Employees (APB No. 25). Assumptions for the calculation of charges
associated with SFAS 123 include:

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|      |  |            |      |          |  |           |      |              |  |  |   |  |  |  |   | 
|----- |  | ---------- | ---- | -------- |  | --------- | ---- | ------------ |  |  | - |  |  |  | - | 
|      |  |            |      |          |  | Risk-Free |      |              |  |  |   |  |  | 
|Grant |  | Volatility |      | Interest |  | Expected  |      | Expected    
|Date  |  | Rate       |      | Rate     |  | Dividends |      | Term (Years)
|      |  |            |      |          |  |           |      |             
|2000  |  |            | 72.5 |          |  |           | 6.28 |              |  |  |  |  |  |  | 5 | 
|2001  |  |            | 70.0 |          |  |           | 4.11 |              |  |  |  |  |  |  | 5 | 
|2002  |  |            | 66.0 |          |  |           | 4.20 |              |  |  |  |  |  |  | 5 | 

As of December 31, 2002, the Company had outstanding options to purchase
6,544,822 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:

|                               |  |           |           |       |  |                 |       |  |  |         |   |  |  |  |       |  |  |  |  |          |  |  |       | 
|------------------------------ |  | --------- | --------- | ----- |  | --------------- | ----- |  |  | ------- | - |  |  |  | ----- |  |  |  |  | -------- |  |  | ----- | 
|                               |  |           |           |       |  | Exercise Prices
|                               |  |           |           |       |  |                
|                               |  | Number of |           |       |  |                 |       |  |  |         |   |  |  |  |       |  |  |  |  | Weighted
|                               |  | Shares    |           | Range |  |                 |       |  |  | Average
|                               |  |           |           |       |  |                 |       |  |  |        
|Outstanding, December 31, 1999 |  |           | 3,077,840 |       |  |                 | 0.60  |  |  |         |  |  |  |  | 27.25 |  |  |  |  |          |  |  | 5.76  | 
|Granted                        |  |           | 1,959,975 |       |  |                 | 8.47  |  |  |         |  |  |  |  | 22.22 |  |  |  |  |          |  |  | 15.97 | 
|Exercised                      |  |           | (472,968  | )     |  |                 | 0.75  |  |  |         |  |  |  |  | 11.16 |  |  |  |  |          |  |  | 4.47  | 
|Canceled                       |  |           | (204,260  | )     |  |                 | 5.06  |  |  |         |  |  |  |  | 19.88 |  |  |  |  |          |  |  | 7.26  | 
|                               |  |           |           |       |  |                 |       |  |  |         |   |  |  |  |       |  |  |  |  |          |  |  |       | 
|Outstanding, December 31, 2000 |  |           | 4,360,587 |       |  |                 | 0.60  |  |  |         |  |  |  |  | 27.25 |  |  |  |  |          |  |  | 10.23 | 
|Granted                        |  |           | 1,000,200 |       |  |                 | 15.75 |  |  |         |  |  |  |  | 36.50 |  |  |  |  |          |  |  | 20.27 | 
|Exercised                      |  |           | (374,672  | )     |  |                 | 4.88  |  |  |         |  |  |  |  | 19.88 |  |  |  |  |          |  |  | 6.21  | 
|Canceled                       |  |           | (284,233  | )     |  |                 | 4.88  |  |  |         |  |  |  |  | 32.58 |  |  |  |  |          |  |  | 14.54 | 
|                               |  |           |           |       |  |                 |       |  |  |         |   |  |  |  |       |  |  |  |  |          |  |  |       | 
|Outstanding, December 31, 2001 |  |           | 4,701,882 |       |  |                 | 0.60  |  |  |         |  |  |  |  | 36.50 |  |  |  |  |          |  |  | 12.47 | 
|Granted                        |  |           | 2,182,775 |       |  |                 | 10.48 |  |  |         |  |  |  |  | 27.21 |  |  |  |  |          |  |  | 21.64 | 
|Exercised                      |  |           | (196,132  | )     |  |                 | 5.06  |  |  |         |  |  |  |  | 22.22 |  |  |  |  |          |  |  | 8.45  | 
|Canceled                       |  |           | (143,703  | )     |  |                 | 5.06  |  |  |         |  |  |  |  | 30.91 |  |  |  |  |          |  |  | 19.33 | 
|                               |  |           |           |       |  |                 |       |  |  |         |   |  |  |  |       |  |  |  |  |          |  |  |       | 
|Outstanding, December 31, 2002 |  |           | 6,544,822 |       |  |                 |       |  |  |         |   |  |  |  |       |  |  |  |  |          |  |  |       | 
|                               |  |           |           |       |  |                 |       |  |  |         |   |  |  |  |       |  |  |  |  |          |  |  |       | 

