<PAGE>


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2001

                                       OR

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

                        Commission file number 000-22171

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

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

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

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

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

                          Common Stock, $.01 par value

     Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

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

     The aggregate market value of Kos Pharmaceuticals, Inc. Common Stock, $.01
par value, held by non-affiliates, computed by reference to the price at which
the stock was sold as of February 22, 2002: $216,665,669.

     Number of shares of Common Stock of Kos Pharmaceuticals, Inc. issued and
outstanding as of February 22, 2002: 20,526,096.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Definitive Proxy Statement for the Company's 2002 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


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                                                                              PAGE
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<S>                                                                           <C>
PART I

Item 1.  Business .........................................................     2

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 ..........................................................    15

Item 6.  Selected Consolidated Financial Data .............................    16

Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations ............................................    17

         Forward-Looking Information: Certain Cautionary Statements .......    23

Item 7A. Quantitative and Qualitative Disclosures about Market Risk .......    35

Item 8.  Consolidated Financial Statements and Supplementary Data .........    35

Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosures ............................................    62

PART III ..................................................................    63

PART IV

Item 14. Exhibits, Financial Schedules and Reports on Form 8-K ............    64

Signatures ................................................................    67

</TABLE>




NIASPAN(R)and ADVICOR(TM)are trademarks of Kos Pharmaceuticals, Inc.
HEART ALLIANCESM is a service mark of Kos Pharmaceuticals, Inc.

MAVIK(R)and TARKA(R)are trademarks of Abbott Laboratories Inc.

<PAGE>
                                     PART I

ITEM 1.  BUSINESS

     Kos Pharmaceuticals, Inc. ("Kos" or the "Company") is a fully-integrated
specialty pharmaceutical company engaged in the development of proprietary
prescription products for the treatment of chronic cardiovascular and
respiratory diseases. The Company manufactures its currently marketed products,
NIASPAN(R) 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 cardiovascular products under development consist of
controlled-release, once-a-day, oral dosage formulations. The Company's
respiratory products under development consist of aerosolized inhalation
formulations to be used primarily with the Company's proprietary inhalation
devices.

     The Company believes that substantial market opportunities exist for
developing drugs that are reformulations of existing approved prescription
pharmaceutical products, but which offer certain safety advantages (such as
reduced side effects) or patient compliance advantages (such as once-a-day
rather than multiple daily dosing regimens) over currently 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 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 for the Greek island where Hippocrates
founded the science of medicine) was incorporated in Florida as the successor to
the business of Holdings. On June 30, 1996, all of the assets (except for
certain net operating loss carry-forwards) and all of the liabilities of
Holdings were transferred to the Company in exchange for shares of Common Stock
of the Company (the "Reorganization"). The Reorganization was accomplished in
order to transfer the assets and operations of Holdings to the Company while
preserving Holdings' net operating loss carry-forwards and related tax benefits
for Holdings. As a result, the Company had no tax assets or liabilities as of
June 30, 1996. Kos Investments, Inc. ("Investments") is the sole shareholder of
Holdings. Investments is controlled by, and serves as an investment vehicle for,
Michael Jaharis, one of the Company's founders and its Chairman Emeritus. All
references in this 10-K to the Company include its wholly owned subsidiary,
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.


                                       2
<PAGE>


MARKETED PRODUCTS

NIASPAN

     On July 28, 1997, the Company received clearance from the FDA to market
NIASPAN for the treatment of mixed lipid disorders. NIASPAN is the only
once-a-day 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,
NIASPAN is 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 NIASPAN references 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 seven 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 couple of 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. NIASPAN is the
most potent drug on the market for raising HDL cholesterol.



                                       3
<PAGE>


     In addition to the HATS trials, during 2001, the Assessment of Diabetics
Control and Evaluation of the Efficacy of NIASPAN Trial ("ADVENT"), which was
sponsored by Kos, evaluated the effects of NIASPAN on lipids and blood sugar
levels in 148 diabetic patients. Kos sponsored this trial because previous
reports had previously 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 were presented at the 2001 meetings of the American Diabetes Association
and of the American College of Cardiology, showed that NIASPAN increased HDL up
to 24% and decreased triglycerides by as much as 30%, with minimal effect on
glucose control. These results of this important study helped reassure
physicians that NIASPAN can be used to treat dyslipidemic patients who also
suffer from diabetes, provided that appropriate adjustments are made, if needed,
to concomitant anti-diabetes therapy.

     During 2001, Kos also benefited 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 new 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, an almost
three-fold increase since the previous guidelines were first published in 1993.

     The Company markets NIASPAN directly to specialist physicians within the
cardiovascular market who specialize in treating patients with CHD and who are
among the leading prescribers of lipid-altering medications. Such
"lipid-management specialists," 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 NIASPAN therapy. Many such patients are candidates
for combination therapy using principally an HMG-CoA reductase inhibitor, or
"statin," to reduce LDL combined with NIASPAN to raise HDL, lower triglycerides,
and enhance the statin's LDL efficacy. Since the launch of NIASPAN, Kos has
found that many lipid specialists are receptive to using combination therapy to
treat their refractory patients in order to address all of the lipids that may
contribute to a coronary event. Sixty-seven percent of the nearly 11,200
cardiologists who have been detailed on NIASPAN since 1999 have prescribed
NIASPAN, and more than 78,000 physicians have prescribed NIASPAN at least once.

     NIASPAN will also benefit from an expanded field sales force in 2002,
consisting of 300 Kos sales representatives and 150 from a contract sales
organization (under the terms of an agreement entered into on December 17,
2001). As of March 18, 2002, Kos had 281 sales representatives and the contract
sales organization had 143 representatives promoting the NIASPAN and ADVICOR
products, with the expectation to be at 450 combined sales representatives by
midyear 2002. Under the terms of the agreement, the contract sales organization
will provide the Company with an approximately 150-person field sales force for
a two-year term beginning on January 1, 2002 (the "Contract Sales Force
Agreement"). The representatives provided under the Contract Sales Force
Agreement will complement the Company's existing sales force. Under the terms of
the Contract Sales Force Agreement, the Company will pay the contract sales
organization a royalty based on net sales of the Company's NIASPAN and ADVICOR
products 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.



                                       4
<PAGE>

     In addition to a larger field sales force, Kos intends to increase its
promotional commitment to NIASPAN during 2002. 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 not only targeted physicians but also to the
broader group of physicians associated with the launch of ADVICOR.

     In addition to promoting NIASPAN as the drug of choice to treat low HDL
cholesterol and multiple lipid disorders, the Company informs physicians as to
the manner in which NIASPAN achieves its safety and efficacy profile. This
marketing program is implemented through direct office visits with selected
physicians, medical journal reprints, medical seminars, and clinical discussion
groups. The Company also educates patients on the benefits and proper use of
NIASPAN through brochures and the product sample pack. Information delivered by
the Company to physicians and patients includes a discussion about the flushing
side effects of NIASPAN, including the importance of proper dose titration and
adherence to the prescribed dosing regimen to reduce this side effect. Although
most patients taking NIASPAN will flush occasionally, the Company believes that
the combination of NIASPAN'S formulation, its patented dosing regimen, and
proper dose titration should result in an incidence of flushing episodes that
are tolerable for most patients. NIASPAN'S patented 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 ADVICOR to physicians on January 28, 2002. ADVICOR is a single tablet
formulation containing NIASPAN and 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 complimentary properties of NIASPAN and lovastatin represent
an effective method for treating patients with mixed lipid disorders.

     Advicor is 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. Advicor is not
indicated for initial therapy. In multicenter clinical trials, Advicor was
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. Advicor is contraindicated for pregnant or nursing
women or for patients with liver problems or active peptic ulcer.

     The launch of ADVICOR in January 2002 is 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
considerable 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 clinical study that compared the potency of ADVICOR
with the two best-selling statins in modulating multiple lipid risk factors. The
results of this 316-patient study, known as ADVOCATE, were





                                       5
<PAGE>

presented at the March 2002 meeting of the American College of Cardiology and
showed that ADVICOR's LDL efficacy is comparable to the leading statin drugs
while its efficacy in all other lip parameters is far superior. Specifically,
patients receiving 1000mg/40mg of ADVICOR (the expected "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%. These data provide compelling evidence
of the potency of ADVICOR to offer physicians "one-stop-shopping" for treating
patients with multiple lipid disorders.

     Similar to NIASPAN, the Company markets ADVICOR directly to specialist
physicians within the cardiovascular market who specialize in treating patients
with CHD and who are among the leading prescribers of lipid-altering
medications. 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 ADVICOR therapy. 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 NIASPAN is one of the two active ingredients in ADVICOR, most
patients taking ADVICOR will 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 ADVICOR product,
including the right to all product profits and the ability to entertain future
partnership discussions with other interested parties.


                                       6
<PAGE>


CO-PROMOTION OF MAVIK(R) AND TARKA(R)

     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 MAVIK and TARKA products
(MAVIK(R) and TARKA(R) 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.

SOLID-DOSE DRUG DELIVERY SYSTEMS

     The Company continues to conduct research on novel solid-dose drug delivery
systems. Utilizing the Company's considerable knowledge obtained from
formulating both NIASPAN and ADVICOR, Kos continues to make progress in
developing innovative solid-dose delivery systems that could be used to
formulate a variety of compounds. One of such delivery systems 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 2002, 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 unnamed proteins for delivery to the lungs using a Kos
proprietary metered-dose inhaler ("MDI") device. As the Company generates cogent
IN VITRO and IN VIVO data 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 believes it has a leadership position in formulating
proteins to be delivered through MDI devices using non-CFC propellants.

     In 2001, the Company commenced a proof-of-principle study to evaluate a
formulation of an inhaled protein and of the delivery device. Early results
demonstrate that the Company's inhalation




                                       7
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technology platforms are efficient, reproducible, rapidly acting, and convenient
methods for most patients to take their medication. If successful, the Company
believes that such compelling results will be extremely attractive to potential
development partners for not only for developing this product, but also for
other proteins/peptides, possibly on a contract formulation basis.

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 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 CARTE basis 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. In 2001, four 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 ("in-licensing"); product co-marketing arrangements; joint
ventures; and other strategic alliances. Many existing pharmaceutical products
or products currently under development may be suitable candidates for specialty
promotional or co-marketing campaigns. Accordingly, Kos intends to attempt to
identify licensing, co-marketing and product acquisition opportunities that can
complement the Company's future product portfolio. In situations where
third-party drug delivery technologies are complementary to the Company's drug
development formulation capabilities, the Company may pursue licensing rights
for such technology.

