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

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

                                  FORM 10-K/A
                               (Amendment No. 1)

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
   For The Fiscal Year Ended December 31, 2001

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934
   For The Transition Period From      To

                        Commission File Number 0-31781

                    American Pharmaceutical Partners, Inc.
            (Exact name of registrant as specified in its charter)

<TABLE>
 <S>                                      <C>
                 Delaware                              68-0389419
         (State of Incorporation)         (I.R.S. Employer Identification No.)
  11777 San Vicente Boulevard, Suite 550
          Los Angeles, CA 90049                      (310) 826-8505
 (Address of principal executive offices,   (Registrant's telephone number,
           including zip code)                    including area code)
</TABLE>

       Securities registered pursuant to Section 12(b) of the Act: None

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

                   Common Stock, Par Value $0.001 Per Share

                               (Title Of Class)

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

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the 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. [_]

   As of March 25, 2002, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $298,228,000 based upon the
average of the high and low prices of the Common Stock as reported on The
Nasdaq National Market on such date.

   As of March 25, 2002, the Registrant had 49,735,063 shares of Common Stock
outstanding.

================================================================================

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                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

                                  FORM 10-K/A
                  For the Fiscal Year Ended December 31, 2001

                               TABLE OF CONTENTS

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<C>      <S>                                                                                   <C>
                                            PART I

Item 1.  Business.............................................................................   3
Item 2.  Properties...........................................................................  23
Item 3.  Legal Proceedings....................................................................  24
Item 4.  Submission of Matters to a Vote of Security Holders..................................  24

                                           PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters................  25
Item 6.  Selected Financial Data..............................................................  26
Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations  28
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...........................  34
Item 8.  Financial Statements and Supplementary Data..........................................  34
Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.  59

                                           PART III

Item 10. Directors and Executive Officers of the Registrant...................................  60
Item 11. Executive Compensation...............................................................  61
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................  63
Item 13. Certain Relationships and Related Transactions.......................................  64

                                           PART IV

Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.......................  65
         Signatures...........................................................................  67
</TABLE>

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                                    PART I

Item 1.  Business

Note Regarding Forward-looking Statements

   Statements contained in this Annual Report on Form 10-K, which are not
historical facts, are forward-looking statements, as the term is defined in the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements, whether expressed or implied, are subject to risks and
uncertainties which can cause actual results to differ materially from those
currently anticipated, due to a number of factors, which include, but are not
limited to:

  .   the impact of competitive products and pricing;

  .   the availability and pricing of raw materials and components used in the
      manufacture of our pharmaceutical products;

  .   the ability to successfully manufacture products in an efficient,
      time-sensitive and cost effective manner;

  .   the acceptance of and demand for our existing and new pharmaceutical
      products;

  .   the impact of laws and regulations, and their interpretations, which
      govern or affect the pharmaceutical industry;

  .   the impact of patents and other proprietary rights licensed or owned by
      us, our competitors and other third parties;

  .   the difficulty in predicting the timing or outcome of product development
      efforts and regulatory approvals;

  .   the actual results achieved in the Phase III clinical trials for ABI-007;

  .   the timing of the completion of Phase III trials for ABI-007;

  .   licenses or acquisitions; and

  .   relationships and agreements with other parties.

   Forward-looking statements also include the assumptions underlying or
relating to any of the foregoing or other such statements. When used in this
report, the words "may," "will," "should," "could," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "continue", and similar
expressions are generally intended to identify forward-looking statements.

   Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date hereof. We
undertake no obligation to revise or publicly release the results of any
revision to these forward-looking statements. Readers should carefully review
the factors described in BUSINESS: FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS and other documents we file from time to time with the Securities
and Exchange Commission, including the Quarterly Reports on Form 10-Q to be
filed by us in fiscal year 2002.