|                    |  |                     |           |             |  |           |  |   |       |  |  |  |  |  |  |              |  |  |  |  |           |          |  |  |  |  |  |   |       |  |  | 
|------------------- |  | ------------------- | --------- | ----------- |  | --------- |  | - | ----- |  |  |  |  |  |  | ------------ |  |  |  |  | --------- | -------- |  |  |  |  |  | - | ----- |  |  | 
|Options Outstanding |  | Options Exercisable
|                    |  |                    
|                    |  |                     |           |             |  | Weighted  |  |   |       |  |  |  |  |  |  |              |  |  |  |  |           |          |  |  |  |  |  |   |       | 
|                    |  | Number              |           | Average     |  | Weighted  |  |   |       |  |  |  |  |  |  | Number       |  |  |  |  |           | Weighted
|                    |  | Outstanding         |           | Remaining   |  | Average   |  |   |       |  |  |  |  |  |  | Exercisable  |  |  |  |  |           | Average 
|Range of            |  | December 31,        |           | Contractual |  | Exercise  |  |   |       |  |  |  |  |  |  | December 31, |  |  |  |  |           | Exercise
|Exercise Prices     |  | 2002                |           | Life        |  | Price     |  |   |       |  |  |  |  |  |  | 2002         |  |  |  |  |           | Price   
|                    |  |                     |           |             |  |           |  |   |       |  |  |  |  |  |  |              |  |  |  |  |           |         
|$0.60               |  |                     | 300,000   |             |  | 3.5 years |  | $ | 0.60  |  |  |  |  |  |  |              |  |  |  |  | 300,000   |          |  |  |  |  |  | $ | 0.60  | 
|4.28 to 6.24        |  |                     | 913,425   |             |  | 5.6 years |  |   | 5.18  |  |  |  |  |  |  |              |  |  |  |  | 828,009   |          |  |  |  |  |  |   | 5.14  | 
|6.59 to 8.47        |  |                     | 371,392   |             |  | 4.1 years |  |   | 7.06  |  |  |  |  |  |  |              |  |  |  |  | 368,392   |          |  |  |  |  |  |   | 7.05  | 
|9.94 to 14.81       |  |                     | 1,275,839 |             |  | 6.9 years |  |   | 12.28 |  |  |  |  |  |  |              |  |  |  |  | 727,384   |          |  |  |  |  |  |   | 12.11 | 
|15.00 to 20.69      |  |                     | 1,573,291 |             |  | 8.0 years |  |   | 17.93 |  |  |  |  |  |  |              |  |  |  |  | 607,305   |          |  |  |  |  |  |   | 18.23 | 
|22.55 to 32.58      |  |                     | 2,072,875 |             |  | 9.0 years |  |   | 23.37 |  |  |  |  |  |  |              |  |  |  |  | 94,027    |          |  |  |  |  |  |   | 26.08 | 
|34.10 to 36.50      |  |                     | 38,000    |             |  | 8.5 years |  |   | 35.36 |  |  |  |  |  |  |              |  |  |  |  | 24,500    |          |  |  |  |  |  |   | 36.06 | 
|                    |  |                     |           |             |  |           |  |   |       |  |  |  |  |  |  |              |  |  |  |  |           |          |  |  |  |  |  |   |       | 
|                    |  |                     | 6,544,822 |             |  | 7.3 years |  | $ | 15.46 |  |  |  |  |  |  |              |  |  |  |  | 2,949,617 |          |  |  |  |  |  | $ | 10.25 | 
|                    |  |                     |           |             |  |           |  |   |       |  |  |  |  |  |  |              |  |  |  |  |           |          |  |  |  |  |  |   |       | 