     The Company is also pursuing strategic alliances to license certain of its
products and technologies to third parties ("out-licensing"). Specifically, the
Company is seeking suitable co-promotion partners for NIASPAN and ADVICOR in
international markets and is also receptive to forging co-promotion alliances
for these products in the United States. 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




                                       8
<PAGE>

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 has been issued 30 patents, filed for 49
additional patent applications, and has been licensed 1 patent and 1 patent
application. In addition, the Company has been issued patents and patent
applications filed in foreign jurisdictions.

     In general, the U.S. patents and patent applications owned by or licensed
to Kos are method-of-use patents that cover the timed use of certain compounds
to treat specified conditions. Composition-of-matter protection is not available
for the active ingredient in NIASPAN, or either of the 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. Even in jurisdictions
where the use of the active ingredients in NIASPAN and ADVICOR for lipid
altering and other indications may be covered by the claims of a 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 NIASPAN or ADVICOR, thereby potentially reducing the sales of such
products.

     The U.S. Patent and Trademark Office has issued U.S. Patents numbers
6,129,930 and 6,080,428 to the Company with claims covering NIASPAN'S
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 are covered by such patents and its
failure to obtain licenses under such patents in the event such patents are
determined to be valid and enforceable could have an adverse effect on the
Company's business.

     On January 23, 2002, the Company received notice from Barr Laboratories,
Inc. ("Barr") that it had filed with the FDA an ANDA that would, if approved,
allow Barr to market a generic version of the Company's 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. The Company filed an Amended Complaint on March 11, 2002.
In this lawsuit, the Company asserts that Barr has infringed




                                       9
<PAGE>

two valid patents that cover the NIASPAN product and its once-a-day at night
method of dosage. Under FDA law, the filing of a patent infringement suit by the
Company suspends the ANDA approval process for 30 months or until the Court
resolves the suit. On March 25, 2002, Barr answered the Amended Complaint by
denying that the two patents are valid and infringed, and seeking a declaratory
judgment to that effect. Kos intends to vigorously pursue its rights in this
litigation, although the outcome of the litigation can not yet be determined.

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




                                       10
<PAGE>


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 18, 2002, the Company had a 329-person sales and marketing
organization, excluding 143 sales representatives being provided by the contract
sales organization. During 2001, in preparation for the commercial launch of
ADVICOR, Kos significantly increased the sale of its sale force. In addition, in
late 2001, Kos also retained an approximately 150-person sales force from a
contract sale organization. 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 NIASPAN during September 1997 and ADVICOR on January 28, 2002. The
Company believes that the sizable increased 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 NIASPAN and ADVICOR products in one
manufacturing plant in Edison, New Jersey that has been inspected and approved
by the FDA for both products. Kos began manufacturing Niaspan in 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 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 NIASPAN and ADVICOR are currently obtained
from single sources of supply. The Company does not have a contractual supply
arrangement with the sole supplier of the


                                       11
<PAGE>

active ingredient in NIASPAN or 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
NIASPAN and ADVICOR, although an alternate source for at least one such material
will not be available because of the supplier's patent rights.

     In 2001, Kos steadily improved its efficiency in manufacturing NIASPAN.
Specifically, gross margins increased three percentage points, reaching 93% of
net sales during the second-half of 2001. The Company expects improvements in
gross margins for NIASPAN as sales volumes increase and 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 NIASPAN prescriptions account
for approximately 2.1% 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 26,000
representatives compared with the Company's approximately 420-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 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




                                       12
<PAGE>

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 February 28, 2002, the Company had 580 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.



                                       13
<PAGE>


ITEM 2.  PROPERTIES

     The Company leased the following properties as of December 31, 2001:


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

<S>                       <C>                                   <C>                        <C>        <C>
Miami, FL                 Corporate offices                     15,250            December 2004       $550,000

Miami Lakes, FL           Research and admin. Offices           21,000            December 2003        419,000

Hollywood, FL             Manufacturing, research and
                          admin. offices                        23,500            November 2004        327,000

Edison, NJ                Manufacturing, research, and
                          admin. offices                        43,400             October 2006        288,000

Raleigh, NC               Device engineering offices             6,000             August 2002          32,500

</TABLE>

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



ITEM 3.  LEGAL PROCEEDINGS

     On August 5, 1998, a purported class action lawsuit was filed in the United
States District Court for the Northern District of Illinois, Eastern Division,
against the Company, the members of the Company's Board of Directors, certain
officers of 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
NIASPAN product. 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 along with 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. Because the outcome of the
litigation cannot yet be determined, no provision for any liability that may
result from these matters has been recognized in the Company's financial
statements. Nevertheless, the outcome of this litigation may have a material
adverse effect on the Company's business, results of operations, and financial
condition.

     On January 23, 2002, the Company received notice from Barr Laboratories,
Inc. ("Barr") that it had filed with the FDA an ANDA that would, if approved,
allow Barr to market a generic version of the Company's 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




                                       14
<PAGE>

infringement lawsuit against Barr in the Southern District of New York. The
Company filed an Amended Complaint on March 11, 2002. In this lawsuit, the
Company asserts that Barr has infringed two valid patents that cover the NIASPAN
product and its once-a-day at night method of dosage. Under FDA law, the filing
of a patent infringement suit by the Company suspends the ANDA approval process
for 30 months or until the Court resolves the suit. On March 25, 2002, Barr
answered the Amended Complaint by denying that the two patents are valid and
infringed, and seeking a declaratory judgment to that effect. Kos intends to
vigorously pursue its rights in this litigation, although the outcome of the
litigation can not yet be determined.



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, 2001.



PART II

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

     The Company's Common Stock, par value $.01 per share, commenced trading on
March 7, 1997, on the Nasdaq National Market under the symbol "KOSP". As of
March 1, 2002, there were 375 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.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 2001               HIGH         LOW
----------------------------             ---------   ---------

<S>                                      <C>             <C>
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, 2000               HIGH         LOW
----------------------------             ---------   ---------

First Quarter .....................      $   22.13   $    5.30
Second Quarter ....................          18.56       10.00
Third Quarter .....................          17.88       10.75
Fourth Quarter ....................          25.13       13.63

</TABLE>

      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.




                                       15
<PAGE>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

     The following consolidated selected financial data of the Company for the
five years ended December 31, 2001, should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes thereto.
See "Item 8. Consolidated Financial Statements and Supplementary Data."


<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                             ------------------------------------------------------------------------------------
                                                  2001              2000              1999              1998              1997
                                             ------------      ------------      ------------      ------------      ------------
                                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                          <C>               <C>               <C>               <C>               <C>
STATEMENT OF OPERATIONS:
Revenues, net ..........................     $     91,447      $     60,174      $     36,340      $     13,038      $      2,892
Cost of sales ..........................            7,646             5,932             5,406             3,276               792
                                             ------------      ------------      ------------      ------------      ------------
                                                   83,801            54,242            30,934             9,762             2,100
                                             ------------      ------------      ------------      ------------      ------------

Operating expenses:
   Research and development ............           30,974            26,459            25,619            29,144            24,130
   Selling, general and administrative .           83,587            56,831            56,843            61,519            20,509
                                             ------------      ------------      ------------      ------------      ------------
       Total operating expenses ........          114,561            83,290            82,462            90,663            44,639
                                             ------------      ------------      ------------      ------------      ------------

Loss from operations ...................          (30,760)          (29,048)          (51,528)          (80,901)          (42,539)
Other:
   Interest income, net ................              242               323               169             1,793             2,787
   Interest expense-related parties ....           (6,081)           (6,560)           (3,207)              (68)             (868)
   Other income (expense) ..............           38,985                20                14                15               (10)
                                             ------------      ------------      ------------      ------------      ------------

     Net income (loss) .................     $      2,386      $    (35,265)     $    (54,552)     $    (79,161)     $    (40,630)
                                             ============      ============      ============      ============      ============

Net income (loss) per share(1):
   Basic ...............................     $       0.12      $      (1.84)     $      (3.06)     $      (4.50)     $      (2.79)
   Diluted .............................             0.10             (1.84)            (3.06)            (4.50)            (2.79)
Weighted average common stock and common
   stock equivalents used in computing
   net income (loss) per share(1):
   Basic ...............................       20,221,089        19,202,877        17,842,879        17,589,767        14,569,474
   Diluted .............................       22,798,632        19,202,877        17,842,879        17,589,767        14,569,474


</TABLE>
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                        ---------------------------------------------------------------------
                                           2001           2000           1999           1998           1997
                                        ---------      ---------      ---------      ---------      ---------
                                                                    (IN THOUSANDS)
<S>                                     <C>            <C>            <C>            <C>            <C>
BALANCE SHEET:
Cash and marketable securities ....     $  45,319      $   6,125      $   4,336      $   4,879      $  70,396
Working capital (deficit) .........        27,160         (1,911)        (2,354)        (3,136)        70,939
Total assets ......................        82,941         29,648         26,258         21,570         84,403
Total long-term debt(2) ...........        95,082         72,000         62,089          9,239             --
Accumulated deficit(3) ............      (272,545)      (274,931)      (239,666)      (185,114)      (105,952)
Shareholders' equity (deficit) ....       (58,439)       (65,090)       (53,195)          (338)        77,870
</TABLE>

-----

(1)  See Note 2 of Notes to Consolidated Financial Statements for information
     concerning the computation of net loss per share.
(2)  For 2001, excludes $10 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, 2002.
(3)  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 $214
     million as of December 31, 2001), to offset future taxable income, if any.
     See "Management's Discussion and Analysis of Financial Condition and
     Results of Operations".


                                       16
<PAGE>


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


GENERAL

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

     On March 12, 1997, the Company completed an initial public offering ("IPO")
of its Common Stock. Through December 31, 2001, the Company had accumulated a
deficit from operations of approximately $272.5 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 $214 million as of
December 31, 2001, 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 NIASPAN to wholesalers in
mid-August 1997 and began detailing NIASPAN to 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
ADVICOR at the end of January 2002.

