PHARMACEUTICAL RESOURCES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10 - K

Annual Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For Fiscal Year Ended December 31, 2002

Commission File Number: 1-10827

PHARMACEUTICAL RESOURCES, INC.
(Exact name of Registrant as specified in its charter)

NEW JERSEY 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

ONE RAM RIDGE ROAD, SPRING VALLEY, NEW YORK 10977
(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code: (845) 425-7100

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

TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value The New York Stock Exchange, Inc.
- ---------------------------- ---------------------------------

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-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. [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes X No
--- ---

The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant was $1,371,238,982 as of March 21, 2003
(assuming, solely for purposes of this calculation, that all directors and
executive officers of the Registrant are "affiliates").

Number of shares of the Registrant's common stock outstanding
as of March 21, 2003: 32,936,414

DOCUMENTS INCORPORATED BY REFERENCE: None

PART I

ITEM 1. Business.
- ------ --------

GENERAL

Pharmaceutical Resources, Inc. (the "Company" or "PRX") is a holding
company that, through its principal subsidiary, is in the business of
developing, manufacturing and distributing a broad line of generic drugs in the
United States. In addition, the Company develops and manufactures in small
quantities complex synthetic active pharmaceutical ingredients through its
subsidiary, FineTech Laboratories, Ltd. ("FineTech") based in Haifa, Israel and
sells a limited number of mature brand name drugs through an agreement with
Bristol Myers Squibb ("BMS"). PRX operates primarily through its wholly-owned
subsidiary, Par Pharmaceutical, Inc. ("Par"), a manufacturer and distributor of
generic drugs. The Company's executive offices are located at One Ram Ridge
Road, Spring Valley, New York 10977, and its telephone number is (845) 425-7100.

Generic drugs are the pharmaceutical and therapeutic equivalents of brand
name drugs and are usually marketed under their generic (chemical) names rather
than by a brand name. Generally, a generic drug cannot be marketed until the
expiration of applicable patents on the brand name drug. Generic drugs must meet
the same government standards as brand name drugs, but are typically sold at
prices below those of brand name drugs. Generic drugs provide a cost-effective
alternative for consumers while maintaining the safety and effectiveness of the
brand name pharmaceutical product.

The Company's product line consists primarily of prescription generic drugs
consisting of 156 products representing various dosage strengths for 59 drugs.
In addition to manufacturing its own products, the Company has strategic
alliances with several pharmaceutical and chemical companies providing it with
products for sale through distribution, development or licensing agreements (see
"-Product Line Information").

The Company markets its products primarily to wholesalers, retail drug
store chains, managed health care providers and drug distributors, principally
through its own sales staff. The Company promotes the sales efforts of
wholesalers and drug distributors that sell the Company's products to clinics,
government agencies and other managed health care organizations (see "-Marketing
and Customers").

As described in Management's Discussion and Analysis of Financial Condition
and Results of Operations, certain statements in this document may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, including those concerning management's
expectations with respect to future financial performance and future events.
Such statements involve known and unknown risks, uncertainties, trends and
contingencies, many of which are beyond the control of the Company, which could
cause actual results and outcomes to differ materially from those expressed
herein. Any forward-looking statements included in this document are made only
as of the date hereof, based on information available to the Company as of the
date hereof, and, subject to applicable law to the contrary, the Company assumes
no obligation to update any forward-looking statements.

The financial data and share amounts, except per share, employee and
shareholder numbers, contained in Parts I and II are in thousands.

FISCAL YEAR 2002 HIGHLIGHTS:

RESULTS OF OPERATIONS. Fiscal year 2002 marked the Company's second
consecutive historical year in terms of revenues and earnings. The Company's net
income in 2002 of $79,454 increased $25,532, or 47%, from $53,922 for fiscal
year 2001. The significantly improved results reflected record net sales and
gross margins for the Company of $381,603 and $183,290 (48% of net sales),
respectively, primarily attributable to the continued success of megestrol
acetate oral suspension, the generic version of BMS's Megace(R) Oral Suspension,
and the introduction of new products throughout the year. Revenues and gross
margins in fiscal year 2001 of $271,035 and $109,729 (40% of net sales),
respectively, benefited from marketing exclusivity for fluoxetine 10 mg and 20
mg tablets and fluoxetine 40 mg capsules, the generic versions of Eli Lilly and
Company's Prozac(R), which expired in January 2002. The growth was obtained
despite the loss of exclusivity on these key products and a substantially
increased investment in research and development. Research and development
spending in fiscal year 2002 rose 61% to $17,910 from $11,113 for the prior
year.

POSITION FOR FUTURE GROWTH. The Company recognizes that the development of
successful new products is critical to achieving its goal of sustainable growth
over the long term. As such, the Company's investment in research and
development in fiscal year 2002, which is expected to increase again in fiscal
year 2003, reflects its commitment to develop new products or technologies

2

through its internal development programs in addition to projects with strategic
partners. In fiscal year 2002, the Company expanded its capabilities in product
development through its acquisition of FineTech, as well as, entering into new
development agreements with Rhodes Technologies, Inc. ("RTI"), an affiliated
company of Purdue Pharma L.P., Three Rivers Pharmaceuticals, LLC ("Three
Rivers"), Nortec Development Associates, Inc. (a Glatt company) ("Nortec") and
Genpharm Inc. ("Genpharm"), a Canadian subsidiary of Merck KGaA. Together with
its strategic partners, PRX currently has over 40 drugs in development and 28
Abbreviated New Drug Applications ("ANDAs") filed with the United States Food
and Drug Administration ("FDA") awaiting approval. Among the 28 ANDAs are
several the Company believes may represent first-to-file opportunities that may
entitle Par, or its strategic partner, up to 180 days of marketing exclusivity
or co-exclusivity. However, it is difficult to know with certainty that an ANDA
filing has exclusivity, or shared exclusivity, until final approval is received
from the FDA. These products include: paroxetine capsules (Paxil(R)); olanzapine
20 mg (Zyprexa(R)); latanoprost (Xalatan(R)); ribavirin (Rebetol(R)); and
tramadol with acetaminophen (Ultracet(R)). The Company expects to file as many
as 18 to 20 more ANDAs in 2003. The process of bringing new products to market
and the cost associated with research and development involves many
uncertainties, including, among other things, unforeseen changes in market
conditions, and regulatory or legal challenges. As such, no assurance can be
given that the Company will file ANDAs with the FDA, obtain FDA approval or
launch any of the products that are currently in development.

PROFIT SHARING ON OMEPRAZOLE. In the fourth quarter of 2002, the Company
began receiving royalty payments as a result of KUDCo's, a subsidiary of Schwarz
Pharma AG of Germany, launch of omeprazole, the generic version of Astra
Zeneca's ("Astra") Prilosec(R). Under terms of its agreement with KUDCo,
Genpharm, PRX's strategic partner, is currently receiving a 15 percent share of
the profits, as defined in their agreement, generated by KUDCo's sales of
omeprazole. Through its partnership agreement with Genpharm, PRX is currently
receiving 25 percent of Genpharm's profit. KUDCo's launch of omeprazole is "at
risk" because Astra appealed the court's patent infringement decision. The full
impact of KUDCo's omeprazole launch on the Company's revenues is unclear since,
among other things, Astra has introduced a new drug, Nexium(R), in an apparent
attempt to switch consumers using Prilosec(R) and Astra's decision to market a
non-prescription form of Prilosec(R) along with Proctor & Gamble, all of which
may reduce generic sales of omeprazole. In December 2002, the Company recognized
$755 of revenues related to its share of Genpharm's profits. The December 2002
revenues were significantly reduced as Genpharm recovered out-of-pocket
development and legal expenses incurred during the product development and
litigation process. Unless there is a court ruling that is unfavorable to KUDCo
in the pending appeal by Astra, in which case the Company could be obligated to
return any payments received from Genpharm, the Company anticipates recording
revenues of up to $20,000 in fiscal year 2003 from its share of the profits on
omeprazole.

LEGAL PROCEEDINGS. The Company prevailed against Alpharma USPD, Inc.
("Alpharma") in an interference proceeding before the U.S. Patent and Trademark
Office regarding PRX's patents and applications relating to megestrol acetate
oral suspension formulations. Additionally, PRX filed suit against Alpharma in
the U.S. District Court, Southern District of New York in February 2002.
Alpharma has now entered into a consent judgment and order of permanent
injunction in this matter. Alpharma is now enjoined from making, using, selling
or importing its megestrol oral suspension product. PRX believes these
proceedings validate its strategy of developing products based on patented
science and technology. The Company expects megestrol oral suspension to be a
strong contributor to its earnings in 2003.

In February 2003, Three Rivers reached a final settlement with Schering
Corporation ("Schering") in the patent litigation case of Rebetol(R) brand
ribavirin. Schering has provided a non-exclusive license to Three Rivers for all
its U.S. patents relating to this product. In return, Three Rivers has agreed to
pay Schering a reasonable royalty based upon net sales of Three Rivers' and
Par's generic ribavirin product. Although the license does not remove all
existing legal hurdles to distribute this product, the Company believes it
significantly improves the likelihood of Par and Three Rivers eventually
marketing ribavirin.

ACQUISITION OF FINETECH. On March 15, 2002, the Company terminated its
negotiations with International Specialty Products ("ISP") related to the
Company's purchase of the combined ISP FineTech fine chemical business, based in
Haifa, Israel and Columbus, Ohio. At that time, the Company discontinued
negotiations with ISP as a result of various events and circumstances that
occurred following the announcement of the proposed transaction. Pursuant to the
termination of negotiations, the Company paid ISP a $3,000 break-up fee in March
2002, which was subject to certain credits and offsets, and incurred
approximately $1,262 in related acquisition costs, both of which were included
in acquisition termination charges on the consolidated statements of operations
in fiscal year 2002.

3

The Company subsequently purchased FineTech, based in Haifa, Israel, from
ISP in April 2002 for approximately $32,000 and incurred $1,237 in related
acquisition costs, all of which were financed by its cash-on-hand. The Company
acquired the physical facilities, intellectual property and patents of FineTech
and retained all FineTech employees. FineTech specializes in the design and
manufacture of proprietary synthetic chemical processes used in the production
of complex organic compounds for the pharmaceutical industry. FineTech also has
the ability to manufacture in small quantities complex synthetic active
pharmaceutical ingredients at its manufacturing facility in Haifa, Israel. This
facility operates in compliance with FDA current Good Manufacturing Practices
("cGMP") standards. The Company is in the process of transferring a portion of
FineTech's personnel and technological resources to a laboratory facility in
Rhode Island. FineTech is operated as an independent, wholly-owned subsidiary of
PRX and provides immediate chemical synthesis capabilities and strategic
opportunities to the Company and other customers.

REINCORPORATION. In fiscal year 2003, the Company intends to submit for
shareholder approval a proposal to change its state of incorporation from New
Jersey to Delaware (the "Reincorporation"). The Reincorporation will be effected
by the merger of the Company with and into a wholly-owned Delaware subsidiary of
the Company formed solely for the purpose of consummating the Reincorporation.
The operations, business, assets and liabilities of the Company, as well as its
directors and officers, will be unaffected by the Reincorporation. The surviving
corporation of the Reincorporation shall retain the name "Pharmaceutical
Resources, Inc." and the Company's common stock will continue to be listed and
traded on the New York Stock Exchange ("NYSE") under the symbol "PRX". In
addition to the Reincorporation, the Company expects to shortly change the state
of incorporation of Par from New Jersey to Delaware.

PRODUCT LINE INFORMATION

The Company operates in one industry segment, namely the manufacture and
distribution of generic pharmaceuticals. Products are marketed principally in
solid oral dosage form consisting of tablets, caplets and two-piece hard-shell
capsules. The Company also distributes one product in the semi-solid form of a
cream and one oral suspension product.

Par markets 69 products, representing various dosage strengths for 25 drugs
that are manufactured by the Company and 87 additional products, representing
various dosage strengths for 34 drugs that are manufactured for it by other
companies. Par holds ANDAs for the drugs it manufactures. Below is a list of
drugs manufactured and/or distributed by Par, including several brand-name
products, Capoten(R), Capozide(R), Questran(R) and Questran Light(R), and
Sumycin(R), the Company sells through an agreement with BMS. The names of all of
the drugs under the caption "Competitive Brand-Name Drug" are trademarked. The
holders of the trademarks are non-affiliated pharmaceutical manufacturers.

NAME COMPETITIVE BRAND-NAME DRUG
---- ---------------------------
CENTRAL NERVOUS SYSTEM:
Biperiden Hydrochloride Akineton
Benztropine Mesylate Cogentin
Buspirone Hydrochloride BuSpar
Doxepin Hydrochloride Sinequan, Adapin
Fluoxetine Prozac
Fluphenazine Hydrochloride Prolixin
Imipramine Hydrochloride Tofranil
Tizanidine Hydrochloride Zanaflex
Triazolam Halcion

CARDIOVASCULAR:
Acebutolol Hydrochloride Sectral
Amiodarone Hydrochloride Cordarone
Captopril Capoten
Captopril & HCTZ Capozide
Doxazosin Mesylate Cardura
Enalapril Maleate Vasotec
Enalapril Maleate & HCTZ Vaseretic
Flecainide Acetate Tambocor

4

Guanfacine Tenex
Hydralazine Hydrochloride Apresoline
Hydra-Zide Apresazide
Indapamide Lozol
Isosorbide Dinitrate Isordil
Lisinopril Zestril
Minoxidil Loniten
Nicardipine Hydrochloride Cardene
Sotalol Hydrochloride Betapace

ANALGESIC/ANTI-INFLAMMATORY:
Aspirin (zero order release) Zorprin
Carisoprodol & Aspirin Soma Compound
Dexamethasone Decadron
Etodolac Lodine
Ibuprofen Advil, Nuprin, Motrin
Orphengesic/Orphengesic Forte Norgesic/Norgesic Forte
Oxaprozin Daypro
Tramadol Hydrochloride Ultram

ANTI-BACTERIAL:
Doxycycline Monohydrate Monodox
Silver Sulfadiazine (SSD) Silvadene
Tetracycline Sumycin

ANTI-DIABETIC:
Metformin Hydrochloride Glucophage

ANTI-DIARRHEAL:
Diphenoxylate Hydrochloride & Atropine Sulfate Lomotil

ANTIEMETIC:
Meclizine Hydrochloride Antivert
Prochlorperazine Maleate Compazine

ANTI-GOUT:
Allopurinol Zyloprim

ANTI-HISTAMINIC:
Cyproheptadine Hydrochloride Periactin

ANTI-NEOPLASTIC:
Hydroxyurea Hydrea
Megestrol Acetate Megace
Megestrol Acetate Oral Suspension Megace Oral Suspension

ANTI-PARKINSON:
Selegiline Hydrochloride Eldepryl

ANTI-THROMBOTIC:
Ticlopidine Hydrochloride Ticlid

ANTI-ULCERATIVE:
Ranitidine Hydrochloride Zantac
Famotidine Pepcid
Nizatidine Axid

5

ANTI-VIRAL:
Acyclovir Zovirax

ANTI-HYPERTHYROID:
Methimazole Tapazole

BRONCODILATOR:
Metaproterenol Sulfate Alupent

CHOLESTEROL LOWERING:
Lovastatin Mevacor
Cholestyramine Questran

GENTRO-URINARY (DIURETIC):
Amiloride Hydrochloride Midamor

GLUCORTICOID:
Methylprednisolone Medrol

OVULATION STIMULANT:
Clomiphene Citrate Clomid

From January 1, 2002 to March 1, 2003, the FDA approved ANDAs filed by
either the Company or its strategic partners for the following drugs: buspirone
5 mg, 10 mg and 15 mg tablets; ciprofloxacin 100 mg, 250 mg, 500 mg and 750 mg;
doxycycline 75 mg; fluoxetine 10 mg and 20 mg capsules; lisinopril 2.5 mg, 5 mg,
10 mg, 20 mg, 30 mg and 40 mg tablets; metformin hydrochloride 500 mg, 850 mg
and 1,000 mg tablets; nizatidine 150 mg and 300 mg capsules; tizanidine 2 mg and
4 mg tablets; and tramadol 50 mg tablets. In addition, the Company or its
strategic partners received tentative FDA approval in the same period for the
following drugs: loratadine 10 mg tablets; mirtazapine 15 mg, 30 mg and 45 mg
tablets; omeprazole delayed release 10 mg and 20 mg capsules; quinapril 5 mg, 10
mg, 20 mg and 40 mg tablets; torsemide 5 mg, 10 mg, 20 mg and 100 mg tablets;
and zolpidem tartrate 5 mg and 10 mg tablets.

The Company has two patents related to its unique formulation of megestrol
acetate oral suspension. The U.S. Patent and Trademark Office granted the
patents, United States Patent No. 6,028,065 and No. 6,268,356, on March 1, 2000
and July 31, 2001, respectively.

The Company seeks to introduce new products not only through its internal
research and development program, but also through joint venture, distribution
and other agreements with pharmaceutical companies located throughout the world.
As part of that strategy, the Company has pursued and continues to pursue
arrangements and affiliations which it believes could provide access to raw
materials at favorable prices, share development costs, generate profits from
jointly-developed products and expand distribution channels for new and existing
products. The Company's existing material distribution and supply agreements are
described in Notes to Consolidated Financial Statements - Distribution and
Supply Agreements. In fiscal year 2002, the Company entered into several new
agreements, which are described below.

The Company is selling five of BMS's brand products, the antihypertensives
Capoten(R) and Capozide(R), the cholesterol-lowering medications Questran(R) and
Questran Light(R), and Sumycin(R), an antibiotic, through the BMS Asset Purchase
Agreement, dated March 5, 2002. The Company obtained the right to sell these
products manufactured by BMS through a legal settlement and began selling the
products in March 2002.

In December 2002, the Company entered in a supply and distribution
agreement with Genpharm and Leiner Health Products, LLC. ("Leiner") related to
the recent switch of loratadine 10 mg tablets (Claritin(R)) from prescription to
over-the counter. Pursuant to the agreement, Genpharm has agreed to manufacture
the product and Leiner has agreed to market and engage in over-the-counter
distribution of the product in the United States and its territories for Par.
The Company is to receive a portion of installment payments made to Genpharm by
Leiner in fiscal year 2003 totaling $594 in addition to a percentage of the net
profit attributable to Leiner sales.

6

RESEARCH AND DEVELOPMENT

The Company's research and development activities consist of (i)
identifying and conducting patent and market research on brand name drugs for
which patent protection has expired or is expected to expire in the near future,
(ii) researching and developing new product formulations based upon such drugs,
(iii) obtaining approval from the FDA for such new product formulations, and
(iv) introducing technology to improve production efficiency and enhance product
quality. The scientific process of developing new products and obtaining FDA
approval is complex, costly and time consuming and there can be no assurance
that any products will be developed despite the amount of time and money spent
on research and development. The development of products may be curtailed in the
early or later stages of development due to the introduction of competing
generic products or for other strategic reasons.

The research and development of oral solid and suspension products,
including preformulation research, process and formulation development, required
studies and FDA review and approval, has historically taken approximately two to
three years. Accordingly, Par typically selects for development products that it
intends to market several years in the future. However, the length of time
necessary to bring a product to market can vary significantly and depends on,
among other things, availability of funding, problems relating to formulation
and safety or efficacy or patent issues associated with the product.

The Company contracts with outside laboratories to conduct biostudies,
which, in the case of oral solids, generally are required for FDA approval.
Biostudies are used to demonstrate that the rate and extent of absorption of a
generic drug are not significantly different from the corresponding brand name
drug and currently cost between $100 to $500 for each biostudy. During fiscal
year 2002, the Company contracted with outside laboratories, expending $1,502 to
conduct biostudies for four potential new products, and will continue to do so
in the future. In addition, the Company shared in certain costs for biostudies
totaling $630 for products in development with its strategic partners.
Biostudies must be conducted and documented in conformity with FDA standards
(see "-Government Regulation").

As part of its internal research and development program, the Company has
approximately 15 products in active development. The Company expects that
approximately ten of these products will be the subject of biostudies in fiscal
year 2003, but has not filed any ANDAs with respect to such potential products.
In addition, the Company from time to time enters into agreements with third
parties with respect to the development of new products and technologies. To
date, the Company has entered into agreements and advanced funds to several
non-affiliated companies for products in various stages of development. Although
there can be no assurance, annual research and development expenses for fiscal
year 2003, including certain payments to non-affiliated companies, are expected
to increase by approximately 30% to 40% from fiscal year 2002.

As a result of its internal product development program, the Company
currently has nine ANDAs pending with the FDA, three of which have received
tentative approval, for potential products that are not subject to any
distribution or profit sharing agreements. In addition, there are 19 ANDAs
pending with the FDA, four of which have received tentative approval, that have
been filed by the Company or one of its strategic partners, for potential
products covered under various distribution agreements. No assurance can be
given that the Company or any of its strategic partners will successfully
complete the development of products either under development or proposed for
development, that they will obtain regulatory approval for any such product,
that any approved product will be produced in commercial quantities or that any
approved product can be sold at a profit.

To supplement its own internal development program, the Company enters into
development and license agreements with third parties with respect to the
development and marketing of new products and technologies. The Company's
existing material product development agreements are described in Notes to
Consolidated Financial Statements - Research and Development Agreements and
Research and Development Ventures. In fiscal year 2002, the Company entered into
the following new agreements, which are described below.

In November 2002, the Company amended its agreement (the "Supply and
Marketing Agreement") with Pentech Pharmaceuticals, Inc. ("Pentech"), dated
November 2001, to market paroxetine hydrochloride capsules. Pursuant to the
Supply and Marketing Agreement, as amended, Par has the exclusive right to
market, sell and distribute the product in the United States and its territories
and will pay Pentech a percentage of the gross profit from sales on the product.
Paroxetine hydrochloride is the generic version of GlaxoSmithKline's Paxil(R).
Currently, GlaxoSmithKline markets Paxil(R) only in tablet form. Paxil(R), a
selective serotonin reuptake inhibitor, is indicated for the treatment of

7

depression and other disorders. Par believes that its ANDA submission for
paroxetine hydrochloride capsules is the first to be filed with a paragraph IV
certification. The Company believes that another generic drug company has
first-to-file status for the tablet form of this product. Par intends to market
a capsule form of the product. Pursuant to the Supply and Marketing Agreement
with Pentech, Par is responsible for payment of all legal expenses up to $2,000,
which have been expensed as incurred, to obtain final regulatory approval. Legal
expenses in excess of $2,000 are fully creditable against future profit
payments. In fiscal year 2003, Par will be responsible for Pentech costs
associated with the project up to $1,300, which will be charged to research and
development expenses as incurred.

The Company and Three Rivers entered into a license and distribution
agreement in July 2002 (the "Three Rivers Distribution Agreement"), which was
amended in October 2002, to market and distribute ribavirin 200 mg capsules, the
generic version of Schering-Plough's Rebetol(R). Ribavirin, a synthetic
nucleoside analogue with antiviral activity, is indicated for the treatment of
hepatitis C, a chronic condition, which according to the Company's market
research, is suffered by approximately four million Americans. Under the terms
of the Three Rivers Distribution Agreement, Three Rivers will supply the product
and be responsible for managing the regulatory process and ongoing patent
litigation. Upon FDA approval and final marketing clearance, Par will have the
exclusive right to sell the product in non-hospital markets and will be required
to pay Three Rivers a percentage of the gross profits, as defined in the
agreement. In addition, the Company paid Three Rivers $1,000, which was charged
to research and development expenses in fiscal year 2002, and agreed to pay
Three Rivers $500 at such time Par commercially launches the product. Three
Rivers filed an ANDA with a Paragraph IV certification with the FDA in August
2001 and is currently in litigation with the patent holders. According to
current FDA practice, Par believes it may be entitled to co-exclusively market
the generic product ribavirin for up to 180 days, during which time only one
other company could be approved to market another generic version of the drug.
If successful, Par could introduce ribavirin in the 2003 to 2004 timeframe.

In May 2002, the Company entered into an agreement with Nortec to develop
an extended release generic version of a currently marketed branded extended
release pharmaceutical product. Under the terms of the agreement, the Company
obtained the right to utilize Nortec/Glatt's drug delivery system technology in
its ANDA submission for the potential product covered in the agreement. If
formulation and development are successful, the ANDA for the drug could be
submitted to the FDA in 2004 and will include a Paragraph IV certification. The
Company and Nortec have agreed to collaborate on the formulation, while Par has
agreed to serve as the exclusive marketer and distributor of the product.

In June 2002, the Company expanded its collaboration with Nortec to develop
an extended release generic version of another currently marketed, branded
extended release pharmaceutical product. Under the terms of the new agreement,
Par also obtained the right to utilize Nortec/Glatt's drug delivery system
technology in its ANDA submission for the potential product covered in the
agreement. If successful in development, the Company expects to submit an ANDA
to the FDA for the product in 2003. The Company and Nortec have agreed to
collaborate on the formulation, while Par has agreed to serve as the exclusive
marketer and distributor of the product.

Pursuant to these agreements with Nortec, the Company made non-refundable
payments totaling $1,000, which were charged to research and development
expenses in fiscal year 2002. The Company also agreed to pay a total of $800 in
various installments related to the achievement of certain milestones in the
development of the two potential products and $600 for each product on the day
of its first commercial sale. In addition to these payments, the Company agreed
to pay Nortec a royalty on net sales of the products, as defined in the
agreements.

In April 2002, the Company entered into an agreement (the "Genpharm 11
Product Agreement") with Genpharm, to expand its strategic product partnership.
Pursuant to the Genpharm 11 Product Agreement, Genpharm has agreed to develop
the products, submit all corresponding ANDAs to the FDA and subsequently
manufacture the products. Par has agreed to serve as exclusive U.S. marketer and
distributor of the products, pay a share of the costs, including development and
legal expenses incurred to obtain final regulatory approval, and pay Genpharm a
percentage of the gross profits, as defined in the agreement, on all sales of
products covered under this agreement. In the second quarter of 2002, the
Company paid Genpharm a non-refundable fee of $2,000 for two products,
loratadine 10 mg tablets and mirtazapine tablets, which have been tentatively
approved by the FDA. Although there can be no assurance, the Company anticipates
bringing the two products to market in fiscal year 2003. The Company will also
be required to pay an additional non-refundable fee of up to $414 based upon FDA
acceptance of filings for six of the nine remaining products. There are ANDA's
for three of these potential products covered under the Genpharm 11 Product
Agreement, pending with, and awaiting approval from, the FDA.

8

In April 2002, the Company entered into an agreement with RTI to establish
a joint venture partnership in the United States. The new joint venture was
named SVC Pharma and is owned equally by both parties. SVC Pharma will utilize,
on a case-by-case basis, advanced technologies and patented processes to
develop, manufacture, market and distribute certain unique, proprietary
pharmaceutical products. Under the terms of the agreement, when both partners
agree to pursue a specific project, each partner will contribute resources to
the new enterprise. RTI has agreed to provide scientific and technological
expertise in the development of non-infringing, complex molecules. In addition
to providing chemical synthesis capabilities, RTI has agreed to provide the
manufacturing capacity for sophisticated intermediate and active pharmaceutical
ingredients. Par has agreed to provide development expertise in dosage
formulation and will be responsible for marketing, sales and distribution. The
companies have agreed to share equally in expenses and profits. SVC Pharma has
identified several candidates for drug development, the first of which has the
potential to be marketed by the Company late in fiscal year 2004. The Company's
funding of $952, related to the first project, began in the fourth quarter of
fiscal year 2002. The Company accounts for its share of the expenses of SVC
Pharma with a charge to research and development as incurred.

For fiscal year 2002, the Company increased research and development
spending to $17,910 from $11,113 and $7,634, respectively, in fiscal years 2001
and 2000. The increase in 2002 reflects payments to Elan related to the
development of a clonidine transdermal patch and other products; external
development costs as described above and, to a lesser extent, increased
personnel costs and the acquisition of FineTech.

MARKETING AND CUSTOMERS

The Company primarily markets its products under the Par label to
wholesalers, retail drug store chains, managed health care providers,
distributors and, to a lesser extent, drug manufacturers and government
agencies, primarily through its own sales staff. Some of the Company's
wholesalers and distributors purchase products that are warehoused for certain
drug chains, independent pharmacies and managed health care organizations.
Customers in the managed health care market include health maintenance
organizations, nursing homes, hospitals, clinics, pharmacy benefit management
companies and mail order customers. The Company promotes its products primarily
through incentive programs with its customers, at trade shows and through
advertisements in trade journals.

The Company has approximately 140 customers, some of which are part of
larger buying groups. In fiscal year 2002, the Company's three largest customers
in terms of net sales dollars, McKesson Drug Co., Cardinal Health, Inc., and
Walgreen Co. accounted for approximately 17%, 16% and 10%, respectively, of its
net sales. The loss of any one or more of these customers or the substantial
reduction in orders from any of such customers could have a material adverse
affect on the Company's operating results, prospects and financial condition
(see "Notes to Consolidated Financial Statements-Accounts Receivable-Major
Customers").

ORDER BACKLOG

The approximate dollar amount of open orders, believed by management to be
firm, as of December 31, 2002 was $18,185, as compared to $12,800 at December
31, 2001 and $4,400 at December 31, 2000. Although open orders are subject to
cancellation without penalty, management expects to substantially fill all of
such orders in the near future.

COMPETITION

The generic pharmaceutical industry is highly competitive due principally
to the number of competitors in the market along with the consolidation of the
Company's distribution outlets through mergers, acquisitions and the formation
of buying groups. The Company has identified at least ten principal competitors,
and experiences varying degrees of competition from numerous other companies in
the health care industry. The Company also experiences competition from certain
manufacturers of brand name drugs and/or their affiliates introducing generic
pharmaceuticals comparable to certain of the Company's products.

When other manufacturers introduce generic products in competition with the
Company's existing products, its market share and prices with respect to such
existing products typically decline, sometimes substantially, depending largely
on, among other things, the number of competitors entering the market.
Similarly, the Company's potential for profits is significantly reduced, if not
eliminated, as competitors introduce products before the Company. In addition,
the Company believes that the shrinking number of significant distribution
channels over the past years through consolidation among wholesalers and
retailers and the formation of large buying groups have resulted in further

9

pricing pressures. Accordingly, the level of revenues and gross profit generated
by the Company's current and prospective products depend, in large part, on the
number and timing of introductions of competing products and the Company's
timely development and introduction of new products.