At December 31, 2002, 3,780,646 shares remain reserved for issuance under
the Plan, and options to purchase 2,949,617 shares of Common Stock were
exercisable, including options granted outside the Plan.

As permitted by SFAS No. 123, the Company accounts for options issued to
employees and to outside directors (after June 30, 2000) under APB No. 25.
Consequently, no compensation cost has been

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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.

Had compensation cost for options issued to employees been determined
consistent with SFAS No. 123, the Company would have recorded compensation cost
of $14,837,272, $7,850,363 and $4,160,638 for the years ended December 31,
2002, 2001 and 2000, respectively, and its reported net loss and net loss per
share would have been the Pro Forma amounts shown in the following table:

|                             |              |         |   |                                 |       |      |   |            |       |   |   |             |       |   |  |  |  | 
|---------------------------- | ------------ | ------- | - | ------------------------------- | ----- | ---- | - | ---------- | ----- | - | - | ----------- | ----- | - |  |  |  | 
|                             |              |         |   | For the Year Ended December 31,
|                             |              |         |   |                                
|                             |              |         |   | 2002                            |       | 2001 |   | 2000       |       |   |   |            
|                             |              |         |   |                                 |       |      |   |            |       |   |   |            
|Net income (loss):           |              |         |   |                                 |       |      |   |            |       |   |   |            
|                             | As reported  |         | $ | (20,816,164                     | )     |      | $ | 2,386,241  |       |   | $ | (35,265,022 | )    
|                             | Pro forma    |         |   | (35,653,436                     | )     |      |   | (5,464,122 | )     |   |   | (39,425,660 | )    
|Net income (loss) per share: |              |         |   |                                 |       |      |   |            |       |   |   |            
|                             | As reported: |         |   |                                 |       |      |   |            |       |   |   |             |      
|                             |              | Basic   |   | $                               | (1.01 | )    |   | $          | 0.12  |   |   | $           | (1.84 | )
|                             |              | Diluted |   |                                 | (1.01 | )    |   |            | 0.10  |   |   |             | (1.84 | )
|                             | Pro forma:   |         |   |                                 |       |      |   |            |       |   |   |             |      
|                             |              | Basic   |   | $                               | (1.73 | )    |   | $          | (0.27 | ) |   |             | (2.05 | )
|                             |              | Diluted |   |                                 | (1.73 | )    |   |            | (0.27 | ) |   |             | (2.05 | )

Restricted Common Stock Grant

On April 26, 2001, the Company entered into an employment agreement with
one of its officers (the April Employment Agreement). Under the terms of the
April Employment Agreement, the Company made a restricted grant to the officer
of 66,668 shares of Common Stock, valued at approximately $1,200,000, or $17.97
per share (the fair market of the Common Stock on the effective date of the
agreement). The restricted stock grant vests 25% on each anniversary date of
the April Employment Agreement. The Company recorded $300,000 and $203,000, of
compensation expense related to the April Employment Agreement for the years
ended December 31, 2002 and 2001, respectively, and are included in Selling,
general and administrative in the accompanying consolidated statements of
operations.



|13. |  | Legal Proceedings
|--- |  | -----------------

Class Action Lawsuit

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 Niaspanproduct. 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 4, 1999, the United States District Court

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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. On July 16, 2002, the 11th Circuit
Court of Appeals affirmed the District Courts dismissal of the plaintiffs
claims with prejudice. The plaintiffs have petitioned the Court of Appeals for
a rehearing of the appeal, which has not yet been ruled upon by the Court. The
outcome of the litigation cannot yet be determined. Accordingly, no provision
for any liability that may result from this matter 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.