     The Company's Board of Directors changed the end of the Company's fiscal
year from June 30 to December 31 effective with its December 31, 1997, reporting
period. Fiscal years presented and referred to in the Company's consolidated
financial statements, along with all other financial data, have been restated to
conform with a December 31 fiscal year basis.

RESULTS OF OPERATIONS

   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 and other allowances. The impact of these estimates on results
of operations in 2001 and 2000 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, 2001.



                                       17
<PAGE>


   YEARS ENDED DECEMBER 31, 2001 AND 2000

     Similar to most other pharmaceutical companies, Kos has at times been
subject to significant "forward buying" from pharmaceutical wholesalers.
"Forward buying" 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 a
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 the NIASPAN
product 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.

     Consequently, the Company's reported revenue, including the effect of
NIASPAN revenue 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 NIASPAN product. The increase in NIASPAN revenue is best
explained as follows:

                                                          YEAR ENDED
                                                        DECEMBER 31,
                                                     --------------------
                                                      2001         2000
                                                     -------      -------
                                                        (IN MILLIONS)
         NIASPAN shipments .....................     $  87.4      $  56.6
         Prior period NIASPAN shipments
            recorded as revenue during period ..         3.8          2.3
         Current period NIASPAN shipments
            not recognized as revenue ..........        (7.0)        (3.8)
                                                     -------      -------
                Reported NIASPAN 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
Company's co-promotion collaboration agreement with Abbott Laboratories Inc.
(hereinafter "Abbott"), for the promotion and marketing of Abbott's MAVIK and
TARKA products within the United States (the "Abbott Agreement"). Kos and Abbott
have agreed to terminate the Abbott Agreement effective January 1, 2002.

     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 NIASPAN volume 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 new dual-component
NIASPAN/lovastatin product, ADVICOR. 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.



                                       18
<PAGE>


     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 NIASPAN product and the
anticipated launch of the ADVICOR product, of $2.0 million in personnel and
personnel related costs, and of $2.8 million in clinical study costs mostly
associated with an ADVICOR safety study. These increases in research and
development expenses were partially offset by a $3.9 million contribution
received from DuPont Pharmaceuticals Company ("DuPont") under the terms of the
Company's co-promotion arrangement with DuPont (the "DuPont Agreement"). 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 ADVICOR product. See below, and Liquidity
and Capital Resources section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations, for further discussion regarding
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 $23.3 million to $66.2
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 NIASPAN and ADVICOR, and of $2.5 million in
marketing costs associated with MAVIK and TARKA promotional efforts. 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 $17.4 million for
the year ended December 31, 2001, from $13.9 million for the preceding period,
primarily as a result of an increase of $2.1 million in personnel and
personnel-related costs, and of $0.3 million in royalty expenses associated with
the increase in net sales of the NIASPAN product.

     During 2000, the Company entered into a co-promotion agreement with DuPont,
to co-promote ADVICOR. Under the terms of the agreement, Kos received from
DuPont a $20-million equity investment at closing. 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 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 a one-time, $45
million settlement. 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.

     The Company is subject to the terms of the July 1, 1998, $30 million credit
facility (the "Credit Facility"), the September 1, 1999, $50 million credit
facility (the "Supplemental Credit 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.
Borrowings under these credit facilities totaled $105 million as of December 31,
2001, and bear interest at the prime rate (4.75% as of December 31, 2001).
Interest expense under these credit facilities totaled approximately $6.1
million and $6.6 million for the years ended December 31, 2001 and 2000,
respectively. On January 15, 2002, Kos utilized $25 million of the settlement
received from BMS to reduce the amount of its outstanding indebtedness with Mr.
Jaharis. As such, as of January 15, 2002, the total amount borrowed from Mr.
Jaharis was reduced to $80 million.



                                       19
<PAGE>

     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.

   YEARS ENDED DECEMBER 31, 2000 AND 1999

     The Company's reported revenue, including the effect of NIASPAN revenue not
recognized during the period, increased to $60.2 million for the year ended
December 31, 2000, from $36.3 million for the year ended 1999. This $23.9
million increase in revenue reflects a $21.5 million increase in recorded sales
of the Company's NIASPAN product. The increase in NIASPAN revenue is best
explained as follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDED
                                                         DECEMBER 31,
                                                     --------------------
                                                       2000         1999
                                                     -------      -------
                                                         (IN MILLIONS)
<S>                                                  <C>          <C>
         NIASPAN shipments .....................     $  56.6      $  36.0
         Prior period NIASPAN shipments
            recorded as revenue during period ..         2.3           --
         Current period NIASPAN shipments
            not recognized as revenue ..........        (3.8)        (2.3)
                                                     -------      -------
         Reported NIASPAN sales ................     $  55.1      $  33.7
                                                     =======      =======
</TABLE>

     Revenue for the year ended December 31, 2000, also included $5.0 million,
or an increase of $2.4 million, in co-promotion revenue associated with the
Company's co-promotion collaboration agreement with Abbott.

     Cost of sales was $5.9 million and $5.4 million for the years ended
December 31, 2000 and 1999, respectively. The higher cost of sales in 2000 was
attributable to higher NIASPAN volume during the period, partially offset by
efficiencies attained in the production of NIASPAN.

     The Company's research and development expenses increased to $26.5 million
for the year ended December 31, 2000, from $25.6 million for the year ended
December 31, 1999. The increased expenses related primarily to increases of $0.9
million in personnel and personnel-related costs, of $0.9 million in formulation
development costs for products under development, of $0.6 million in costs
associated with NDA submission expenses for the Company's ADVICOR product, and
of $0.5 million in costs associated with licensing activities. These costs were
partially offset by a decrease of $2.1 million in the costs of clinical trials
resulting from the completion of most of the clinical trial activities
associated with the NDA submission for the ADVICOR product during the year ended
December 31, 2000.

     Selling, general and administrative expenses remained at the same level
overall for the years ended December 31, 2000 and 1999. Within this category,
however, selling expenses decreased $2.5 million primarily as a result of a
decrease of $3.5 million in sales force operating expenses, and of $2.0 million
in marketing programs in support of NIASPAN. These decreases were partially
offset by an increase of $2.5 million in marketing costs associated with MAVIK
and TARKA promotional efforts. General and administrative expenses increased to
$13.9 million for the year ended December 31, 2000, from $11.5 million for the
preceding period, primarily as a result of an increase of $1.0 million in
royalty expenses associated with the increase in net sales of the NIASPAN
product, and of an increase of $0.8 million in personnel and personnel-related
costs.


                                       20
<PAGE>


     Interest expense under the Company's credit facilities totaled
approximately $6.6 million and $3.2 million for the year ended December 31, 2000
and 1999, respectively.

     The Company incurred a net loss of $35.3 million for the year ended
December 31, 2000, compared with a net loss of $54.6 million for the year ended
December 31, 1999.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 2001, the Company had cash and cash equivalents totaling
$45.3 million and working capital of $27.2 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, 2001, the Company's investment in equipment and leasehold improvements, net
of depreciation and amortization, was $6.9 million. During the year ended
December 31, 2001, the Company spent $4.3 million in capital expenditures and
deposits on fixed assets to be acquired. The Company expects to increase the
level of capital expenditures during 2002 mostly to provide increased production
capacity for the ADVICOR product. Accordingly, 2002 capital expenditures are
expected to be significantly higher than those incurred during the year ended
December 31, 2001.

     On July 1, 1998, the Company entered into a $30-million credit facility
(the "Credit Facility") with Michael Jaharis, Chairman Emeritus of the Company's
Board of Directors and its principal shareholder. On June 9, 2000, in order to
reduce interest costs, the Company utilized the proceeds of a $20-million equity
contribution from DuPont Pharmaceuticals Company ("DuPont") to pay-off
borrowings made under the Credit Facility. In connection with this loan
repayment, Mr. Jaharis agreed to continue to make available to the Company the
full original borrowing capacity of the Credit Facility, provided that future
Company borrowings from Mr. Jaharis be first made from the existing borrowing
capacity of Mr. Jaharis' other credit lines with Kos. All other terms of the
Credit Facility remain in full force and effect. Borrowings under the Credit
Facility totaled $10 million as of December 31, 2001, bear interest at the prime
rate (4.75% as of December 31, 2001), and are due December 31, 2002.

     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, 2001, bear interest at the prime rate, are convertible (at $4.91
per share) into shares of the Company's Common Stock, and will be due December
31, 2003. As of December 31, 2001, 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.



                                       21
<PAGE>


     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 $45 million as of December 31, 2001, are due June 30, 2005, and
are also subject to most of the terms and conditions of borrowings made under
the Supplemental Credit Facility. Borrowings made under the Standby Facility are
not, however, convertible into shares of the Company's Common Stock. In lieu of
a conversion feature, the Company has granted to Mr. Jaharis 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.

     During 2000, the Company entered into a co-promotion agreement with DuPont,
to co-promote ADVICOR. Under the terms of the agreement, Kos received from
DuPont a $20-million equity investment at closing. 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 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 a one-time, $45
million settlement. 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 15, 2002, Kos utilized $25 million of the settlement received
from DuPont to reduce the amount of its outstanding indebtedness with Mr.
Jaharis. As such, as of January 15, 2002, the total amount borrowed from Mr.
Jaharis was reduced to $80 million.

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





                                       22
<PAGE>


           FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS

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

MARKET ACCEPTANCE AND SALES GROWTH OF NIASPAN AND ADVICOR

     The Company's success depends primarily upon its ability to successfully
market and sell increasing quantities of the NIASPAN and ADVICOR products. The
Company's ability to successfully sell increasing quantities of the NIASPAN
product will depend significantly on the continued acceptance of the NIASPAN
product by physicians and their patients despite the introduction of ADVICOR.
Following the commercialization of the ADVICOR product, which is a combination
product including NIASPAN and a statin, prescription levels for NIASPAN may be
adversely affected to the extent a significant number of physicians prescribe
ADVICOR as 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
NIASPAN and ADVICOR products will sometimes flush, the formulation and dosing
regimen for NIASPAN and 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 NIASPAN and ADVICOR products
were to suffer episodes of flushing that they consider intolerable or to suffer
other side effects, physicians may discontinue prescribing the NIASPAN and
ADVICOR products or patients may stop taking NIASPAN and ADVICOR, which would
have a material adverse effect on the Company. Unanticipated side effects or
unfavorable publicity concerning the NIASPAN or ADVICOR products or any other
product incorporating technology similar to that used in the NIASPAN or ADVICOR
products 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.