In the generic drug industry, when a company first introduces a generic
drug, it may, under certain circumstances, be granted exclusivity by the FDA to
market a product for a period of time before any other generic manufacturers may
enter the market. At the expiration of such exclusivity periods, other generic
manufacturers may enter the market, and as a result the price of the drug may
decline significantly (in some instances a price decline has exceeded 90%). As a
result of the expected price decline upon the expiration of a marketing
exclusivity period, it has become common in the industry for generic
pharmaceutical manufacturers, like the Company, that have been granted such
exclusivity periods to offer price protection to their customers. Under such
price protection arrangements, the Company will generally provide a credit to
its customers for the difference between the Company's new price at the
expiration of the exclusivity period and the price at which the Company sold the
customers the product with respect to the quantity remaining in the customer's
inventory at the expiration of the exclusivity period. As a result, the total
price protection the Company will credit customers at the expiration of an
exclusivity period will depend on the amount by which the price declines as the
result of the introduction of comparable generic products by additional
manufacturers, and the inventory customers have at the expiration of the
exclusivity period.

In July 2001 and August 2001, the Company began marketing megestrol acetate
oral suspension, and fluoxetine 40 mg capsules and fluoxetine 10 mg and 20 mg
tablets, respectively, which as first-to-file opportunities entitled the Company
to 180-days of marketing exclusivity for the products. Generic competitors of
the Company received 180-days marketing exclusivity for the generic version of
fluoxetine 10 mg and 20 mg capsules, which the Company began selling in the
first quarter of 2002, following the expiration of such other party's
exclusivity period. As expected, additional generic competitors, with products
comparable to all three strengths of the Company's fluoxetine products, began
entering the market in the first quarter of 2002, eroding the pricing the
Company received during the exclusivity period, particularly on the 10 mg and 20
mg strengths. Despite another generic approval for megestrol acetate oral
suspension in the first quarter of 2002, to date the Company still maintains a
significant share of the market for this product. Although megestrol oral
suspension and fluoxetine 40 mg capsules are expected to continue to contribute
significantly to the Company's overall performance, the rapid growth of the
Company's product line through new product introductions and, to a lesser
extent, increased sales of certain existing products have somewhat reduced its
reliance on each of these key products.

The principal competitive factors in the generic pharmaceutical market,
include, among other things: (i) introduction of other generic drug
manufacturer's products in direct competition with the Company's products, (ii)
consolidation among distribution outlets through mergers, acquisitions and the
formation of buying groups, (iii) ability of generic competitors to quickly
enter the market after patent expiration or exclusivity periods, diminishing the
amount and duration of significant profits, (iv) willingness of generic drug
customers, including wholesale and retail customers, to switch among
pharmaceutical manufacturers, (v) pricing pressures and product deletions by
competitors, (vi) reputation as a manufacturer of quality products, (vii) level
of service (including maintaining sufficient inventory levels for timely
deliveries), (viii) product appearance, and (ix) breadth of product line.

RAW MATERIALS

The raw materials essential to the Company's manufacturing business are
purchased primarily from United States distributors of bulk pharmaceutical
chemicals manufactured by foreign companies. To date, the Company has
experienced no significant difficulty in obtaining raw materials and expects
that raw materials will generally continue to be available in the future.
However, since the federal drug application process requires specification of
raw material suppliers, if raw materials from a specified supplier were to
become unavailable, FDA approval of a new supplier would be required. A delay of
six months or more in the manufacture and marketing of the drug involved could
result, while a new supplier becomes qualified by the FDA and its manufacturing
process is judged to meet FDA standards, which, depending on the particular
product, could have a material adverse effect on the Company's results of
operations and financial condition. Generally the Company attempts to minimize
the effects of any such situation by specifying, where economically and
otherwise feasible, two or more suppliers of raw materials for the drugs it
manufactures.

10

EMPLOYEES

As of December 31, 2002 the Company had approximately 456 employees
compared to 393 and 297, respectively, at December 31, 2001 and 2000. The
increased headcount levels in fiscal year 2002, primarily in research and
development and administrative functions, reflect the continued growth of the
Company from fiscal year 2001.

GOVERNMENT REGULATION

All pharmaceutical manufacturers are subject to extensive regulation by the
Federal government, principally the FDA and, as appropriate, the Drug
Enforcement Administration, Federal Trade Commission ("FTC"), and state and
local governments. The Federal Food, Drug, and Cosmetic Act (the "Act"), the
Controlled Substances Act, and other Federal statutes and regulations govern the
development, testing, manufacture, safety/effectiveness, labeling, storage,
record keeping, approval, advertising and promotion of the Company's products.
Noncompliance with applicable regulations can result in judicially and/or
administratively imposed sanctions, including the initiation of product
seizures, injunction actions, fines and criminal prosecutions. Administrative
enforcement measures may involve the recall of products, as well as the refusal
of the government to enter into supply contracts or to approve new drug
applications. The FDA also has the authority to withdraw approval of drugs in
accordance with regulatory due process procedures.

FDA approval is required before any new drug, including a generic
equivalent of a previously approved proprietary drug, can be marketed. To obtain
FDA approval for a new drug, a prospective manufacturer must, among other things
as discussed below, demonstrate that its manufacturing facilities comply with
the FDA's cGMP regulations. The FDA may inspect the manufacturer's facilities to
assure such compliance prior to approval or at any other reasonable time. The
manufacturer must follow cGMP regulations at all times during the manufacture
and processing of drugs. To comply with the standards set forth in these
regulations, the Company must continue to expend significant time, money and
effort in the areas of production, quality control and quality assurance.

To obtain FDA approval of a new drug, a manufacturer must demonstrate the
safety and effectiveness of the proposed drug. There are currently two basic
ways to satisfy the FDA's safety and effectiveness requirements:

1. NEW DRUG APPLICATIONS ("NDA"): Unless the procedure discussed in
paragraph 2 below is permitted under the Act, a prospective
manufacturer must submit to the FDA an NDA containing complete
pre-clinical and clinical safety and efficacy data or a right of
reference to such data. The pre-clinical data must provide an adequate
basis for evaluating the safety and scientific rationale for the
initiation of clinical trials. Clinical trials are conducted in three
sequential phases and may take several years to complete. At times,
the phases may overlap. Data from pre-clinical testing and clinical
trials is submitted to the FDA as an NDA for marketing approval.

2. ABBREVIATED NEW DRUG APPLICATIONS: The Hatch-Waxman amendments
established a statutory procedure for submission, FDA review and
approval of ANDAs for generic versions of drugs previously approved by
the FDA (such previously approved drugs are hereinafter referred to as
"listed drugs"). As the safety and efficacy have already been
established by the innovator company, the FDA waives the need for
complete clinical trials. However, a generic manufacturer is typically
required to conduct bioavailability/bioequivalence studies of its test
product against the listed drug. The bioavailability/bioequivalence
studies assess the rate and extent of absorption and concentration
levels of a drug in the blood stream required to produce a therapeutic
effect. Bioequivalence is established when the rate of absorption and
concentration levels of a generic product are substantially equivalent
to the listed drug. For some drugs (e.g., topical antifungals), other
means of demonstrating bioequivalence may be required by the FDA,
especially where rate and/or extent of absorption are difficult or
impossible to measure. In addition to the bioequivalence data, an ANDA
must contain patent certifications, chemistry, manufacturing, labeling
and stability data.

The Hatch-Waxman amendments also established certain statutory protections
for listed drugs. Under the Hatch-Waxman amendments, approval of an ANDA for a
generic drug may not be made effective for interstate marketing until all
relevant patents for the listed drug have expired or been determined to be
invalid or not infringed by the generic drug. Prior to enactment of the
Hatch-Waxman amendments, the FDA did not consider the patent status of a
previously approved drug. In addition, under the Hatch-Waxman amendments,
statutory non-patent exclusivity periods are established following approval of

11

certain listed drugs, where specific criteria are met by the drug. If
exclusivity is applicable to a particular listed drug, the effective date of
approval of ANDAs (and, in at least one case, submission of an ANDA) for the
generic version of the listed drug is usually delayed until the expiration of
the exclusivity period, which, for newly approved drugs, can be either three or
five years. The Hatch-Waxman amendments also provide for extensions of up to
five years of certain patents covering drugs to compensate the patent holder for
reduction of the effective market life of the patented drug resulting from the
time involved in the Federal regulatory review process.

During 1995, patent terms for a number of listed drugs were extended when
the Uruguay Round Agreements Act (the "URAA") went into effect to implement the
latest General Agreement on Tariffs and Trade (the "GATT") to which the United
States became a treaty signatory in 1994. Under GATT, the term of patents was
established as 20 years from the date of patent application. In the United
States, the patent terms historically have been calculated at 17 years from the
date of patent grant. The URAA provided that the term of issued patents be
either the existing 17 years from the date of patent grant or 20 years from the
date of application, whichever was longer. The effect generally was to add
patent life to already issued patents, thus delaying FDA approvals of
applications for generic products.

In addition to the Federal government, states have laws regulating the
manufacture and distribution of pharmaceuticals, as well as regulations dealing
with the substitution of generic drugs for brand-name drugs. The Company's
operations are also subject to regulation, licensing requirements and inspection
by the states in which they are located and/or conduct business.

Certain activities of the Company may also be subject to FTC enforcement.
The FTC enforces a variety of antitrust and consumer protection laws to ensure
that the nation's markets function competitively, are vigorous, efficient and
free of undue restrictions.

The Company also is governed by Federal and state laws of general
applicability, including laws regulating matters of environmental quality,
working conditions, and equal employment opportunity.

The Company is also subject to the recently enacted Sarbanes-Oxley Act (the
"SOX Act"), including regulations to be promulgated thereunder. The SOX Act
contains a variety of provisions affecting public reporting companies, such as
the Company, including its relationship with its auditors, prohibiting loans to
executive officers and requiring the evaluations of a company's internal
disclosure controls and procedures.

The Federal government made significant changes to Medicaid drug
reimbursement as part of the Omnibus Budget Reconciliation Act of 1990 ("OBRA").
Generally, OBRA provides that a generic drug manufacturer must offer the states
an 11% rebate on drugs dispensed under the Medicaid program and must enter into
a formal drug rebate agreement, as the Company has, with the Federal Health Care
Financing Administration. Although not required under OBRA, the Company has also
entered into similar state agreements.

ITEM 2. PROPERTIES.
- ------ ----------

The Company owns an approximately 92,000 square foot facility built to
Par's specifications which contain its executive offices, and manufacturing and
domestic research and development operations. The building, occupied by Par
since fiscal year 1986, also includes research and quality control laboratories,
as well as packaging and warehouse facilities. The building is located in Spring
Valley, New York, on a parcel of land of approximately 24 acres, of which
approximately 15 acres are available for future expansion.

The Company owns another building in Spring Valley, New York, across the
street from its executive offices, occupying approximately 36,000 square feet on
two acres. This property was acquired in fiscal year 1994 and is used for
offices and warehousing. The Company is currently in the process of converting
the warehouse and some of the office space into new research and quality control
laboratories. The capital project is expected to be completed in fiscal year
2003. The purchase of the land and building was financed by a mortgage loan,
which was paid in full in February 2003.

Par owns a third facility (the "Congers Facility") of approximately 33,000
square feet located on six acres in Congers, New York. The Company has
outsourced the operations previously performed at the Congers Facility to BASF
and the Halsey Drug Co., Inc. ("Halsey"). In March 1999, Par entered into an
agreement to lease the Congers Facility and related machinery and equipment to

12

Halsey. The lease agreement had an initial term of three years, with an
additional two-year renewal period and contains purchase options permitting
Halsey to purchase the Congers Facility and substantially all the equipment
thereof at any time during the lease terms for a specified amount. Pursuant to
the lease agreement, Halsey paid the purchase options of $150 and $100,
respectively, in March of 2002 and 1999. The lease agreement provides for annual
fixed rent of $600 per year during the two-year renewal period.

In fiscal year 2002, the Company leased additional office space in
Woodcliff Lake, New Jersey. The lease, as amended in December 2002, covers
approximately 41,000 square feet and expires in January 2010. The Company moved
certain of its administrative personnel to the facility in July 2002. In the
first quarter of 2003, the Company moved additional administrative functions to
this location.

In fiscal year 2003, the Company is planning to move its primary
warehousing operation to a facility in Montebello, New York. In August 2002, the
Company entered into a ten-year lease expiring in September 2012 to occupy
approximately 190,000 square feet of the facility.

Par occupies approximately 47,000 square feet in a building located in
Spring Valley, New York for warehouse space under a lease that expires December
2004. The Company has the option to extend the lease for two additional
five-year periods.

FineTech is currently leasing approximately 8,600 square feet at three
locations in Nesher and Technion, Israel, which contain its laboratories and
administrative offices. The terms of the lease are for ten years and 11 months,
with an additional two-year and 11 month renewal period. In fiscal year 2003,
FineTech is planning on moving its laboratories from Technion to Nesher,
expanding its space under the current lease by approximately 8,600 additional
square feet. FineTech also leases approximately 2,500 square feet of laboratory
space in Coventry, Rhode Island. The lease expires in December 2007 and may be
extended up to an additional five-year period.

Israel Pharmaceutical Resources L.P. ("IPR"), a research and development
operation owned by the Company, leased approximately 13,000 square feet at
Yaacobi House in Even Yehuda, Israel. The term of the lease was to expire in
April 2005, and the Company guaranteed IPR's obligations under the lease. In
fiscal year 2002, the Company sold the assets of IPR and the lessor of the
facility agreed to terminate the lease subject to the fulfillment of certain
conditions, including the payment of a $75 fee.

The Company believes that its owned and leased properties are sufficient in
size, scope and nature to meet its anticipated needs for the reasonably
foreseeable future (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Financial Condition" and "Notes to
Consolidated Financial Statements-Long-Term Debt" and "-Commitments,
Contingencies and Other Matters-Leases").

ITEM 3. LEGAL PROCEEDINGS.
- ------ -----------------

Par has filed an ANDA (currently pending with the FDA) for latanoprost
(Xalatan(R)), which was developed by Breath Ltd. of the Arrow Group pursuant to
a joint manufacturing and marketing agreement with the Company, seeking approval
to engage in the commercial manufacture, sale and use of the latanoprost product
in the United States. Par's ANDA includes a Paragraph IV certification that the
existing patents in connection with Xalatan(R) are invalid, unenforceable or
will not be infringed by Par's generic product. Par believes that its ANDA is
the first to be filed for this drug with a Paragraph IV certification. As a
result of the filing of the ANDA, Pharmacia Corporation, Pharmacia AB, Pharmacia
Enterprises, S.A., Pharmacia and Upjohn Company and the Trustees of Columbia
University in the City of New York filed lawsuits against the Company on
December 14, 2001 in the United States District Court for the District of
Delaware and on December 21, 2001 in the United States District Court for the
District of New Jersey alleging patent infringement. Pharmacia and Columbia are
seeking an injunction to prevent the Company from marketing its generic product
prior to the expiration of their patents. On February 8, 2002, Par answered the
complaint brought in the District of New Jersey and filed a counterclaim, which
seeks a declaration that the patents-in-suit are invalid, unenforceable and/or
not infringed by Par's products. Par is also seeking a declaratory judgment that
the extension of the term of one of the patents is invalid. All parties are
seeking to recover their respective attorneys' fees. On February 25, 2002, the
lawsuit brought in the District of Delaware was dismissed pursuant to a
stipulation of the parties. The case in the District of New Jersey is currently
in fact discovery. Par intends to vigorously defend the lawsuit. At this time,
it is not possible for the Company to predict the outcome of the plaintiffs'
motion for injunctive relief or their claim for attorneys' fees.

13

Par, among others, is a defendant in three lawsuits filed in the United
States District Court for the Eastern District of North Carolina (filed on
August 1, 2001, October 30, 2001 and November 16, 2001, respectively) by
aaiPharma Inc., involving patent infringement allegations connected to a total
of three patents related to polymorphic forms of fluoxetine (Prozac(R)). Par
intends to vigorously defend these lawsuits. While the outcome of litigation is
never certain, Par believes that it will prevail in these lawsuits.

The Company prevailed against Alpharma in an interference proceeding before
the U.S. Patent and Trademark Office regarding PRX's patents and applications
relating to megestrol acetate oral suspension formulations. Additionally, PRX
filed suit against Alpharma in the U.S. District Court, Southern District of New
York in February 2002. Alpharma has now entered into a consent judgment and
order of permanent injunction in this matter. Alpharma is hereby enjoined from
making, using, selling or importing its megestrol oral suspension product.

The Company is involved in certain other litigation matters, including
product liability and patent actions, as well as actions by former employees,
and believes these actions are incidental to the conduct of its business and
that the ultimate resolution thereof will not have a material adverse effect on
its financial condition, results of operations or liquidity. The Company intends
to vigorously defend these actions.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2002.

14

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------ ---------------------------------------------------------------------

(a) MARKET INFORMATION. The Company's Common Stock is traded on the NYSE.
The following table shows the range of closing prices for the Common
Stock as reported by the NYSE for each calendar quarter during the
Company's two most recent fiscal years.

YEAR ENDED IN
2002 2001
--------------- ----------------
QUARTER ENDED APPROXIMATELY HIGH LOW HIGH LOW
--------------------------- ----- --- ---- --- -
March 31 $33.20 $16.10 $13.41 $6.63
June 30 29.00 20.91 30.69 12.35
September 30 28.60 21.85 41.50 29.91
December 31 30.55 20.05 39.06 29.40

(b) HOLDERS. As of March 21, 2003, there were approximately 2,200 holders
of record of the Common Stock. The Company believes that, in addition,
there are a significant number of beneficial owners of its Common
Stock whose shares are held in "street name".

(c) DIVIDENDS. During fiscal years 2002, 2001 and 2000, the Company did
not pay any cash dividends on its Common Stock. The payment of future
dividends on its Common Stock is subject to the discretion of the
Board of Directors and is dependent upon many factors, including the
Company's earnings, its capital needs, the terms of its financing
agreements and its general financial condition. The Company's current
loan agreement with General Electric Capital Corporation ("GECC")
prohibits the declaration or payment of any dividend, or the making of
any distribution, to any of the Company's stockholders (see "Notes to
Consolidated Financial Statements-Short-Term Debt").

(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.

NUMBER OF
SECURITIES TO WEIGHTED
TO BE ISSUED AVERAGE NUMBER OF
UPON EXERCISE EXERCISE PRICE OF SECURITIES
OF OUTSTANDING OF OUTSTANDING REMAINING
OPTIONS, WARRANTS OPTIONS, WARRANTS AVAILABLE FOR
PLAN CATEGORY AND RIGHTS AND RIGHTS FUTURE ISSUANCE
------------- ----------------- ----------------- ---------------
EQUITY COMPENSATION
PLANS APPROVED BY
SECURITY HOLDERS:
2001 Performance Equity
Plan 2,751 $28.56 1,249
1997 Directors Stock
Option Plan 138 $18.81 27
1990 Stock Incentive
Plan 134 $3.54 -

EQUITY COMPENSATION
PLANS NOT APPROVED BY
SECURITY HOLDERS:
2000 Performance Equity
Plan 741 $6.87 54
----- -----
Total 3,764 $23.04 1,330

In fiscal year 2000, the Company's Board of Directors adopted the 2000
Performance Equity Plan (the "2000 Plan") which plan was subsequently
amended, making it a non-qualified, broad-based plan not subject to
shareholder approval. The 2000 Plan provides for the granting of incentive
and nonqualified stock options to employees of the Company and to others.
The 2000 Plan became effective March 23, 2000 and will continue until March
22, 2010 unless terminated sooner. The Company reserved 1,025 shares of
Common Stock for issuance under the 2000 Plan. The maximum term of an
option under the 2000 Plan is ten years. Vesting and option terms are
determined in each case by the Compensation and Stock Option Committee of
the Board. The maximum term of the option is reduced to five years if an
incentive stock option is granted to a holder of more than 10% in the
Company (see "Notes to Consolidated Financial Statements-Short-Term Debt").

(e) RECENT STOCK PRICE. On March 21, 2003, the closing price of a share of
the Common Stock on the NYSE was $41.71 per share.

15

ITEM 6. SELECTED FINANCIAL DATA.
- ------ -----------------------

THREE TWELVE
FOR THE YEARS ENDED MONTHS MONTHS
------------------------------------------ ENDED ENDED
(*RESTATED)(*RESTATED)(*RESTATED)(*RESTATED)
12/31/02 12/31/01 12/31/00 12/31/99 12/31/98 9/30/98
-------- -------- -------- -------- -------- -------

INCOME STATEMENT DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Net sales $381,603 $271,035 $85,022 $80,315 $16,775 $59,705
Cost of goods sold 198,313 161,306 62,332 64,140 17,105 56,135
-------- -------- -------- ------- ------- -------
Gross margin 183,290 109,729 22,690 16,175 (330) 3,570

Operating expenses (income):
Research and development 17,910 11,113 7,634 6,005 1,125 5,775
Selling, general and
administrative 40,215 21,878 16,297 13,509 3,792 12,271
Settlements (9,051) - - - - -
Acquisition termination
charges 4,262 - - - - -
Asset impairment/restructuring
charge - - - - 1,906 1,212
-------- -------- -------- ------- ------- -------
Total operating expenses 53,336 32,991 23,931 19,514 6,823 19,258
-------- -------- -------- ------- ------- -------
Operating income (loss) 129,954 76,738 (1,241) (3,339) (7,153) (15,688)

Other (expense) income (305) (364) 506 906 1 6,261
Interest income (expense) 604 (442) (916) (63) 89 (382)
-------- -------- -------- ------- ------- -------
Income (loss) before provision
for income taxes 130,253 75,932 (1,651) (2,496) (7,063) (9,809)
Provision for income taxes 50,799 22,010 - - - -
-------- -------- -------- ------- ------- -------
Net income (loss) $79,454 $53,922 $(1,651) $(2,496) $(7,063) $(9,809)
======== ======== ======== ======= ======= =======

Net income (loss) per share of
common stock:
Basic $2.46 $1.76 $(.06) $(.08) $(.24) $(.46)
======== ======== ======== ======= ======= =======
Diluted $2.40 $1.68 $(.06) $(.08) $(.24) $(.46)
======== ======== ======== ======= ======= =======

Weighted average number of
common shares
outstanding:
Basic 32,337 30,595 29,604 29,461 29,320 21,521
======== ======== ======== ======= ======= =======
Diluted 33,051 32,190 29,604 29,461 29,320 21,521
======== ======== ======== ======= ======= =======

BALANCE SHEET DATA
Working capital $136,305 $102,867 $18,512 $21,221 $24,208 $29,124
Property, plant and equipment
(net) 27,055 24,345 23,560 22,681 22,789 24,283
Total assets 301,457 216,926 93,844 92,435 88,418 93,576
Long-term debt, less current
portion 2,426 1,060 163 1,075 1,102 1,143
Shareholders' equity 220,790 138,423 64,779 65,755 67,329 74,328

* Restated as described in Notes to Consolidated Financial Statements.

16

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

CERTAIN STATEMENTS IN THIS DOCUMENT MAY CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, INCLUDING THOSE CONCERNING MANAGEMENT'S EXPECTATIONS WITH RESPECT TO
FUTURE FINANCIAL PERFORMANCE AND FUTURE EVENTS, PARTICULARLY RELATING TO SALES
OF CURRENT PRODUCTS AND THE INTRODUCTION OF NEW MANUFACTURED AND DISTRIBUTED
PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, TRENDS
AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, WHICH
COULD CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM THOSE
EXPRESSED HEREIN. THESE STATEMENTS ARE OFTEN, BUT NOT ALWAYS, MADE TYPICALLY BY
USE OF WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS," "ANTICIPATES,"
"CONTINUING," "ONGOING," "EXPECTS," "BELIEVES," OR SIMILAR WORDS AND PHRASES.
FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING STATEMENTS SET FORTH IN THIS
DOCUMENT INCLUDE (i) INCREASED COMPETITION FROM NEW AND EXISTING COMPETITORS AND
PRICING PRACTICES FROM SUCH COMPETITORS (ESPECIALLY UPON COMPLETION OF
EXCLUSIVITY PERIODS), (ii) PRICING PRESSURES RESULTING FROM THE CONTINUED
CONSOLIDATION BY THE COMPANY'S DISTRIBUTION CHANNELS, (iii) THE AMOUNT OF FUNDS
AVAILABLE FOR INTERNAL RESEARCH AND DEVELOPMENT AND RESEARCH AND DEVELOPMENT
JOINT VENTURES, (iv) RESEARCH AND DEVELOPMENT PROJECT DELAYS OR DELAYS AND
UNANTICIPATED COSTS IN OBTAINING REGULATORY APPROVALS, (v) CONTINUATION OF
DISTRIBUTION RIGHTS UNDER SIGNIFICANT AGREEMENTS, (vi) THE CONTINUED ABILITY OF
DISTRIBUTED PRODUCT SUPPLIERS TO MEET FUTURE DEMAND, (vii) THE COSTS AND OUTCOME
OF ANY THREATENED OR PENDING LITIGATION, INCLUDING PATENT AND INFRINGEMENT
CLAIMS, (viii) UNANTICIPATED COSTS IN ABSORBING ACQUISITIONS (ix) OBTAINING OR
LOSING 180-DAY EXCLUSIVITY ON PRODUCTS AND (x) GENERAL INDUSTRY AND ECONOMIC
CONDITIONS. ANY FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE MADE
ONLY AS OF THE DATE HEREOF, BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF
THE DATE HEREOF, AND, SUBJECT TO APPLICABLE LAW TO THE CONTRARY, THE COMPANY
ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.

FISCAL YEAR 2000 RESULTS GIVE EFFECT TO THE RESTATEMENT DESCRIBED IN THE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. THE FINANCIAL DATA CONTAINED IN THIS
SECTION IS IN THOUSANDS.

RESULTS OF OPERATIONS

GENERAL

The Company experienced significant sales, gross margin and net income
growth in fiscal year 2002 when compared to fiscal year 2001. Net income of
$79,454 for the year ended December 31, 2002 increased $25,532 from $53,922 for
the year ended December 31, 2001. Net income in 2001 included the favorable
impact from the reversal of a previously established valuation allowance of
$9,092 related to net operating loss ("NOL") carryforwards. Net sales reached a
historical high of $381,603 in 2002, an increase of $110,568, or 41%, from 2001.
The increased revenues were primarily the result of new product introductions in
fiscal year 2002 and the continuing success of megestrol acetate oral suspension
(Megace(R) Oral Suspension), introduced in the third quarter of 2001. The
revenue increase was achieved despite lower sales of fluoxetine (Prozac(R)) 10
mg and 20 mg tablets, which were introduced with 180-day exclusivity in August
2001 and experienced severe price competition in fiscal year 2002. The sales
growth generated increased gross margins of $183,290, or 48% of net sales, in
fiscal year 2002, compared to $109,729, or 40% of net sales, in 2001. Results
for fiscal year 2002 included increased spending on research and development and
selling, general and administrative expenses of $6,797 and $18,337,
respectively, primarily due to increased activity with outside development
partners, and additional legal fees, personnel costs, product liability
insurance and shipping costs associated with new product launches. Additionally,
the Company recorded income from settlements of $9,051 in the first quarter of
2002 related to the termination of its litigation with BMS and acquisition
termination charges of $4,262 in connection with its termination of the
acquisition of the combined ISP FineTech fine chemical business based in Haifa,
Israel and Columbus, Ohio. The Company subsequently purchased FineTech, based in
Haifa, Israel, from ISP in April 2002. The purchase of FineTech did not have a
material effect on the Company's earnings for fiscal year 2002.

The Company's net income of $53,922 for fiscal year 2001, which included
the reversal of a previously established valuation allowance related to NOL
carryforwards, increased $55,573 from a net loss of $1,651 for fiscal year 2000.
The Company did not recognize a tax benefit for its losses in fiscal year 2000.
The revenue increase of $186,013, or 219%, in 2001 from revenues generated
during 2000, reflected the successful launch of three products that benefited
from marketing exclusivity in fiscal year 2001, fluoxetine 10 mg and 20 mg
tablets, fluoxetine 40 mg capsules and megestrol acetate oral suspension. Net
sales were $271,035 for fiscal year 2001 compared to net sales of $85,022 in
fiscal year 2000. Accompanying the sales growth, the gross margins increased to
$109,729, or 40% of net sales, in 2001, from $22,690, or 27% of net sales, in
2000. The improved results included an increased investment in research and

17

development, which totaled $11,113 for fiscal year 2001, an increase of $3,479
from fiscal year 2000. In fiscal year 2001, selling, general and administrative
costs were $21,878, an increase of $5,581 from the previous year, primarily due
to additional marketing programs, shipping costs and legal fees associated with
new product launches.

In addition to its own product development program, the Company has several
strategic alliances through which it co-develops and distributes products. As a
result of its internal program and these strategic alliances, the Company's
pipeline of potential products includes 28 ANDAs (seven of which have been
tentatively approved), pending with, and awaiting approval from, the FDA. The
Company pays a percentage of the gross profits to its strategic partners on
sales of products covered by its distribution agreements. Generally, products
that the Company develops internally, without having to split gross profits with
its strategic partners, would contribute higher gross margins than products
covered under distribution agreements (see "Notes to Consolidated Financial
Statements-Research and Development Agreements" and "-Distribution and Supply
Agreements").

In July 2001 and August 2001, the FDA granted approvals for three ANDA
submissions, one each by Par, Dr. Reddy's Laboratories Ltd. ("Reddy") and
Alphapharm Pty Ltd., an Australian subsidiary of Merck KGaA, for megestrol
acetate oral suspension, fluoxetine 40 mg capsules and fluoxetine 10 mg and 20
mg tablets, respectively, which as first-to-file opportunities entitled the
Company to 180-days of marketing exclusivity for the products. The Company began
marketing megestrol acetate oral suspension, which is not subject to any profit
sharing agreements, in July 2001. In August 2001, the Company began marketing
fluoxetine 40 mg capsules covered under a distribution agreement with Reddy and
fluoxetine 10 mg and 20 mg tablets covered under a distribution agreement with
Genpharm. Generic competitors of the Company received 180-days marketing
exclusivity for the generic version of fluoxetine 10 mg and 20 mg capsules,
which the Company began selling in the first quarter of 2002 following the
expiration of such other party's exclusivity period. As expected, additional
generic competitors, with products comparable to all three strengths of the
Company's fluoxetine products, began entering the market in the first quarter of
2002, eroding the pricing the Company received during the exclusivity periods,
particularly on the 10 mg and 20 mg strengths. Despite another generic approval
for megestrol acetate oral suspension in the first quarter of 2002, to date the
Company still maintains a significant share of the market for this product.
Although megestrol oral suspension and fluoxetine 40 mg capsules are expected to
continue to contribute significantly to the Company's overall performance, the
rapid growth of the Company's product line through new product introductions
and, to a lesser extent, increased sales of certain existing products have
reduced its reliance on each of these key products.