Patent Infringement Lawsuit

On January 23, 2002, the Company received notice from Barr Laboratories,
Inc. (Barr) that it had filed with the FDA an Abbreviated New Drug
Application (ANDA) that would, if approved, allow Barr to market a generic
version of the Companys 1000 mg Niaspanproduct. Under the patent laws of the
United States, the filing of an ANDA for a pharmaceutical composition or method
of use that is currently protected by a patent, such as Niaspan, constitutes an
act of infringement. As a result, on March 4, 2002, the Company filed a patent
infringement lawsuit against Barr in the Southern District of New York
(SDNY). On March 11, 2002, the Company filed an amended complaint (the
Amended Complaint). In this lawsuit, the Company asserts that Barr has
infringed Kos 6,080,428 and 6,129,930 patents. Under the FDA statute, the
filing of a patent infringement suit by the Company suspends the ANDA approval
process for the earlier of 30 months or until the infringement suit is
resolved. On March 25, 2002, Barr answered the Amended Complaint (the
Answer) by denying that the 428 and 930 patents are valid and infringed,
and seeking a declaratory judgment to that effect. On August 19, 2002, Barr
amended its Answer to add counterclaims requesting a declaratory judgment that
two other patents owned by Kos, U.S. patent number 5,126,145 and 5,268,181, are
not infringed, and that the 181 patent is invalid.

On July 9, 2002, the Company received notice from Barr that it had filed
an ANDA with the FDA that would, if approved, allow Barr to market generic
versions of the Companys 500 mg and 750 mg Niaspanproducts. On August 13,
2002, the Company filed a second patent infringement lawsuit against Barr also
in the SDNY. Again, the Company asserted that Barr has infringed the 428 and
930 patents. On September 3, 2002, Barr answered the complaint by denying
infringement and alleging that the patents are invalid. Barr also sought a
declaratory judgment that the 428, 930, 145, and 181 patents are not
infringed, and that the 428, 930, and 181 patents are invalid. The two
cases were consolidated on September 23, 2002.

On September 30, 2002, the Company received notice from Barr that it had

filed a Supplemental Paragraph IV Certification relating to Kos 6,406,715
patent. The Company filed a third lawsuit on November 12, 2002, against Barr
in the SDNY asserting infringement of this patent. On December 3, 2002, Barr
answered the complaint by denying that the 715 patent is valid and infringed,
and enforceable, and seeking a declaratory judgment of invalidity. Barr also
sought a declaratory judgment that the 428, 930, 145, and 181 patents are
not infringed, and that the 428, 930 and 181 patents are invalid. The third
case was consolidated with the first two on January 23, 2003. On March 4,
2003, Kos replied to Barrs declaratory judgment counterclaims by denying that
Kos patents are invalid or not infringed. Kos also sought a declaratory
judgment that one or more of Barrs products will infringe the 145 and 181
patents.

The outcome of this litigation cannot yet be determined. 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.

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II

To the Shareholders of Kos Pharmaceuticals, Inc.:

We have audited the consolidated financial statements of Kos
Pharmaceuticals, Inc. and subsidiaries as of December 31, 2002, and for the
year then ended, and have issued our report thereon dated February 12, 2003
(except with respect to the matter discussed in the fourth paragraph
of Note 13, as to which the date is March 4, 2003) (included elsewhere in the Form 10-K). Our audit also included the financial
statement schedule listed in Item 8 of this Form 10-K. This schedule is the
responsibility of the Companys management. Our responsibility is to express an
opinion based on our audit. The consolidated financial statements and financial
statement schedule of Kos Pharmaceuticals, Inc and subsidiaries as of December
31, 2001, and for the years ended December 31, 2001 and 2000, were audited by
other auditors who have ceased operations and whose report dated February 7,
2002, expressed an unqualified opinion on those financial statements and
financial statement schedule.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Miami, Florida,
February 12, 2003

68



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The following audit report of Arthur Andersen LLP is a copy of the original
report dated February 7, 2002 included in our Annual Report on Form 10-K for
the year ended December 31, 2001, and has not been reissued by Arthur Andersen
LLP. We are including this copy of the Arthur Andersen LLP audit report
pursuant to Rule 2-02(e) of Regulation S-X under the Securities Act of 1933.