     On December 17, 2001, the FDA issued to the Company an approval letter
granting marketing clearance for the ADVICOR product. The Company's ability to
successfully sell increasing quantities of the ADVICOR product will depend
significantly on the increasing acceptance of the ADVICOR product by physicians
and their patients. If a significant number of patients using the ADVICOR
product 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,




                                       23
<PAGE>

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 ADVICOR although there have been several cases where NIASPAN (one of the
principal ingredients in ADVICOR) or ADVICOR have 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 ADVICOR product 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, ADVICOR may 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, ADVICOR is a combination of two well-known
cholesterol drugs, niacin and lovastatin, that have been available for a long
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 ADVICOR because it is not as new as more recently introduced
compounds, such as the potent statin products marketed by the Company's
competitors. Also, because ADVICOR is a combination of two currently available
drugs, ADVICOR has 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 NIASPAN or 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 ADVICOR until
they have first prescribed either NIASPAN, lovastatin, or another statin alone
and subsequently determined that their patients need ADVICOR to achieve desired
cholesterol improvements. Similarly the Company's ability to successfully sell
increasing quantities of the ADVICOR product may be adversely affected by the
release of Crestor, a new, highly powerful statin product that is scheduled to
be launched soon after ADVICOR by AstraZeneca, one of the Company's competitors
with substantially greater resources than Kos. 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 ADVICOR may also be affected by the potential release
of several other new combination statin drugs in the future. Further,
simultaneous with the final approval of the ADVICOR product, there will be at
least five new versions of generic lovastatin, one of the components of ADVICOR,
being 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 NIASPAN and ADVICOR products, the
development of other products, and general and administrative expenses. The
Company expects to incur significant operating losses for at least the next
twelve months, due primarily to continued manufacturing and marketing, sales and
administrative expenses associated with the commercial launch of the ADVICOR
product, the continued marketing of NIASPAN, 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
NIASPAN and ADVICOR products; 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 (due to receipt of a one-time
settlement payment of approximately $45 million resulting from the termination
of the DuPont




                                       24
<PAGE>

Agreement), the Company's net loss for the years ended December 31, 2000, 1999,
and 1998 has been $35.3 million, $54.6 million, and $79.2 million, respectively.
As of December 31, 2001, the Company's accumulated deficit was $272.5 million.
In connection with the transfer of operations from Kos Holdings, Inc. to the
Company on June 30, 1996, net operating loss carryforwards 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 $214 million as of December 31, 2001, 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.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

     In order to finance the Company's operations, as of December 31, 2001, the
Company has borrowed a total of $105 million from Michael Jaharis, the Company's
principal shareholder and a director. The Company can borrow up to an additional
$25 million from Mr. Jaharis under agreements currently in place. 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. 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 NIASPAN and ADVICOR
products 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, the proceeds from this offering, and amounts paid to the Company in
connection with the termination of the DuPont Agreement, 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 anticipates that it will expend significant
amounts of capital to launch the ADVICOR product in a manner that maximizes the
product's commercial potential. In light of the launch plans for ADVICOR, 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 NIASPAN and ADVICOR; the Company's ability
to meet the conditions necessary to obtain funding under its lines of credit;
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 NIASPAN and ADVICOR
products, the regulatory and commercial success of the ADVICOR product, 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 NIASPAN
product, and following its launch, the ADVICOR product, do not




                                       25
<PAGE>

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
planned launch activities for ADVICOR 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 NIASPAN or ADVICOR products 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.

LIMITED SALES AND MARKETING EXPERIENCE AND RESOURCES

     Although the Company markets the NIASPAN and ADVICOR products 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 NIASPAN and ADVICOR products, 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 NIASPAN and ADVICOR products 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 NIASPAN and ADVICOR products. As a result, Kos may be unable to generate
significantly increased sales of the NIASPAN or ADVICOR products. The failure of
the Company's sales representatives to generate increased sales of the NIASPAN
and ADVICOR products 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, 9,287,570 shares of the Company's common stock as of
December 31, 2001, or approximately 45% 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 exercise were to occur, Mr. Jaharis' direct or
indirect ownership of the Company's common stock would increase to 20,379,220
shares, or approximately 65% of the common stock outstanding, and Mary Jaharis
would control 5,809,150 shares in each case assuming such conversion and warrant
exercise had occurred as of December 31, 2001.




                                       26
<PAGE>

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:

          o    Abbott (TRICOR)

          o    Bristol-Myers Squibb (PRAVACHOL)

          o    Merck (ZOCOR AND MEVACOR)

          o    Novartis (LESCOL)

          o    Pfizer (LIPITOR AND LOPID)

          o    Sankyo (WELCHOL)

     The Company estimates that the existing NIASPAN prescriptions account for
slightly more than 2.0% of the total prescriptions currently being written in
the United States for cholesterol-lowering pharmaceutical compounds. In
addition, Crestor, a new, highly powerful statin product, is scheduled to be
launched soon after ADVICOR by AstraZeneca, one of the Company's competitors who
also has substantially greater resources than those available to Kos. Further,
several other new combination statin drugs may be marketed during succeeding
years. Finally, simultaneous with the final approval of the ADVICOR product,
there will be at least five new versions of generic lovastatin, one of the
components of ADVICOR, being launched into the cholesterol market. The existence
of distributors of generic lovastatin and the competitive environment they may
create may inhibit the NIASPAN and ADVICOR products from competing successfully
or from achieving increased sales of the NIASPAN product or, following its
approval, the ADVICOR product. Moreover, the active ingredient in NIASPAN,
niacin, is available in several other formulations, most of which do not require
a prescription. Although the Company believes that there are no other currently
available niacin formulations that have been approved by the FDA specifically
for once-a-day dosing, 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 NIASPAN product 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 NIASPAN
product's dosing regimen and could promote the sale of their products to treat
the indications for which the Company has received clearance to market NIASPAN.
Although such promotion would be a violation of FDA regulations, the 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




                                       27
<PAGE>

developed by Kos, the Company's products may be unable to compete successfully
with any of those products.

NO ASSURANCE OF ADEQUATE THIRD-PARTY REIMBURSEMENT

     The Company's ability to commercialize successfully its products under
development is dependent in part on the extent to which appropriate levels of
reimbursement for the NIASPAN and ADVICOR products, 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, 2001, approximately $138
million, or 73%, of the Company's cumulative NIASPAN revenue 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 ADVICOR product, 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 NIASPAN and ADVICOR from many third-party payors,
such approvals, in the United States and in foreign countries, may be
discontinued for NIASPAN, or unavailable for ADVICOR or 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.

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' 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
NIASPAN and ADVICOR products, 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




                                       28
<PAGE>

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 the 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, ADVICOR and certain other of the Company's products under
development are based on, among other things, the timed administration of
NIASPAN. If the indications treated by NIASPAN, ADVICOR and such other products
under development could be treated using drugs without such timed
administration, 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:

          o    The patent applications licensed to or owned by Kos do not result
               in issued patents;

          o    Patent protection is not secured for any particular technology;

          o    Any patents that have been or may be issued to Kos or the
               Company's licensors, including the patents covering the Company's
               NIASPAN product, are invalid or unenforceable; or

          o    Any patents fail to provide meaningful protection to Kos.

     In the United States, the Company has been issued 30 patents, filed for 49
additional patent applications, and has been licensed 1 patent and 1 patent
application. In addition, the Company has been issued patents and patent
applications filed in foreign jurisdictions.

     In general, the U.S. patents and patent applications owned by or licensed
to Kos are method-of-use patents that cover the timed use of certain compounds
to treat specified conditions. Composition-of-matter protection is not available
for the active ingredient in NIASPAN, or either of the 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. Even in jurisdictions
where the use of the active ingredients in NIASPAN and ADVICOR for lipid
altering and other indications may be covered by the claims of a 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 NIASPAN or ADVICOR, thereby potentially reducing the sales of such
products.

     The U.S. Patent and Trademark Office has issued U.S. Patents numbers
6,129,930 and 6,080,428 to the Company with claims covering NIASPAN'S
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




                                       29
<PAGE>

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 are covered by such patents and its failure to
obtain licenses under such patents in the event such patents are determined to
be valid and enforceable could have an adverse effect on the Company's business.

     On January 23, 2002, the Company received notice from Barr Laboratories,
Inc. ("Barr") that it had filed with the FDA an ANDA that would, if approved,
allow Barr to market a generic version of the Company's 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. The Company filed an Amended Complaint on March 11, 2002.
In this lawsuit, the Company asserts that Barr has infringed two valid patents
that cover the NIASPAN product and its once-a-day at night method of dosage.
Under FDA law, the filing of a patent infringement suit by the Company suspends
the ANDA approval process for 30 months or until the Court resolves the suit. On
March 25, 2002, Barr answered the Amended Complaint by denying that the two
patents are valid and infringed, and seeking a declaratory judgment to that
effect. Kos intends to vigorously pursue its rights in this litigation, although
the outcome of the litigation can not yet be determined.

     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




                                       30
<PAGE>

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 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.

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 and may in the future be subject
to foreign regulations. 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. Similar delays may also be encountered in foreign
countries. 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 can, among other
things, result in fines, suspensions of regulatory approvals, product recalls,
operating restrictions and criminal prosecution, any of which could have a
material adverse effect on Kos.

     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 NIASPAN product. In its warning letter, the FDA objected to the
advertisement on the grounds that the advertisement failed to reflect a fair
balance of the




                                       31
<PAGE>

contraindications, warnings, precautions and side effects of the Company's
NIASPAN product. The FDA also objected to the advertisement on the grounds that
the advertisement overstated the efficacy of the NIASPAN product 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.

LIMITED MANUFACTURING EXPERIENCE; RISK OF SCALE-UP

     The Company currently manufactures the NIASPAN and ADVICOR products in one
manufacturing plant in Edison, New Jersey that has been inspected and approved
by the FDA for both NIASPAN and 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.
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 NIASPAN and 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. Further, the Company does not have a contractual
arrangement with Lonza Ltd., the Company's sole supplier of niacin, the active
ingredient in NIASPAN and the other active ingredient in ADVICOR. Although the
Company has maintained a business relationship with this supplier since 1993,
and has




                                       32
<PAGE>

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.