Critical to the continued growth of the Company is the introduction of new
manufactured and distributed products at selling prices that generate
significant gross margins. The Company, through its internal development program
and strategic alliances, is committed to developing new products that have
limited competition and longer product life cycles. In addition to new product
introductions expected as part of its various strategic alliances, the Company
plans to continue to invest in its internal research and development efforts
while seeking additional products for sale through new and existing distribution
agreements, additional first-to-file opportunities, vertical integration with
raw material suppliers and unique dosage forms and strengths to differentiate
its products in the marketplace. The Company is engaged in efforts, subject to
FDA approval and other factors, to introduce new products as a result of its
research and development efforts and distribution and development agreements
with third parties. No assurance can be given that the Company will obtain or
develop any additional products for sale.

Sales and gross margins of the Company's products are principally dependent
upon (i) pricing and product deletions by competitors, (ii) the introduction of
other generic drug manufacturers' products in direct competition with the
Company's significant products, (iii) the ability of generic competitors to
quickly enter the market after patent or exclusivity period expirations,
diminishing the amount and duration of significant profits from any one product,
(iv) the continuation of existing distribution agreements, (v) the introduction
of new distributed products, (vi) the consolidation among distribution outlets
through mergers, acquisitions and the formation of buying groups, (vii) the
willingness of generic drug customers, including wholesale and retail customers,
to switch among generic pharmaceutical manufacturers, (viii) approval of ANDAs
and introduction of new manufactured products, (ix) granting of potential
exclusivity periods, (x) market penetration for the existing product line and
(xi) the level of customer service (see "Business-Competition").

NET SALES

Net sales of $381,603 for fiscal year 2002 increased $110,568, or 41%, from
net sales in fiscal year 2001. The sales increase was primarily due to higher
sales of megestrol acetate oral suspension, introduced in late July 2001, new

18

products introduced in fiscal year 2002, particularly tizanidine (Zanaflex(R)),
metformin (Glucophage(R)), flecainide (Tambocor(R)) and nizatidine (Axid(R)),
sold under distribution agreements with Reddy or Genpharm, and the addition of
five BMS brand products, sold pursuant to an agreement with BMS. Net sales of
fluoxetine and megestrol acetate oral suspension in fiscal year 2002 were
$89,952 and $83,022, respectively, compared to $122,270 and $43,869,
respectively, in the prior year. Net sales of distributed products, which
consist of products manufactured under contract and licensed products, were
approximately 60% and 66%, respectively, of the Company's net sales in fiscal
years 2002 and 2001. The Company is substantially dependent upon distributed
products for its overall sales, and as the Company introduces new products under
its distribution agreements, it is expected that this dependence will continue.
Any inability by suppliers to meet expected demand could adversely affect future
sales.

The Company's exclusivity period for fluoxetine expired in late-January
2002. The Company established a price protection reserve with respect to
fluoxetine during the exclusivity period of approximately $34,400, based on its
estimate that between eight and ten additional generic manufacturers would
introduce and market comparable products for the 10 mg and 20 mg tablets and
between one and three additional manufacturers would introduce and market a
comparable product for the 40 mg capsules. In fiscal year 2002, the Company
issued price protection credits totaling approximately $27,400 and eliminated
the price protection reserve it believed was no longer necessary. Pursuant to
distribution agreements with strategic partners, the elimination of the
remaining reserve had a favorable impact on the Company's gross margin of
approximately $1,800 in fiscal year 2002. As a result of the introduction of
these competing generic products during the first quarter of 2002, the sales
price for fluoxetine has substantially declined from the price the Company
charged during the exclusivity period. Accordingly, the Company's sales and
gross margins generated by fluoxetine in fiscal year 2002 were and will continue
to be adversely affected (see "Notes to Consolidated Financial
Statements-Accounts Receivable").

The Company's exclusivity period for megestrol acetate oral suspension
expired in mid-January 2002. One generic competitor was granted FDA approval to
market another generic version of megestrol acetate oral suspension and began
shipping the product to a limited number of customers in the second quarter of
2002. In addition, a second potential generic competitor entered into a
settlement agreement with BMS pursuant to which the public record states that
the present formulation of the generic company's product infringes a BMS patent.
However, at this time the Company has no information as to whether the
settlement agreement provides for the generic competitor to enter the market at
some point in the future. The Company has patents that cover its unique
formulation for megestrol acetate oral suspension and will avail itself of all
legal remedies and take steps necessary to protect its intellectual property
rights. Although competitors may be taking the steps necessary to enter the
market, the Company believes it will be difficult for them to successfully enter
this market because of patents owned by BMS or the Company. Megestrol acetate
oral suspension is still anticipated by the Company to be a significant profit
contributor for fiscal year 2003, despite the potential of competition. In
accordance with the Company's accounting policies, the Company did not record a
price protection reserve for megestrol acetate oral suspension as of December
31, 2002. The Company will continue to evaluate the effect of potential
competition and will record a price protection reserve when and as it deems
necessary.

Pursuant to a profit sharing agreement with Genpharm (the "Genpharm Profit
Sharing Agreement"), the Company will receive a portion of the profits generated
from the sale of omeprazole, the generic version of Astra Zeneca's ("Astra")
Prilosec(R). In November 2001, the FDA granted Genpharm 180 days' marketing
co-exclusivity for 10 mg and 20 mg doses of omeprazole. The exclusivity would
have allowed only Genpharm and/or Andrx Corporation ("Andrx") "), a
pharmaceutical company located in Fort Lauderdale, Florida, to enter the market
during the exclusivity period. Under the Genpharm Profit Sharing Agreement, the
Company was entitled to receive at least 30% of profits generated by Genpharm
based on the sale of omeprazole. In November 2002, the Company announced that
Genpharm and Andrx, in conjunction with KUDCo, a subsidiary of Schwarz Pharma AG
of Germany, had relinquished exclusivity rights for 10 mg and 20 mg doses of
omeprazole, thereby allowing KUDCo to enter the market with a generic version of
Prilosec(R). As a result, KUDCo received final ANDA approval from the FDA for
its generic version of Prilosec(R). The terms of the agreement provide Genpharm
with an initial 15% share of KUDCo's profits, as defined in their agreement,
with a subsequent reduction over time based on a number of factors. The Company
reduced its share of Genpharm's profit derived from omeprazole pursuant to the
Genpharm Profit Sharing Agreement from 30% to 25%. In December 2002, KUDCo
launched omeprazole "at risk" because Astra appealed the court's patent
infringement decision. The full impact of KUDCo's omeprazole launch on the
Company's revenues is presently unclear since, among other things, Astra has
introduced a new drug, Nexium(R), in an apparent attempt to switch consumers
using Prilosec(R) and Astra's decision to market a non-prescription form of
Prilosec(R) along with Proctor & Gamble, all of which may reduce generic sales
of omeprazole. In December 2002, the Company recognized $755 of revenues related

19

to its share of Genpharm profits, which were significantly reduced as Genpharm
recovered out-of-pocket development and legal expenses incurred during the
product development and litigation process. These expenses were substantially
recovered by Genpharm in 2002. Unless there is a court ruling that is
unfavorable to KUDCo in the pending appeal by Astra, in which case the Company
could be obligated to return any payments received from Genpharm, the Company
anticipates recording revenues of up to $20,000 in fiscal year 2003 from its
share of the profits on omeprazole.

Net sales for fiscal year 2001 of $271,035 increased $186,013, or 219%,
from net sales of $85,022 for fiscal year 2000. The sales increase was primarily
due to the launch in the third quarter of 2001 of fluoxetine 10 mg and 20 mg
tablets sold under a distribution agreement with Genpharm, fluoxetine 40 mg
capsules sold under a distribution agreement with Reddy, and megestrol acetate
oral suspension manufactured by the Company. Net sales of distributed products
represented approximately 66% and 64%, respectively, of the Company's net sales
in fiscal years 2001 and 2000.

GROSS MARGINS

The gross margin for fiscal year 2002 of $183,290 (48% of net sales)
increased $73,561 from $109,729 (40% of net sales) in the prior year. The gross
margin improvement was achieved primarily through the additional contributions
from sales of higher margin new products, including megestrol acetate oral
suspension and, to a lesser extent, increased sales of certain existing
products. Megestrol acetate oral suspension contributed an additional $33,552 in
fiscal year 2002 to the gross margin improvement when compared to fiscal year
2001. As previously discussed, additional generic drug manufacturers introduced
comparable fluoxetine products at the expiration of the Company's exclusivity
period that adversely affected the Company's sales volumes, selling prices and
gross margins for such products, particularly the 10 mg and 20 mg strengths. The
effects of gross margin declines from lower pricing on the fluoxetine 40 mg
capsule have been partially offset, however, by an increase in the Company's
profit sharing percentage under an agreement with Reddy. Although aggregate
sales of the fluoxetine products declined in 2002, the increased profits on the
40 mg capsule lessened the impact of the lower margin contributions from the 10
mg and 20 mg strengths. The Company's gross margin for megestrol acetate oral
suspension could also decline if additional manufacturers enter the market with
comparable generic products.

The gross margin of $109,729 (40% of net sales) for fiscal year 2001
increased $87,039 from $22,690 (27% of net sales) in fiscal year 2000. The gross
margin improvement was achieved through additional contributions from sales of
higher margin new products and, to a lesser extent, increased sales of certain
existing products and more favorable manufacturing overhead variances. For
fiscal year 2001, fluoxetine, which is subject to profit sharing agreements with
Genpharm and Reddy, contributed approximately $38,736 to the gross margin
improvement while megestrol acetate oral suspension contributed approximately
$34,613.

Inventory write-offs amounted to $3,096 for fiscal year 2002 compared to
$1,790 in fiscal year 2001. The increase was primarily attributable to normally
occurring write-offs resulting from increased production required to meet higher
sales and inventory levels. The inventory write-offs, taken in the normal course
of business, are related primarily to work in process inventory not meeting the
Company's quality control standards and the disposal of finished products due to
short shelf lives. In addition, the Company experienced both the write-off of
inventory for a product whose launch was delayed due to unexpected patent issues
and certain raw material not meeting the Company's quality control standards in
fiscal year 2002.

Inventory write-offs of $1,790 for fiscal year 2001 were comparable to
$1,645 in fiscal year 2000. In addition to write-offs taken in the normal course
of business, inventory write-offs in fiscal year 2001 included the disposal of
validation batches related to manufacturing process improvements.

In fiscal year 2002, the Company's top four selling products accounted for
approximately 57% of net sales compared to 70% and 45%, respectively, of net
sales in fiscal years 2001 and 2000. One of the products, tizanidine, was not
one of the top four products in either of the preceding periods and accounted
for approximately 6% of the Company's total 2002 net sales. The aggregate sales
and gross margins generated by fluoxetine and megestrol acetate oral suspension
continued to account for a significant portion of the Company's overall sales
and gross margins in both fiscal years 2002 and 2001 and any further reductions
in pricing for these products will continue to reduce future contributions of
these products to the Company's overall financial performance. Although there
can be no such assurance, the Company anticipates continuing to introduce new
products in fiscal year 2003 and attempt to increase sales of certain existing
products in an effort to offset the sales and gross margin declines resulting
from competition on any of its significant products. The Company will also try

20

to reduce the overall impact of the top four products, by adding additional
products through new and existing distribution agreements and seeking to gain
efficiencies through manufacturing process improvements.

OPERATING EXPENSES/INCOME

RESEARCH AND DEVELOPMENT
Research and development expenses of $17,910 for fiscal year 2002 increased
$6,797, or 61%, from $11,113 for the prior year. The increased costs were
primarily attributable to additional payments of approximately $7,100 for
development work performed for the Company by unaffiliated companies,
particularly Elan Transdermal Technologies, Inc. ("Elan"), related to the
development of a clonidine transdermal patch and other products and, to a lesser
extent, higher costs for personnel, the acquisition of FineTech and funding of
SVC Pharma, the Company's joint venture partnership. These expenses were
partially offset by lower biostudy costs, primarily related to products covered
under distribution agreements with Genpharm, in fiscal year 2001.

Total research and development costs for fiscal year 2003 are expected to
exceed the total for fiscal year 2002 by approximately 30% to 40%. The increase
is expected as a result of increased internal development activity and projects
with third parties, increased research and development venture activity and the
inclusion of FineTech activities for the full year.

The Company purchased FineTech, based in Haifa, Israel, from ISP in April
2002. The Company has enjoyed a long-standing relationship with FineTech for
more than seven years. One of the Company's potential first-to-file products,
latanoprost, resulted from the Company's relationship with FineTech. In
addition, the Company and FineTech are currently collaborating on two additional
products for which ANDAs have already been filed with the FDA (see "Notes to
Consolidated Financial Statements-Acquisition of FineTech").

In April 2002, the Company entered into an agreement with RTI to establish
a joint venture partnership in the United States. The new joint venture was
named SVC Pharma and is owned equally by both parties. SVC Pharma will utilize,
on a case-by-case basis, advanced technologies and patented processes to
develop, manufacture, market and distribute certain unique, proprietary
pharmaceutical products. Under the terms of the agreement, when both partners
agree to pursue a specific project, each partner will contribute resources to
the new enterprise. RTI has agreed to provide scientific and technological
expertise in the development of non-infringing, complex molecules. In addition
to providing chemical synthesis capabilities, RTI has agreed to provide the
manufacturing capacity for sophisticated intermediate and active pharmaceutical
ingredients. Par has agreed to provide development expertise in dosage
formulation and will be responsible for marketing, sales and distribution. The
companies have agreed to share equally in expenses and profits. SVC Pharma has
identified several candidates for drug development, the first of which has the
potential to be marketed by the Company late in fiscal year 2004. The Company's
funding of $952 related to the first project began in the fourth quarter of
fiscal year 2002 and was charged to research and development expenses. The
Company accounts for its share of the expenses of SVC Pharma with a charge to
research and development as incurred.

The Company currently has nine ANDAs for potential products (three
tentatively approved) pending with, and awaiting approval from, the FDA as a
result of its own product development program. The Company has in process or
expects to commence biostudies for at least ten additional products during
fiscal year 2003.

Under the Genpharm 11 Product Agreement, Genpharm will develop the
products, submit all corresponding ANDAs to the FDA and subsequently manufacture
the products. Par will serve as exclusive U.S. marketer and distributor of the
products, pay a share of the costs, including development and legal expenses
incurred to obtain final regulatory approval, and pay Genpharm a percentage of
the gross profits on all sales of products covered under this agreement.
Currently, there are five ANDAs for potential products (two tentatively
approved) covered under the Genpharm 11 Product Agreement pending with, and
awaiting approval from, the FDA (see "Notes to Consolidated Financial
Statements-Research and Development Agreements").

The Company and Genpharm entered into a distribution agreement (the
"Genpharm Distribution Agreement"), dated March 1998. Under the Genpharm
Distribution Agreement, Genpharm pays the research and development costs
associated with the products covered by the Genpharm Distribution Agreement.
Currently, there are seven ANDAs for potential products (two tentatively
approved) that are covered by the Genpharm Distribution Agreement pending with,
and awaiting approval from, the FDA. The Company is currently marketing 19
products under the Genpharm Distribution Agreement (see "Notes to Consolidated
Financial Statements-Distribution and Supply Agreements-Genpharm, Inc.").

21

Genpharm and the Company share the costs of developing products covered
under an agreement (the "Genpharm Additional Product Agreement"), dated November
27, 2000. The Company is currently marketing two products under the Genpharm
Additional Product Agreement (see "Notes to Consolidated Financial
Statements-Distribution and Supply Agreements-Genpharm, Inc.").

In fiscal year 2001, the Company incurred research and development expenses
of $11,113 compared to $7,634 for fiscal year 2000. The increased costs were
primarily attributable to payments to Elan related to the development of a
clonidine transdermal patch and higher costs for raw material, biostudies,
including those related to products developed by Genpharm, personnel and
additional payments for formulation development work performed for the Company
by unaffiliated companies.

SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs of $40,215 (11% of net sales) for
fiscal year 2002 increased $18,337 from $21,878 (8% of net sales) in fiscal year
2001. The increase in 2002 was primarily attributable to additional legal fees
of $6,029, personnel costs of $4,247 and, to a lesser extent, product liability
insurance and distribution costs associated with new product introductions and
higher sales volumes. Distribution costs include those related to shipping
product to the Company's customers, primarily through the use of a common
carrier or an external distribution service. Shipping costs totaled $2,838 in
fiscal year 2002, an increase of $1,489 from the prior year. The Company
anticipates it will continue to incur a high level of legal expenses related to
the costs of litigation connected with potential new product introductions (see
"Notes to Consolidated Financial Statements-Commitments, Contingencies and Other
Matters-Legal Proceedings"). Although there can be no such assurance, selling,
general and administrative costs in fiscal year 2003 are expected to increase by
approximately 10% from fiscal year 2002.

Although selling, general and administrative costs of $21,878 for fiscal
year 2001 increased $5,581, or 34%, over the preceding year, the cost as a
percentage of net sales in the respective periods decreased to 8% in 2001 from
19% in 2000. The higher dollar amount in fiscal year 2001 was primarily
attributable to additional marketing programs, distribution costs and legal fees
associated with new product introductions and, to a lesser extent, increased
personnel costs. In fiscal year 2001, shipping costs of $1,349 increased $575
from $774 in fiscal year 2000.

SETTLEMENTS
On March 5, 2002 the Company entered into the BMS Asset Purchase Agreement
and acquired the United States rights to five products from BMS. The products
include the antihypertensives Capoten(R) and Capozide(R), the
cholesterol-lowering medications Questran(R) and Questran Light(R), and
Sumycin(R), an antibiotic. To obtain the rights to the five products, the
Company agreed to terminate its outstanding litigation against BMS involving
megestrol acetate oral suspension and buspirone, paid approximately $1,024 in
March 2002 and agreed to make an additional payment of approximately $1,025 in
the first quarter of 2003. The Company determined, through an independent third
party appraisal, the fair value of the product rights received to be $11,700,
which exceeded the cash consideration of $2,049 and associated costs of $600 by
$9,051. The $9,051 value was assigned to the litigation settlements and included
in settlement income in the first quarter of 2002. The fair value of the product
rights received is being amortized on a straight-line basis over seven years
beginning in March 2002, with the net amount included in intangible assets on
the consolidated balance sheets.

ACQUISITION TERMINATION CHARGES
On March 15, 2002, the Company terminated its negotiations with ISP related
to the Company's purchase of the combined ISP FineTech fine chemical business,
based in Haifa, Israel and Columbus, Ohio. At that time, the Company
discontinued negotiations with ISP as a result of various events and
circumstances that occurred following the announcement of the proposed
transaction. Pursuant to the termination of negotiations, the Company paid ISP a
$3,000 break-up fee in March 2002, which was subject to certain credits and
offsets, and incurred $1,262 in related acquisition costs, both of which were
included in acquisition termination charges on the consolidated statements of
operations in fiscal year 2002.

22

OTHER EXPENSE/INCOME

Other expense of $305 for fiscal year 2002 was comparable to $364 in fiscal
year 2001. Other income of $506 in fiscal year 2000 included payments from
strategic partners to reimburse the Company for research costs incurred in prior
periods.

INTEREST INCOME/EXPENSE

Net interest income of $604 in fiscal year 2002 was primarily derived from
money market and other short-term investments. Net interest expense of $442 and
$916 in fiscal years 2001 and 2000, respectively, was primarily due to
outstanding balances on the Company's line of credit with GECC during the
periods.

INCOME TAXES

The Company recorded provisions for income taxes of $50,799 and $22,010,
respectively, for the years ended December 31, 2002 and 2001 based on the
applicable federal and state tax rates for those periods. The provision in
fiscal year 2001 was net of tax benefits of $9,092 related to previously
unrecognized NOL carryforwards. The Company did not recognize a benefit for its
operating losses for fiscal year 2000 (see "Notes to Consolidated Financial
Statements-Income Taxes").

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents of $65,121 at December 31, 2002 decreased $2,621
from $67,742 at December 31, 2001. In fiscal year 2002, the Company funded the
acquisition of FineTech and capital projects primarily through its operating
activities. Working capital, which includes cash and cash equivalents, increased
to $136,305 at December 31, 2002 from $102,867 at December 31, 2001, primarily
from increases in inventory and accounts receivable due to the Company's sales
growth, as well as, maintaining customer service levels. The working capital
ratio of 2.83x at December 31, 2002 improved from 2.41x at December 31, 2001.

A summary of the Company's contractual obligations and commercial
commitments as of December 31, 2002 were as follows:

AMOUNTS DUE IN FISCAL YEARS
---------------------------
TOTAL 2005 AND
OBLIGATION OBLIGATION 2003 2004 THEREAFTER
---------- ---------- ---- ---- ----------
Operating leases $21,054 $2,812 $2,927 $15,315
Industrial revenue bond 2,000 397 384 1,219
Mortgage loan 809 39 39 731
Other 213 164 49 -
------- ------ ------ -------

Total obligations $24,076 $3,412 $3,399 $17,265
======= ====== ====== =======

In addition to its internal research and development costs, the Company,
from time to time, enters into agreements with third parties with respect to the
development of new products and technologies. To date, the Company has entered
into agreements and advanced funds to several non-affiliated companies for
products in various stages of development. These types of payments, the most
significant of which are described below, are either capitalized or expensed
according to the Company's accounting policies.

Pursuant to the Genpharm Profit Sharing Agreement, Genpharm will pay the
Company its share of profits related to KUDCo's sale of omeprazole 60 days after
the month in which the product was sold. The terms of the agreement provide
Genpharm with an initial 15% share of KUDCo's profits, as defined in their
agreement, with a subsequent reduction over time based on a number of factors.
The Company reduced its share of Genpharm's profit derived from omeprazole
pursuant to the Genpharm Profit Sharing Agreement from 30% to 25%. In December
2002, KUDCo launched omeprazole "at risk" because Astra appealed the court's
patent infringement decision. In December 2002, the Company recognized $755 of
revenues related to its share of Genpharm profits. Unless there is a court
ruling that is unfavorable to KUDCo in the pending appeal by Astra, in which
case the Company could be obligated to return any payments received from

23

Genpharm, the Company anticipates receiving up to $17,000 in cash in fiscal year
2003 from its share of the profits on omeprazole.

In November 2002, the Company amended the Supply and Marketing Agreement
with Pentech, dated November 2001, to market paroxetine hydrochloride capsules.
Pursuant to the Supply and Marketing Agreement, Par is responsible for all legal
expenses up to $2,000, which have been expensed as incurred, to obtain final
regulatory approval. Legal expenses in excess of $2,000 are fully creditable
against future profit payments. In fiscal year 2003, Par will also be
responsible for Pentech costs associated with the project up to $1,300, which
will be charged to research and development expenses as incurred.

Pursuant to its joint venture partnership with RTI named SVC Pharma, the
Company agreed to share equally in expenses and profits of the partnership. The
Company's funding of $952 related to the first project began in the fourth
quarter of fiscal year 2002. The Company accounts for its share of the expenses
of SVC Pharma with a charge to research and development as incurred.

In July 2002, the Company and Three Rivers entered into the Three Rivers
Distribution Agreement, which was amended in October 2002, to market and
distribute ribavirin 200 mg capsules, the generic version of Schering-Plough's
Rebetol(R). Under the terms of the Three Rivers Distribution Agreement, Three
Rivers will supply the product and be responsible for managing the regulatory
process and ongoing patent litigation. Par will have the exclusive right to sell
the product in non-hospital markets upon FDA approval and final marketing
clearance and pay Three Rivers a percentage of the gross profits as defined in
the agreement. The Company paid Three Rivers $1,000 in November 2002, which was
charged to research and development during the period, and agreed to pay Three
Rivers $500 at such time Par commercially launches the product.

The Company made non-refundable payments totaling $1,000 pursuant to its
agreements with Nortec, entered into in the second quarter of 2002, which were
charged to research and development expenses during the period. In addition, the
Company agreed to pay a total of $800 in various installments related to the
achievement of certain milestones in the development of two potential products
and $600 for each product on the day of the first commercial sale (see-"Notes to
Consolidated Financial Statements-Research and Development Agreements").

In April 2002, the Company entered into the Genpharm 11 Product Agreement
pursuant to which Genpharm agreed to develop the products, submit all
corresponding ANDAs to the FDA and subsequently manufacture the products. Par
agreed to serve as exclusive U.S. marketer and distributor of the products, pay
a share of the costs, including development and legal expenses incurred to
obtain final regulatory approval, and pay Genpharm a percentage of the gross
profits, as defined in the agreement, on all sales of the products covered under
this agreement. Pursuant to the Genpharm 11 Product Agreement, the Company paid
Genpharm a non-refundable fee of $2,000, included in intangible assets on the
consolidated balance sheets, in the second quarter of 2002 for two of the
products. In addition, the Company will be required to pay an additional
non-refundable fee of up to $414 based upon FDA acceptance of filings for six of
the nine remaining products.

In April 2002, the Company purchased FineTech, a portion of ISP's fine
chemical business based in Haifa, Israel, from ISP for approximately $32,000 and
$1,237 in related acquisition costs, all of which were financed by its
cash-on-hand (see "Notes to Consolidated Financial Statements-Acquisition of
FineTech").

As of December 31, 2002 the Company had payables due to distribution
agreement partners of $18,163, related primarily to amounts due pursuant to
profit sharing agreements with strategic partners. The Company expects to pay
these amounts out of its working capital in the first quarter of 2003.

In December 2002, the Company and Elan terminated an agreement (the
"Development, License and Supply Agreement"), dated December 2001, to develop
several modified release drugs over the next five years. The Company paid Elan
$1,902 in fiscal years 2002 and 2003, which was charged to research and
development expenses, for a product covered under the Development, License and
Supply Agreement, thereby completing its obligations pursuant to the agreement.

In December 2001, the Company made the first payment of a potential equity
investment of up to $2,438 to be made over a period of time in HighRapids, Inc.
("HighRapids"), a Delaware Corporation and software developer and owner of
patented rights to an artificial intelligence generator. Pursuant to an
agreement between the Company and HighRapids, effective December 1, 2001, the
Company, subject to its ongoing evaluation of HighRapids' operations, has agreed

24

to purchase units, consisting of secured debt, evidenced by 7% secured
promissory notes, up to an aggregate principal amount of $2,425 and up to an
aggregate 1,330 shares of the common stock of HighRapids. HighRapids is the
surviving corporation of a merger with Authorgenics, Inc., a Florida
corporation. HighRapids will utilize the Company's cash infusion for working
capital and operating expenses. Through December 31, 2002, the Company had
invested $768 of its potential investment. Due to HighRapids current operating
losses and the Company's evaluation of its short-term prospects for
profitability, the investment was expensed as incurred in fiscal years 2002 and
2001 and included in other expense on the consolidated statements of operations
(see-"Notes to Consolidated Financial Statements-Commitments, Contingencies and
Other Matters-Other Matters").

In November 2001, the Company entered into a joint development and
marketing agreement with Breath Ltd. of the Arrow Group to pursue the worldwide
distribution of latanoprost ophthalmic solution 0.005% (Xalatan(R)). Pursuant to
this agreement, Par paid Breath Ltd. $2,500 in fiscal year 2001 and an
additional $2,500 in the first quarter of 2002, which are included in intangible
assets on the consolidated balance sheets.

The Company paid FineTech a total of $2,000 from September 2000 through
September 2001, which is included in intangible assets on the consolidated
balance sheets, pursuant to an agreement with FineTech in April 1999, which was
later modified in August 2000, for the right to use a process for a
pharmaceutical bulk active latanoprost together with its technology transfer
package, DMF and patent filings. FineTech paid all costs and expenses associated
with the development of the process, exclusive of patent prosecution and
maintenance, which shall be at the Company's expense.

In April 2001, Par entered into a licensing agreement with Elan to market a
generic clonidine transdermal patch (Catapres TTS(R)). Elan will be responsible
for the development and manufacture of all products, while Par will be
responsible for marketing, sales and distribution. Pursuant to the agreement,
the Company paid Elan $1,167 in fiscal year 2001 and $833 in 2002, which were
charged to research and development expenses in the respective periods. In
addition, Par will pay Elan $1,000 upon FDA approval of the product and a
royalty on all sales of the product.

The Company, IPR and Generics (UK) Ltd. ("Generics"), a subsidiary of Merck
KGaA, entered into an agreement (the "Development Agreement"), dated as of
August 11, 1998, pursuant to which Generics agreed to fund one-half the costs of
the operating budget of IPR, the Company's research and development operation in
Israel, in exchange for the exclusive distribution rights outside of the United
States to products developed by IPR after the date of the Development Agreement.
In December 2002, the Company decided to terminate its IPR operations and sold
the assets of IPR to a private company in Israel. The loss on the sale of IPR's
assets was $920 and was included in selling, general and administrative expenses
in December 2002. The expenses of IPR for fiscal year 2002 were $1,032 and are
included in research and development expenses as incurred, net of the funding
from Generics. The Company expects the remaining shutdown expenses at IPR to be
nominal in fiscal year 2003 (see "Notes to Consolidated Financial
Statements-Research and Development Ventures").

The Company expects to continue to fund its operations, including research
and development activities, capital projects, and its obligations under the
existing distribution and development arrangements discussed herein, out of its
working capital and, if necessary, with available borrowings against its line of
credit with GECC, if and to the extent available. In addition, the Company
expects to fund the purchase and installation of certain capital equipment for
FineTech in Rhode Island from an industrial revenue bond issued for that purpose
(see "-Financing"). In fiscal year 2003, the Company expects its capital
spending to increase due to the planned expansion of its laboratories, office
space and an initiative related to improvements of its information systems.
Although there can be no assurance, the Company anticipates it will continue to
introduce new products and attempt to increase sales of certain existing
products, in an effort to offset the loss of sales and gross margins from
competition on any of its significant products. The Company will also try to
reduce the overall impact of its top products by adding additional products
through new and existing distribution agreements.

FINANCING

At December 31, 2002, the Company's total outstanding long-term debt,
including the current portion, amounted to $3,022. The amount consists primarily
of an outstanding mortgage loan with a bank, an industrial revenue bond and
capital leases for computer equipment. In June 2001, the Company and the bank
entered into an agreement that extended the term of the mortgage loan of which
the remaining balance was originally due in May 2001. The mortgage loan

25

extension, in the principal amount of $877, was to be paid in equal monthly
installments over a term of 13 years maturing May 1, 2014. The mortgage loan,
secured by certain real property of the Company, had a fixed interest rate of
8.5% per annum, with rate resets after the fifth and tenth years based upon a
per annum rate of 3.25% over the five-year Federal Home Loan Bank of New York
rate. The Company paid the remaining balance on the mortgage loan in February
2003. The industrial revenue bond, in the principal amount of $2,000, is to be
paid in equal monthly installments over a term of five years maturing January 1,
2008. The bond will be secured by certain equipment of FineTech located in Rhode
Island, bears interest at 4.27% per annum and is subject to covenants based on
various financial benchmarks.

At December 31, 2001, the Company's total outstanding long-term debt,
including the current portion, amounted to $1,299 consisting primarily of an
outstanding mortgage loan with a bank and capital leases for computer equipment.