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II

To the Shareholders 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 7, 2002. 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 7, 2002.

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KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(in thousands)


|                                    |  |              |     |          |  |            |     |           |  |     |    |         |  |   |     | 
|----------------------------------- |  | ------------ | --- | -------- |  | ---------- | --- | --------- |  | --- | -- | ------- |  | - | --- | 
|                                    |  |              |     |          |  | Charged    |     |           |  |     |    | Balance
|                                    |  | Balance at   |     | to Costs |  |            |     |           |  | at 
|                                    |  | Beginning of |     | and      |  |            |     |           |  | End
|Description                         |  | Period       |     | Expenses |  | Deductions |     | of Period
|                                    |  |              |     |          |  |            |     |          
|Allowance for Doubtful Accounts:    |  |              |     |          |  |            |     |           |  |     |    |         |  |   |     | 
|Fiscal year ended December 31, 2000 |  | $            | 238 |          |  | $          | 50  |           |  | $   | 88 |         |  | $ | 200 | 
|Fiscal year ended December 31, 2001 |  |              | 200 |          |  |            | 75  |           |  |     | 81 |         |  |   | 194 | 
|Fiscal year ended December 31, 2002 |  |              | 194 |          |  |            | 150 |           |  |     | 38 |         |  |   | 306 | 




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

On March 6, 2002, the Audit Committee of the Board of Directors decided to
no longer engage Arthur Andersen LLP as the Companys independent certified
public accountants. The Company previously disclosed this change in its
Certifying Accountant in filings on Form 8-K and in the Companys definitive
proxy statement, which filings occurred on March 12 and March 19, 2002,
respectively. On April 25, 2002, the appointment of Ernst & Young LLP as the
Companys independent certified public accountants for the fiscal year ending
December 31, 2002, was ratified by the shareholders of the Company.

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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 2003 Annual Meeting of
Shareholders to be filed
with the Securities and Exchange Commission.




ITEM 14. CONTROLS AND PROCEDURES.

Within 90 days prior to the date of this report, the Company evaluated
the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in Exchange Act Rule 13a-14(c)),
under the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer and Chief
Financial Officer. Based upon such evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that there was no
reasonably apparent deficiency in the Companys disclosure controls and
procedures such that the controls and procedures should not be expected
to operate effectively. The Company is not aware of any significant
changes in the Companys internal controls or in other factors that could
significantly affect those controls subsequent to the date of the most
recent evaluation of such controls by the Company.

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PART IV




ITEM 15. 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 41 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, 2002

| |    |                                           
| | -- | ------------------------------------------
| | 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)  |  | Nonqualified Stock Option Agreement by and between the
Company and Daniel M. Bell dated as of June 20, 1996.                                                                                              
|         |  |                                                                                                                                                                                                           
|10.2(1)  |  | Employment Agreement dated as of June 15, 1996, between
David J. Bova and the Company                                                                                                                     
|         |  |                                                                                                                                                                                                           
|10.3(1)  |  | Kos Pharmaceuticals, Inc. 1996 Stock Option Plan                                                                                                                                                          
|         |  |                                                                                                                                                                                                           
|10.4(3)  |  | Kos Pharmaceuticals, Inc. 1999 Employee Stock Purchase
Plan.                                                                                                                                              
|         |  |                                                                                                                                                                                                           
|10.5(1)+ |  | Development Agreement by and between the Company and Fuisz
Technologies, Ltd.                                                                                                                             
|         |  |                                                                                                                                                                                                           
|10.6(1)+ |  | Option/Licensing Agreement by and between the Company and
Fuisz Technologies, Ltd.                                                                                                                        
|         |  |                                                                                                                                                                                                           
|10.7(1)+ |  | Development Agreement by and between the Company and Fuisz
Technologies, Ltd.                                                                                                                             