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 ADVICOR has 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 ADVICOR develop 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 ADVICOR product, 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.

SHARES ELIGIBLE FOR FUTURE SALE; 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 24,753,368
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.

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.



                                       33
<PAGE>

     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, 1998             HIGH          LOW
      ----------------------------             ----          ---

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

      YEAR ENDED DECEMBER 31, 1999
      ----------------------------

          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


     The sale by the Company's controlling shareholder or members of the
Company's management of shares of Common Stock, announcements of technological
innovations or new commercial products by the Company or its competitors,
developments or disputes concerning patent or proprietary rights, publicity
regarding actual or potential medical results relating to the NIASPAN and
ADVICOR products 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 NIASPAN product and the ADVICOR product 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.

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.





                                       34
<PAGE>


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

     The Company's exposure to market risk is limited primarily to fluctuating
interest rates associated with variable rate indebtedness that is subject to
interest rate changes in the United States. The Company does not use, nor has it
historically used, derivative financial instruments to manage or reduce market
risk. At December 31, 2001, the Company had $105 million of variable rate
indebtedness bearing interest at the prime rate (4.75% at December 31, 2001).


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.

<TABLE>
<CAPTION>
                                                                                 PAGE
                                                                                 ----
<S>                                                                               <C>
        FINANCIAL STATEMENTS:

        Report of Independent Certified Public Accountants .................      36

        Consolidated Balance Sheets at December 31, 2001 and 2000 ..........      37

        Consolidated Statements of Operations for the years ended
            December 31, 2001, 2000 and 1999 ...............................      38

        Consolidated Statements of Shareholders' Deficit for
            the years ended December 31, 2001, 2000 and 1999 ...............      39

        Consolidated Statements of Cash Flows for the years ended
            December 31, 2001, 2000 and 1999 ...............................      40

        Notes to Consolidated Financial Statements .........................      41

        FINANCIAL STATEMENT SCHEDULE:*

        Report of Independent Certified Public Accountants on Schedule II ..      60

        Schedule II. Valuation and Qualifying Accounts .....................      61

</TABLE>

----------

*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.




                                       35
<PAGE>


               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.



                                       36
<PAGE>


                    KOS PHARMACEUTICALS, INC. AND SUBSIDIARY


                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                       DECEMBER 31,
                                                                            ---------------------------------
                                                                                 2001                2000
                                                                            -------------       -------------
<S>                                                                         <C>                 <C>
ASSETS
Current Assets:
   Cash and cash equivalents .........................................      $  45,318,551       $   6,125,437
   Trade accounts receivable, net ....................................         12,441,002           9,602,734
   Inventories .......................................................          7,732,169           1,826,053
   Prepaid expenses and other current assets .........................          7,966,458           3,272,726
                                                                            -------------       -------------
       Total current assets ..........................................         73,458,180          20,826,950
Fixed Assets, net ....................................................          6,878,752           7,914,458
Goodwill, net ........................................................                 --             722,864
Other Assets .........................................................          2,603,871             184,051
                                                                            -------------       -------------

       Total assets ..................................................      $  82,940,803       $  29,648,323
                                                                            =============       =============

LIABILITIES AND SHAREHOLDERS'
  DEFICIT
Current Liabilities:
   Accounts payable ..................................................      $   4,697,354       $   3,012,861
   Accrued expenses ..................................................         24,856,426          15,353,719
   Advance payments from customers ...................................          6,691,192           4,322,460
   Current portion of notes payable to Shareholder ...................         10,000,000                  --
   Current portion of capital lease obligations ......................             53,253              49,145
                                                                            -------------       -------------
       Total current liabilities .....................................         46,298,225          22,738,185
                                                                            -------------       -------------

Notes Payable to Shareholder, net of current portion .................         95,000,000          72,000,000
Capital Lease Obligations, net of current portion ....................             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,
      20,492,371 and 19,947,061 shares issued and outstanding as of
      December 31, 2001 and 2000, respectively .......................            204,924             199,471
   Additional paid-in capital ........................................        214,895,089         209,641,721
   Restricted stock grant ............................................           (994,521)                 --
   Accumulated deficit ...............................................       (272,544,813)       (274,931,054)
                                                                            -------------       -------------
       Total shareholders' deficit ...................................        (58,439,321)        (65,089,862)
                                                                            -------------       -------------

       Total liabilities and shareholders' deficit ...................      $  82,940,803       $  29,648,323
                                                                            =============       =============

</TABLE>



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


                                       37
<PAGE>


                    KOS PHARMACEUTICALS, INC. AND SUBSIDIARY


                      CONSOLIDATED STATEMENTS OF OPERATIONS




<TABLE>
<CAPTION>
                                                                                        FOR THE YEAR ENDED DECEMBER 31,
                                                                             -----------------------------------------------------
                                                                                  2001                2000                1999
                                                                             -------------       -------------       -------------
<S>                                                                          <C>                 <C>                 <C>
Revenues, net .........................................................      $  91,447,043       $  60,173,940       $  36,339,514
Cost of sales .........................................................          7,645,600           5,931,637           5,405,960
                                                                             -------------       -------------       -------------
                                                                                83,801,443          54,242,303          30,933,554
                                                                             -------------       -------------       -------------

Operating expenses:
   Research and development ...........................................         30,974,279          26,458,963          25,618,870
   Selling, general and administrative ................................         83,587,439          56,831,657          56,843,187
      Total operating expenses ........................................        114,561,718          83,290,620          82,462,057
                                                                             -------------       -------------       -------------

Loss from operations ..................................................        (30,760,275)        (29,048,317)        (51,528,503)
                                                                             -------------       -------------       -------------
Other:
   Interest income, net ...............................................            241,748             323,400             169,326
   Interest expense-related parties ...................................         (6,080,572)         (6,560,288)         (3,206,521)
   Other income .......................................................         38,985,340              20,183              13,471
                                                                             -------------       -------------       -------------
       Total other income (expense) ...................................         33,146,516          (6,216,705)         (3,023,724)
                                                                             -------------       -------------       -------------

       Net income (loss) ..............................................      $   2,386,241       $ (35,265,022)      $ (54,552,227)
                                                                             =============       =============       =============

Basic earnings (loss) per share of Common Stock .......................      $        0.12       $       (1.84)      $       (3.06)
Diluted earnings (loss) per share of Common Stock .....................      $        0.10       $       (1.84)      $       (3.06)

Weighted average shares of Common Stock and Common Stock equivalents
   outstanding:
     Basic ............................................................         20,221,089          19,202,877          17,842,879
     Diluted ..........................................................         22,798,632          19,202,877          17,842,879

</TABLE>


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


                                       38
<PAGE>


                    KOS PHARMACEUTICALS, INC. AND SUBSIDIARY


                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

<TABLE>
<CAPTION>
                                                                  ADDITIONAL
                                                     COMMON         PAID-IN       ACCUMULATED     RESTRICTED
                                                      STOCK         CAPITAL         DEFICIT       STOCK GRANT           TOTAL
                                                   ----------     -----------     -----------     ------------       -----------
<S>                                            <C>              <C>              <C>               <C>               <C>
BALANCE AT DECEMBER 31, 1998 ................  $     177,203    $ 184,598,845    $(185,113,805)    $          --     $    (337,757)

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

BALANCE AT DECEMBER 31, 1999 ................        180,260      186,291,218     (239,666,032)               --       (53,194,554)

Common Stock granted 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 granted 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    $(272,544,813)    $    (994,521)    $ (58,439,321)
                                               =============    =============    =============     =============     =============



</TABLE>

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


                                       39
<PAGE>


                    KOS PHARMACEUTICALS, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                    FOR THE YEAR ENDED DECEMBER 31,
                                                                           --------------------------------------------------
                                                                               2001               2000               1999
                                                                           ------------       ------------       ------------
<S>                                                                        <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net Income (Loss) .................................................      $  2,386,241       $(35,265,022)      $(54,552,227)
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities -
    Provision for doubtful accounts .................................            75,000             50,000            160,100
    Depreciation and amortization ...................................         3,489,113          3,254,338          3,010,462
    Provision for inventory obsolescence ............................         1,050,000            420,000            640,737
    Loss (Gain) from disposals of fixed assets ......................           140,560            (20,183)           (13,471)
    Common Stock issued to employees ................................           586,872            536,274            573,555
    Stock options issued to non-employees ...........................                --                 --            300,000
    Compensation expense on restricted stock grant ..................           203,503                 --                 --
    Changes in operating assets and liabilities:
      Trade accounts receivable .....................................        (2,913,268)        (2,675,762)        (5,119,921)
      Inventories ...................................................        (6,956,116)        (1,160,204)          (414,030)
      Prepaid expenses and other current assets .....................        (4,693,732)          (662,314)        (1,284,723)
      Other assets ..................................................           178,150           (168,728)             1,424
      Accounts payable ..............................................         1,684,493            192,021         (1,512,163)
      Accrued expenses ..............................................         9,502,707          2,903,684          4,254,449
    Advance payments from customers .................................         2,368,732          2,342,460          1,980,000
                                                                           ------------       ------------       ------------
       Net cash provided by (used in) operating activities ..........         7,102,255        (30,253,436)       (51,975,808)
                                                                           ------------       ------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of assets of IEP Group, Inc. ..........................                --                 --           (700,000)
  Capital expenditures and deposits on fixed assets to be acquired ..        (4,302,309)          (638,252)        (1,117,637)
                                                                           ------------       ------------       ------------
       Net cash used in investing activities ........................        (4,302,309)          (638,252)        (1,817,637)
                                                                           ------------       ------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of Common Stock to employees under
      Stock Purchase Plan ...........................................         1,150,736            719,038            302,057
  Net proceeds from issuance of Common Stock to a third party .......                --         20,000,000                 --
  Net proceeds from exercise of stock options .......................         2,323,189          2,114,402            126,818
  Borrowings under Notes Payable to Shareholder .....................        33,000,000         30,000,000         53,000,000
  Payments of Note Payable to Shareholder ...........................                --        (20,000,000)                --
  Payments under capital lease obligations ..........................           (80,757)          (152,641)          (177,745)
                                                                           ------------       ------------       ------------
       Net cash provided by financing activities ....................        36,393,168         32,680,799         53,251,130
                                                                           ------------       ------------       ------------

          Net increase (decrease) in cash and cash equivalents ......        39,193,114          1,789,111           (542,315)

Cash and Cash Equivalents, beginning of period ......................         6,125,437          4,336,326          4,878,641
                                                                           ------------       ------------       ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................      $ 45,318,551       $  6,125,437       $  4,336,326
                                                                           ============       ============       ============

Supplemental Disclosure of Cash Flow Information:
  Interest paid .....................................................      $  6,050,458       $  6,524,688       $  3,309,299
Supplemental Disclosure of Non-cash Information:
  Acquisition of equipment under capital lease obligations ..........      $    166,764       $         --       $         --

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



</TABLE>



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



                                       40
<PAGE>
                    KOS PHARMACEUTICALS, INC. AND SUBSIDIARY

                   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 NIASPAN for 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. NIASPAN is 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.
NIASPAN is 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'S prescribing 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 NIASPAN and 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 NIASPAN product and lovastatin represents an
effective method for treating patients with mixed lipid disorders. The Company
received approval from the FDA to market ADVICOR on December 17, 2001, and began
shipments to customers in January 2002.