In December 1996, Par entered into a Loan and Security Agreement (the "Loan
Agreement") with GECC. The Loan Agreement was amended in December 2002, to
incorporate the addition of FineTech and remove IPR as a party to the agreement.
The Loan Agreement, as amended, provides Par with a revolving line of credit
expiring March 2005. Pursuant to the Loan Agreement, Par is permitted to borrow
up to the lesser of (i) the borrowing base established under the Loan Agreement
or (ii) $30,000. The borrowing base is limited to 85% of eligible accounts
receivable plus 50% of eligible inventory of Par, each as determined from time
to time by GECC. As of December 31, 2002, the borrowing base was approximately
$27,000. The interest rate charged on the line of credit is based upon a per
annum rate of 2.25% above the 30-day commercial paper rate for high-grade
unsecured notes adjusted monthly. The line of credit with GECC is collateralized
by the assets of the Company, other than real property, and is guaranteed by the
Company. In connection with such facility, the Company established a cash
management system pursuant to which all cash and cash equivalents received by
any of such entities are deposited into a lockbox account over which GECC has
sole operating control if there are amounts outstanding under the line of
credit. The deposits would then be applied on a daily basis to reduce the
amounts outstanding under the line of credit. The revolving credit facility is
subject to covenants based on various financial benchmarks. In November 2002,
GECC waived certain events of default related to financial covenants and amended
the financial covenants in the Loan Agreement. To date, no debt is outstanding
under the Loan Agreement.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

Critical accounting policies are those most important to the portrayal of
the Company's financial condition and results of operations, and require
management's most difficult, subjective and complex judgments, resulting from
the need to make estimates about the effect of matters that are inherently
uncertain. The Company's most critical accounting policies, discussed below,
pertain to revenue recognition including the determination of sales returns and
allowances, the determination of whether certain costs pertaining to the
Company's significant development and marketing agreements are capitalized or
expensed as incurred, the valuation and assessment of impairment of intangible
assets, the determination of depreciable and amortizable lives, the
determination of pension benefits and issues related to legal proceedings. In
applying such policies, management must use some amounts that are based on its
informed judgments and estimates. Because of the uncertainty inherent in these
estimates, actual results could differ from estimates used in applying the
critical accounting policies. The Company is not aware of any reasonably likely
events or circumstances that would result in different amounts being reported
that would materially affect its financial condition or results of operations.

REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE AND RESERVES:
At the time product is shipped and title passes to its customers, the
Company recognizes revenue and simultaneously records an estimate for sales
returns, chargebacks, rebates, price protection adjustments or other sales
allowances, as a reduction in revenue, with a corresponding adjustment to the
accounts receivable reserves (see "Notes to Consolidated Financial
Statements-Accounts Receivable"). The Company has the historical experience and
access to other information, including the total demand for each drug the
Company manufactures or distributes, the Company's market share, the recent or
pending introduction of new drugs, the inventory practices of the Company's
customers, the resales by its customers to end-users having contracts with the
Company, and rebate agreements with each customer, necessary to reasonably
estimate the amount of such sales returns and allowances. Some of the
assumptions used for certain of the Company's estimates are based on information
received from third parties, such as customer inventories at a particular point
in time, or other market factors beyond the Company's control. The Company
regularly reviews all information related to these estimates and adjusts the
reserves accordingly if and when actual experience differs from previous
estimates. The Company's reserves related to the items described above, at
December 31, 2002 and 2001, totaled $113,008 and $103,079, respectively.

26

Customer rebates are price reductions generally given to customers as an
incentive to increase sales volume. This incentive is based on a customer's
volume of purchases made during an applicable monthly, quarterly or annual
period. Chargebacks are price adjustments given to the wholesale customer for
product it resells to specific healthcare providers on the basis of prices
negotiated between the Company and the provider.

The Company accepts returns of product according to the following: (i) the
returns must be approved by authorized personnel in writing or by telephone with
the lot number and expiration date accompanying any request, (ii) the Company
generally will accept returns of products from any customer and will give such
customer a credit for such return provided such product is returned within six
months prior to, and until 12 months following, such product's expiration date,
(iii) any product that has more than six months until its expiration date may be
returned to the Company; however, no credit will be issued to the customer, (iv)
the Company will not accept returns of products if such products cannot be
resold, unless the reason that such products cannot be resold is that the
expiration date has passed. In addition, private label stock is not returnable.
The Company's provision for returns has increased in fiscal year 2002 primarily
due to higher overall sales volumes and a higher rate of returns from several
brand products the Company began selling in 2002 pursuant to an agreement with
BMS.

The accounts receivable reserves also include provisions for cash
discounts, sales promotions and price protection. Cash or terms discounts are
given to customers who pay within a specific period of time. Sales or trade show
promotions may be run by the Company where additional discounts may be given on
a new product or certain existing products as an added incentive for the
customer to purchase the Company's products. The Company generally offers price
protection, or shelf-stock adjustments, with respect to sales of new generic
drugs for which it has a market exclusivity period. Price protection accounts
for the fact that the price of such drugs typically will decline, sometimes
substantially, when additional generic manufacturers introduce and market a
comparable generic product at the end of the exclusivity period. Such plans,
which are common in the industry, generally provide for a credit to customers
with respect to the customer's remaining inventory at the end of the exclusivity
period for the difference between the Company's new price and the price at which
the Company originally sold the product. The Company estimates the amount by
which prices will decline based on its monitoring of the number and status of
FDA applications and tentative approvals and its historical experience with
other drugs for which the Company had market exclusivity. The Company estimates
the amount of shelf stock that will remain at the end of an exclusivity period
based on both its knowledge of the inventory practices for wholesalers and
retail distributors and conversations it has with its major customers. Using
these factors, the Company estimates the total price protection credit it will
have to issue at the end of an exclusivity period and records charges
(reductions of sales) to accrue this amount for specific product sales that will
be subject to price protection based on the Company's estimate of customer
inventory levels and market prices at the end of the exclusivity period. As
noted above, although the Company believes it has the information necessary to
reasonably estimate the amount of such price protection at the time the product
is sold, there are inherent risks associated with these estimates. The Company
adjusts its price protection reserves accordingly if and when actual experience
differs from those estimates. At December 31, 2002, the Company did not have any
significant price protection reserves. At December 31, 2001, the Company's price
protection reserve was $31,400.

INVENTORY RESERVES:
The Company examines inventory levels, including expiration dates by
product, on a regular basis. The Company makes provisions for obsolete and slow
moving inventories as necessary to properly reflect inventory value with changes
in these provisions charged to cost of goods sold. Inventory reserves at
December 31, 2002 and 2001, respectively, totaled $6,803 and $5,714.

RESEARCH AND DEVELOPMENT AND MARKETING AGREEMENTS:
The Company will either capitalize or expense amounts related to the
development and marketing of new products and technologies through third parties
based on the Company's determination of its ability to recover in a reasonable
period of time the estimated future cash flows anticipated to be generated
pursuant to each agreement. Under the Company's accounting policies, amounts
related to the Company's funding of the research and development efforts of
others or to the purchase of contractual rights to products that have not been
approved by the FDA where the Company has no alternative future use for the
product, are expensed and included in research and development costs. Amounts
for contractual rights acquired by the Company to a process, product or other
legal right having multiple or alternative future uses that support its
realizabilty, as well as, an approved product, are capitalized and included in
intangible assets on the consolidated balance sheets. The Company records the
value of these agreements based on the purchase price and subsequent milestone

27

payments related to each agreement. Capitalized costs are amortized on an
accelerated basis over the estimated useful life over which the related cash
flows are expected to be generated and charged to cost of goods sold. Changing
market, regulatory or legal factors, among other things, may affect the
realizability of the projected cash flows an agreement was expected to generate.
The Company regularly monitors these factors and subjects all capitalized costs
to periodic impairment testing.

GOODWILL AND INTANGIBLE ASSETS:
The Company determines the estimated fair values of goodwill and certain
intangible assets with definitive lives based on purchase price allocations
performed by independent third party valuation firms at the time of acquisition.
In addition, certain amounts paid to third parties related to the development
and marketing of new products and technologies, as described above, are
capitalized and included in intangible assets on the consolidated balance
sheets. The goodwill is tested at least annually for impairment using a fair
value approach. Intangible assets with definitive lives, also tested
periodically for impairment, are capitalized and amortized over their estimated
useful lives. As a result of the acquisition of FineTech in fiscal year 2002,
the Company had recorded goodwill of $24,662 at December 31, 2002. In addition,
intangible assets with definitive lives, net of accumulated amortization,
totaled $35,692 and $15,822, respectively, at December 31, 2002 and 2001.

PENSION BENEFITS:
The determination of the Company's obligation and expense for pension
benefits is dependent on its selection of certain assumptions used by actuaries
in calculating such amounts. Those assumptions are described in Notes to
Consolidated Financial Statements - Commitments, Contingencies and Other Matters
and include, among others, the discount rate, expected long-term rate of return
on plan assets and rates of increase in compensation. In accordance with
accounting principles generally accepted in the United States, actual results
that differ from the Company's assumptions are accumulated and amortized over
future periods and therefore, generally affect the recognized expense and
recorded obligation in future periods. While the Company believes its
assumptions are appropriate, significant differences in actual experience or
significant changes in assumptions may materially affect pension obligations and
future expense.

LEGAL PROCEEDINGS:
The Company records its costs, including patent litigation expenses,
related to legal proceedings as incurred in selling, general and administrative
expenses. As discussed in Notes to Consolidated Financial Statements -
Commitments, Contingencies and Other Matters, the Company is a party to several
patent infringement matters whose outcome could have a material impact on its
future profitability, cash flows and financial condition. The Company is also
currently involved in other litigation matters, including certain patent
actions, product liability and actions by former employees and believes these
actions are incidental to the business and that the ultimate resolution thereof
will not have a material adverse effect on its future profitability, cash flows
or financial condition. The Company is defending or intends to defend all of
these actions vigorously.

NEW ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Accounting for
Goodwill and Other Intangible Assets" ("SFAS 142"). This statement requires that
goodwill and intangible assets deemed to have an indefinite life are not be
amortized. Instead of amortizing goodwill and intangible assets deemed to have
an indefinite life, the statement requires a test for impairment to be performed
annually, or immediately if conditions indicate an impairment might exist by
applying a fair-value-based test. The adoption of this standard did not have a
material impact on our financial position or results of operations.

In August 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which is effective January 1, 2003. It requires the recording of
an asset and a liability equal to the present value of the estimated costs
associated with the retirement of long-lived assets where a legal or contractual
obligation exists. The asset is required to be depreciated over the life of the
related equipment or facility, and the liability accreted each year based on a
present value interest rate. This standard, which the Company will adopt in
2003, will not have a material effect on the Company's consolidated financial
position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). It establishes a
single accounting model for the impairment of long-lived assets to be held and
used or to be disposed of by sale or abandonment, and broadens the definition of
discontinued operations. The Company adopted SFAS 144 in 2002, with no
significant change in the accounting for the impairment and disposal of
long-lived assets.

28

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123" ("SFAS 148") to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this standard amends the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company adopted the disclosure requirements
of SFAS 148 as of December 31, 2002. The Company accounts for stock-based
employee compensation arrangements in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and complies with the disclosure provisions of SFAS 123, as amended.
Under APB Opinion No. 25, compensation expense is based on the difference, if
any, on the date of grant, between the fair value of our stock and the exercise
price.

SUBSEQUENT EVENTS

In February 2003, Three Rivers Pharmaceuticals reached a settlement with
Schering in the patent litigation case involving Rebetol(R) brand ribavirin
which is indicated for the treatment of chronic hepatitis C. Under the terms of
the settlement, Schering has provided a non-exclusive license to Three Rivers
for all its U.S. patents relating to this product. In return for this license,
Three Rivers has agreed to pay Schering a reasonable royalty based upon net
sales of Three Rivers' and Par's generic ribavirin product. The parties were in
litigation in the U.S. District Court for the Western District of Pennsylvania.
The agreement is subject to the Court's dismissal of the relevant lawsuits.

Three Rivers is also currently in litigation with Ribapharm, Inc. regarding
certain patents that Ribapharm asserts relate to ribavirin. A trial date in that
litigation is scheduled for May 2003. Three Rivers does not have tentative
approval from the FDA at this time, although the Company anticipates an approval
within a reasonable period of time. Three Rivers anticipates that the product
will not be launched until the Ribapharm litigation is satisfactorily resolved
and an approval is obtained from the FDA.

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

Not applicable.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------ --------------------------------------------------------

See Index to Consolidated Financial Statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
DISCLOSURE.
----------

In May 2002, the Company engaged Deloitte & Touche LLP ("Deloitte &
Touche") to serve as Pharmaceutical Resources, Inc.'s independent auditor for
2002. Prior to that date, Arthur Andersen LLP ("Andersen") had served as the
Company's independent public accountants.

The reports by Andersen on the Company's consolidated financial statements
for the past two years did not contain an adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles. Andersen's report on Pharmaceutical Resources, Inc.
consolidated financial statements for 2001 was issued on an unqualified basis in
conjunction with the filing of Pharmaceutical Resources, Inc.'s Annual Report on
Form 10-K.

During the Company's two most recent fiscal years, and through the date of
the change, there were no disagreements with Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures which, if not resolved to Andersen's satisfaction, would
have caused them to make reference to the subject matter in connection with
their report on the Company's consolidated financial statements for such years;
and there were no reportable events, as listed in Item 304(a)(1)(v) of
Regulation S-K.

The decision to change accountants was recommended by the Audit and Finance
Committee and approved by the Audit Committee of the Board of Directors on May
1, 2002.

During 2002, there were no disagreements with Deloitte & Touche on any
matter of accounting principles or practices, financial statement disclosure, or

29

auditing scope or procedures which, if not resolved to Deloitte & Touche's
satisfaction, would have caused them to make reference to the subject matter in
connection with their report on the Company's consolidated financial statements
for 2002 and there were no reportable events, as listed in Item 304(a)(1)(v) of
Regulation S-K.

30

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------- --------------------------------------------------

DIRECTORS

The Company's Certificate of Incorporation, as amended, provides that the
Company's Board of Directors (the "Board") shall be divided into three classes,
with the term of office of one class expiring each year. The Company's Bylaws
provide that the number of directors constituting the Board shall not be less
than three nor more than 15, with the actual number to be set from time to time
by resolution of the Board. The Board has set such number at seven. Peter S.
Knight and Scott L. Tarriff, the present Class I directors, have terms that
expire in 2003, and have been selected as nominees for election as Class I
directors at the Company's 2003 Annual Meeting of Shareholders (the "Meeting").
If Messrs. Knight and Tarriff are elected to the Board at the Meeting, their
terms will expire in 2006. The three Class II directors have terms that expire
in 2004 and the two Class III directors have terms that expire in 2005.

The following table sets forth certain information regarding each nominee
(provided by such nominee) for election as a Class I director of the Company and
the year in which each was first elected as a director of the Company:

CLASS I

NAME AND AGE
PRINCIPAL OCCUPATION(S) (AS OF 3/20/03) YEAR OF FIRST ELECTION
- ----------------------- --------------- ----------------------

PETER S. KNIGHT (1)(2)(3) 52 2001*

Since November 2001, a
managing director of MetWest
Financial, a Los Angeles-based
asset management holding
company. From January 2000 to
October 2001, President of
Sage Venture Partners, a
telecommunications investment
firm. From 1990 to 2000, a
partner in Wunder, Knight,
Forscey & DeVierno, a law
firm. Also, Mr. Knight is a
director of the Whitman
Education Group, Medicis
Pharmaceutical Corporation,
EntreMed, Inc. and the
Schroder Mutual Funds.

SCOTT L. TARRIFF 43 2001*

Since September 2001, President
and Chief Executive Officer of
Par Pharmaceutical, Inc., the
Company's principal operating
subsidiary, and from January
1998, Executive Vice President
of the Company. From 1995 to
1997, Senior Director,
Marketing, Business Development
and Strategic Planning, of the
Apothecon division of
Bristol-Myers Squibb.

31

The following table sets forth certain information (provided by them)
regarding the Class II directors (whose terms expire in 2004) and the Class III
directors (whose terms expire in 2005) and the year in which each was first
elected as a director of the Company:

CLASS II

NAME AND AGE
PRINCIPAL OCCUPATION(S) (AS OF 3/20/03) YEAR OF FIRST ELECTION
- ----------------------- --------------- ----------------------

KENNETH I. SAWYER 57 1989

Since October 1990, Chairman
of the Board of the Company.
Since October 1989, Chief
Executive Officer and
President of the Company.

MARK AUERBACH (1)(2)(3) 64 1990

Since June 1993, Senior Vice
President and Chief Financial
Officer of Central Lewmar
L.P., a distributor of fine
papers. From December 1995 to
January 1999, Chief Financial
Officer of Oakhurst Company,
Inc. and of Steel City
Products, Inc., each a
distributor of automotive
products. Chief Executive
Officer of Oakhurst Company,
Inc. from December 1995 to May
1997. Also, Mr. Auerbach is a
director of Acorn Holding
Corp.

JOHN D. ABERNATHY (1)(2)(3) 65 2001

Since January 1995, Chief
Operating Officer of Patton
Boggs LLP, a law firm. Also,
Mr. Abernathy is a director of
Sterling Construction Company,
Inc., a heavy civil
construction company, and
Steel City Products, Inc., a
distributor of automotive
products.

32

Class III

NAME AND AGE
PRINCIPAL OCCUPATION(S) (AS OF 3/20/03) YEAR OF FIRST ELECTION
- ----------------------- --------------- ----------------------

RONALD M. 61 2001*
NORDMANN (1)(2)(3)

Since October 2000,
Co-President of Global Health
Associates, LLC, a provider of
consulting services to the
pharmaceutical and financial
services industries. From
September 1994 to December
1999, a partner and portfolio
manager at Deerfield
Management, a health care
hedge fund. From December
1999 to October 2000, Mr.
Nordmann was a private
investor. Also, Mr. Nordmann
is a director of Neurochem,
Inc., Guilford Pharmaceuticals
Inc. and Shire Pharmaceuticals
Group plc. and is a trustee of
The Johns Hopkins University.

ARIE GUTMAN 49 2002

Since June 1991, President and
Chief Executive Officer of
FineTech Laboratories, Ltd.
(formerly known as ISP
Finetech Ltd.), an Israeli
company, which, as of April
19, 2002, became a
wholly-owned subsidiary of the
Company. FineTech
Laboratories, Ltd. develops
synthetic chemical processes
utilized in the pharmaceutical
industry.

(1) A member of the Compensation and Stock Option Committee of the Board.
(2) A member of the Audit Committee of the Board.
(3) A member of the Nominating Committee of the Board.

* On October 11, 2001, the Board filled a vacancy caused by a director
resignation by selecting Peter S. Knight as a Class I director. On December 14,
2001, the Board filled two additional vacancies caused by director resignations
by selecting Scott L. Tarriff as a Class I director and Ronald M. Nordmann as a
Class III director.

EXECUTIVE OFFICERS

The executive officers of the Company consist of Mr. Sawyer as Chief
Executive Officer, President and Chairman of the Board, Mr. Tarriff as Executive
Vice President, and Dennis J. O'Connor as Vice President, Chief Financial
Officer and Secretary. Mr. O'Connor, age 51, has served as Vice President, Chief
Financial Officer and Secretary of the Company since October 1996. From June
1995 to October 1996, he served as Controller of Par. The executive officers of
Par consist of Mr. Sawyer as Chairman, Mr. Tarriff as President and Chief
Executive Officer, and Mr. O'Connor as Vice President, Chief Financial Officer
and Secretary. The executive officers of FineTech Laboratories, Ltd.
("FineTech") consist of Dr. Gutman as President and Chief Executive Officer, Mr.
Sawyer as Chairman, and Mr. O'Connor as Vice President, Chief Financial Officer
and Secretary.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

As a public company, the Company's directors, executive officers and more
than 10% beneficial owners of its Common Stock are subject to reporting
requirements under Section 16(a) of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act") and required to file certain reports with the
Securities and Exchange Commission (the "Commission") in respect of their
ownership of Company equity securities. The Company believes that during fiscal
year 2002, other than with respect to one Form 4 report required to be filed by
Mr. Auerbach, all such required reports were filed on a timely basis.

33

ITEM 11. EXECUTIVE COMPENSATION.
- ------- ----------------------

The following table sets forth information for fiscal years 2002, 2001 and
2000 in respect of compensation earned by the Company's Chief Executive Officer
and the only three other executive officers of the Company who earned over
$100,000 in salary and bonus during fiscal year 2002 (the "Named Executives").
The Company awarded or paid such compensation to all such persons for services
rendered in all capacities during the applicable fiscal years.

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
NAME AND RESTRICTED SECURITIES
PRINCIPAL FISCAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER
POSITION(S) YEAR SALARY($) BONUS($) COMPENSATION AWARDS($)(1) OPTIONS(#)(2) COMPENSATION($)
- ----------- ------ ------- -------- ------------ ------------ ------------- ---------------

Kenneth I.
Sawyer 2002 $403,468 $220,000 $ 15,533(4) - - $28,501(3)
CHIEF EXECUTIVE 2001 $397,088 $305,000 $173,046(4) - 325,000 $13,185(3)
OFFICER, 2000 $355,175 - $169,477(4) - - $9,760(3)
PRESIDENT AND
CHAIRMAN

Scott L. Tarriff 2002 $300,000 $200,000 $12,600 - 200,000 $60,191(5)
EXECUTIVE VICE 2001 $220,510 $200,000 $12,288 - 295,000 $11,620(5)
PRESIDENT; 2000 $185,000 $42,000 $3,692 - - $8,074(5)
CHIEF EXECUTIVE
OFFICER AND
PRESIDENT
OF PAR

Dennis J. 2002 $186,197 $100,000 $12,600 - 25,000 $25,314(6)
O'Connor
VICE PRESIDENT, 2001 $158,077 $150,000 $12,288 - 165,000 $11,597(6)
CHIEF FINANCIAL 2000 $150,700 $5,000 $12,000 - 30,000 $6,211(6)
OFFICER AND
SECRETARY

Arie Gutman 2002 $167,308(7) $50,000 - - 300,000 $1,697(8)
CHIEF EXECUTIVE 2001 - - - - - -
OFFICER AND 2000 - - - - - -
PRESIDENT OF
FINETECH

(1) The Named Executives do not hold any shares of restricted stock.
(2) Reflects options granted to Messrs. Sawyer, Tarriff and O'Connor and Dr.
Gutman under the Company's various stock option plans.
(3) Includes insurance premiums paid by the Company for term life and
disability insurance for the benefit of Mr. Sawyer of $6,276, $93 and $74,
respectively, for fiscal years 2002, 2001 and 2000, $5,500, $5,250 and
$5,250, respectively, in contributions to the Company's 401(k) Plan for
each of the fiscal years 2002, 2001 and 2000, and $14,949, $6,288 and
$2,755, respectively, for fiscal years 2002, 2001 and 2000 in contributions
made by the Company to the Retirement Savings Plan for the benefit of Mr.
Sawyer. Also includes $1,776, $1,554 and $1,681 in fiscal years 2002, 2001
and 2000, respectively, for the maximum potential estimated dollar value of
the Company's portion of insurance premium payments from a split-dollar
life insurance policy as if the premiums were advanced to Mr. Sawyer,
without interest, until the earliest time the premiums may be refunded by
Mr. Sawyer to the Company.
(4) Includes $129,477 for each of the fiscal years 2001 and 2000 for the
forgiveness of a loan from the Company and $2,933, $43,569 and $40,000,
respectively, earned by Mr. Sawyer in fiscal years 2002, 2001 and 2000
pursuant to his employment agreement for annual cost of living increases
since 1996.
(5) Includes $7,855, $82 and $68, respectively, of insurance premiums paid by
the Company for term life and disability insurance for the benefit of Mr.
Tarriff for fiscal years 2002, 2001 and 2000, $5,500, $5,250 and $5,250,
respectively, in contributions to the Company's 401(k) Plan for fiscal
years 2002, 2001 and 2000, and $14,949, $6,288 and $2,755, respectively,
for fiscal years 2002, 2001 and 2000 in contributions made by the Company

34

to the Retirement Savings Plan for the benefit of Mr. Tarriff. Also
includes $31,887 for the reimbursement of financial planning expenses for
fiscal year 2002.
(6) Represents $4,865, $58 and $56, respectively, of insurance premiums paid by
the Company for term life and disability insurance for the benefit of Mr.
O'Connor for fiscal years 2002, 2001 and 2000, $5,500, $5,250 and $3,450,
respectively, in contributions to the Company's 401(k) Plan for fiscal
years 2002, 2001 and 2000, and $14,949, $6,288 and $2,705, respectively,
for fiscal years 2002, 2001 and 2000 in contributions made by the Company
to the Retirement Savings Plan for the benefit of Mr. O'Connor.
(7) Dr. Gutman's salary for fiscal year 2002 reflects the fact that he was
employed by the Company for less than a full year. Pursuant to his
employment agreement with the Company, Dr. Gutman is entitled to an annual
base salary of $300,000, subject to certain increases set forth therein.
Dr. Gutman was not employed by the Company in fiscal years 2001 and 2000.
(8) Represents $1,697 of insurance premiums paid by the Company for term life
and disability insurance for the benefit of Dr. Gutman for fiscal year
2002.

The following table sets forth stock options granted to the Named
Executives during fiscal year 2002.

STOCK OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
----------------- ------------------

% OF
SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED(#) FISCAL YEAR(1) PRICE($) DATE 5%($) 10%($)
- ---- ---------- -------------- -------- ---------- ----- ------

Kenneth I. Sawyer - - - - - -
Scott L. Tarriff(2) 200,000 23.58% $25.85 7/28/09 $2,104,709 $4,904,867
Dennis J. O'Connor(3) 25,000 2.95% $25.90 8/28/09 $263,598 $614,294
Arie Gutman(4) 300,000 35.37% $21.65 4/11/12 $4,084,671 $10,351,357

(1) Represents the percentage of total options granted to all employees of the
Company during fiscal year 2002.
(2) Represents options granted on July 29, 2002 pursuant to the 2001 Plan.
One-quarter of such options become exercisable on each anniversary date of
the grant over the next four years.
(3) Represents options granted on August 29, 2002 pursuant to the 2001 Plan.
One-quarter of such options become exercisable on each anniversary date of
the grant over the next four years.
(4) Represents options granted on April 12, 2002 pursuant to the 2001 Plan.
One-quarter of such options become exercisable on each anniversary date of
the grant over the next four years.

The following table sets forth certain information with respect to the
number of stock options exercised by the Named Executives during fiscal year
2002 and, as of December 31, 2002, the number of securities underlying
unexercised stock options and the value of the in-the-money options held by the
Named Executives.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END(#) AT FY-END($)(1)
---------------------- --------------------

SHARES
ACQUIRED ON VALUE
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------

Kenneth I. Sawyer 297,500 $7,432,990 101,667 223,333 $221,750 $887,000
Scott L. Tarriff 100,000 $2,537,168 122,750 422,250 $1,503,700 $1,144,800
Dennis J. O'Connor 30,000 $750,796 69,000 158,500 $791,325 $585,675
Arie Gutman - - - 300,000 - $2,445,000

(1) Based upon the NYSE closing price of the Common Stock on December 31, 2002
of $29.80.

35

COMPENSATION OF DIRECTORS

Effective January 1, 2003, directors who are not employees of the Company
(or any of its subsidiaries) and who are deemed to be independent under the
audit committee rules of the NYSE are entitled to receive an annual retainer of
$30,000 (which covers payments for attending up to six meetings of the Board)
for service on the Board. Such directors received an annual retainer of $24,000
for serving on the Board in fiscal year 2002. Each member who serves as a
chairman of a committee (other than the Audit Committee) is entitled to receive
an additional annual retainer of $5,000 per chairmanship. Each member of a
committee (other than the Audit Committee) is entitled to receive an additional
annual retainer of $2,000 for each committee membership. Effective January 1,
2003, any member who serves as the Chairman of the Audit Committee is entitled
to receive an additional annual retainer of $10,000 (compared to $5,000 in
fiscal year 2002) and each other member of the Audit Committee is entitled to
receive an additional annual retainer of $5,000 (compared to $2,000 in fiscal
year 2002). In addition to receiving the annual retainers, under the Company's
1997 Directors' Stock Option Plan (the "Directors' Plan"), non-employee
directors are granted options each year to purchase 10,000 shares of Common
Stock on the earliest to occur of the following: (x) the date on which the
Company's shareholders elect directors at an annual meeting of shareholders or
any adjournment thereof, (y) the date in January of each year on which the first
meeting of the Compensation Committee occurs or (z) the last business day of
January of such fiscal year. Prior to an amendment to the Directors' Plan
adopted by the Board in January 2003, which was not subject to the approval of
shareholders, such directors were granted options to purchase 7,500 shares of
Common Stock on the earlier to occur of the following: (x) the date on which
shareholders of the Company elected directors at an annual meeting of
shareholders or (y) December 31 of such fiscal year. Directors who are employees
of the Company (or any of its subsidiaries) receive no additional remuneration
for serving as directors or as members of committees of the Board. All directors
are entitled to reimbursement for out-of-pocket expenses incurred by them in
connection with their attendance at Board and committee meetings. In February
2003, the Board adopted, subject to shareholder approval at the Meeting,
amendments to the Directors' Plan providing for an increase in the number of
shares of Common Stock reserved for issuance under the Directors' Plan from
450,000 to 750,000 and an extension of the expiration date of the Plan from
October 28, 2007 to October 28, 2013.

EMPLOYMENT AGREEMENTS

The Company and Mr. Sawyer entered into an amended and restated employment
agreement, dated as of January 4, 2002 (the "Amended Agreement"), that provides
for Mr. Sawyer to remain as the Company's Chief Executive Officer ("CEO") and
Chairman of the Board ("Chairman") and Chairman of the board of directors of Par
until: (i) the termination by Mr. Sawyer for any reason, including the Company's
material breach of the Amended Agreement (as provided therein), or by the
Company for Cause (as such term is defined in the Amended Agreement), without
Cause or by reason of Disability (as such term is defined in the Amended
Agreement), (ii) a Change of Control (as such term is defined in the Amended
Agreement), (iii) the election by the Board of a new CEO or (iv) the death of
Mr. Sawyer. So long as Mr. Sawyer remains employed under the Amended Agreement
as CEO, he is to be paid a base annual salary in 2003 equal to $414,362, subject
to any increases provided in the Board's discretion and annual adjustments to
reflect increases in the Consumer Price Index (the "CPI"). In addition, Mr.
Sawyer is eligible for annual bonuses based on performance criteria to be
determined by the Board, including his performance and the performance and
financial condition of the Company and/or Par. Pursuant to the Amended
Agreement, Mr. Sawyer earned a base salary of $403,468 in fiscal year 2002 and
received an increase to his base salary equal to $10,894 to reflect an increase
in the CPI. The annual adjustment became effective as of October 2002, and
resulted in an increase of $2,933 to Mr. Sawyer's compensation for fiscal year
2002. Mr. Sawyer earned a bonus equal to $220,000 for fiscal year 2002.