72



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|          |  |                                                                                                                                                                                        
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8(1)+  |  | Option/Licensing Agreement by and between the Company and
Fuisz Technologies, Ltd.                                                                                                     
|          |  |                                                                                                                                                                                        
|10.9(1)+  |  | License Agreement by and between the Company and
Upsher-Smith Laboratories, Inc., dated February 7, 1997.                                                                              
|          |  |                                                                                                                                                                                        
|10.10(4)  |  | Revolving Credit and Loan Agreement dated July 1, 1998,
between Kos Pharmaceuticals, Inc. and Michael Jaharis.                                                                         
|          |  |                                                                                                                                                                                        
|10.11(4)  |  | Promissory Note dated July 1, 1998, in favor of Michael
Jaharis.                                                                                                                       
|          |  |                                                                                                                                                                                        
|10.12(5)+ |  | Co-promotion Collaboration Agreement dated July 22, 1999,
between the Company and Knoll Pharmaceutical Company.                                                                        
|          |  |                                                                                                                                                                                        
|10.13(5)  |  | Revolving Credit and Loan Agreement dated September 1,
1999, between the Company and Michael Jaharis.                                                                                  
|          |  |                                                                                                                                                                                        
|10.14(6)  |  | Promissory Note dated September 1, 1999, in favor of
Michael Jaharis.                                                                                                                  
|          |  |                                                                                                                                                                                        
|10.15(6)  |  | Revolving Credit and Loan Agreement dated December 21,
1999, between the Company and Michael Jaharis.                                                                                  
|          |  |                                                                                                                                                                                        
|10.16     |  | Third Amended and Restated Registration Rights
Agreement effective as of December 19, 2002, by and between
the Company, Kos Holdings, Inc., Kos Investments, Inc., and
Michael Jaharis.
|          |  |                                                                                                                                                                                        
|10.17(6)  |  | Promissory Note dated December 21, 1999, in favor of
Michael Jaharis.                                                                                                                  
|          |  |                                                                                                                                                                                        
|10.18(6)  |  | Non-Detachable Common Stock Purchase Warrant.                                                                                                                                          
|          |  |                                                                                                                                                                                        
|10.19     |  | Revolving Credit and Loan Agreement dated as of
December 19, 2002, between Kos Pharmaceuticals and Michael
Jaharis.                                                                    
|          |  |                                                                                                                                                                                        
|10.20     |  | Revolving Credit Promissory Note dated December
19, 2002 in favor of Michael Jaharis.                                                                                                  
|          |  |                                                                                                                                                                                        
|10.21     |  | Non-Detachable Common Stock Purchase Warrant dated December 19, 2002.                                                                                                                  
|          |  |                                                                                                                                                                                        
|10.22     |  | Second Amended and Restated Security Agreement
dated December 19, 2002, by and between the Company and
Michael Jaharis.                                                                
|          |  |                                                                                                                                                                                        
|10.23(7)+ |  | Co-promotion and Future Development Agreement dated May 3,
2000, between the Company and DuPont Pharmaceuticals Company.                                                               
|          |  |                                                                                                                                                                                        
|10.24(7)  |  | Stock Purchase Agreement dated May 3, 2000, between the
Company and DuPont Pharmaceuticals Company.                                                                                    
|          |  |                                                                                                                                                                                        
|10.25(8)  |  | Employment Agreement dated April 26, 2001, between the
Company and Adrian Adams.                                                                                                       
|          |  |                                                                                                                                                                                        
|10.26(9)  |  | Management Agreement dated December 13, 2001, between the
Company and Daniel M. Bell.                                                                                                  