      The Company expects to incur additional losses in the near-term due
primarily to its sales and marketing efforts associated with NIASPAN and
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 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.



                                       41
<PAGE>

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      BASIS OF PRESENTATION

      The consolidated financial statements include the results of the Company
and its subsidiary, Aeropharm Technology, 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.

      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, 2001 or 2000.




                                       42
<PAGE>


      GOODWILL

      Goodwill consists of the excess of cost over the fair value of the net
assets acquired. The Company amortizes goodwill on a straight-line basis over
ten years.

      FAIR VALUE OF FINANCIAL INSTRUMENTS

      As of December 31, 2001 and 2000, 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.

      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,
83% of the trade accounts receivable before allowances at December 31, 2001,
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 rebates and
chargebacks, discounts, and returns to customers and to managed care
organizations with whom the Company has contracts. These provisions totaled
$19,542,000, $13,149,000 and $6,626,000 for the years ended December 31, 2001,
2000 and 1999, respectively. Included in "Accrued expenses" in the accompanying
consolidated balance sheets are $5,171,000 and $5,328,000, at December 31, 2001
and 2000, respectively, related to these provisions.

      ADVANCE PAYMENTS FROM CUSTOMERS

      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 the NIASPAN product 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 2001 and 2000, certain of the Company's customers purchased
abnormally high levels of the NIASPAN product. As a result, as of December 31,
2001 and 2000, the level of the NIASPAN product warehoused by these customers
was well above normal levels. Accordingly, the Company did not recognize $8.7
million in gross revenues (or $7.0 million in net revenues) and related expenses
associated with 2001 product shipments, and of $4.8 million in gross revenues
(or $3.8 million in net revenues) and related expenses associated with 2000
product shipments.

      Included in "Advance payments from customers" in the accompanying
consolidated balance sheets are $6,691,000 and $4,322,000, as of December 31,
2001 and 2000, respectively, representing payments received on NIASPAN product
shipments for which revenue has not been recognized.




                                       43
<PAGE>


      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 MAVIK and TARKA products (MAVIK(R) and TARKA(R) 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, $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. 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 ADVICOR product 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 ADVICOR product. Specifically, DuPont had agreed (i) to make equity
investments in the Company up to $30 million through the date of FDA approval of
the ADVICOR product; (ii) to pay the Company $17.5 million in milestone payments
upon FDA approval of the ADVICOR product; (iii) to fund up to $32.5 million for
future clinical development of the ADVICOR product; and (iv) to share equally in
the costs associated with promoting the ADVICOR product 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 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...............................         3-7
      Computer software and hardware........................         3-5
      Laboratory and manufacturing equipment................         3-5
      Leasehold improvements................................   Lives of leases

      RESEARCH AND DEVELOPMENT EXPENSES

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



                                       44
<PAGE>


      ADVERTISING EXPENSE

      The Company records the cost of its advertising efforts when services are
performed or goods are delivered. The Company recorded $6,781,000, $1,075,000
and $1,508,000 in advertising expense for the years ended December 31, 2001,
2000 and 1999, 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:
<TABLE>
<CAPTION>

                                                                    DECEMBER 31,
                                                       --------------------------------------
                                                          2001          2000          1999
                                                       ----------    ----------    ----------
<S>                                                    <C>           <C>           <C>
      Basic weighted average number of
         shares outstanding .......................    20,221,089    19,202,877    17,842,879
      Effect of dilutive securities - stock options     2,577,543            --            --
                                                       ----------    ----------    ----------
            Diluted weighted average number of
            shares outstanding ....................    22,798,632    19,202,877    17,842,879
                                                       ==========    ==========    ==========
</TABLE>


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

                                                            DECEMBER 31,
                                                --------------------------------------
                                                    2001          2000         1999
                                                ----------    ----------    ---------
<S>                                            <C>             <C>          <C>
      Stock options outstanding ............            --     4,360,587    3,077,840
      Convertible debt ($50 million at $4.91
         per share - See Note 8) ...........    10,183,299    10,183,299    6,517,312
      Non-detachable warrants (at $5.00
         per share - See Note 8) ...........     6,000,000     2,400,000           --
                                                ----------    ----------    ---------
            Total ..........................    16,183,299    16,943,886    9,595,152
                                                ==========    ==========    =========
</TABLE>




                                       45
<PAGE>


      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, 2001, the Company had available approximately $214 million of
net operating loss carryforwards that expire between 2011 and 2020.

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

                                                      DECEMBER 31,
                                              -----------------------------
                                                 2001             2000
                                              ------------     ------------

      Tax net operating loss carryforwards    $ 82,692,275     $ 84,500,294
      Reserves and accruals ..............       3,442,524        3,559,824
      Intangible assets ..................       1,433,118        1,286,948
      Property and equipment, principally
         due to depreciation .............         345,533           34,595
      Other ..............................       2,676,480        1,668,470
                                              ------------     ------------
                                                90,589,930       91,050,131
      Valuation allowance ................     (90,589,930)     (91,050,131)
                                              ------------     ------------
                                              $         --     $         --
                                              ============     ============

      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.

      There was no provision for income taxes for the years ended December 31,
2001, 2000 and 1999. A 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, 2001 and 2000 is set forth below:

                                                          DECEMBER 31,
                                                     ------------------------
                                                        2001           2000
                                                     ---------   ------------

      Computed expected income tax expense based on
         statutory federal income tax rate ........  $ 835,184.  $(12,342,758)
      State income taxes, net of federal benefit ..     85,905     (1,269,541)
      Non deductible expenses .....................    434,417        417,972
      Employee stock options exercised ............   (895,305)      (814,335)
      Change in valuation allowance ...............   (460,201)    14,091,726
      Other .......................................         --        (83,065)
                                                     ---------   ------------

           Provision for income taxes .............  $      --   $         --
                                                     =========   ============





                                       46
<PAGE>


      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.

      RECENT ACCOUNTING PRONOUNCEMENTS

      SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), as amended, is effective for fiscal years ended after
June 15, 2000. The Company adopted SFAS 133 effective June 30, 1998. The Company
does not presently have any derivative or hedging-type investment as defined by
SFAS 133.

      On December 3, 1999, the staff of the SEC published Staff Accounting
Bulletin 101, "Topic 13: Revenue Recognition" ("SAB 101") to provide guidance on
the recognition, presentation and disclosure of revenue in financial statements.
Specific items discussed in SAB 101 include up-front fees when the seller has
significant continuing involvement and the amount of revenue recognized when the
seller is acting as a sales agent or in a similar capacity. SAB 101 also
provides guidance on disclosures that should be made for revenue recognition
policies and the impact of events and trends on revenue. The Company adopted the
provisions of SAB 101 for the year ended December 31, 2000. The adoption of SAB
101 did not have a material effect on the Company's financial position or
results of operations.

      In May 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") reached a consensus on Issue No. 00-14,
"Accounting for Certain Sales Incentives" ("EITF Issue No. 00-14"), which
addresses the recognition, measurement, and income statement classification for
sales incentives offered by vendors to customers. The Company adopted the
provisions of EITF Issue No. 00-14 during the year ended December 31, 2000. The
adoption of EITF Issue No. 00-14 did not have a material impact on Kos'
financial condition or results of operations.

      In September 2000, the EITF reached a consensus on Issue No. 00-10,
"Accounting for Shipping and Handling Revenues and Costs" ("EITF Issue No.
00-10"), which addresses the income statement classification of shipping and
handling revenues and related costs. The Company adopted the provisions of EITF
Issue No. 00-10 during the year ended December 31, 2000. The adoption of EITF
Issue No. 00-10 did not have a material impact on Kos' financial condition or
results of operations.

      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.



                                       47
<PAGE>


      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 Company does not expect the adoption
of SFAS 142 to have a significant impact on its 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
Company believes the adoption of SFAS No. 143 will not have a material impact on
its 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 Company believes the adoption of
SFAS No. 144 will not have a material impact on its financial position or
results of operations.

3.    TRADE ACCOUNTS RECEIVABLE, NET

      Trade accounts receivable consist of the following:

                                                     DECEMBER 31,
                                              ----------------------------
                                                  2001            2000
                                              ------------     -----------

      Trade accounts receivable ..........    $ 12,635,194     $ 9,802,802
      Less allowance for doubtful accounts        (194,192)       (200,068)
                                              ------------     -----------
         Trade accounts receivable, net ..    $ 12,441,002     $ 9,602,734
                                              ============     ===========


                                       48
<PAGE>


4.    INVENTORIES

      Inventories consist of the following:

                                                      DECEMBER 31,
                                                 ------------------------
                                                    2001          2000
                                                 ----------    ----------

      Raw materials .........................    $  936,356    $  257,326
      Work in process .......................     2,499,440       446,834
      Finished goods ........................     4,296,373     1,121,893
                                                 ----------    ----------
      Total inventories .....................    $7,732,169    $1,826,053
                                                 ==========    ==========


5.    FIXED ASSETS, NET

      Fixed assets consist of the following:
<TABLE>
<CAPTION>

                                                                        DECEMBER 31,
                                                                -----------------------------
                                                                     2001             2000
                                                                ------------     ------------
<S>                                                             <C>              <C>
          Furniture and equipment ............................  $  1,531,102     $  1,569,248
          Computer software and hardware .....................     3,019,103        2,910,888
          Laboratory and manufacturing equipment .............     8,616,639        8,552,550
          Leasehold improvements .............................     5,358,062        5,384,910
                                                                ------------     ------------
            Fixed assets, gross ..............................    18,524,906       18,417,596
          Less accumulated depreciation and amortization .....   (11,646,154)     (10,503,138)
                                                                ------------     ------------
            Fixed assets, net ................................  $  6,878,752     $  7,914,458
                                                                ============     ============
</TABLE>

      The Company recorded depreciation and amortization expense of $3,409,113,
$3,174,338, and $3,010,462 for the years ended December 31, 2001, 2000 and 1999,
respectively.