The Amended Agreement provides for certain payments and benefits upon a
Change of Control, the election of a new CEO and/or the termination of Mr.
Sawyer's employment, and it permits him to remain as Chairman for successive
one-year periods following the termination of his duties as CEO. Upon the
earliest to occur of (i) the election of a new CEO, (ii) a Change of Control or
(iii) the termination of Mr. Sawyer's employment with the Company for any
reason, Mr. Sawyer is entitled to a one-time lump sum payment of $1,000,000. In
the event that Mr. Sawyer remains as Chairman following the election of a new
CEO, the Company will additionally pay Mr. Sawyer an annual base salary of
$250,000 (subject to annual CPI increases) in return for a commitment from Mr.
Sawyer that he will devote up to 50% of his business time to the Company as its
Chairman. Mr. Sawyer will be permitted, in such event, to engage in other
employment activities so long as such activities do not directly compete with

36

the Company's business or involve the disclosure of Confidential Information (as
such term is defined in the Amended Agreement) or the hiring or solicitation of
any employees, agents, customers or suppliers of the Company.

The Amended Agreement provides also for (i) the transfer to Mr. Sawyer of
ownership of a life insurance policy maintained by the Company on Mr. Sawyer and
(ii) a lump sum payment to Mr. Sawyer (calculated based on his then current base
salary), which was made on February 28, 2002, equal to 45 days of vacation time
previously accrued but unused by Mr. Sawyer.

Upon termination of Mr. Sawyer's employment by the Company for Cause or by
reason of his Disability or termination by Mr. Sawyer for any reason (other than
as a result of a material breach of the Amended Agreement by the Company) or
termination by reason of his death, the Company will pay Mr. Sawyer, or his
estate, as the case may be, his then current base salary through the termination
date. Upon a termination of Mr. Sawyer's employment without Cause by the Company
or by Mr. Sawyer following a material breach by the Company, Mr. Sawyer is to be
paid an additional lump sum payment as follows (i) if during Mr. Sawyer's tenure
as CEO, an amount equal to his unpaid and owed base salary through December 31
of the year of such termination or (ii) if Mr. Sawyer is employed solely as
Chairman, an amount equal to his unpaid and owed base salary for the remaining
period in which he was to serve as Chairman. In addition, for two years
following the date of Mr. Sawyer's termination of employment for any reason, the
Company will pay the costs associated with Mr. Sawyer's continued participation
in all life insurance, medical, health and accident, and disability plans and
programs in which he was entitled to participate immediately before his
termination. In connection with his employment by the Company and Par, Mr.
Sawyer was granted options, in January 2003, to purchase 50,000 shares of Common
Stock at an exercise price of $31.70.

The Company has entered into an employment agreement with Mr. Tarriff,
dated as of February 6, 2003, to replace a prior employment agreement originally
entered into on February 20, 1998. Pursuant to his employment agreement, Mr.
Tarriff holds the positions of Executive Vice President of the Company and Chief
Executive Officer of Par for an initial three-year term, with successive
one-year terms thereafter, for which he is paid an initial annual base salary of
$300,000, subject to review and increase by the Board and annual adjustments to
reflect increases in the CPI. In addition, Mr. Tariff is eligible for annual
bonuses based on performance criteria to be determined by the Board, including
his performance and the performance and financial condition of the Company
and/or Par. In the event that Mr. Tarriff's employment is terminated by the
Company without Cause (as such term is defined in the agreement) or by Mr.
Tarriff upon a material breach of his employment agreement by the Company, or if
the Company elects not to renew his employment agreement, Mr. Tarriff is
entitled to receive a severance payment equal to two times his base salary or a
severance payment equal to $1,000,000, if such termination were to occur after
July 15, 2003 or at any time after a Change of Control (as such term is defined
in the agreement). In addition, while Mr. Tarriff is employed by the Company,
the Company is obligated to pay the premiums on a $3,000,000 term life insurance
policy for the benefit of Mr. Tarriff and his estate. If Mr. Tarriff's
employment is terminated other than for Cause within 12 months following a
Change of Control, then Mr. Tarriff (or his estate) will have 24 months from the
date of such termination to exercise his stock options, so long as the stock
option plan underlying such options is still in effect and such stock options
have not expired at the time of the exercise. In connection with his employment
by the Company and Par, Mr. Tarriff was granted, in July 2002, options to
purchase 200,000 shares of Common Stock at an exercise price of $25.85 and, in
January 2003, he was granted additional options to purchase 100,000 shares of
Common Stock at an exercise price of $31.50.

The Company has entered into an employment agreement with Mr. O'Connor,
dated as of February 6, 2003, to replace a prior severance agreement originally
entered into on October 23, 1996. Pursuant to his employment agreement, Mr.
O'Connor holds the positions of Vice President, Chief Financial Officer and
Secretary of each of the Company and Par for an initial three-year term, with
successive one-year terms thereafter, for which he is paid an initial annual
base salary of $210,000, subject to review and increase by the Board and annual
adjustments to reflect increases in the CPI. In addition, Mr. O'Connor is
eligible for annual bonuses based on performance criteria to be determined by
the Board, including his performance and the performance and financial condition
of the Company and/or Par. In the event that Mr. O'Connor's employment is
terminated by the Company without Cause (as such term is defined in the
agreement) or by Mr. O'Connor upon a material breach of his employment agreement
by the Company, or if the Company elects not to renew his employment agreement,
Mr. O'Connor is entitled to receive a severance payment equal to one-and-a-half
times his base salary or a severance payment equal to two times his base salary,
if such termination were to occur after July 15, 2003 or at any time after a
Change of Control (as such term is defined in the agreement). In addition, while
Mr. O'Connor is employed by the Company, the Company is obligated to pay the
premiums on a $1,000,000 term life insurance policy for the benefit of Mr.
O'Connor and his estate. If Mr. O'Connor's employment is terminated other than
for Cause within 12 months following a Change of Control, then Mr. O'Connor (or

37

his estate) will have 24 months from the date of such termination to exercise
his stock options, so long as the stock option plan underlying such options is
still in effect and such stock options have not expired at the time of the
exercise. In connection with his employment by the Company and Par, Mr. O'Connor
was granted, in August 2002, options to purchase 25,000 shares of Common Stock
at an exercise price of $25.90 and, in January 2003, he was granted additional
options to purchase 25,000 shares of Common Stock at an exercise price of $31.50
and 25,000 shares at an exercise price of $31.70.

In connection with its acquisition of FineTech, the Company entered into an
employment agreement with Dr. Gutman, dated as of December 18, 2002. Pursuant to
his employment agreement, Dr. Gutman holds the positions of Chief Executive
Officer and President of FineTech for an initial five-year term, with successive
one-year terms thereafter, for which he is paid an initial annual base salary of
$300,000, subject to review and increase by the Board and annual adjustments to
reflect increases in the CPI. In addition, Dr. Gutman is eligible for an annual
bonus that is based on performance criteria to be determined by the Board,
including his performance and the performance and financial condition of the
Company and/or FineTech. Dr. Gutman is entitled to receive a severance payment
equal to one-and-a-half times his base salary if his employment were terminated
by the Company or FineTech without Cause (as such term is defined in the
employment agreement) or by Dr. Gutman upon a material breach by the Company
and/or FineTech, or if his employment agreement were not renewed by the Company
after the five-year term or if he were to terminate his employment for any
reason after the five-year term. In addition, while Dr. Gutman is employed by
the Company, the Company is obligated to pay the premiums on a $1,000,000 term
life insurance policy for the benefit of Dr. Gutman and his estate. If Dr.
Gutman's employment is terminated other than for Cause within 12 months
following a Change of Control, then Dr. Gutman (or his estate) will have 24
months from the date of such termination to exercise his stock options, so long
as the stock option plan underlying such options is still in effect and such
stock options have not expired at the time of the exercise. In connection with
his employment by the Company and FineTech, Dr. Gutman was granted options, in
April 2002, to purchase 300,000 shares of Common Stock at an exercise price of
$21.65.

Under the Company's stock option agreements with Messrs. Sawyer, Tarriff
and O'Connor and Dr. Gutman, any unexercised portion of the options becomes
immediately exercisable in the event of a Change of Control (as such term is
defined in their respective employment agreements).

PENSION PLAN

The Company maintains a defined benefit plan (the "Pension Plan") intended
to qualify under Section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code"). Effective October 1, 1989, the Company ceased benefit accruals
under the Pension Plan with respect to service after such date. The Company
intends that distributions will be made, in accordance with the terms of the
Pension Plan, to participants as of such date and/or their beneficiaries. The
Company will continue to make contributions to the Pension Plan to fund its past
service obligations. Generally, all employees of the Company (or a participating
subsidiary) who had completed at least one year of continuous service and
attained 21 years of age were eligible to participate in the Pension Plan. For
benefit and vesting purposes, the Pension Plan's "Normal Retirement Date" is the
date on which a participant attains age 65 or, if later, the date of his/her
completion of ten years of service. Service is measured from the date of
employment. The retirement income formula is 45% of the highest consecutive
five-year average basic earnings during the last ten years of employment, less
83-1/3% of the participant's Social Security benefit, reduced proportionately
for years of service less than ten at retirement. The normal form of benefit is
a life annuity, or for married persons, a joint survivor annuity. None of the
Named Executives has any years of credited service under the Pension Plan.

The Company maintains a Retirement Savings Plan (the "Retirement Savings
Plan") whereby eligible employees, including the Named Executives, are permitted
to contribute from 1% to 25% of their compensation to the Retirement Savings
Plan. The Company contributes an amount equal to 50% of up to 6% of compensation
contributed by the employee. Participants of the Retirement Savings Plan become
vested with respect to 20% of the Company's contributions for each full year of
employment with the Company and thus become fully vested after five full years.
The Company also may contribute additional funds each fiscal year to the
Retirement Savings Plan, the amount of which, if any, is determined by the Board
in its sole discretion. In June 2002, the Company made a discretionary
contribution to the Retirement Savings Plan of approximately $600,000 for Plan
year 2001.

38

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee currently consists of Messrs. Knight (Chairman),
Abernathy, Auerbach and Nordmann. None of such committee members is, or was
ever, an executive officer or employee of the Company.

COMPENSATION AND STOCK OPTION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee approves the policies and programs pursuant to
which compensation is paid or awarded to the Company's executive officers and
key employees. In reviewing overall compensation for fiscal year 2002, the
Compensation Committee focused on the Company's objectives to attract executive
officers of high caliber from larger, well-established pharmaceutical
manufacturers, to retain the Company's executive officers, to encourage the
highest level of performance from such executive officers and to align the
financial interests of the Company's management with that of its shareholders by
offering awards that can result in the ownership of Common Stock. The Company
did not utilize any specific formulae or guidelines in reviewing and approving
executive compensation.

KEY ELEMENTS OF EXECUTIVE OFFICER COMPENSATION PROGRAM. The key elements of
the Company's executive officer compensation program consist of base salary,
annual bonus, stock options and other incentive awards through participation in
the Company's various incentive plans. In awarding or approving compensation to
executive officers in fiscal year 2002, the Compensation Committee considered
the present and potential contributions of the executive officers to the
Company, the ability of the Company to attract and retain qualified executive
officers in light of the competitive environment of the Company's industry and
the Company's financial condition.

BASE SALARY AND ANNUAL BONUS. Base salary and annual bonus for executive
officers are determined by reference to Company-wide and individual performances
for the previous fiscal year. The factors considered by the Compensation
Committee include both strategic and operational factors, such as efforts in
responding to regulatory challenges, in exploring strategic alternatives for the
Company, in research and development, in reviewing and implementing updated
systems and operational procedures, as well as the Company's financial
performance. In addition to Company-wide measures of performance, the
Compensation Committee considered performance factors particular to each
executive officer, including the performance of the area(s) for which such
officer had management responsibility and individual accomplishments of such
officer.

Base salaries for executive officers of the Company were determined
primarily by reference to industry norms, the principal job duties and
responsibilities undertaken by such persons, individual performance and other
relevant criteria. The Compensation Committee annually re-evaluates whether or
not any adjustments are necessary to reflect compensation for executive officers
of similar entities such as the Company. The Compensation Committee considered
it appropriate and in the best interests of the Company and its shareholders to
set the base salaries for the Company's executive officers at competitive levels
in order to attract and retain high caliber managers for the Company so as to
position the Company for future growth and improved performance.

The Compensation Committee, in determining the annual bonuses to be paid to
the Company's executive officers for fiscal year 2002, considered each
individual's contribution to the Company's performance, as well as the Company's
financial performance and assessments of each executive officer's participation
and contribution as described above. The non-financial considerations applied
varied among executive officers depending upon the operations under their
management and direction.

STOCK OPTIONS AND OTHER AWARDS. The Company's 2000 Plan, as amended by the
Board to constitute a non-qualified, broad-based option plan not requiring
shareholder approval under NYSE rules, provides for stock option and other
equity-based awards. The Company's 2001 Plan, which was approved by the
Company's shareholders initially at the Company's annual meeting held on July
12, 2001, provides for stock option and other equity-based awards. Under such
Plans, the size of each award and the persons to whom such awards are granted is
determined by the Compensation Committee based upon the nature of services
rendered by the executive officer, the present and potential contribution of the
grantee to the Company and the overall performance of the Company. The
Compensation Committee believes that grants of stock options will help enable
the Company to attract and retain the best available talent and to encourage the
highest level of performance in order to continue to serve the best interests of
the Company and its shareholders. Stock options and other equity-based awards
provide executive officers with the opportunity to acquire equity interests in

39

the Company and to participate in the creation of shareholder value and benefit
correspondingly with increases in the price of the Common Stock. In fiscal
year 2003, the Company intends to submit for shareholder approval an increase in
the number of shares issuable under the 2001 Plan.

COMPENSATION COMMITTEE'S ACTIONS FOR FISCAL YEAR 2002. In determining the
amount and form of executive officer compensation to be paid or awarded for
fiscal year 2002, the Compensation Committee considered the criteria discussed
above. Based upon the Compensation Committee's review of the Company's
performance following the conclusion of fiscal year 2002, the Company granted
cash bonuses to Messrs. Sawyer, Tarriff and O'Connor and Dr. Gutman, the Named
Executives, in the amounts of $220,000, $200,000, $100,000 and $50,000,
respectively. In addition, Messrs. Sawyer, Tarriff and O'Connor were granted, in
January 2003, options to purchase shares of Common Stock in the amounts of
50,000, 100,000 and 50,000, respectively.

CHIEF EXECUTIVE OFFICER COMPENSATION. The Compensation Committee approved
an amended employment agreement for Mr. Sawyer on January 4, 2002. Under the
employment agreement, Mr. Sawyer's base salary for fiscal year 2002 was
$403,468. The employment agreement provides for annual increases based on
changes in the CPI during Mr. Sawyer's term of employment. In fiscal year 2002,
Mr. Sawyer earned a base salary of $403,468 and received an annual adjustment to
his base salary equal to $10,894 to reflect an increase in the CPI. The annual
adjustment became effective as of October 2002, and resulted in an increase of
$2,933 in Mr. Sawyer's compensation for fiscal year 2002. Based upon the
Compensation Committee's review of the Company's performance following the
conclusion of fiscal year 2002, the Company granted to Mr. Sawyer a cash bonus
in the amount of $220,000. Mr. Sawyer did not receive any options to purchase
shares of Common Stock during fiscal year 2002.

COMPENSATION AND STOCK OPTION COMMITTEE

The Compensation Committee currently consists of Messrs. Knight (Chairman),
Abernathy, Auerbach and Nordmann.

40

PERFORMANCE GRAPH

The graph below compares the cumulative total return of the Common Stock
with the cumulative total returns of the NYSE Composite Index, the S&P(R) Health
Care Index (Drugs - Major Pharmaceuticals) and the S&P(R) Health Care
(Pharmaceuticals) Index for the period from September 30, 1997 to December 31,
2002, including the transition period reflecting the change of the Company's
fiscal year from September 30 to December 31 in fiscal year 1998. The graph
assumes $100 was invested on September 30, 1997 in the Common Stock and $100 was
invested on such date in each of the Indexes. The comparison assumes that any
dividends were reinvested.

CUMULATIVE TOTAL RETURN

(GRAPH OMITTED)

3Q97 3Q98 4Q98 4Q99 4Q00 4Q01 4Q02

- --------------------------------------------------------------------------------
Company / Index SEP-97 SEP-98 DEC-98 DEC-99 DEC-00 DEC-01 DEC-02
- --------------------------------------------------------------------------------

PHARMACEUTICAL RESOURCES,
INC. $100 $200 $224 $232 $326 $1,591 $1,402
- --------------------------------------------------------------------------------
NYSE COMPOSITE INDEX $100 $101 $120 $131 $132 $119 $95
- --------------------------------------------------------------------------------
S&P(R)HEALTH CARE INDEX
(DRUGS - MAJOR
PHARMACEUTICALS)
(COMPRISED OF SEVEN
COMPANIES) $100 $152 $174 $143 $197 $152 N/A*
- --------------------------------------------------------------------------------
S&P(R)HEALTH CARE
(PHARMACEUTICALS)
INDEX (COMPRISED OF 13
COMPANIES) $100 $146 $166 $146 $200 $170 $136
- --------------------------------------------------------------------------------

* On December 31, 2001, Standard & Poor's discontinued the S&P(R) Health
Care Index (Drugs - Major Pharmaceuticals) and replaced it with the S&P(R)
Health Care (Pharmaceuticals) Index.

41

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------- --------------------------------------------------------------

The following table sets forth, as of March 12, 2003, the beneficial
ownership of shares of Common Stock by (i) each current director, including the
two nominees, of the Company, (ii) the Named Executives, as defined in the
"Executive Compensation" section of this report and (iii) all directors and
current executive officers of the Company as a group (based solely in respect of
clauses (i), (ii) and (iii) upon information furnished to the Company by such
persons). Pursuant to rules promulgated under the Exchange Act, a person is
deemed to be a beneficial owner of an equity security if such person has or
shares the power to vote or to direct the voting of such security and/or the
power to dispose of or to direct the disposition of such security. Accordingly,
more than one person may be deemed to be a beneficial owner of the same
security. In general, a person is also deemed to be a beneficial owner of any
equity securities that the person has the right to acquire within 60 days. Based
solely upon its review of filings made with the Commission on Schedule 13G and
Form 13F pursuant to Section 13 of the Exchange Act, the Company believes that
no person beneficially owned more than 5% of the Common Stock as of March 12,
2003.

SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT

SHARES OF % OF
COMMON COMMON
STOCK STOCK
NAME OF BENEFICIAL OWNER --------- ------
------------------------
Kenneth I. Sawyer(1)(2)........................ 139,167 *

Scott L. Tarriff(1)(2)(3)...................... 93,250 *

Dennis J. O'Connor(2).......................... 66,119 *

John D. Abernathy(1)(2)........................ 13,500 *

Mark Auerbach(1)(2)............................ 21,000 *

Arie Gutman(1)(2).............................. 77,750 *

Peter S. Knight(1)(2).......................... 7,500 *

Ronald M. Nordmann(1)(2)....................... 7,500 *

All directors and current executive officers
as a group (eight persons)(2)(3)............... 425,786 1.3%

- ------------------------
* Less than 1%.
(1) A current director of the Company.

(2) Includes the following shares of Common Stock that may be acquired upon the
exercise of options that are or will be vested and exercisable on or before
May 11, 2003 under the Company's stock option plans: Mr. Sawyer - 111,667;
Mr. Tarriff - 76,750; Mr. O'Connor - 64,500; Mr. Abernathy - 11,000; Mr.
Auerbach - 11,000; Dr. Gutman - 75,000; Mr. Knight - 7,500; Mr. Nordmann -
7,500; and all directors and current executive officers as a group -
364,917.
(3) Includes 1,500 shares of Common Stock held by Mr. Tarriff's spouse.

For the purposes of the foregoing table, the business address of each
director and Named Executive of the Company is c/o Pharmaceutical Resources,
Inc., One Ram Ridge Road, Spring Valley, NY 10977.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ------- ----------------------------------------------

In December 2001, the Company made the first installment of an agreed-to
investment of up to $2,438,297 to be made over a period of time in HighRapids,
Inc. ("HighRapids"), a Delaware corporation and software developer. Pursuant to
an agreement between the Company and HighRapids, effective December 1, 2001, the
Company, subject to its ongoing evaluation of HighRapids' operations, has agreed
to purchase units, consisting of secured debt, evidenced by 7% secured
promissory notes, up to an aggregate principal amount of $2,425,000 and up to an
aggregate 1,329,650 shares of the common stock of HighRapids. HighRapids is the
surviving corporation of a merger with Authorgenics, Inc., a Florida

42

corporation. The Company's cash infusion will be utilized by HighRapids for
working capital and operating expenses. As of December 31, 2002, the Company had
invested approximately $768,000 in HighRapids. As of December 31, 2002, the
Company held approximately 30% of the outstanding common stock of HighRapids and
had the exclusive right to market to the pharmaceutical industry certain
regulatory compliance and laboratory software currently in development. Mr.
Sawyer is the President, Chief Executive Officer and a director of HighRapids.
Mr. Auerbach, a director of the Company, owns shares of HighRapids' common stock
(less than 1%) that were acquired prior to the commitment of the Company
discussed above.

In April 1999, the Company entered into an agreement with FineTech for the
right to use a process for the pharmaceutical bulk active latanoprost. Pursuant
to this agreement, the Company paid FineTech an aggregate of approximately
$2,000,000 in fiscal years 2000 and 2001, which is included in intangible assets
on the consolidated balance sheets, for a completed process together with its
technology transfer package and patent. The Company has since purchased FineTech
and pursuant to this agreement, the Company is obligated to pay royalties on
gross profits from sales of all products developed under this agreement to the
President of FineTech, Dr. Gutman, who is currently a director of the Company.
In addition, Dr. Gutman is entitled to royalties on gross profits from potential
sales of several other products pursuant to agreements made with FineTech prior
to the Company's acquisition.

ITEM 14. CONTROLS AND PROCEDURES.
- ------- -----------------------

Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including our consolidated
subsidiaries) required to be included in our periodic SEC filings.

There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation referred to above.

43

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ------- ----------------------------------------------------------------

(a)(1)&(2) FINANCIAL STATEMENTS AND SCHEDULES.

See Index to Consolidated Financial Statements and Schedules after
Signature Page.

(a)(3) EXHIBITS.

3.1.1 Certificate of Incorporation of the Registrant, dated July 29, 1991 -
previously filed as an exhibit to the Registrant's Report on Form 8-K
dated June 30, 1998 and incorporated herein by reference.

3.1.2 Certificate of Amendment to the Certificate of Incorporation of the
Registrant, dated August 3, 1992 - previously filed as an exhibit to
the Registrant's Report on Form 8-K dated June 30, 1998 and
incorporated herein by reference.

3.1.3 Articles of Amendment to the Certificate of Incorporation of the
Registrant, dated June 26, 1998 - previously filed as an exhibit to
the Registrant's Report on Form 8-K dated June 30, 1998 and
incorporated herein by reference.

3.2 By-Laws of the Registrant, as amended - previously filed as an
exhibit to the Registrant's Report on Form 8-K dated June 30, 1998
and incorporated herein by reference.

10.1 1989 Employee Stock Purchase Program of the Registrant - previously
filed as an exhibit to the Registrant's proxy statement dated August
16, 1990 and incorporated herein by reference.

10.2 1990 Stock Incentive Plan of the Registrant, as amended - previously
filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the 1997 fiscal year and incorporated herein by reference.

10.3 1997 Directors' Stock Option Plan - previously filed as an exhibit to
the Registrant's Report on Form 8-K dated June 30, 1998 and
incorporated herein by reference.

10.3.1 1997 Directors' Stock Option Plan, as amended- previously filed as an
exhibit to the Registrant's Quarterly Report for the quarter ended
March 31, 2002 and incorporated herein by reference.

10.4 2000 Performance Equity Plan - previously filed as an exhibit to the
Registrant's Annual Report for the 2000 fiscal year and incorporated
herein by reference.

10.5 2001 Performance Equity Plan - previously filed as an exhibit to the
Registrant's Quarterly Report for the quarter ended June 30, 2001 and
incorporated herein by reference.

10.6 Form of Retirement Plan of Par - previously filed as an exhibit to
the Registrant's Registration Statement on Form S-1 (File No.
2-86614) and incorporated herein by reference.

10.6.1 First Amendment to Par's Retirement Plan, dated October 26, 1984 -
previously filed as an exhibit to the Registrant's Annual Report on
Form 10-K for the 1990 fiscal year and incorporated herein by
reference.

10.7 Form of Retirement Savings Plan of Par - previously filed as an
exhibit to the Registrant's Registration Statement on Form S-1 (File
No. 2-86614) and incorporated herein by reference.

10.7.1 Amendment to Par's Retirement Savings Plan, dated July 26, 1984 -
previously filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 33-4533) and incorporated herein by
reference.

10.7.2 Amendment to Par's Retirement Savings Plan, dated November 1, 1984 -
previously filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 33-4533) and incorporated herein by
reference.

44

10.7.3 Amendment to Par's Retirement Savings Plan, dated September 30, 1985
- previously filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 33-4533) and incorporated herein by
reference.

10.8 Par Pension Plan, effective October 1, 1984 - previously filed as an
exhibit to the Registrant's Annual Report on Form 10-K for the 1991
fiscal year and incorporated herein by reference.

10.9 Second Amended and Restated Employment Agreement, dated as of January
4, 2002, between the Company and Kenneth I. Sawyer - previously filed
as an exhibit to Amendment No. 1 to the Quarterly Report on Form 10-Q
for the quarter ended September 29, 2001 and incorporated herein by
reference.

10.9.1 Severance Agreement, dated as of October 23, 1996, between the
Registrant and Dennis J. O'Connor - previously filed as an exhibit to
the Registrant's Annual Report for the 1997 fiscal year and
incorporated herein by reference.

10.9.2 Employment Agreement, dated as of February 6, 2003, by and between
Pharmaceutical Resources, Inc., and Scott L. Tarriff.

10.9.3 Employment Agreement, dated as of February 6, 2003, by and between
Pharmaceutical Resources, Inc., and Dennis O'Connor.

10.11 Lease Agreement, dated as of January 1, 1993, between Par and Ramapo
Corporate Park Associates - previously filed as an exhibit to the
Registrant's Annual Report for the 1996 fiscal year and incorporated
herein by reference.

10.12 Lease Extension and Modification Agreement, dated as of August 30,
1997, between Par and Ramapo Corporate Park Associates - previously
filed as an exhibit to the Registrant's Annual Report for the 1997
fiscal year and incorporated herein by reference.

10.13 Amended and Restated Distribution Agreement, dated as of May 1, 1998,
among the Company, Par Pharmaceutical, Inc. and Sano Corporation -
previously filed as an exhibit to the Registrant's Report on Form 8-K
dated June 30, 1998 and incorporated herein by reference.*

10.14 Release and Amendment Agreement, dated as of May 1, 1998, among the
Company, Par Pharmaceutical, Inc., Sano Corporation, and Elan
Corporation, plc - previously filed as an exhibit to the Registrant's
Report on Form 8-K dated June 30, 1998 and incorporated herein by
reference.*

10.15 Mortgage and Security Agreement, dated May 4, 1994, between Urban
National Bank and Par - previously filed as an exhibit to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 2, 1994 and incorporated herein by reference.

10.15.1 Mortgage Loan Note, dated May 4, 1994 - previously filed as an
exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter
ended April 2, 1994 and incorporated herein by reference.

10.15.2 Corporate Guarantee, dated May 4, 1994, by the Registrant to Urban
National Bank - previously filed as an exhibit to Registrant's
Quarterly Report on Form 10-Q for the quarter ended April 2, 1994 and
incorporated herein by reference.

10.15.3 Mortgage Modification Agreement and Restated Mortgage Loan Note,
dated May 1, 2001, between Hudson United Bank and Par - previously
filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001 and incorporated herein by reference.

10.16 Pledge Agreement, dated December 27, 1996, between Par and General
Electric Capital Corporation - previously filed as an exhibit to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 28, 1996 and incorporated herein by reference.

45

10.17 Pledge Agreement, dated December 27, 1996, between the Registrant and
General Electric Capital Corporation - previously filed as an exhibit
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 28, 1996 and incorporated herein by reference.

10.18 Loan and Security Agreement, dated December 27, 1996, between Par and
General Electric Capital Corporation. - previously filed as an
exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 28, 1996 and incorporated herein by reference.

10.18.1 First Amendment and Waiver to Loan and Security Agreement, dated May
22, 1997, between Par and General Electric Capital Corporation -
previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 28, 1997 and incorporated herein
by reference.

10.18.2 Second Amendment and Waiver to Loan and Security Agreement, dated as
of August 22, 1997, between Par and General Electric Capital
Corporation - previously filed as an exhibit to Registrant's Annual
Report on Form 10-K for the 1997 fiscal year and incorporated herein
by reference.

10.18.3 Third Amendment and Consent to Loan and Security Agreement, dated as
of March 4, 1998, between Par and General Electric Capital
Corporation - previously filed as an exhibit to Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 28, 1998
and incorporated herein by reference.

10.18.4 Fourth Amendment and Consent to Loan and Security Agreement, dated as
of May 5, 1998, among the Company, General Electric Capital
Corporation, and the other parties named therein - previously filed
as an exhibit to Registrant's Report on Form 8-K dated June 30, 1998
and incorporated herein by reference.

10.18.5 Fifth Amendment to Loan and Security Agreement, dated as of October
30, 1998, among the Company, General Electric Capital Corporation,
and the other parties named therein - previously filed as an exhibit
to Registrant's Annual Report on Form 10-K for the 1998 fiscal year
and incorporated herein by reference.

10.18.6 Sixth Amendment to Loan and Security Agreement, dated as of February
2, 1999, among the Company, General Electric Capital Corporation, and
the other parties named therein - previously filed as an exhibit to
Registrant's Quarterly Report on Form 10-Q for the transition period
ended December 31, 1998 and incorporated herein by reference.

10.18.7 Seventh Amendment and Waiver to Loan and Security Agreement, dated as
of August 13, 1999, among the Company, General Electric Capital
Corporation, and the other parties named therein - previously filed
as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended October 2, 1999 and incorporated herein by reference.