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|           |  |                                                                                                                                                                                
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.27(9)+  |  | Master Services Agreement effective December 17, 2001,
between the Company, Innovex LP and PharmaBio Development,
Inc.                                                         
|           |  |                                                                                                                                                                                
|10.28(9)+  |  | Investment and Royalty Agreement effective December 17,
2001, between the Company, Innovex LP and PharmaBio
Development, Inc.                                                  
|           |  |                                                                                                                                                                                
|10.29(9)   |  | Warrant Agreement dated January 1, 2002, between the
Company and PharmaBio Development, Inc.                                                                                   
|           |  |                                                                                                                                                                                
|10.30(10)+ |  | Distribution, Patent & Trademark License, Marketing and
Supply Agreement, dated October 23, 2002, between the Company
and Merck KGaA.                                          
|           |  |                                                                                                                                                                                
|21         |  | Subsidiaries of the Company.                                                                                                                                                   
|           |  |                                                                                                                                                                                
|23.1       |  | Consent of independent certified public accountants, Ernst & Young LLP.                                                                                                        
|           |  |                                                                                                                                                                                
|23.2       |  | Notice Regarding Consent of Arthur Andersen LLP.                                                                                                                               
|           |  |                                                                                                                                                                                
|24         |  | Powers of Attorney (included on signature page hereto).                                                                                                                        
|           |  |                                                                                                                                                                                
|99.1(11)   |  | Certification by Adrian Adams, President and
Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|           |  |                                                                                                                                                                                
|99.2(11)   |  | Certification by Christopher P. Kiritsy, Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.    



---

|(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.                
|   
|(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.
|   
|(6) |  | Filed with the Companys Annual Report on Form
10-K filed with the Securities and Exchange Commission for the
Companys year ended December 31, 1999,                                                        

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|     |  | and incorporated herein by reference.                                                                                                                                                                        
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(7)  |  | 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 June 30, 2000, and
incorporated herein by reference.     
|    
|(8)  |  | 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, 2001, and
incorporated herein by reference.
|    
|(9)  |  | Filed with the Companys Annual Report on Form
10-K filed with the Securities and Exchange Commission for the
Companys year ended December 31, 2001, and incorporated
herein by reference.                  
|    
|(10) |  | Filed with the Companys Current Report on Form
8-K filed with the Securities and Exchange Commission on
November 4, 2002, and incorporated herein by reference.                                             
|    
|(11) |  | This exhibit shall be treated as accompanying
this Annual Report on Form 10-K and shall not be deemed as filed as
part of the Report.                                                                        
|    
|+    |  | 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) | On November 4, 2002, the Company filed a Report on Form 8-K
dated October 23, 2002, submitting a copy of the Distribution,
Patent & Trademark License, Marketing and Supply Agreement, dated
October 23, 2002, between the Company and Merck KGaA.

75



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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/ Adrian Adams
Adrian Adams
President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Adrian Adams 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.

|                                                   |  |                                                                                |  |               
|-------------------------------------------------- |  | ------------------------------------------------------------------------------ |  | --------------
|Signature                                          |  | Title                                                                          |  | Date          
|                                                   |  |                                                                                |  |               
|/s/ Michael Jaharis
Michael Jaharis                |  | Chairman Emeritus of the Board
of Directors                                    |  | March 26, 2003
|                                                   |  |                                                                                |  |               
|Daniel M. Bell                                     |  | Chairman of the Board
of Directors                                             |  | March 26, 2003
|                                                   |  |                                                                                |  |               
|/s/ Robert E. Baldini

Robert E. Baldini           |  | Vice Chairman of the Board                                                     |  | March 26, 2003
|                                                   |  |                                                                                |  |               
|/s/ Adrian Adams
Adrian Adams                      |  | President, Chief Executive
Officer, and Director
(Principal Executive Officer) |  | March 26, 2003
|                                                   |  |                                                                                |  |               
|/s/ Christopher P. Kiritsy

Christopher P. Kiritsy |  | Senior Vice President, Chief
Financial Officer
(Principal Financial Officer)   |  | March 26, 2003
|                                                   |  |                                                                                |  |               
|/s/ Juan F. Rodriguez