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.



                                       49
<PAGE>


7.    ACCRUED EXPENSES

      The components of accrued expenses are as follows:

                                                         DECEMBER 31,
                                                  --------------------------
                                                      2001           2000
                                                  -----------    -----------

      Employee commissions and bonuses .......    $ 4,086,003    $ 2,316,758
      Managed care rebates and chargebacks ...      4,018,897      4,602,574
      Expenses due under copromotion agreement      3,600,000        378,427
      Clinical studies .......................      2,199,250      1,740,900
      Royalties ..............................      1,858,563        644,382
      Employee vacations .....................      1,401,836      1,143,592
      All other ..............................      7,691,877      4,527,086
                                                  -----------    -----------
        Total accrued expenses ...............    $24,856,426    $15,353,719
                                                  ===========    ===========


8.    NOTES PAYABLE TO SHAREHOLDER

      On July 1, 1998, the Company entered into a $30-million credit facility
(the "Credit Facility") with Michael Jaharis, the Company's Chairman and its
principal shareholder. On June 9, 2000, in order to reduce interest costs, the
Company utilized the proceeds of the $20-million equity contribution from DuPont
to pay-off borrowings made under the Credit Facility. In connection with this
loan repayment, Mr. Jaharis agreed to continue to make available to the Company
the full original borrowing capacity of the Credit Facility provided that future
Company borrowings from Mr. Jaharis be first made from the existing borrowing
capacity of Mr. Jaharis' other credit lines with Kos. All other terms of the
Credit Facility remain in full force and effect. Borrowings under the Credit
Facility, which totaled $10 million at December 31, 2001, bear interest at the
prime rate (4.75% as of December 31, 2001), and are due December 31, 2002.

      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, 2001, 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.

      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 $45 million as of December 31, 2001, are due June 20, 2005, and
are also subject to most of the terms and conditions of borrowings made under
the Supplemental Credit Facility. Borrowings made under the Standby Facility are
not, however, convertible into shares of the Company's Common Stock. In lieu of
a conversion feature, the Company 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 $6,081,000, $6,560,000 and $3,207,000 of interest
expense for the years ended December 31, 2001, 2000 and 1999, respectively,
related to its credit facilities with Mr. Jaharis.




                                       50
<PAGE>

9.    MAJOR CUSTOMERS

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

                                                 DECEMBER 31,
                                    -----------------------------------------
                                        2001           2000           1999
                                    -----------    -----------    -----------

      Customer A ...............    $30,014,553    $13,113,597    $ 7,781,733
      Customer B ...............     24,230,472     17,611,515     12,376,801
      Customer C ...............     17,635,530      6,693,483      7,233,560
                                    -----------    -----------    -----------
          Total ................    $71,880,555    $37,418,595    $27,392,094
                                    ===========    ===========    ===========

10.   SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

      The following table summarizes selected quarterly financial data of the
Company for the year ended December 31, 2001 and 2000 (IN THOUSANDS, EXCEPT PER
SHARE DATA):
<TABLE>
<CAPTION>

                                              FIRST           SECOND           THIRD          FOURTH           FULL
                                             QUARTER         QUARTER          QUARTER        QUARTER           YEAR
                                            -----------    -------------    ------------    -----------    -------------
<S>                                          <C>             <C>             <C>             <C>              <C>
      2001

      Revenues, net                          $ 14,383        $ 21,891        $ 25,877        $ 29,296         $  91,447
      Cost of sales                             1,411           1,991           1,955           2,288             7,645
      Operating expenses                       21,472          27,953          31,622          33,514           114,561
      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

      2000

      Revenues, net                          $ 13,366        $ 10,159        $ 16,559        $ 20,090         $  60,174
      Cost of sales                             1,561           1,131           1,407           1,833             5,932
      Operating expenses                       21,679          19,627          21,080          20,905            83,291
      Loss from operations                     (9,874)        (10,599)         (5,928)         (2,647)          (29,048)
      Net loss                                (11,206)        (12,270)         (7,510)         (4,279)          (35,265)
      Basic and diluted loss per share       $  (0.62)       $  (0.65)       $  (0.38)       $  (0.19)        $   (1.84)
      Market prices per common
        share:
           High                              $  22.13        $  18.56        $  17.88        $  25.13         $   25.13
           Low                               $   5.30        $  10.00        $  10.75        $  13.63         $    5.30
</TABLE>


---------

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

11.   COMMITMENTS AND CONTINGENCIES

      LETTER OF CREDIT FACILITY

      The Company is subject to the terms of a $3-million letter of credit
facility with a bank (the "Letter of Credit Facility"). Under the terms of the
Letter of Credit Facility, letters of credit outstanding must not exceed 90% of
the Company's cash balance kept at such bank. As of December 31, 2001 and 2000,
letters of credit outstanding totaled $1,460,000 and $1,551,000, respectively.



                                       51
<PAGE>



      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, 2001, the Company had open purchase
commitments totaling $5,070,000.

      EMPLOYMENT AND ROYALTY AGREEMENTS

      As of December 31, 2001, the Company had employment and/or royalty
agreements with four of its officers, including a deferred compensation
agreement with one of its 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 date of the officer's
retirement, the then-present value of the annual payments will have been
accrued. Salary and benefits expense recorded under the employment agreements
totaled $1,326,000, $749,000 and $698,000, during the years ended December 31,
2001, 2000 and 1999, 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, 2001, 2000 and 1999 was $842,000, $551,000 and $336,000,
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
     ------------------------                                      ------

     2002................................................     $    985,000
     2003................................................          860,000
     2004................................................          675,000
     2005................................................          675,000
     2006................................................          487,500
     Thereafter..........................................          300,000
                                                            ---------------
        Total............................................      $ 3,982,500
                                                            ===============

      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 commencing in 2002 through 2009.

      LEASE COMMITMENTS

      The Company has various operating leases that expire through 2006 for the
rental of office space, laboratory facilities, and vehicles. Future minimum
commitments under these agreements are as follows:

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

     2002.................................................      $ 3,233,000
     2003.................................................        2,835,000
     2004.................................................        1,948,000
     2005.................................................          576,000
     2006.................................................          291,000
                                                            ---------------
        Total.............................................      $ 8,883,000
                                                            ===============


                                       52
<PAGE>


      As of December 31, 2001 and 2000, standby letters of credit of $1,232,000
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
$4,234,000, $3,655,000 and $3,494,000, during the years ended December 31, 2001,
2000 and 1999, respectively.

   LICENSING AGREEMENTS

     The Company has certain license agreements (the "License Agreements") with
third parties (the "Licensees") for the development of future products. Under
the License Agreements, the Company is required to make payments to the
Licensees in order to secure exclusive rights to develop, manufacture, sell
and/or sublicense future products developed through the License Agreements. In
connection with the License Agreements, the Company recorded licensing expense
of approximately $275,000, $250,000 and $135,000, for the years ended December
31, 2001, 2000 and 1999, 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
     ------------------------                                ------

     2002...........................................     $    155,000
     2003...........................................          180,000
     2004...........................................          275,000
     2005...........................................           75,000
     2006...........................................           75,000
     Thereafter.....................................          150,000
                                                       ---------------
        Total.......................................      $   910,000
                                                       ===============


      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 NIASPAN subject to a cap on such royalty payments
in the United States and a separate cap on such payments for sales outside the
United States. The Company recorded $2,500,000, $2,500,000 and $1,682,000, of
royalty expense from this agreement for the years ended December 31, 2001, 2000
and 1999, respectively, 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.



                                       53
<PAGE>


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

     2002................................................   $    901,000
     2003................................................        410,000
                                                          ---------------
        Total............................................    $ 1,311,000
                                                          ===============


      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 $536,000, $381,000 and $408,000, during the years ended December
31, 2001, 2000 and 1999, 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 $68,000, $193,000 and $380,000, during the years ended December
31, 2001, 2000 and 1999, 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 will complement 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 NIASPAN and ADVICOR
products 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.



                                       54
<PAGE>


      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
compensation cost, as determined above, will be recognized by the Company as
these warrants vest.

      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 unissued
Common Stock. The Company matches employee contributions up to 50% of an
employee's 401(k) contribution, and not to exceed 3% of such employee's
compensation or $5,000 per employee for any given year. An employee is always
100% 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 $587,000,
$536,000 and $574,000, in expenses related to its match of employee
contributions to the Kos Savings Plan for the years ended December 31, 2001,
2000 and 1999, 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.