10.18.8 Eighth Amendment to Loan and Security Agreement, dated as of December
28, 1999, among the Company, General Electric Capital Corporation,
and the other parties named therein - previously filed as an exhibit
to Registrant's Annual Report on Form 10-K for the 1999 fiscal year
and incorporated herein by reference.

10.18.9 Ninth Amendment and Waiver to Loan and Security Agreement, dated as
of March 27, 2001, among the Company, General Electric Capital
Corporation, and the other parties named therein - previously filed
as an exhibit to Registrant's Annual Report on Form 10-K for the 2000
fiscal year and incorporated herein by reference.

10.18.10 Tenth Amendment and Consent to Loan and Security Agreement, dated as
of August 20, 2001, among the Company, General Electric Capital
Corporation, and the other parties named therein - previously filed
as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 29, 2001 and incorporated herein by
reference.

10.18.11 Eleventh Amendment to Loan and Security Agreement, dated as of March
29, 2002, among the Company, General Electric Capital Corporation,
and the other parties named therein- previously filed as an exhibit
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002 and incorporated herein by reference.

46

10.18.12 Twelfth Amendment and Waiver to Loan and Security Agreement, dated as
of November 13, 2002, among the Company, General Electric Capital
Corporation, and the other parties named therein- previously filed as
an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002 and incorporated herein by
reference.

10.18.13 Thirteenth Amendment, Waiver and Consent to Loan and Security
Agreement, dated as of December 2002, among the Company, General
Electric Capital Corporation, and the other parties named therein.

10.18.14 Loan Agreement, dated as of December 1, 2002, among GE Capital Public
Finance, Inc., as Lender and Rhode Island Industrial Facilities
Corporation, as Issuer, and FineTech Laboratories, Ltd., as Borrower.

10.19 Distribution Agreement, dated March 25, 1998, between the Company and
Genpharm, Inc. - previously filed as an exhibit to Registrant's
Report on Form 8-K dated June 30, 1998 and incorporated herein by
reference.*

10.20 Services Agreement, dated June 26, 1998, between the Company and
Merck KGaA - previously filed as an exhibit to Registrant's Report on
Form 8-K dated June 30, 1998 and incorporated herein by reference.

10.21 Services Agreement, dated June 26, 1998, between the Company and
Genpharm, Inc - previously filed as an exhibit to Registrant's Report
on Form 8-K dated June 30, 1998 and incorporated herein by reference.

10.22 Manufacturing and Supply Agreement, dated April 30, 1997, between Par
and BASF Corporation - previously filed as an exhibit to Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 29, 1997
and incorporated herein by reference.

10.23 Development Agreement, dated as of August 11, 1998, among the
Company, Generics (UK) Ltd., and Israel Pharmaceutical Resources L.P
- previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-Q for the transition period ended December 31, 1998 and
incorporated herein by reference.

10.24 Agreement of Lease, dated as of March 17, 1999, between Par
Pharmaceutical, Inc. and Halsey Drug Co., Inc. - previously filed as
an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended April 3, 1999 and incorporated herein by reference.

10.25 Manufacturing and Supply Agreement, dated as of March 17, 1999,
between Par Pharmaceutical, Inc. and Halsey Drug Co., Inc. -
previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 3, 1999 and incorporated herein
by reference.

10.26 Letter Agreement, dated as of January 21, 1999, between the
Registrant and Genpharm, Inc. - previously filed as an exhibit to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 3, 1999 and incorporated herein by reference.*

10.27 License Agreement, dated as of July 9, 2001, between Breath Easy
Limited and Par Pharmaceutical, Inc. - previously filed as an exhibit
to Amendment No. 1 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 29, 2001 and incorporated herein by
reference.

10.28 License and Supply Agreement, dated as of April 26, 2001, between
Elan Transdermal Technologies, Inc. and Par Pharmaceutical, Inc. -
previously filed as an exhibit to Amendment No. 1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 29,
2001 and incorporated herein by reference.*

10.29 Development and Supply Agreement, dated as of April 17, 2001, between
Par Pharmaceutical, Inc., Dr. Reddy's Laboratories Limited, and
Reddy-Cheminor, Inc. - previously filed as an exhibit to Amendment
No. 1 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 29, 2001 and incorporated herein by reference.*

47

10.30 Supply and Marketing Agreement, dated as of November 19, 2001,
between Pentech Pharmaceuticals, Inc. and Par Pharmaceutical, Inc. -
previously filed as an exhibit to Amendment No. 1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 29,
2001 and incorporated herein by reference.

10.31 Development, License and Supply Agreement, dated as of December 11,
2001, between Elan Corporation PLC. and Par Pharmaceutical, Inc. -
previously filed as an exhibit to Amendment No. 1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 29,
2001 and incorporated herein by reference.*

10.32 Letter Agreement, dated as of December 28, 2001, among Pharmaceutical
Resources, Inc., ISP Hungary Holdings Limited, ISP Investments, Inc.,
ISP Chemicals, Inc. and ISP Technologies Inc. (with the attached form
of Purchase Agreement) - previously filed as an exhibit to
Registrant's Report on Form 8-K dated January 11, 2002 and
incorporated herein by reference.

10.33 Purchase Agreement among ISP Hungary Holdings Limited, ISP
Investments Inc., ISP Chemco Inc. and Par Pharmaceutical, Inc. dated
April 17, 2002 - previously filed as an exhibit to Registrant's
Report on Form 8-K dated April 17, 2002 and incorporated herein by
reference.

10.35 Asset Purchase Agreement between Bristol-Myers Squibb Company and Par
Pharmaceutical, Inc. in respect of the sale of the Capoten(R),
Capozide(R), Questran(R) and Questran Light(R) Brands - previously
filed as an exhibit to Registrant's Report on Form 8-K dated March 7,
2002 and incorporated herein by reference.

10.36 Asset Purchase Agreement between Bristol-Myers Squibb Company and Par
Pharmaceutical, Inc. in respect of the sale of the Sumycin(R) Brand -
previously filed as an exhibit to Registrant's Report on Form 8-K
dated March 7, 2002 and incorporated herein by reference.

10.37 11 Product Development Agreement, effective April 2002, between the
Company and Genpharm, Inc. - previously filed as an exhibit to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002 and incorporated herein by reference.*

10.38 SVC Pharma LP Limited Partnership Agreement dated April 2002, among
the Company, UDF LP, a Delaware limited partnership, and the other
parties named therein - previously filed as an exhibit to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002 and incorporated herein by reference.

10.39 Patent and Know How License Agreement dated May 24, 2002 among Nortec
Development Associates, Inc. and Par Pharmaceutical, Inc - previously
filed as an exhibit to Registrant's Quarterly Report on Form 10-Q/A
Amendment No. 1 for the quarter ended June 30, 2002 and incorporated
herein by reference.*

10.40 Amendment No. 1 to the Patent and Know How License Agreement dated
May 24, 2002 among Nortec Development Associates, Inc. and Par
Pharmaceutical, Inc. - previously filed as an exhibit to Registrant's
Quarterly Report on Form 10-Q/A Amendment No. 1 for the quarter ended
June 30, 2002 and incorporated herein by reference.*

10.41 Patent and Know How License Agreement dated June 14, 2002 among
Nortec Development Associates, Inc. and Par Pharmaceutical, Inc. -
previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 2002 and
incorporated herein by reference.*

10.42 License and Distribution Agreement, dated July 3, 2002, between the
Company and Three Rivers Pharmaceuticals, LLC. - previously filed as
an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002 and incorporated herein by
reference. *

10.43 First Amendment to License and Distribution Agreement, dated October
18, 2002, between the Company and Three Rivers Pharmaceuticals, LLC.

48

- previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002 and incorporated
herein by reference.

10.44 First Amendment to the Supply and Marketing Agreement, dated as of
November 12, 2002, between Pentech Pharmaceuticals, Inc. and Par
Pharmaceutical, Inc.*

10.45 Termination Agreement, dated December 20, 2002, relating to
Development, License and Supply Agreement, dated as of December 11,
2001, between Elan Corporation PLC. and Par Pharmaceutical, Inc.*

10.46 Asset Purchase Agreement, dated December 5, 2002, by and between
Israel Pharmaceutical Resources L.P., and Trima, Israel
Pharmaceutical Products, Maabarot LTD.

10.47 Supply and Distribution Agreement, dated as of December 20, 2002,
between Genpharm Inc., Leiner Health Products, LLC, and Par
Pharmaceutical, Inc.*

21 List of Subsidiaries.

99.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

99.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

(a)(4) REPORTS ON FORM 8-K. During the quarter ended December 31,
2002, the Company did not file any reports on Form 8-K.

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

* Certain portions have been omitted and have been filed with the Commission
pursuant to a request for confidential treatment thereof.

49

SIGNATURES

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

Dated: March 28, 2003 PHARMACEUTICAL RESOURCES, INC.
------------------------------
(REGISTRANT)

By: /s/ Kenneth I. Sawyer
------------------------------
Kenneth I. Sawyer
Chief Executive Officer
(Principal Executive Officer)

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

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

/s/ Kenneth I. Sawyer Chief Executive Officer and March 28, 2003
- ------------------------ Chairman of the Board of
Kenneth I. Sawyer Directors

/s/ Scott L. Tarriff Executive Vice President and March 28, 2003
- ------------------------ Director
Scott L. Tarriff

/s/ Dennis J. O'Connor Vice President, Chief Financial March 28, 2003
Officer and Secretary (Principal
- ------------------------ Accounting and Financial Officer)
Dennis J. O'Connor

/s/ John D. Abernathy Director March 28, 2003
- ------------------------
John D. Abernathy

/s/ Mark Auerbach
- ------------------------ Director March 28, 2003
Mark Auerbach

/s/ Arie Gutman Director March 28, 2003
- ------------------------
Arie Gutman

/s/ Peter S. Knight Director March 28, 2003
- ------------------------
Peter S. Knight

/s/ Ronald M. Nordmann Director March 28, 2003
- ------------------------
Ronald M. Nordmann

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kenneth I. Sawyer, Chief Executive Officer of Pharmaceutical Resources, Inc.,
certify that:

1. I have reviewed this annual report on Form 10-K of Pharmaceutical
Resources, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

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

Date: March 28, 2003 /s/ Kenneth I. Sawyer
-------------------------------
Kenneth I. Sawyer
Chief Executive Officer

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Dennis J. O'Connor, Chief Financial Officer of Pharmaceutical Resources,
Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Pharmaceutical
Resources, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

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

Date: March 28, 2003
/s/ Dennis J. O'Connor
--------------------------------
Dennis J. O'Connor
Chief Financial Officer

PHARMACEUTICAL RESOURCES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FILED WITH THE ANNUAL REPORT OF THE
COMPANY ON FORM 10-K

FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

PAGE
INCLUDED IN PART II: ----
- -------------------
Reports of Independent Public Accountants F-2 through F-3

Consolidated Balance Sheets at December 31, 2002 and 2001 F-4

Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit) for the years ended December 31, 2002,
2001 and 2000 F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-6

Notes to Consolidated Financial Statements F-7 through F-28

INCLUDED IN PART IV:

SCHEDULE:

II Valuation and qualifying accounts F-29

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

Other financial statement schedules are omitted because the conditions requiring
their filing do not exist or the information required thereby is included in the
financial statements filed, including the notes thereto.

F - 1

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Pharmaceutical Resources, Inc.:

We have audited the accompanying consolidated balance sheet of Pharmaceutical
Resources, Inc. (a New Jersey corporation) and subsidiaries as of December 31,
2002, and the related consolidated statements of operations and retained
earnings (accumulated deficit) and cash flows for the year then ended. Our audit
also included the financial statement schedule for the year ended December 31,
2002, listed in the Index at Item 15a2. These consolidated financial statements
and the financial statement schedule are the responsibility of Pharmaceutical
Resources, Inc.'s management. Our responsibility is to express an opinion on the
consolidated financial statements and the financial statement schedule based on
our audit. Pharmaceutical Resources, Inc.'s consolidated financial statements
and financial statement schedules for each of the years in the two-year period
ended December 31, 2001, were audited by other auditors who have ceased
operations. Those auditors' report dated March 26, 2002 expressed an unqualified
opinion on those consolidated financial statements, which included an
explanatory paragraph that described the restatement discussion in Note 2 to the
consolidated financial statements.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Pharmaceutical Resources, Inc. and
subsidiaries, as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

/s/ Deloitte & Touche LLP

Parsippany, New Jersey
March 11, 2003

F - 2

THIS REPORT SET FORTH BELOW IS A COPY OF A PREVIOUSLY ISSUED AUDIT REPORT BY
ARTHUR ANDERSEN LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH ITS INCLUSION IN THIS FORM 10-K.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
Pharmaceutical Resources, Inc.:

We have audited the accompanying consolidated balance sheets of Pharmaceutical
Resources, Inc. (a New Jersey corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations and
retained earnings (accumulated deficit) and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule 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.

As discussed in the Restatement of Results footnote, the 2000 and 1999
consolidated financial statements have been restated to reflect the value of
exclusive U.S. distribution rights obtained by the Company through its strategic
alliance with Merck KGaA.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pharmaceutical Resources, Inc.
and subsidiaries 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.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
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
consolidated financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

Roseland, New Jersey
March 26, 2002

F - 3

PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(In Thousands, Except Share Data)

ASSETS 2002 2001
------ ---- ----
Current assets:
Cash and cash equivalents $65,121 $67,742
Accounts receivable, net of allowances of
$36,257 and $47,168 54,263 38,009
Inventories, net 51,591 31,458
Prepaid expenses and other current assets 7,136 4,156
Deferred income tax assets 32,873 34,485
------- ------
Total current assets 210,984 175,850

Property, plant and equipment, at cost, less
accumulated depreciation and amortization 27,055 24,345

Unexpended industrial revenue bond proceeds 2,000 -

Intangible assets, net 35,692 15,822

Goodwill 24,662 -

Other assets 1,064 909
------- ------
Total assets $301,457 $216,926
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Current portion of long-term debt $596 $239
Accounts payable 14,637 18,007
Payables due to distribution agreement partners 18,163 32,295
Accrued salaries and employee benefits 5,175 2,859
Accrued expenses and other current liabilities 10,034 4,817
Income taxes payable 26,074 14,766
------- ------
Total current liabilities 74,679 72,983

Long-term debt, less current portion 2,426 1,060

Accrued pension liability - 331

Deferred income tax liabilities, net 3,562 4,129

Commitments and contingencies

Shareholders' equity:
Common Stock, par value $.01 per share;
authorized 90,000,000 shares; issued and
outstanding 32,804,480 and 32,035,189 shares 328 320
Additional paid-in capital 118,515 115,610
Retained earnings 101,947 22,493
------- ------
Total shareholders' equity 220,790 138,423
------- -------
Total liabilities and shareholders' equity $301,457 $216,926
======= =======

The accompanying notes are an integral part of these
consolidated balance sheets.

F-4

PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (ACCUMULATED DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In Thousands, Except Per Share Amounts)

(*Restated)
2002 2001 2000
---- ---- ----
Net sales $381,603 $271,035 $85,022
Cost of goods sold 198,313 161,306 62,332
------- ------- ------
Gross margin 183,290 109,729 22,690
Operating expenses (income):
Research and development 17,910 11,113 7,634
Selling, general and administrative 40,215 21,878 16,297
Settlements (9,051) - -
Acquisition termination charges 4,262 - -
------- ------- ------
Total operating expenses 53,336 32,991 23,931
------- ------- ------
Operating income (loss) 129,954 76,738 (1,241)
Other (expense) income (305 ) (364) 506
Interest income (expense) 604 (442) (916)
------- ------- ------
Income (loss) before provision for
income taxes 130,253 75,932 (1,651)
Provision for income taxes 50,799 22,010 -
------- ------- ------
Net income (loss) 79,454 53,922 (1,651)
Retained earnings (accumulated
deficit), beginning of year 22,493 (31,429) (29,778)
------- ------- ------

Retained earnings (accumulated
deficit), end of year $101,947 $22,493 $(31,429)
------- ------- ------
Net income (loss) per share of
common stock
Basic $2.46 $1.76 $(.06)
==== ==== ===
Diluted $2.40 $1.68 $(.06)
==== ==== ===

Weighted average number of
common shares outstanding
Basic 32,337 30,595 29,604
====== ====== ======
Diluted 33,051 32,190 29,604
====== ====== ======

* Restated as described in the Notes to Consolidated Financial Statements.

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

F-5

PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In Thousands)

(*Restated)
2002 2001 2000
---- ---- ----

Cash flows from operating activities:
Net income (loss) $79,454 $53,922 $(1,651)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Deferred income taxes 1,045 (20,081) -
Depreciation and amortization 5,775 3,349 3,030
Write-off of inventories 3,096 1,790 1,645
Allowances against accounts receivable (10,911) 43,214 1,395
Settlements (9,051) - -
Tax benefit from exercise of stock options 220 11,765 -
Other 991 181 234

Changes in assets and liabilities:
Increase in accounts receivable (5,087) (58,917) (6,173)
Increase in inventories (23,161) (12,999) (1,991)
Increase in prepaid expenses
and other assets (11,937) (4,377) (415)
(Decrease) increase in accounts payable (3,469) 6,532 41
(Decrease) increase in payables due to
distribution agreement partners (14,132) 30,607 404
Increase in accrued expenses
and other liabilities 7,610 3,569 786
Increase in income taxes payable 11,308 14,766 -
-------- ------- -------
Net cash provided by (used in) operating activities 31,751 73,321 (2,695)
-------- ------- -------
Cash flows from investing activities:
Capital expenditures (6,921) (4,622) (3,207)
Acquisition of FineTech, net of cash acquired (32,618) - -
Proceeds from sale of fixed assets 751 1,158 44
-------- ------- -------
Net cash used in investing activities (38,788) (3,464) (3,163)
-------- ------- -------
Cash flows from financing activities:
Proceeds from issuances of Common Stock 2,693 7,597 382
Net (payments) proceeds from revolving
credit line and other short-term borrowings - (9,666) 5,775
Restricted proceeds from industrial revenue bond 2,000 - -
Principal payments under long-term debt
and other borrowings (277) (268) (253)
-------- ------- -------
Net cash provided by (used in) financing activities 4,416 (2,337) 5,904
-------- ------- -------
Net (decrease) increase in cash and cash equivalents (2,621) 67,520 46
Cash and cash equivalents at beginning of year 67,742 222 176
-------- ------- -------
Cash and cash equivalents at end of year $65,121 $67,742 $222
-------- ------- -------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Taxes $38,211 $15,620 -
Interest $148 $626 $933

* Restated as described in the Notes to Consolidated Financial Statements.

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

F-6

PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
(In Thousands, Except Per Share Amounts)

Pharmaceutical Resources, Inc. (the "Company" or "PRX") operates, primarily
through its wholly-owned subsidiary, Par Pharmaceutical, Inc. ("Par"), in one
business segment, the manufacture and distribution of generic pharmaceuticals in
the United States. In addition, the Company develops and manufactures in small
quantities complex synthetic active pharmaceutical ingredients through its
subsidiary, FineTech Ltd. ("FineTech") based in Haifa, Israel and sells a
limited number of mature brand name drugs through an agreement with Bristol
Myers Squibb ("BMS"). Marketed products are principally in solid oral dosage
form (tablet, caplet and two-piece hard-shell capsule). The Company also
distributes one product in the semi-solid form of a cream and one oral
suspension.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of PRX and its
wholly owned subsidiaries. All intercompany transactions are eliminated in
consolidation. References herein to the "Company" refer to PRX and its
subsidiaries. Certain items on the consolidated financial statements and in
Notes to Consolidated Financial Statements for the prior years have been
reclassified to conform to the current year financial statement presentation.

On April 17, 2002, the Company purchased FineTech Ltd. ("FineTech"), which
is based in Haifa, Israel, from International Specialty Products ("ISP"). The
acquisition was accounted for as a purchase under Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations", and the
accompanying consolidated financial statements include the operating results of
FineTech from the date of acquisition.

USE OF ESTIMATES:
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. The consolidated
financial statements include certain amounts that are based on management's best
estimates and judgments. Estimates are used in determining such items as
provisions for rebates, returns, price adjustments, price protection and other
sales allowances, depreciable/amortizable lives, pension benefits, and amounts
recorded for contingencies and other reserves. Because of the uncertainty
inherent in such estimates, actual results may differ from these estimates. The
Company is not aware of reasonably likely events or circumstances that would
result in different amounts being reported that would have a material impact on
results of operations or financial condition.

INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out basis) or
market value. The Company examines inventory levels, including expiration dates
by product, on a regular basis. The Company makes provisions for obsolete and
slow moving inventories as necessary to properly reflect inventory value.
Changes in these provisions are charged to cost of goods sold.

DEPRECIATION AND AMORTIZATION:
Property, plant and equipment are depreciated on a straight-line basis over
their estimated useful lives that range from three to 40 years. Leasehold
improvements are amortized over the shorter of the estimated useful life or the
term of the lease.

IMPAIRMENT OF LONG-LIVED ASSETS:
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may no
longer be recoverable. If the estimated future cash flows (undiscounted and
without interest charges) from the use of an asset were less than the carrying
value, a write-down would be recorded to reduce the related asset to its
estimated fair value.

F-7

RESEARCH AND DEVELOPMENT AND PATENT LITIGATION COSTS:
Costs incurred by the Company's internal product development program to
develop new products and obtain pre-marketing regulatory approval for such
products are expensed as incurred and charged to research and development. The
Company will either capitalize or expense amounts related to the development and
marketing of new products and technologies through third parties based on the
Company's determination of its ability to recover in a reasonable period of time
the estimated future cash flows anticipated to be generated pursuant to each
agreement. Accordingly, amounts related to the Company's funding of the research
and development efforts of others or to the purchase of contractual rights to
products that have not been approved by the United States Food and Drug
Administration ("FDA") where the Company has no alternative future use for the
product, are expensed and included in research and development costs. Amounts
for contractual rights acquired by the Company to a process, product or other
legal right having multiple or alternative future uses that support its
realizabilty, as well as, an approved product, are capitalized and included in
intangible assets on the consolidated balance sheets. The capitalized costs are
amortized on an accelerated basis over the estimated useful life over which the
related cash flows are expected to be generated and the amortization is charged
to cost of goods sold. Patent litigation costs are expensed as incurred and
included in selling, general and administrative expenses.

GOODWILL AND INTANGIBLE ASSETS:
The Company determines the estimated fair values of goodwill and certain
intangible assets with definitive lives based on purchase price allocations
performed by independent third party valuation firms at the time of acquisition.
In addition, certain amounts paid to third parties related to the development
and marketing of new products and technologies, as described above, are
capitalized and included in intangible assets on the consolidated balance
sheets. Goodwill is not amortized, but tested at least annually for impairment
using a fair value approach. Intangible assets with definitive lives are
capitalized and amortized over their estimated useful lives.

INCOME TAXES:
Deferred income tax assets and liabilities are computed annually based on
enacted tax laws and rates for temporary differences between the financial
accounting and income tax bases of assets and liabilities. A valuation allowance
is established, when necessary, to reduce deferred income tax assets to the
amount that is more likely than not to be realized.

PENSION BENEFITS:
The determination of the Company's obligation and expense for pension
benefits is dependent on its selection of certain assumptions used by actuaries
in calculating such amounts. Those assumptions are described in the Commitments,
Contingencies and Other Matters footnote to the consolidated financial
statements and include, among others, the discount rate, expected long-term rate
of return on plan assets and rates of increase in compensation. In accordance
with accounting principles generally accepted in the United States, actual
results that differ from the Company's assumptions are accumulated and amortized
over future periods and therefore, generally affect the recognized expense and
recorded obligation in future periods. While the Company believes its
assumptions are appropriate, significant differences in actual experience or
significant changes in assumptions may materially affect pension obligations and
future expense.

REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE AND RESERVES:
At the time product is shipped and title passes to its customers, the
Company recognizes revenue and simultaneously records an estimate for sales
returns, chargebacks, rebates, price protection adjustments or other sales
allowances, as a reduction in revenue, with a corresponding adjustment to the
accounts receivable reserves. Customers are permitted to return unused product,
after approval from the Company, up to 180 days before and one year after the
expiration date for the product's lot. Additionally, certain customers are
eligible for price rebates, offered as an incentive to increase sales volume, on
the basis of the volume of purchases of a product over a specified period which
generally ranges from one to three months, and certain customers are credited
with chargebacks on the basis of their resales to end-use customers, such as
HMO's, which have contracts with the Company. The Company also generally offers
price protection, also known as shelf-stock adjustments, with respect to sales
of new generic drugs for which it has a market exclusivity period. Price
protection accounts for the fact that the price of such drugs typically will
decline, sometimes substantially, when additional generic manufacturers
introduce and market a comparable generic product at the end of the exclusivity
period. Such plans, which are common in the industry, generally provide for a
credit to customers with respect to the customer's remaining inventory at the
expiration of the exclusivity period for the difference between the Company's
new price and the price at which the Company originally sold the product. The
Company records charges (reductions of revenue) to accrue this amount for

F-8

specific product sales that will be subject to price protection based on the
Company's estimate of customer inventory levels and market prices at the
expiration of the exclusivity period. In each of these instances, the Company
has the historical experience and access to other information, including the
total demand for each drug the Company manufactures, the Company's market share,
recent or pending introduction of new drugs, inventory practices of the
Company's customers and the resales by its customers to end-users having
contracts with the Company, necessary to reasonably estimate the amount of such
returns or allowances, and records reserves for such returns or allowances at
the time of sale.

EARNINGS PER COMMON SHARE DATA:
Earnings (loss) per common share is computed by dividing earnings (loss) by
the weighted average number of common shares outstanding. Earnings (loss) per
common share assuming dilution, were computed assuming that all potentially
dilutive securities, including "in-the-money" stock options, were converted into
common shares at the beginning of each year.

FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of the Company's accounts receivable, accounts payable
and accrued liabilities approximate fair market value based upon the relatively
short-term nature of these financial instruments. The carrying amount of the
Company's long-term debt, including the current portion, approximate fair market
value based upon current borrowing rates available to the Company.

CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to credit risk
consist of trade receivables. The Company markets its products primarily to
domestic wholesalers, retail drug store chains, managed health care providers
and distributors. The Company believes the risk associated with this
concentration is limited due to the number of wholesalers, drug store chains,
managed health care providers and distributors, and their geographic dispersion
and its performance of certain credit evaluation procedures (see "-Accounts
Receivable-Major Customers").

CASH EQUIVALENTS:
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid money market instruments with an original maturity
of three months or less when purchased to be cash equivalents. At December 31,
2002, cash equivalents were deposited in financial institutions and consisted of
immediately available fund balances.

STOCK-BASED COMPENSATION:
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB Opinion 25") and complies
with the disclosure provisions SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under APB Opinion 25, compensation expense is based
on the difference, if any, on the date of grant, between the fair value of the
Company's stock and the exercise price.

In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123" ("SFAS 148") to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
standard amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.

F-9

The following table illustrates the effect on net income (loss) and net
income (loss) per share if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation:

For the Years Ended December 31,
(*Restated)
2002 2001 2000
---- ---- ----

Net income (loss) as reported $79,454 $53,922 $(1,651)
Total stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects (7,702) (5,137) (970)
-------- ------- -------
Pro forma net income (loss) 71,752 $48,785 $(2,621)

Net income (loss) per share of common stock:
As reported - Basic $2.46 $1.76 $(.06)
As reported - Diluted $2.40 $1.68 $(.06)

Pro forma - Basic $2.22 $1.59 $(.09)
Pro forma - Diluted $2.17 $1.52 $(.09)

SEGMENTS OF AN ENTERPRISE:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting of financial information about
operating segments in annual financial statements. The Company's management
considers its business to be a single business entity.

NEW ACCOUNTING PRONOUNCEMENTS:
In June 2001, FASB issued SFAS No. 142, "Accounting for Goodwill and Other
Intangible Assets" ("SFAS 142"). This statement requires that goodwill and
intangible assets deemed to have an indefinite life are not be amortized.
Instead of amortizing goodwill and intangible assets deemed to have an
indefinite life, the statement requires a test for impairment to be performed
annually, or immediately if conditions indicate an impairment might exist by
applying a fair-value-based test. The adoption of this standard did not have a
material impact on our financial position or results of operations.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is effective January 1, 2003. It requires the
recording of an asset and a liability equal to the present value of the
estimated costs associated with the retirement of long-lived assets where a
legal or contractual obligation exists. The asset is required to be depreciated
over the life of the related equipment or facility, and the liability accreted
each year based on a present value interest rate. This standard, which the
Company will adopt in 2003, will not have a material effect on the Company's
consolidated financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). It establishes a
single accounting model for the impairment of long-lived assets to be held and
used or to be disposed of by sale or abandonment, and broadens the definition of
discontinued operations. The Company adopted SFAS 144 in 2002, with no
significant change in the accounting for the impairment and disposal of
long-lived assets.

NOTE 2 - RESTATEMENT OF RESULTS:

Certain items in the consolidated financial statements for fiscal year 2000
were restated due to a change in the manner the Company accounted for its
transactions with Merck KGaA in fiscal year 1998. In June 1998, the Company sold
to Merck KGaA 10,400 shares of its Common Stock, and entered into a distribution
agreement (the "Genpharm Distribution Agreement"), dated March 1998, with
Genpharm, Inc. ("Genpharm"), a Canadian subsidiary of Merck KGaA. The Company
previously accounted for the sale of the Common Stock and the distribution
agreement as separate transactions. In restating its consolidated financial
statements, the Company accounted for the two transactions as a single
transaction under Emerging Issues Task Force Issue ("EITF") No. 96-18

F-10

"Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling Goods or Services". Under EITF 96-18,
the fair value of the Common Stock sold, to the extent it exceeded the cash
consideration received for such Common Stock, is attributed to the distribution
agreement. Under the restatement, the Company determined the fair value of the
Common Stock sold to Merck KGaA to be $27,300, which exceeded the cash
consideration of $20,800 received by the Company by $6,500. That $6,500 was
assigned to the Genpharm Distribution Agreement, with a corresponding increase
in shareholders' equity. Additionally, the Company recorded a deferred tax
liability of $4,333 and a corresponding increase in the financial reporting
basis of the Genpharm Distribution Agreement to account for the difference
between the basis in the Genpharm Distribution Agreement for financial reporting
and income tax purposes as required by SFAS No. 109, "Accounting for Income
Taxes" ("SFAS 109"). The aggregate value assigned to the Genpharm Distribution
Agreement of $10,833 is being amortized on a straight-line basis over 15 years
beginning in the third quarter of fiscal 1998, and the net amount is included in
intangible assets. The amortization is included as a non-cash charge in selling,
general and administrative expenses.