Juan F. Rodriguez           |  | Vice President, Controller
(Principal Accounting Officer)                      |  | March 26, 2003
|                                                   |  |                                                                                |  |               
|/s/ John Brademas
John Brademas                    |  | Director                                                                       |  | March 26, 2003
|                                                   |  |                                                                                |  |               
|/s/ Steven Jaharis
Steven Jaharis                  |  | Director                                                                       |  | March 26, 2003
|                                                   |  |                                                                                |  |               
|/s/ Louis C. Lasagna

Louis C. Lasagna             |  | Director                                                                       |  | March 26, 2003
|                                                   |  |                                                                                |  |               
|/s/ Nicolaos E. Madias

Nicolaos E. Madias         |  | Director                                                                       |  | March 26, 2003
|                                                   |  |                                                                                |  |               
|/s/ Mark Novitch
Mark Novitch                      |  | Director                                                                       |  | March 26, 2003
|                                                   |  |                                                                                |  |               
|/s/ Frederick B. Wittemore

Frederick B. Wittemore |  | Director                                                                       |  | March 26, 2003

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CERTIFICATIONS

I, Adrian Adams, Chief Executive Officer of Kos Pharmaceuticals, Inc.,
certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Kos
Pharmaceuticals, Inc;                                                                                                                                                                                                                                            
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;                   
|
| | 4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                               



| | a. |  | designed such disclosure controls and procedures
to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly
during the period in which this annual report is being
prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing of this annual report (the Evaluation
Date); and                                                                                                       
|
| | c. |  | presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



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



| | a. |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrants internal controls; and                                                                                                                                        

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

Date: March 26, 2003

/s/ Adrian Adams

---

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##### Table of Contents



I, Christopher P. Kiritsy, Chief Financial Officer of Kos Pharmaceuticals,
Inc., certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Kos
Pharmaceuticals, Inc;                                                                                                                                                                                                                                            
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;                   
|
| | 4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                               



| | a. |  | designed such disclosure controls and procedures
to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly
during the period in which this annual report is being
prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing of this annual report (the Evaluation
Date); and                                                                                                       
|
| | c. |  | presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



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



| | a. |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrants internal controls; and                                                                                                                                        



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

Date: March 26, 2003

/s/ Christopher P. Kiritsy
Christopher P. Kiritsy
Chief Financial Officer

79



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##### Table of Contents






EXHIBIT INDEX

|        |  |                                                                                                                                                                                        
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                        
|Number  |  | Description                                                                                                                                                                            
|        |  |                                                                                                                                                                                        
|10.16   |  | Third Amended and Restated Registration Rights Agreement effective as of
December 19, 2002, by and between the Company, Kos Holdings, Inc., Kos
Investments, Inc., and Michael Jaharis.
|        |  |                                                                                                                                                                                        
|10.19   |  | Revolving Credit and Loan Agreement dated as of December 19, 2002,
between Kos Pharmaceuticals and Michael Jaharis.                                                                    
|        |  |                                                                                                                                                                                        
|10.20   |  | Revolving Credit Promissory Note dated December 19, 2002 in favor of
Michael Jaharis.                                                                                                  
|        |  |                                                                                                                                                                                        
|10.21   |  | Non-Detachable Common Stock Purchase Warrant dated December 19, 2002.                                                                                                                  
|        |  |                                                                                                                                                                                        
|10.22   |  | Second Amended and Restated Security Agreement dated December 19, 2002,
by and between the Company and Michael Jaharis.                                                                
|        |  |                                                                                                                                                                                        
|21      |  | Subsidiaries of the Company.                                                                                                                                                           
|        |  |                                                                                                                                                                                        
|23.1    |  | Consent of independent certified public accountants, Ernst & Young LLP.                                                                                                                
|        |  |                                                                                                                                                                                        
|23.2    |  | Notice Regarding Consent of Arthur Andersen LLP                                                                                                                                        
|        |  |                                                                                                                                                                                        
|99.1    |  | Certification by Adrian Adams pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                               
|        |  |                                                                                                                                                                                        
|99.2    |  | Certification by Christopher P. Kiritsy pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.                                                                                     

80