                                       55
<PAGE>

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,
2001, a maximum of 7,000,000 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 20,000 shares effective on each director's anniversary date and 5,000
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:

<TABLE>
<CAPTION>

                                                       RISK-FREE                             EXPECTED
                 GRANT               VOLATILITY         INTEREST          EXPECTED         TERM (YEARS)
                  DATE                  RATE              RATE           DIVIDENDS
          ---------------------    ---------------    -------------     -------------    -----------------
<S>               <C>                    <C>               <C>              <C>                 <C>
                  1999                   60.0              5.03              --                 5
                  2000                   72.5              6.28              --                 5
                  2001                   70.0              4.11              --                 5

</TABLE>

                                       56
<PAGE>


     As of December 31, 2001, the Company had outstanding options to purchase
4,701,882 shares of Common Stock to employees, consultants, management and
directors, including options granted prior to the implementation of the Plan.
Detail of option activity is as follows:

<TABLE>
<CAPTION>

                                                                                              EXERCISE PRICES
                                                                                   -----------------------------------
                                                                NUMBER OF                                  WEIGHTED
                                                                   SHARES                 RANGE             AVERAGE
                                                             -----------------     -------------------   -------------
<S>                                                              <C>                <C>                         <C>
         Outstanding, December 31, 1998...........               2,857,215          0.60   -  27.25             5.93
         Granted..................................                 670,000          4.28   -   7.25             5.39
         Exercised................................                 (56,375)         0.75   -   5.06             2.21
         Canceled.................................                (393,000)         5.06   -  11.16             6.78
                                                               ------------

         Outstanding, December 31, 1999...........               3,077,840          0.60   -  27.25             5.76
         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
                                                               ===========

</TABLE>
<TABLE>
<CAPTION>

                                      OPTIONS OUTSTANDING                                     OPTIONS EXERCISABLE
         ------------------------------------------------------------------------------- ------------------------------
                                        NUMBER              WEIGHTED         WEIGHTED        NUMBER         WEIGHTED
                                     OUTSTANDING            AVERAGE          AVERAGE       EXERCISABLE      AVERAGE
                 RANGE OF            DECEMBER 31,          REMAINING         EXERCISE     DECEMBER 31,      EXERCISE
             EXERCISE PRICES             2001           CONTRACTUAL LIFE      PRICE           2001           PRICE
         ------------------------- -----------------   ------------------- ------------- ---------------- -------------
<S>                                         <C>            <C>                    <C>            <C>             <C>
                  $0.60                  300,000           4.5 years          $0.60          300,000         $0.60
               4.28 to 6.24            1,014,973           6.5 years           5.18          741,746          5.10
               6.59 to 8.47              432,167           5.1 years           7.06          422,792          7.05
               9.94 to 14.81           1,126,040           7.4 years          12.44          482,995         11.88
              15.00 to 20.69           1,520,852           8.9 years          17.94          233,905         18.48
              24.68 to 36.50             307,850           9.3 YEARS          28.11           23,000         25.02
                                       ---------           ---------          -----        ---------         -----
                                       4,701,882           7.4 years         $12.43        2,204,438         $7.97
                                       =========           =========         ======        =========         =====
</TABLE>

      At December 31, 2001, 819,108 shares remain reserved for issuance under
the Plan, and options to purchase 2,204,438 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 recognized on options issued to
employees because the exercise price of such options was not less than the
market value of the Common Stock on the date of grant. Compensation costs of
$300,000 and $380,815 were recorded for the years ended December 31, 1999 and
1998, respectively, to reflect the cost associated with stock options granted to
non-employees and to outside directors (through June 30, 2000).




                                       57
<PAGE>


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

<TABLE>
<CAPTION>

                                                     FOR THE YEAR ENDED DECEMBER 31,
                                        ------------------------------------------------------------
                                              2001                   2000                  1999
                                        -----------------    ------------------    ------------------
<S>                                      <C>                   <C>                   <C>
      Net income (loss):
          As reported                    $    2,386,243        $  (35,265,022)       $  (54,552,227)
          Pro forma                          (5,464,122)          (39,425,660)          (57,537,053)

      Net income (loss) per share:
          As reported:
             Basic                       $         0.12        $        (1.84)       $        (3.06)
             Diluted                               0.10                 (1.84)                (3.06)
          Pro forma:
             Basic                       $        (0.27)                (2.05)                (3.22)
             Diluted                              (0.27)                (2.05)                (3.22)

</TABLE>

      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 $203,000 of compensation
expense related to the April Employment Agreement for the year ended December
31, 2001, and is included in "Selling, general and administrative" in the
accompanying consolidated statements of operations.

13.     LEGAL PROCEEDING

      On August 5, 1998, a purported class action lawsuit was filed in the
United States District Court for the Northern District of Illinois, Eastern
Division, against the Company, the members of the Company's Board of Directors,
certain officers of the Company, and the underwriters of the Company's October
1997 offering of shares of Common Stock. In its complaint, the plaintiff
asserts, on behalf of itself and a putative class of purchasers of the Company's



                                       58
<PAGE>

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

14.   SUBSEQUENT EVENT

      On January 15, 2002, the Company utilized $10 million and $15 million of
the BMS Payment to paydown its outstanding indebtedness under the Credit
Facility and the Standby Facility, respectively. As such, total borrowings
outstanding under the Company's credit facilities with Mr. Jaharis totaled $80
million as of January 15, 2002.



                                       59
<PAGE>


        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.







                                       60
<PAGE>


                    KOS PHARMACEUTICALS, INC. AND SUBSIDIARY

                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                                 (in thousands)



<TABLE>
<CAPTION>


                                                            BALANCE AT        CHARGED TO                         BALANCE AT
                                                           BEGINNING OF        COSTS AND                             END
                     DESCRIPTION                              PERIOD           EXPENSES         DEDUCTIONS        OF PERIOD
------------------------------------------------------     --------------    --------------    -------------    --------------

<S>                                                            <C>              <C>                <C>             <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:

Fiscal year ended December 31, 1999...............             $  100           $  160             $  22           $  238
Fiscal year ended December 31, 2000...............                238               50                88              200
Fiscal year ended December 31, 2001...............                200               75               119              194



</TABLE>

                                       61
<PAGE>



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.


                                       62
<PAGE>


                                    PART III

     The information required in Item 10 (Directors and Executive Officers of
the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership
of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships
and Related Transactions) is incorporated by reference to the Company's
definitive proxy statement for the 2002 Annual Meeting of Shareholders filed
with the Securities and Exchange Commission on March 19, 2002.



                                       63
<PAGE>


                                     PART IV

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

(a)      1.       The Financial Statements filed as part of this report are
                  listed separately in the index to Financial Statements
                  beginning on page 32 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,
                          2001.

         3.       The following exhibits are filed herewith:

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

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

            3.2(1)           Amended and Restated Bylaws of the Company

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

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

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

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

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

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

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

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

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

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



                                       64
<PAGE>


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

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

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

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

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

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

            10.15(6)         Promissory Note dated September 1, 1999, in favor
                             of Michael Jaharis.

            10.16(6)         Revolving Credit and Loan Agreement dated December
                             21, 1999, between the Company and Michael Jaharis.

            10.17(6)         Second Amended and Restated Registration Rights
                             Agreement effective as of December 21, 1999, by and
                             between the Company, Kos Holdings, Inc., Kos
                             Investments, Inc., and Michael Jaharis.

            10.18(6)         Amended and Restated Security Agreement dated
                             December 21, 1999, by and between the Company and
                             Michael Jaharis.

            10.19(6)         Promissory Note dated December 21, 1999, in favor
                             of Michael Jaharis.

            10.20(6)         Non-Detachable Common Stock Purchase Warrant.

            10.21(7)+        Copromotion and Future Development Agreement dated
                             May 3, 2000, between the Company and DuPont
                             Pharmaceuticals Company.

            10.22(7)         Stock Purchase Agreement dated May 3, 2000, between
                             the Company and DuPont Pharmaceuticals Company.

            10.23(8)         Employment Agreement dated April 26, 2001, between
                             the Company and Adrian Adams.

            10.24            Management Agreement dated December 13, 2001,
                             between the Company and Daniel M. Bell.

            10.25+           Master Services Agreement effective December 17,
                             2001, between the Company, Innovex LP and PharmaBio
                             Development, Inc.

            10.26+           Investment and Royalty Agreement effective December
                             17, 2001, between the Company, Innovex LP and
                             PharmaBio Development, Inc.




                                       65
<PAGE>

            10.27            Warrant Agreement dated January 1, 2002, between
                             the Company and PharmaBio Development, Inc.

            21(1)            Subsidiaries of the Company.

            23               Consent of Arthur Andersen LLP.

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

            99               Letter from Registrant to the Securities and
                             Exchange Commission relating to Arthur Andersen
                             LLP.

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



            (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, 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.

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

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

                                       66
<PAGE>


                                   SIGNATURES

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

                                    KOS PHARMACEUTICALS, INC.

                                    By:   /s/ 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.
<TABLE>
<CAPTION>

                  SIGNATURE                                   TITLE                              DATE
                  ---------                                   -----                              ----

<S>                                                 <C>                                        <C>
/s/ MICHAEL JAHARIS                                  Chairman Emeritus of the Board              March 29, 2002
--------------------------------------------         of Directors
Michael Jaharis

/s/ DANIEL M. BELL                                   Chairman of the Board                       March 29, 2002
--------------------------------------------         of Directors
Daniel M. Bell

/s/ ROBERT E. BALDINI                                Vice Chairman of the Board                  March 29, 2002
--------------------------------------------
Robert E. Baldini

/s/ ADRIAN ADAMS                                     President, Chief Executive                  March 29, 2002
--------------------------------------------         Officer, and Director
Adrian Adams                                         (Principal Executive Officer)

/s/ CHRISTOPHER P. KIRITSY                           Senior Vice President, Chief                March 29, 2002
--------------------------------------------         Financial Officer
Christopher P. Kiritsy                               (Principal Financial Officer)

/s/ JUAN F. RODRIGUEZ                                Vice President, Controller                  March 29, 2002
--------------------------------------------         (Principal Accounting Officer)
Juan F. Rodriguez

/s/ JOHN BRADEMAS                                    Director                                    March 29, 2002
--------------------------------------------
John Brademas

/s/ STEVEN JAHARIS                                   Director                                    March 29, 2002
--------------------------------------------
Steven Jaharis

/s/ LOUIS C. LASAGNA                                 Director                                    March 29, 2002
--------------------------------------------
Louis C. Lasagna

/s/ NICOLAOS E. MADIAS                                Director                                    March 29, 2002
--------------------------------------------
Nicolaos E. Madias

/s/ MARK NOVITCH                                      Director                                    March 29, 2002
--------------------------------------------
Mark Novitch

/s/ FREDERICK B. WHITTEMORE                           Director                                    March 29, 2002
--------------------------------------------
Frederick B. Whittemore

</TABLE>

                                       67
<PAGE>


                                  EXHIBIT INDEX

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

10.24           Management Agreement dated December 13, 2001, between the
                Company and Daniel M. Bell.

10.25+          Master Services Agreement effective December 17, 2001, between
                the Company, Innovex LP and PharmaBio Development, Inc.

10.26+          Investment and Royalty Agreement effective December 17, 2001,
                between the Company, Innovex LP and PharmaBio Development, Inc.

10.27           Warrant Agreement dated January 1, 2002, between the Company and
                PharmaBio Development, Inc.

23              Consent of Arthur Andersen LLP.

99              Letter from Registrant to the Securities and Exchange Commission
                relating to Arthur Andersen LLP.

---------------
+    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.