The impact of the restatements described above on the previously reported
results for fiscal year 2000 were as follows:

FOR THE YEAR ENDED
CONSOLIDATED STATEMENT OF DECEMBER 31, 2000
OPERATIONS AND ACCUMULATED DEFICIT Reported Restated
------------------------------------ ---------------- -----------------
Selling, general and administrative $15,575 $16,297

Net loss ($929) ($1,651)

Accumulated deficit ($29,623) ($31,429)

Net loss per share of common stock:
Basic and diluted ($0.03) ($0.06)

NOTE 3 - ACQUISITION OF FINETECH:

On March 15, 2002, the Company terminated its negotiations with ISP related
to the Company's purchase of the combined ISP FineTech fine chemical business,
based in Haifa, Israel and Columbus, Ohio. At that time, the Company
discontinued negotiations with ISP as a result of various events and
circumstances that occurred after the announcement of the proposed transaction.
Pursuant to the termination, the Company paid ISP a $3,000 break-up fee in March
2002, which was subject to certain credits and offsets, and incurred
approximately $1,262 in related acquisition costs, both of which were included
in acquisition termination charges on the consolidated statement of operations
in fiscal year 2002.

The Company subsequently purchased FineTech, based in Haifa, Israel, from
ISP in April 2002 for approximately $32,000 and incurred $1,237 in related
acquisition costs, all of which were financed by its cash-on-hand. The Company
acquired the physical facilities, intellectual property and patents of FineTech
and retained all FineTech employees. FineTech specializes in the design and
manufacture of proprietary synthetic chemical processes used in the production
of complex organic compounds for the pharmaceutical industry. FineTech also has
the ability to manufacture in small quantities complex synthetic active
pharmaceutical ingredients at its manufacturing facility in Haifa, Israel. This
facility operates in compliance with FDA current Good Manufacturing Practices
(cGMP) standards. The purchase did not have a material effect on the Company's
earnings in fiscal year 2002. The Company is in the process of transferring a
portion of FineTech's personnel and technological resources to a laboratory
facility in Rhode Island. FineTech is operated as an independent, wholly-owned
subsidiary of PRX and provides immediate chemical synthesis capabilities and
strategic opportunities to the Company and other customers.

F-11

The purchase price for FineTech was allocated to assets and liabilities
based on management's estimates of fair value through an independent third party
valuation firm. The following table sets forth the allocation of the purchase
price:

Current assets $971
Property, plant and equipment 1,046
Intellectual property 6,580
Goodwill 24,662
------
Total assets acquired 33,259

Current liabilities 22
------
Total liabilities assumed 22
------

Net assets acquired $33,237
======

In accordance with SFAS 142, the goodwill will not be amortized, but will
be tested for impairment using a fair value approach at least annually.

NOTE 4 - ACCOUNTS RECEIVABLE:
DECEMBER 31, DECEMBER 31,
2002 2001
---- ----

Accounts receivable $90,520 $85,177
------ ------

Allowances:
Doubtful accounts 1,156 998
Returns 18,868 4,847
Price adjustments and allowances 16,233 41,323
------ ------
36,257 47,168
Accounts receivable,
net of allowances $54,263 $38,009
====== ======

The gross accounts receivable amounts above at December 31, 2002 and
December 31, 2001 are net of provisions for customer rebates of $13,610 and
$14,081, and chargebacks of $63,141 and $41,830, respectively. Customer rebates
are price reductions generally given to customers as an incentive to increase
sales volume. This incentive is based on a customer's volume of purchases made
during an applicable monthly, quarterly or annual period. Chargebacks are price
adjustments given to the wholesale customer for product it resells to specific
healthcare providers on the basis of prices negotiated between the Company and
the provider. The increased chargebacks are primarily due to lower contract
pricing on fluoxetine and a larger volume of sales through the Company's
wholesale customers, primarily due to new product awards and trade show
promotions.

The Company accepts returns of product according to the following: (i) the
returns must be approved by authorized personnel in writing or by telephone with
the lot number and expiration date accompanying any request, (ii) the Company
generally will accept returns of products from any customer and will give such
customer a credit for such return provided such product is returned within six
months prior to, and until 12 months following, such product's expiration date,
(iii) any product that has more than six months until its expiration date may be
returned to the Company; however, no credit will be issued to the customer, (iv)
the Company will not accept returns of products if such products cannot be
resold, unless the reason that such products cannot be resold is that the
expiration date has passed. In addition, private label stock is not returnable.
The Company's provision for returns has increased in fiscal year 2002 primarily
due to higher overall sales volumes and a higher rate of returns from the brand
products the Company is currently selling.

The accounts receivable reserve for price adjustments and allowances
includes provisions for cash discounts, sales promotions and price protection.
Cash or terms discounts are given to customers who pay within a specific period
of time. Sales or trade show promotions may be run by the Company where
additional discounts may be given on a new product or certain existing products
as an added incentive for the customer to purchase the Company's products. The
Company generally offers price protection, also known as shelf-stock
adjustments, with respect to sales of new generic drugs for which it has a
market exclusivity period. Price protection accounts for the fact that the price

F-12

of such drugs typically will decline, sometimes substantially, when additional
generic manufacturers introduce and market a comparable generic product at the
end of the exclusivity period. Such plans, which are common in the Company's
industry, generally provide for a credit to customers with respect to the
customer's remaining inventory at the end of the exclusivity period for the
difference between the Company's new price and the price at which the Company
originally sold the product. In the Company's experience, the amount by which
the price of a drug may decline at the end of an exclusivity period will depend
in part on the number of additional generic manufacturers that introduce and
market a comparable product. The Company estimates the amount by which prices
will decline based on its monitoring of the number and status of FDA
applications and tentative approvals and its historical experience with other
drugs for which the Company had market exclusivity. The Company estimates the
amount of shelf stock that will remain at the end of an exclusivity period based
on both its knowledge of the inventory practices for wholesalers and retail
distributors and conversations it has with its major customers. Using these
factors, the Company estimates the total price protection credit it will have to
issue at the end of an exclusivity period. The Company records charges
(reductions of sales) to accrue this amount for specific product sales that will
be subject to price protection based on the Company's estimate of customer
inventory levels and market prices at the end of the exclusivity period. As a
result, the Company will be required to credit customers for price protection
based on the quantity of that inventory and the decrease in a particular
products market price at the end of the exclusivity period.

The Company's exclusivity period for fluoxetine, the generic version of Eli
Lilly and Company's Prozac(R), expired in late-January 2002. With respect to
fluoxetine, the Company established a price protection reserve during the
exclusivity period of approximately $34,400, based on its estimate that between
eight and ten additional generic manufacturers would introduce and market
products comparable to the 10 mg and 20 mg tablets and between one and three
additional manufacturers would introduce and market a comparable product for the
40 mg capsules. As a result of the introduction of these competing generic
products during the first quarter of 2002, the sales price for fluoxetine
substantially declined from the sales price the Company charged during the
exclusivity period. In fiscal year 2002, the Company issued price protection
credits totaling approximately $27,400 and eliminated the price protection
reserve that it believes was no longer necessary. Pursuant to distribution
agreements with strategic partners, the elimination of the reserve had a
favorable impact on the Company's gross margin of approximately $1,800 in fiscal
year 2002.

The Company's exclusivity period for megestrol acetate oral suspension, the
generic version of BMS's Megace(R) Oral Suspension, expired in mid-January 2002.
One generic competitor was granted FDA approval to market another generic
version of megestrol acetate oral suspension and began shipping the product to a
limited number of customers in the second quarter of 2002. In addition, a second
potential generic competitor entered into a settlement agreement with BMS
pursuant to which the public record states that the present formulation of the
generic company's product infringes a BMS patent related to megestrol acetate.
However, at this time, the Company has no information as to whether the
settlement agreement provides for the generic competitor to enter the market at
some point in the future. The Company has patents that cover its unique
formulation for megestrol acetate oral suspension and will avail itself of all
legal remedies and intends to take the steps necessary to protect its
intellectual property rights. According to the Company's accounting policies,
the Company did not record a price protection reserve for such product as of
December 31, 2002. The Company will continue to evaluate the effect of potential
competition and will record a price protection reserve when and as it deems
necessary.

MAJOR CUSTOMERS:
The Company's top three customers by sales volume accounted for
approximately 17%, 16% and 10% of net sales in fiscal year 2002, 14%, 13% and 9%
of net sales in fiscal year 2001 and 21%, 9% and 8% of net sales in fiscal year
2000.

The amounts due from these same three customers accounted for approximately
8%, 11% and 2% of the accounts receivable balance at December 31, 2002 and 23%,
14% and 6% of the accounts receivable balance at December 31, 2001.

NOTE 5 -INVENTORIES, NET:
DECEMBER 31, DECEMBER 31,
2002 2001
---- ----
Raw materials and supplies, net $17,400 $11,574
Work in process and finished goods, net 34,191 19,884
------ ------
$51,591 $31,458
======= =======

F-13

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET:
DECEMBER 31, DECEMBER 31,
2002 2001
---- ----

Land $ 2,231 $ 2,231
Buildings 21,509 20,455
Machinery and equipment 21,858 21,794
Office equipment, furniture and fixtures 8,284 6,474
Leasehold improvements 928 2,170
------ ------
54,810 53,124
Less accumulated depreciation and amortization 27,755 28,779
------ ------
$27,055 $24,345
======= =======

Depreciation and amortization expense was $5,775, $3,349 and $3,030,
respectively, for the years ended December 31, 2002, 2001 and 2000.

NOTE 7 - UNEXPENDED INDUSTRIAL REVENUE BOND PROCEEDS:

On December 1, 2002, FineTech entered into a loan agreement among GE
Capital Public Finance, Inc., a Delaware corporation ("Lender"), and Rhode
Island Industrial Facilities Corporation, a public corporation and governmental
agency of the State of Rhode Island and Providence Plantations ("Issuer"), to
finance the acquisition and installation of equipment in Rhode Island. Pursuant
to the agreement, the Issuer will finance all or a portion of the acquisition
and installation of equipment (as defined in the agreement) by FineTech by
issuing a $2,000 revenue bond and obtaining a loan from the Lender. FineTech
shall repay the loan directly to the Lender, as assignee of Issuer and holder of
the bond (see "-Long-Term Debt). The Lender has deposited the $2,000 in an
escrow fund to be held, invested and disbursed as provided in an escrow
agreement. The $2,000 is restricted for purchase of the equipment, as defined in
the agreement, and was recorded as a noncurrent asset on the consolidated
balance sheet.

NOTE 8 - INTANGIBLE ASSETS, NET:
DECEMBER 31, DECEMBER 31,
2002 2001
---- ----

BMS Asset Purchase Agreement, net of
accumulated amortization of $1,393 $10,307 -
Product License fees 9,199 $5,017
Genpharm Distribution Agreement, net of
accumulated amortization of $3,250 and $2,528 7,583 8,305
Intellectual property, net of accumulated
amortization of $451 6,129 -
Genpharm Profit Sharing Agreement, net of
accumulated amortization of $26 2,474 2,500
------- -------
$35,692 $15,822
======= =======

Intangible assets include estimated fair values of certain distribution
rights acquired by the Company for equity instruments or in legal settlements,
amounts paid for contractual rights acquired by the Company to a process,
product or other legal right having multiple or alternative future uses that
support its realizabilty and intellectual property. The values of the
distribution rights, pursuant to agreements with BMS and Genpharm, are
capitalized and amortized on a straight-line basis over the products' estimated
useful lives of seven to 15 years. The values of the product license fees and
the Genpharm Profit Sharing Agreement will be amortized, beginning in the period
in which the product or products are brought to market, over the estimated
useful life in which the related cash flows are generated. The values of the
intellectual property, consisting of trademarks, patents, product and core
technology, and research contracts, are amortized on a straight-line basis over
their estimated useful lives of six to 10 years. All capitalized costs are
subject to periodic impairment testing.

In March 2002, the Company entered into an agreement with BMS (the "BMS
Asset Purchase Agreement") and acquired the United States rights to five of
BMS's brand products. Pursuant to the BMS Asset Purchase Agreement, the Company
terminated its outstanding litigation against BMS involving megestrol acetate
oral suspension and buspirone, paid approximately $1,024 in March 2002 and
agreed to make an additional payment of approximately $1,025 in the first
quarter of 2003. The Company determined, through an independent third party

F-14

appraisal, the fair value of the product rights received to be $11,700, which
exceeded the cash consideration of $2,049 and associated costs of $600 by
$9,051. The $9,051 value was assigned to the litigation settlements and included
in settlement income in the first quarter of 2002. The fair value of the product
rights received is being amortized on a straight-line basis over seven years
beginning in March 2002, with the net amount included in intangible assets on
the consolidated balance sheets. The amortization is included as a non-cash
charge in cost of goods sold.

In April 2002, the Company entered into an agreement (the "Genpharm 11
Product Agreement") with Genpharm, to expand its strategic product partnership.
Pursuant to the Genpharm 11 Product Agreement, the Company paid Genpharm a
non-refundable fee of $2,000 in the second quarter of 2002, included in
intangible assets on the consolidated balance sheets, for two products,
loratadine 10 mg tablets and mirtazapine tablets, which have been tentatively
approved by the FDA (see "-Research and Development Agreements-Genpharm, Inc.").

In November 2001, the Company entered into a joint development and
marketing agreement with Breath Ltd. of the Arrow Group ("Breath") to pursue the
worldwide distribution of latanoprost ophthalmic solution 0.005%, the generic
equivalent of Pharmacia Corporation's ("Pharmacia") Xalatan(R), a glaucoma
medication. Pursuant to the agreement, the Company has the right to market the
product upon FDA approval in the United States and certain United States
territories while Breath has the rights to all worldwide markets outside of the
United States and such territories. As a result of this agreement, Par filed an
ANDA for latanoprost, including a Paragraph IV certification that the existing
patents for the product will not be infringed by Par's generic product. Par has
reason to believe that its ANDA is the first to be filed for this drug with a
Paragraph IV certification. In December 2001, Pharmacia, among others, initiated
a patent infringement action against Par. Par intends to vigorously defend its
position in the pending litigation with Pharmacia (see "-Legal Proceedings").
Pursuant to this agreement, Par made payments of $2,500 in fiscal year 2001 and
$2,500 in the first quarter of fiscal year 2002 to Breath, which are included in
intangible assets on the consolidated balance sheets.

In April 1999, the Company entered into an agreement with FineTech for the
right to use a process for the pharmaceutical bulk active latanoprost. Pursuant
to this agreement, the Company paid FineTech approximately $2,000 in fiscal
years 2000 and 2001, which is included in intangible assets on the consolidated
balance sheets, for a completed process together with its technology transfer
package and patent. The Company has since purchased FineTech and pursuant to
this agreement, the Company is obligated to pay royalties on gross profits from
sales of all products developed under this agreement to the President of
FineTech, Dr. Gutman, who is currently a director of the Company. In addition,
Dr. Gutman is entitled to royalties on gross profits from potential sales of
several other products pursuant to agreements made with FineTech prior to the
Company's acquisition.

On June 30, 1998, the Company completed a strategic alliance with Merck
KGaA, a pharmaceutical and chemical company located in Darmstadt, Germany.
Pursuant to a Stock Purchase Agreement, dated March 25, 1998, the Company issued
10,400 shares of the Company's Common Stock to Merck KGaA, through its
subsidiary EMD, Inc. ("EMD" formerly known as Lipha Americas, Inc.), in exchange
for cash of $20,800 and the exclusive United States distribution rights to a
portfolio of products covered by a distribution agreement with Genpharm (see
"-Distribution and Supply Agreements-Genpharm, Inc."). The Company determined
the fair value of the Common Stock sold to Merck KGaA to be $27,300, which
exceeded the cash consideration of $20,800 received by the Company by $6,500.
That $6,500 was assigned to the Genpharm Distribution Agreement, with a
corresponding increase in shareholders' equity. Additionally, the Company
recorded a deferred tax liability of $4,333 and a corresponding increase in the
financial reporting basis of the Genpharm Distribution Agreement to account for
the difference between the basis in the Genpharm Distribution Agreement for
financial reporting and income tax purposes as required by SFAS 109. The
aggregate value assigned to the Genpharm Distribution Agreement of $10,833 is
being amortized on a straight-line basis over 15 years beginning in the third
quarter of fiscal 1998, and the net amount is included in intangible assets. The
amortization is included as a non-cash charge in selling, general and
administrative expenses.

In January 1999, the Company and Genpharm, entered into a profit sharing
agreement (the "Genpharm Profit Sharing Agreement") pursuant to which the
Company receives a portion of the profits generated from the sale of omeprazole,
the generic version of Astra Zeneca's ("Astra") Prilosec(R), and 15 products
sold under a separate agreement between Genpharm and an unaffiliated United
States-based pharmaceutical company in exchange for a non-refundable fee of
$2,500 paid by the Company and included in intangible assets on the consolidated
balance sheets. In November 2001, the FDA granted Genpharm 180-days marketing
co-exclusivity for 10 mg and 20 mg doses of omeprazole. The exclusivity would
have allowed only Genpharm and/or Andrx Corporation ("Andrx") to enter the

F-15

market during the exclusivity period. Under the Genpharm Profit Sharing
Agreement, the Company was entitled to receive at least 30% of profits generated
by Genpharm based on the sale of omeprazole. In November 2002, the Company
announced that Genpharm and Andrx in conjunction with KUDCo, a subsidiary of
Schwarz Pharma AG of Germany, had relinquished exclusivity rights for 10 mg and
20 mg doses of omeprazole, thereby allowing KUDCo to enter the market with a
generic version of Prilosec(R). As a result, KUDCo received final ANDA approval
from the FDA for its generic version of Prilosec(R). The terms of the agreement
provide Genpharm with an initial 15% share of KUDCo's profits, as defined in the
agreement, with a subsequent reduction over time based on a number of factors.
The Company reduced its share of Genpharm's profit derived from omeprazole
pursuant to the Genpharm Profit Sharing Agreement from 30% to 25%. In December
2002, KUDCo launched omeprazole "at risk" because Astra is appealing the court's
patent infringement decision. The full impact of KUDCo's omeprazole launch on
the Company's revenues is presently unclear since, among other things, Astra has
introduced a new drug, Nexium(R), in an apparent attempt to switch consumers
using Prilosec(R) and Astra's decision to market a non-prescription form of
Prilosec(R) along with Proctor & Gamble, all of which may reduce generic sales
of omeprazole. The Company recognized $755 in revenues in December 2002 related
to its share of Genpharm profits and began amortizing the $2,500 fee paid
pursuant to the Genpharm Profit Sharing Agreement over the product's cash flows
over its estimated useful life. The amortization is charged to cost of goods
sold. In the event there is a court ruling that is unfavorable to KUDCo in the
pending appeal by Astra, the Company could be obligated to return any payments
received from Genpharm pursuant to this agreement.

The Company recorded amortization expense related to intangible assets of
$2,592 and $722, respectively, for fiscal years 2002 and 2001. Annual
amortization expense in each of the next five years, related to the intangible
assets currently being amortized, is expected to be $3,070 per year.

NOTE 9 - RESEARCH AND DEVELOPMENT AGREEMENTS:

To supplement its own internal development program, the Company seeks to
enter into development and license agreements with third parties with respect to
the development and marketing of new products and technologies. To date, the
Company has entered into several of these types of agreements and advanced funds
to several non-affiliated companies for products in various stages of
development. Payments related to these agreements are either expensed as
incurred or capitalized according to the Company's Significant Accounting
Policies. To date, the Company entered into the following product development
agreements that it believes are significant to its business.

THREE RIVERS PHARMACEUTICALS, LLC.
In July 2002, the Company and Three Rivers Pharmaceuticals, LLC ("Three
Rivers") entered into a license and distribution agreement (the "Three Rivers
Distribution Agreement"), which was amended in October 2002, to market and
distribute ribavirin 200 mg capsules, the generic version of Schering-Plough's
Rebetol(R). Under the terms of the Three Rivers Distribution Agreement, Three
Rivers will supply the product and be responsible for managing the regulatory
process and ongoing patent litigation. Upon FDA approval and final marketing
clearance, Par will have the exclusive right to sell the product in non-hospital
markets and will be required to pay Three Rivers a percentage of the gross
profits, as defined in the agreement. In addition, the Company paid Three Rivers
$1,000, which was charged to research and development expenses in fiscal year
2002, and agreed to pay Three Rivers $500 at such time as Par commercially
launches the product. Three Rivers filed an ANDA with a Paragraph IV
certification with the FDA in August 2001 and is currently in litigation with
the patent holders. According to current FDA practice, Par believes it may be
entitled to co-exclusively market the generic product ribavirin for up to 180
days, during which time only one other company could be approved to market
another generic version of the drug.

NORTEC DEVELOPMENT ASSOCIATES, INC.:
In May 2002, the Company entered into an agreement with Nortec Development
Associates, Inc. (a Glatt company) ("Nortec") to develop an extended release
generic version of a currently marketed branded extended release pharmaceutical
product. Under the terms of the agreement, the Company obtained the right to
utilize Nortec/Glatt's drug delivery system technology in its ANDA submission
for the potential product covered in the agreement. If formulation and
development are successful, the ANDA for the drug could be submitted to the FDA
in 2004 and will include a Paragraph IV certification. The Company and Nortec
have agreed to collaborate on the formulation, and Par has agreed to serve as
the exclusive marketer and distributor of the product.

F-16

In June 2002, the Company expanded its collaboration with Nortec to develop
an extended release generic version of another currently marketed, branded
extended release pharmaceutical product. Under the terms of the new agreement,
Par also obtained the right to utilize Nortec/Glatt's drug delivery system
technology in its ANDA submission for the potential product covered in the
agreement. If successful in development, the Company expects to submit an ANDA
to the FDA for the product in 2003. The Company and Nortec have agreed to
collaborate on the formulation, while Par will serve as the exclusive marketer
and distributor of the product.

Pursuant to these agreements with Nortec, the Company made non-refundable
payments totaling $1,000, which were charged to research and development
expenses in fiscal year 2002. The Company also agreed to pay a total of $800 in
various installments related to the achievement of certain milestones in the
development of the two potential products and $600 for each product on the day
of the first commercial sale. In addition to these payments, the Company agreed
to pay Nortec a royalty on net sales of the products, as defined in the
agreements.

GENPHARM, INC.:
Under the terms of the Genpharm 11 Product Agreement, Par licensed the
exclusive rights to 11 generic pharmaceutical products currently under
development. Pursuant to the Genpharm 11 Product Agreement, Genpharm has agreed
to develop the products, submit all corresponding ANDAs to the FDA and
subsequently manufacture the products. Par has agreed to serve as exclusive U.S.
marketer and distributor of the products, pay a share of the costs, including
development and legal expenses incurred to obtain final regulatory approval, and
pay Genpharm a percentage of the gross profits, as defined in the agreement, on
all sales of products covered under this agreement. In the second quarter of
2002, the Company paid Genpharm a non-refundable fee of $2,000, included in
intangible assets on the consolidated balance sheets, for two of the products.
Pursuant to the Genpharm 11 Product Agreement, the Company's share of
development and legal costs related to the other products has been expensed as
incurred. In addition to the two products noted above, there are three other
ANDAs for potential products covered under the Genpharm 11 Product Agreement,
pending with, and awaiting approval from, the FDA. The Company will also be
required to pay an additional non-refundable fee of up to $414 based upon FDA
acceptance of filings for six of the nine remaining products.

ELAN TRANSDERMAL TECHNOLOGIES, INC.:
In December 2002, the Company and Elan Transdermal Technologies, Inc.
("Elan") terminated an agreement (the "Development, License and Supply
Agreement"), dated December 2001, to develop several modified release drugs over
the next five years. The Company paid Elan $1,902 in fiscal years 2002 and 2003,
which was charged to research and development expenses, for a product covered
under the Development, License and Supply Agreement, thereby completing its
obligations pursuant to the agreement.

In April 2001, Par entered into a licensing agreement with Elan to market a
clonidine transdermal patch, a generic version of Boehringer Ingelheim's
Catapres TTS(R). Elan filed an ANDA for the product with the FDA earlier in
fiscal year 2001, including a Paragraph IV certification, certifying that the
product did not infringe the branded product's formulation patent, which expires
in May 2003. Elan will be responsible for the development and manufacture of the
products, while Par will be responsible for marketing, sales and distribution.
Par will reimburse Elan for research and development costs and Elan will receive
a royalty from the sale of the product. Pursuant to the agreement, the Company
paid Elan approximately $1,167 and $833, respectively, in fiscal years 2001 and
2002, which was charged to research and development expenses. In addition, Par
will pay to Elan $1,000 upon FDA approval of the product, and a royalty on all
future sales of the product.

PENTECH PHARMACEUTICALS, INC.:
In November 2002, the Company amended its agreement (the "Supply and
Marketing Agreement") with Pentech Pharmaceuticals, Inc. ("Pentech"), dated
November 2001, to market paroxetine hydrochloride capsules. Pursuant to the
Supply and Marketing Agreement, as amended, Par has the exclusive right to
market, sell and distribute the product in the United States and its territories
and has agreed to pay Pentech a percentage of the gross profit from sales on the
product. Paroxetine hydrochloride is the generic version of GlaxoSmithKline's
Paxil(R). Currently, GlaxoSmithKline markets Paxil(R) only in tablet form.
Paxil(R), a selective serotonin reuptake inhibitor, is indicated for the
treatment of depression and other disorders. The Company believes that its ANDA
submission for paroxetine hydrochloride capsules is the first to be filed with a
paragraph IV certification. The Company has reason to believe that another
generic drug company has first-to-file status for the tablet form of this
product. Par intends to market a capsule form of the product. Pursuant to the
Supply and Marketing Agreement with Pentech, Par is responsible for all legal
expenses up to $2,000, which have been expensed as incurred, to obtain final
regulatory approval. Legal expenses in excess of $2,000 are fully creditable
against future profit payments. In fiscal year 2003, Par will be responsible for

F-17

Pentech costs associated with the project up to $1,300, which will be charged to
research and development expenses as incurred.

NOTE 10 - RESEARCH AND DEVELOPMENT VENTURES:

The Company is committed to developing new products that have limited
competition and longer product life cycles. To augment its internal development
program, the Company seeks to enter into research and development ventures where
it can share development costs while using the expertise of its partners. To
date, the Company has entered into the following research and development
ventures.

RHODES TECHNOLOGIES, INC.:
In April 2002, the Company entered into an agreement with Rhodes
Technologies, Inc. ("RTI"), an affiliated company of Purdue Pharma L.P., to
establish a joint venture partnership in the United States. The new joint
venture was named SVC Pharma and is owned equally by both parties. SVC Pharma
will utilize, on a case-by-case basis, advanced technologies and patented
processes to develop, manufacture, market and distribute certain unique,
proprietary pharmaceutical products. Under the terms of the agreement, when both
partners agree to pursue a specific project, each partner will contribute
resources to the new enterprise. RTI has agreed to provide scientific and
technological expertise in the development of non-infringing, complex molecules.
In addition to providing chemical synthesis capabilities, RTI has agreed to
provide the manufacturing capacity for sophisticated intermediate and active
pharmaceutical ingredients. Par has agreed to provide development expertise in
dosage formulation and will be responsible for marketing, sales and
distribution. The companies will share equally in expenses and profits. SVC
Pharma has identified several candidates for drug development. The Company's
funding of $952, related to the first project, began in the fourth quarter of
fiscal year 2002. The Company accounts for its share of the expenses of SVC
Pharma with a charge to research and development as incurred.

GENERICS (UK) LTD.:
The Company, Israel Pharmaceutical Resources L.P. ("IPR") and Generics (UK)
Ltd. ("Generics"), a subsidiary of Merck KGaA, entered into an agreement (the
"Development Agreement"), dated as of August 11, 1998, pursuant to which
Generics agreed to fund one-half the costs of the operating budget of IPR, the
Company's research and development operation in Israel, in exchange for the
exclusive distribution rights outside of the United States to products developed
by IPR after the date of the Development Agreement. In December 2002, the
Company decided to terminate its IPR operation and sold the assets of IPR to a
private company in Israel. The loss on the sale of IPR's assets was $920 and is
included in selling, general and administrative expenses in December 2002. The
expenses of IPR for fiscal year 2002 were $1,032 and are included in research
and development as incurred, net of the funding from Generics. The Company
expects the remaining shutdown expenses at IPR to be nominal in fiscal year
2003.

NOTE 11 - DISTRIBUTION AND SUPPLY AGREEMENTS:
BRISTOL MYERS SQUIBB:
The Company is selling five of BMS's brand products including the
antihypertensives Capoten(R) and Capozide(R), the cholesterol-lowering
medications Questran(R) and Questran Light(R), and Sumycin(R), an antibiotic
through the BMS Asset Purchase Agreement, dated March 5, 2002. The Company
obtained the right to sell these products manufactured by BMS through a legal
settlement and began selling the products in March 2002.

DR. REDDY'S LABORATORIES LTD:.
In April 2001, the Company and Dr. Reddy's Laboratories Ltd. ("Reddy"), a
producer of bulk active ingredients for the pharmaceutical industry and a
developer and manufacturer of finished dosage forms located in India, entered
into a broad-based co-marketing and development agreement (the "Reddy
Development and Supply Agreement") covering up to 14 generic pharmaceutical
products to be marketed exclusively by Par in the United States and certain
other United States territories. To date, three of such products have obtained
FDA approval, two of which are currently being marketed by Par. In addition,
three of the products have been filed with, and are awaiting approval from, the
FDA. Reddy is required to use commercially reasonable efforts to develop the
products covered by the Reddy Development and Supply Agreement, and is
responsible for the completion of product development and for obtaining all
applicable regulatory approvals. The products covered by the Reddy Development
and Supply Agreement are in addition to four products currently being marketed
by the Company under prior agreements with Reddy. Pursuant to these agreements
with Reddy, the Company pays Reddy a certain percentage of the gross profits, as

F-18

defined in each agreement, on sales of all products covered under such
agreements.

GENPHARM, INC.:
Pursuant to the Genpharm Distribution Agreement, the Company has the
exclusive distribution rights within the United States and certain other United
States territories to approximately 40 generic pharmaceutical products. To date,
19 of such products have obtained FDA approval and are currently being marketed
by Par. The remaining products are either being developed, have been identified
for development, or have been submitted to the FDA for approval. Currently,
there are seven ANDAs for potential products (two of which have been tentatively
approved) that are covered by the Genpharm Distribution Agreement pending with,
and awaiting approval from, the FDA. Genpharm is required to use commercially
reasonable efforts to develop the products and is responsible for the completion
of product development and obtaining all applicable regulatory approvals. The
Company pays Genpharm a percentage of the gross profits, as defined in the
agreement, on all sales of products covered by the Genpharm Distribution
Agreement.

The Company and Genpharm entered into a distribution agreement (the
"Genpharm Additional Product Agreement"), dated November 27, 2000, pursuant to
which Genpharm granted the Company exclusive distribution rights within the
United States and certain other United States territories with respect to five
generic pharmaceutical products not included in the Company's other distribution
agreements with Genpharm. To date, two of such products have obtained FDA
approval and are currently being marketed by Par. The remaining products are
either being developed or have been identified for development. Genpharm and the
Company are sharing the costs of developing the products and for obtaining all
applicable regulatory approvals. The Company has agreed to pay Genpharm a
percentage of the gross profits, as defined in the agreement, on all sales made
by the Company of products included in the Genpharm Additional Product
Agreement.

In December 2002, the Company entered into a supply and distribution
agreement with Genpharm and Leiner Health Products, LLC. ("Leiner") related to
the recent switch of loratadine 10 mg tablets (Claritin(R)) from prescription to
over-the counter. Pursuant to the agreement, Genpharm has agreed to manufacture
the product and Leiner has agreed to market and engage in over-the-counter
distribution of the product in the United States and its territories for Par.
The Company will receive a portion of installment payments made to Genpharm by
Leiner in fiscal 2003 totaling $594 in addition to a percentage of the net
profit attributable to Leiner sales.

BASF CORPORATION:
In April 1997, Par entered into a Manufacturing and Supply Agreement (the
"BASF Supply Agreement") with BASF Corporation ("BASF"), a manufacturer of
pharmaceutical products. Under the BASF Supply Agreement, Par agreed to purchase
minimum quantities of certain products manufactured by BASF, and to phase out
Par's manufacturing of those products. As part of the agreement, BASF
discontinued its direct sale of those products. The agreement had an initial
term of three years and would have renewed automatically for successive two-year
periods until December 31, 2005, if Par had met certain purchase thresholds.
Since Par did not meet the minimum purchase requirement of one product in the
third and final year of the agreement, BASF had the right to terminate the
agreement with a notice period of one year. BASF has not given Par such notice
and to ensure continuance of product supply, BASF and the Company have agreed to
continue to operate under terms similar to those of the BASF Supply Agreement.

PAYABLES DUE TO DISTRIBUTION AGREEMENT PARTNERS:
Pursuant to these distribution agreements, the Company pays its partners a
percentage of gross profits as defined in each agreement. As of December 31,
2002 and 2001, the Company had payables due to distribution agreement partners
of $18,163 and $32,295, respectively. The decrease is primarily due to lower
pricing on fluoxetine following the expiration of the Company's exclusivity
period in January 2002.

NOTE 12 - SHORT-TERM DEBT:

In December 1996, Par entered into a Loan and Security Agreement (the "Loan
Agreement") with General Electric Capital Corporation ("GECC"). The Loan
Agreement was amended in December 2002, to incorporate the addition of FineTech
and remove IPR as a party to the agreement. The Loan Agreement, as amended,
provides Par with a revolving line of credit expiring March 2005. Pursuant to
the Loan Agreement, Par is permitted to borrow up to the lesser of (i) the

F-19

borrowing base established under the Loan Agreement or (ii) $30,000. The
borrowing base is limited to 85% of eligible accounts receivable plus 50% of
eligible inventory of Par, each as determined from time to time by GECC. As of
December 31, 2002, the borrowing base was approximately $27,000. The interest
rate charged on the line of credit is based upon a per annum rate of 2.25% above
the 30-day commercial paper rate for high-grade unsecured notes adjusted
monthly. The line of credit with GECC is collateralized by the assets of the
Company, other than real property, and is guaranteed by the Company. In
connection with such facility, the Company established a cash management system
pursuant to which all cash and cash equivalents received by any of such entities
are deposited into a lockbox account over which GECC has sole operating control
if there are amounts outstanding under the line of credit. The deposits would
then be applied on a daily basis to reduce the amounts outstanding under the
line of credit. The revolving credit facility is subject to covenants based on
various financial benchmarks. In November 2002, GECC waived certain events of
default related to financial covenants and amended the financial covenants in
the Loan Agreement. To date, no debt is outstanding under the Loan Agreement.

NOTE 13 - LONG-TERM DEBT:
DECEMBER 31, DECEMBER 31,
2002 2001
Industrial revenue bond (a) $2,000 -
Mortgage loan (b) 809 $851
Other (c) 213 448
------- ------
3,022 1,299
Less current portion (596) (239)
------- ------
$2,426 $1,060
======= ======

(a) The industrial revenue bond in the principal amount of $2,000 is to be
paid in equal monthly installments over a term of five years maturing
January 1, 2008. The bond is secured by certain equipment of FineTech in
Rhode Island, bears interest at 4.27% per annum and is subject to
covenants based on various financial benchmarks.

(b) In June 2001, the Company and Hudson United Bank entered into an
agreement that extended the terms of the mortgage loan. The mortgage
loan extension, in the principal amount of $877, is to be paid in equal
monthly installments over a term of 13 years maturing May 1, 2014. The
mortgage loan, secured by certain real property of the Company, has a
fixed interest rate of 8.5% per annum, with rate resets after the fifth
and tenth years based upon a per annum rate of 3.25% over the five-year
Federal Home Loan Bank of New York rate. The Company paid the remaining
balance on the mortgage loan in February 2003.

(c) Includes primarily amounts due under capital leases for computer
equipment.

Long-term debt maturities during the next five years, including the portion
classified as current, are as follows: $596 in 2003, $472 in 2004, $441 in 2005,
$459 in 2006, $442 in 2007, and $612 thereafter.

During fiscal years 2002, 2001 and 2000, the Company incurred interest
expense of $148, $626 and $933, respectively. Interest paid approximated
interest expense in each of these fiscal years.

NOTE 14 - EARNINGS PER SHARE:

Outstanding options and warrants of 1,793 and 3,175 as of December 31, 2002
and 2001, respectively, were included in the computation of diluted earnings per
share because the exercise prices were lower than the average market price of
the Common Stock in the respective periods. Outstanding options and warrants of
3,354 as of December 31, 2000, where the exercise prices were lower than the
average market price of the Common Stock in the respective period, were excluded
from diluted earnings per share because they would have been anti-dilutive.
Outstanding options and warrants of 1,971, 579 and 263 as of December 31, 2002,
2001 and 2000, respectively, were not included in the computation of diluted
earnings per share because the exercise prices were greater than the average
market price of the Common Stock in the respective periods. The following is a
reconciliation of the amounts used to calculate basic and diluted earnings per
share:

F-20

FOR THE YEARS ENDED DECEMBER 31,
(*RESTATED)
2002 2001 2000
---- ---- ----

NET INCOME (LOSS) $79,454 $53,922 $(1,651)

BASIC:
Weighted average number of common
shares outstanding 32,337 30,595 29,604

NET INCOME (LOSS) PER SHARE OF COMMON STOCK $2.46 $1.76 $(.06)
==== ==== ===
ASSUMING DILUTION:
Weighted average number of common
shares outstanding 32,337 30,595 29,604
Effect of dilutive options 714 1,595 -
------- ------- -------
Weighted average number of common and common
equivalent shares outstanding 33,051 32,190 29,604

NET INCOME (LOSS) PER SHARE OF COMMON STOCK $2.40 $1.68 $(.06)
==== ==== ===

NOTE 15 - SHAREHOLDERS' EQUITY:

PREFERRED STOCK:
In 1990, the Company's shareholders authorized 6,000 shares of a newly
created class of preferred stock with a par value of $.0001 per share. The
preferred stock is issuable in such series and with such dividend rates,
redemption prices, preferences and conversion, and other rights as the Board may
determine at the time of issuance. At December 31, 2002 and 2001, the Company
did not have preferred stock issued and outstanding.

COMMON STOCK:
In August 2001, Merck KGaA and Genpharm exercised options and warrants
covering 1,421 shares of Common Stock. EMD, Merck KGaA and Genpharm subsequently
sold their entire holdings of 13,634 shares of Common Stock, representing
approximately 43% of the Company's total outstanding shares of Common Stock at
the close of the transaction in September 2001, to unaffiliated institutional
investors in a private placement.

DIVIDEND:
The Company did not pay any dividends on its Common Stock in fiscal years
2002, 2001 and 2000.

CHANGES IN SHAREHOLDERS' EQUITY:
Changes in the Company's Common Stock and Additional Paid-in Capital
accounts during fiscal years 2002 and 2001 were as follows:

(*RESTATED)
ADDITIONAL
COMMON STOCK PAID-IN
SHARES AMOUNT CAPITAL
------- ------ -------
Balance, December 31, 1999 29,562 $296 $95,503
Issuance of stock options - - 258
Exercise of stock options 66 1 176
Compensatory arrangements 19 - 205
------- ------ -------
Balance, December 31, 2000 29,647 297 96,142
Exercise of Genpharm warrants 250 2 2,095
Exercise of Genpharm stock options 351 4 699
Exercise of Merck KGaA stock options 820 8 1,632
Exercise of stock options 961 9 3,092
Issuance of stock options - - 129
Compensatory arrangements 6 - 11,821
------- ------ -------
Balance, December 31, 2001 32,035 320 115,610
Exercise of stock options 761 8 2,471
Compensatory arrangements 8 - 434
------- ------ -------
Balance, December 31, 2002 32,804 $328 $118,515
======= ====== =======

F-21

Compensatory arrangements include the tax treatment related to the exercise
of stock options.

EMPLOYEE STOCK PURCHASE PROGRAM:
The Company maintains an Employee Stock Purchase Program ("Program"). The
Program is designed to qualify as an employee stock purchase plan under Section
423 of the Internal Revenue Code of 1986, as amended. It enables eligible
employees to purchase shares of Common Stock at a discount of up to 15% of the
fair market value. An aggregate of 1,000 shares of Common Stock have been
reserved for sale to employees under the Program. Employees purchased 8 and 7
shares during fiscal years 2002 and 2001, respectively. At December 31, 2002,
813 shares remain available for issuance and sale under the Program.

STOCK OPTIONS:
The following is a summary of stock option activity in each of the periods
as follows:

FOR THE YEARS ENDED DECEMBER 31,
2002 2001 2000
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ ---------
Outstanding at
beginning of year 3,754 $18.88 2,197 $3.40 1,766 $2.90
Granted 891 $23.99 2,576 $25.95 550 $5.19
Exercised (761) $3.26 (961) $3.23 (66) $2.64
Canceled/Surrendered (120) $25.38 (58) $5.73 (53) $6.11
--- -- --
Outstanding at
end of year 3,764 $23.04 3,754 $18.88 2,197 $3.40
===== ===== =====

At December 31, 2002, 2001 and 2000 exercisable options amounted to 931,
834 and 571, respectively. The weighted average exercise prices of the options
for these respective periods were $20.23, $2.76 and $3.82. Exercise price ranges
and additional information regarding the 3,764 options outstanding at December
31, 2002 were as follows:

Outstanding Options Exercisable Options
------------------- ------------------
Exercise Number Weighted Average Weighted Average Number Weighted Average
Price Range of Options Exercise Price Remaining Life of Options Exercise Price
----------- ---------- -------------- --------------- ---------- ----------------

$1.50 to $4.13 154 $2.16 2.4 years 154 $2.16
$5.13 to $7.63 771 $6.65 6.9 years 224 $6.23
$21.65 to $24.33 542 $22.18 9.2 years 3 $24.05
$25.85 to $29.90 354 $26.77 6.9 years - -
$30.55 to $36.25 1,943 $30.76 8.5 years 550 $30.98

In fiscal year 2001, the Company's shareholders approved the 2001
Performance Equity Plan (the "2001 Plan"). The 2001 Plan provides for the
granting of incentive and nonqualified stock options to employees of the Company
or to others. The 2001 Plan became effective July 12, 2001 and will continue
until July 11, 2011 unless terminated sooner. The Company initially reserved
4,000 shares of Common Stock for issuance under the 2001 Plan. The maximum term
of an option under the 2001 Plan is ten years. Vesting and option terms are
determined in each case by the Compensation and Stock Option Committee of the
Board.

In fiscal year 2000, the Company's Board adopted the 2000 Performance
Equity Plan (the "2000 Plan") which plan was subsequently amended, making it a
non-qualified, broad-based plan not subject to shareholder approval. The 2000
Plan provides for the granting of incentive and nonqualified stock options to
employees of the Company and to others. The 2000 Plan became effective March 23,
2000 and will continue until March 22, 2010 unless terminated sooner. The
Company has reserved 1,025 shares of Common Stock for issuance under the 2000
Plan. The maximum term of an option under the 2000 Plan is ten years. Vesting
and option terms are determined in each case by the Compensation and Stock
Option Committee of the Board. The maximum term of the option is reduced to five
years if an incentive stock option is granted to a holder of more than 10% in
the Company.

In fiscal year 1998, the Company's shareholders approved the 1997
Directors' Stock Option Plan (the "1997 Directors' Plan") pursuant to which
options are granted to non-employee directors of the Company. The 1997
Directors' Plan became effective October 28, 1997 and will continue until

F-22

October 28, 2007, unless terminated sooner. Options granted under the 1997
Directors' Plan will become exercisable in full on the first anniversary of the
date of grant, provided that the eligible director has not been removed "for
cause" as a member of the Board on or prior to the first anniversary of the date
of grant. The maximum term of an option under the 1997 Directors' Plan is ten
years. The Company reduced the number of shares of Common Stock for issuance
under the 1997 Directors' Plan to 450 shares. In connection with the adoption of
the 1997 Directors' Plan, the 1995 Directors' Stock Option Plan was terminated.

Under all the stock option plans, the stock option exercise price of all
the option grants equaled the market price on the date of grant. At December 31,
2002 and 2001, options for 1,330 and 607 shares, respectively, were available
for future grant under the Company's various stock option plans.

As permitted under SFAS 123, the Company elected to follow APB Opinion 25
and related interpretations in accounting for stock-based awards to employees.
Pro-forma information regarding net income is required by SFAS 123. This
required information is to be determined as if the Company had accounted for its
stock-based awards to employees under the fair value method of that standard.
The fair value of options granted during the years ended December 31, 2002,
2001, and 2000, has been estimated at the date of grant using the Black-Scholes
stock option pricing model, based on the following weighted average assumptions:

FOR THE YEARS ENDED DECEMBER 31,
2002 2001 2000
---- ---- ----
Risk free interest rate 4.3% 4.5% 4.8%
Expected term 5.5 years 5.2 years 5.7 years
Expected volatility 68.6% 69.4% 68.4%

It is assumed that no dividend will be paid for the entire term of the
option. The weighted-average fair value of options granted in fiscal years 2002,
2001 and 2000 were $14.89, $15.74 and $3.29, respectively.

NOTE 16 - INCOME TAXES:

The components of the Company's provision for income taxes for the years
ended December 31, 2002, 2001 and 2000 are as follows:

For the Years Ended December 31,
2002 2001 2000
---- ---- ----
Current income tax provision:
Federal $43,682 $34,807 -
State 6,072 5,723 -
------ ------ -
49,754 40,530 -
------ ------ -

Deferred income tax benefit:
Federal 938 (16,075) -
State 107 (2,445) -
------ ------ -
$50,799 $22,010 -
====== ====== =

F-23

Deferred tax assets and (liabilities) as of December 31, 2002 and 2001 are
as follows:

Deferred tax asset, net:
December 31, December 31,
2002 2001
Current deferred assets:
Accounts receivable $29,608 $32,781
Inventories 2,076 1,442
Accrued expenses 913 71
Other 276 191
------ ------
32,873 34,485
------ ------
Non-Current deferred assets:
Asset impairment reserve 431 467
Research and development expenses 377 367
Other 487 280
------ ------
1,295 1,114
------ ------

Deferred tax assets 34,168 35,599
------ ------
Deferred liabilities:
Fixed assets (1,900) (1,921)
Genpharm distribution agreement (2,957) (3,322)
------ ------
(4,857) (5,243)
------ ------
Net deferred tax asset $29,311 $30,356
====== ======

The exercise of stock options in fiscal years 2002 and 2001, respectively,
resulted in credits to additional paid-in capital of $9,984 and $220. In
addition, due to the recognition of the benefit associated with net operating
losses prior to fiscal year 2001 relating to employee stock options, $1,561 was
credited to additional paid-in capital in fiscal year 2001.

The table below provides a reconciliation between the statutory federal
income tax rate and the effective rate of income tax expense for each of the
periods as follows:

For the Years Ended December 31,
2002 2001 2000
---- ---- ----

Federal statutory tax rate 35% 35% (34%)
State tax - net of Federal benefit 4% 3% 2%
Other - 3% -
(Decrease) increase in valuation
reserve for deferred tax assets - (12%) 32%
---- ---- ----
Effective tax rate 39% 29% -
==== ==== ====

NOTE 17 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:

LEASES:
At December 31, 2002, the Company had minimum rental commitments
aggregating $21,054 under non- cancelable operating leases expiring through
fiscal year 2012. Amounts payable there under are $2,812 in 2003, $2,927 in
2004, $2,535 in 2005, $2,436 in 2006, $2,140 in 2007 and $8,204 thereafter. Rent
expense charged to operations in fiscal years 2002, 2001 and 2000 was $1,513,
$611 and $622, respectively.

RETIREMENT PLANS:
The Company has a Retirement Savings Plan (the "Retirement Savings Plan")
whereby eligible employees are permitted to contribute from 1% to 25% of their
compensation to the Retirement Savings Plan. The Company contributes an amount
equal to 50% of up to first 6% of compensation contributed by the employee.
Participants of the Retirement Savings Plan become vested with respect to 20% of
the Company's contributions for each full year of employment with the Company
and thus become fully vested after five full years. The Company also may
contribute additional funds each fiscal year to the Retirement Savings Plan, the
amount of which, if any, is determined by the Company's Board of Directors in

F-24

its sole discretion. The Company's provisions for these plans and the defined
benefit plan discussed below were $1,895 in fiscal year 2002, $559 in fiscal
year 2001 and $317 in fiscal year 2000. In fiscal year 1998, the Company merged
a defined contribution social security integrated Retirement Plan into the
Retirement Savings Plan. In June 2002, the Company made a discretionary
contribution to the Retirement Savings Plan of approximately $600 for Plan year
2001.

The Company maintains a defined benefit plan (the "Pension Plan") that
covers eligible employees, as defined in the Pension Plan. The Pension Plan has
been frozen since October 1, 1989. Since the benefits under the Pension Plan are
based on the participants' length of service and compensation (subject to
Employee Retirement Income Security Act of 1974 and Internal Revenue Service
limitations), service costs subsequent to October 1, 1989 are excluded from
benefit accruals under the Pension Plan. The funding policy for the Pension Plan
is to contribute amounts actuarially determined as necessary to provide
sufficient assets to meet the benefit requirements of the Pension Plan retirees.
The assets of the Pension Plan are invested in mortgages and bonds.

Net pension expense for fiscal years 2002, 2001 and 2000 included the
components set forth in the table below.

FOR THE YEARS ENDED DECEMBER 31,
2002 2001 2000
---- ---- ----
Interest cost $125 $132 $131
Actual return on
Pension Plan assets (216) (405) (132)
Recognized actuarial loss - 2 3
Net amortization and deferral
asset gain 78 290 23
Amortization of initial
unrecognized
transition obligation 51 51 51
---- ---- ----
Net pension expense $38 $70 $76
==== ==== ====

For fiscal years 2002 and 2001, the discount rate used to measure the
projected benefit obligation for the Pension Plan was 6.5% and 6.25%,
respectively, and the assumed long-term rate of return on plan assets was 6.5%
and 7.00% for the same periods.

The following provides a reconciliation of the Pension Plan's benefit
obligation, assets and funded status.

DECEMBER 31, DECEMBER 31,
2002 2001
---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at the beginning
of the year $2,070 $2,020
Interest cost 125 131
Actuarial loss 4 59
Benefits paid (136) (140)
----- -----
Benefit obligation at the end of the year $2,063 $2,070
===== =====

CHANGE IN PLAN ASSETS
Fair value of Pension Plan assets at the
beginning of the year $2,051 $1,661
Actual return on assets 216 404
Employer contributions 17 126
Benefits paid (136) (140)
----- -----
Fair value of Pension Plan assets at the
end of the year $2,148 $2,051
===== =====

FUNDED STATUS OF PLAN
Over/(under) funded status $85 $(19)
Unrecognized net actuarial gain (75) (1)
Unrecognized transition obligation 280 332
Adjustment for minimum liability (290) (331)
----- -----
Net recorded pension liability $- $(19)
===== =====
F-25

The Company has no additional minimum pension liability because the Pension
Plan Assets exceed the benefit obligation at the end of the year. In accordance
with SFAS No. 87, "Employer's Accounting for Pensions", the Company recorded an
additional minimum pension liability for under funded plans of $331 for fiscal
year 2001 representing the excess of under funded accumulated benefit
obligations over previously recorded pension cost liabilities. A corresponding
amount is recognized as an intangible asset except to the extent that these
additional liabilities exceed related unrecognized prior service cost and net
transition obligation, in which case the increase in liabilities would be
charged directly to shareholders' equity.

LEGAL PROCEEDINGS:
Par has filed an ANDA (currently pending with the FDA) for latanoprost
(Xalatan(R)), which was developed by Breath Ltd. of the Arrow Group pursuant to
a joint manufacturing and marketing agreement with the Company, seeking approval
to engage in the commercial manufacture, sale and use of the latanoprost product
in the United States. Par's ANDA includes a Paragraph IV certification that the
existing patents in connection with Xalatan(R) are invalid, unenforceable or
will not be infringed by Par's generic product. Par believes that its ANDA is
the first to be filed for this drug with a Paragraph IV certification. As a
result of the filing of the ANDA, Pharmacia Corporation, Pharmacia AB, Pharmacia
Enterprises, S.A., Pharmacia and Upjohn Company and the Trustees of Columbia
University in the City of New York filed lawsuits against the Company on
December 14, 2001 in the United States District Court for the District of
Delaware and on December 21, 2001 in the United States District Court for the
District of New Jersey alleging patent infringement. Pharmacia and Columbia are
seeking an injunction to prevent the Company from marketing its generic product
prior to the expiration of their patents. On February 8, 2002, Par answered the
complaint brought in the District of New Jersey and filed a counterclaim, which
seeks a declaration that the patents-in-suit are invalid, unenforceable and/or
not infringed by Par's products. Par is also seeking a declaratory judgment that
the extension of the term of one of the patents is invalid. All parties are
seeking to recover their respective attorneys' fees. On February 25, 2002, the
lawsuit brought in the District of Delaware was dismissed pursuant to a
stipulation of the parties. The case in the District of New Jersey is currently
in fact discovery. Par intends to vigorously defend the lawsuit. At this time,
it is not possible for the Company to predict the outcome of the plaintiffs'
motion for injunctive relief or their claim for attorneys' fees.

Par, among others, is a defendant in three lawsuits filed in the United
States District Court for the Eastern District of North Carolina (filed on
August 1, 2001, October 30, 2001 and November 16, 2001, respectively) by
aaiPharma Inc., involving patent infringement allegations connected to a total
of three patents related to polymorphic forms of fluoxetine (Prozac(R)). Par
intends to vigorously defend these lawsuits. While the outcome of litigation is
never certain, Par believes that it will prevail in these lawsuits.

The Company prevailed against Alpharma USPD, Inc. ("Alpharma") in an
interference proceeding before the U.S. Patent and Trademark Office regarding
PRX's patents and applications relating to megestrol acetate oral suspension
formulations. Additionally, PRX filed suit against Alpharma in the U.S. District
Court, Southern District of New York in February 2002. Alpharma has now entered
into a consent judgment and order of permanent injunction in this matter.
Alpharma is hereby enjoined from making, using, selling or importing its
megestrol oral suspension product.

The Company is involved in certain other litigation matters, including
product liability and patent actions, as well as actions by former employees,
and believes these actions are incidental to the conduct of its business and
that the ultimate resolution thereof will not have a material adverse effect on
its financial condition, results of operations or liquidity. The Company intends
to vigorously defend all of these actions.

OTHER MATTERS:
In December 2001, the Company made the first payment of a potential equity
investment of up to $2,438 to be made over a period of time in HighRapids, Inc.
("HighRapids"), a Delaware corporation and software developer and owner of
patented rights to an artificial intelligence generator. Pursuant to an
agreement between the Company and HighRapids, effective December 1, 2001, the
Company, subject to its ongoing evaluation of HighRapids' operations, has agreed
to purchase units, consisting of secured debt, evidenced by 7% secured
promissory notes, up to an aggregate principal amount of $2,425 and up to an
aggregate 1,330 shares of the common stock of HighRapids. HighRapids is the
surviving corporation of a merger with Authorgenics, Inc., a Florida
corporation. HighRapids will utilize the Company's cash infusion for working
capital and operating expenses. Through December 31, 2002, the Company had
invested $768 of its potential investment. Due to HighRapids current operating
losses and the Company's evaluation of its short-term prospects for

F-26

profitability, the investment was expensed as incurred in fiscal years 2002 and
2001 and included in other expense on the consolidated statements of operations.
As of December 31, 2002, the Company held approximately 30% of the outstanding
common stock of HighRapids and had the exclusive right to market to the
pharmaceutical industry certain regulatory compliance and laboratory software
currently in development. PRX's Chief Executive Officer is the President, Chief
Executive Officer and a director of HighRapids. A director of the Company owns
shares of HighRapids' common stock (less than 1%) that were acquired prior to
the commitment of the Company discussed above.

NOTE 18 - UNAUDITED SELECTED QUARTERLY FINANCIAL DATA:

Selected quarterly financial data for fiscal years 2002 and 2001 is
unaudited and included in the table below.

FISCAL QUARTERS ENDED
---------------------------------------------------------
MARCH 31, 2002 JUNE 30, 2002 SEPT. 30, 2002 DEC. 31, 2002
-------------- ------------- -------------- -------------

Net sales $80,508 $101,755 $100,237 $99,103
Gross margin 39,275 46,415 46,952 50,648
Net income 20,760 20,380 19,643 18,671

Net income per common share
Basic $.65 $.64 $.60 $.57
Diluted $.63 $.62 $.59 $.56

FISCAL QUARTERS ENDED
---------------------------------------------------------
(*RESTATED) (*RESTATED) (*RESTATED)
MARCH 31, 2001 JUNE 30, 2001 SEPT. 29, 2001 DEC. 31, 2001
-------------- ------------- -------------- -------------

Net sales $25,704 $29,297 $127,924 $88,110
Gross margin 8,428 11,121 51,928 38,252
Net income 1,496 2,204 33,732 16,490
Net income per common share
Basic $.05 $.07 $1.09 $.52
Diluted $.05 $.07 $1.04 $.50

(REPORTED) (REPORTED) (REPORTED)
Net sales $25,704 $29,297 $99,724
Gross margin 8,428 11,121 41.563
Net income 1,677 2,385 26,850
Net income per common share
Basic $.06 $.08 $.87
Diluted $.05 $.08 $.83

Certain items in the selected quarterly financial data for fiscal year 2001
were restated to reflect the quarterly amortization and corresponding tax effect
of the value of the exclusive United States distribution rights obtained by the
Company through a strategic alliance with Merck KGaA as described in the
"Restatement of Results" footnote. In addition, certain items were restated to
reflect the reversal of a price protection reserve originally recorded in the
third quarter of 2001 related to the Company's fluoxetine (Prozac(R)) product
launch in August 2001. The Company had intended to record the effect of the
total projected price protection reserve anticipated upon competition entering
the market at the end of the Company's exclusivity period in late-January 2002
over the entire exclusivity period based on its net sales in each period.
However, because the total projected price protection reserve was based on
customer inventories at the end of the exclusivity period, the accounting
treatment requires that the reserve be recorded only in the periods in which the
remaining inventory would have been sold (see "-Accounts Receivable"). As a
result, the Company restated its numbers for the third quarter 2001 (reversing
the reserve in such quarter) and recorded the entire price protection reserve in
the fourth quarter of 2001 and January 2002. The restatement related to price
protection resulted in increases in net sales of $28,200, gross margin of
$10,365 and net income of $6,882 in the third quarter of 2001.

F-27

NOTE 19 - SUBSEQUENT EVENTS

In February 2003, Three Rivers Pharmaceuticals reached a settlement with
Schering Corporation ("Schering") in the patent litigation case involving
Rebetol(R) brand ribavirin, which is indicated for the treatment of chronic
hepatitis. Under the terms of the settlement, Schering has provided a
non-exclusive license to Three Rivers for all its U.S. patents relating to this
product. In return for this license, Three Rivers has agreed to pay Schering a
reasonable royalty based upon net sales of Three Rivers' and Par's generic
ribavirin product. The parties were in litigation in the U.S. District Court for
the Western District of Pennsylvania. The agreement is subject to the Court's
dismissal of the relevant lawsuits.

Three Rivers is also currently in litigation with Ribapharm, Inc. regarding
certain patents that Ribapharm asserts relate to ribavirin. A trial date in that
litigation is scheduled for May 2003. Three Rivers does not have tentative
approval from the FDA at this time.

F-28

SCHEDULE II
PHARMACEUTICAL RESOURCES, INC.

SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)

Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at charged to Balance at
beginning costs and end of
Description of period expenses Deductions period
----------- ----------- ---------- ---------- ----------

Allowance for doubtful accounts:

Year ended December 31, 2002 $998 $547 $389(a) $1,156

Year ended December 31, 2001 $914 $84 - $998

Year ended December 31, 2000 $773 $141 - $914

Allowance for returns and price adjustments:

Year ended December 31, 2002 $46,170 $113,281 $124,350(b) $35,101

Year ended December 31, 2001 $3,040 $79,239 $36,109(b) $46,170

Year ended December 31, 2000 $1,786 $9,801 $8,547(b) $3,040

(a) Write-off of uncollectible accounts.
(b) Returns and allowances charged against allowance provided thereof.

F-29

EXHIBIT 21

Pharmaceutical Resources, Inc.
------------------------------

List of Subsidiaries
--------------------

Percentage of Voting
Securities Owned
Jurisdiction of by Its
Entity Organization Immediate Parent
------ ------------ -------------------

Par Pharmaceutical, Inc. New Jersey 100%
PRX Pharmaceuticals, Inc. Delaware 100%
PRI-Research, Inc. Delaware 100%
Par Pharma Group, Ltd. Delaware 100%
Nutriceutical Resources, Inc. New York 100%
ParCare Ltd. New York 100%
Quad Pharmaceuticals Inc. Indiana 100%
Israel Pharmaceutical Resources LP Israel 99%
FineTech Ltd. Israel 100%

EX-99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Exhibit 99.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Pharmaceutical Resources, Inc. (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Kenneth
I. Sawyer, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.

/s/ Kenneth I. Sawyer
- ----------------------------
Kenneth I. Sawyer
Chief Executive Officer
March 28, 2003

EX-99.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER

Exhibit 99.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Pharmaceutical Resources, Inc. (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Dennis
J. O'Connor, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.

/s/ Dennis J. O'Connor
- ------------------------
Dennis J. O'Connor
Chief Financial Officer
March 28, 2003