Overview

   We are a specialty pharmaceutical company that develops, manufactures and
markets injectable pharmaceutical products. We currently produce over 100
generic injectable pharmaceutical products in more than 300 dosages and
formulations. Our primary focus is in the oncology, anti-infective and critical
care markets, and we believe that we offer one of the most comprehensive
generic injectable product portfolios in the pharmaceutical industry across
these therapeutic categories. We manufacture products in all three of the three

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basic forms in which injectable products are sold: liquid, powder and
lyophilized, or freeze-dried. In November 2001, we obtained the exclusive North
American rights to manufacture and sell ABI-007, a proprietary injectable
oncology product candidate that is a patented formulation of paclitaxel.
Paclitaxel is the active ingredient in Taxol, the world's top selling cancer
drug. A multi-center Phase III clinical trial has commenced for ABI-007 for the
treatment of metastatic breast cancer, or breast cancer that has spread to
other parts of the body.

   Our products are generally used in hospitals, long-term care facilities,
alternate care sites, and clinics. Unlike the retail pharmacy market for oral
products, the injectable pharmaceuticals marketplace is largely made up of end
users who have relationships with group purchasing organizations, or GPOs. GPOs
enter into collective purchasing agreements with pharmaceutical suppliers for
products in an effort to secure favorable drug pricing on behalf of their
members.

   We were incorporated in Delaware in 2001, as successor to a California
corporation formed in 1996.

Our Strategy

   Our goal is to become an industry leader in the development, manufacture,
sale and distribution of injectable pharmaceutical products. The key elements
of our strategy include:

  .   Continue To Focus On Higher-Margin Opportunities.  We believe there
      continue to be significant opportunities for growth driven by an
      increasing number of patent expirations for proprietary injectable
      pharmaceutical products. We will continue to target products where
      additional generic competition is likely to be limited because of
      complexities in product development, the need for specialized
      manufacturing capabilities and the need for raw materials that are
      difficult to obtain. In particular, we will continue to focus on product
      opportunities in the oncology, anti-infectives and critical care markets,
      where we can utilize the manufacturing facilities that we already have in
      place.

  .   Continue To Focus On GPO Relationships.  We will continue to focus on
      maintaining strong relationships with the leading GPOs in the United
      States. Much of our growth to date has resulted from increased
      penetration of our existing products into hospitals that are members of
      the largest GPOs. These relationships are key to ensuring a market for
      the products we develop and thus enable us to invest aggressively in new
      product development.

  .   Pursue Proprietary Pharmaceutical Product Opportunities in Our Focus
      Therapeutic Areas.  We intend to acquire or license rights to proprietary
      injectable pharmaceutical products in our focus therapeutic areas,
      allowing us to enhance our market presence and visibility, as well as our
      revenue growth and profitability. We intend to take advantage of our
      manufacturing and marketing resources in oncology, anti-infectives and
      critical care by entering into development and marketing collaborations
      with companies that are developing proprietary products.

  .   Complement Internal Growth With Strategic Acquisitions.  We believe
      opportunities exist for us to enhance our competitive position by
      acquiring companies with complementary products and technologies. We also
      intend to invest in or acquire additional manufacturing capacity to meet
      projected increased demand for our current and future products.

Our Products

  Injectable Oncology Products

   We presently market eleven injectable oncology products. According to IMS
Health, Inc., a market research firm, we were the market leader for four of
these products in terms of units sold for 2001, selling more units than the
innovator and all generic competitors. Our injectable oncology products
generated net sales of approximately $31.2 million in 2001, which represented
approximately 16% of our total net sales for that year.

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   Our oncology products include:

   Cisplatin.  Cisplatin is a chemotherapy agent used alone or in combination
with other agents to treat metastatic testicular or ovarian cancer, Hodgkin's
disease, non-Hodgkin's lymphoma, brain tumors, cancer of the nervous system and
head, neck, bone, cervical, lung and bladder cancer. Bristol-Myers Squibb
originally marketed cisplatin under the brand name Platinol. Together with
several other companies, we prevailed in a lawsuit invalidating Bristol-Myers'
patent covering this product in October 1999 and the FDA granted us 180 days of
market exclusivity when we launched cisplatin in November 1999. We are
currently one of five producers of cisplatin competing for market share.
According to IMS, we were the market leader for cisplatin in terms of units
sold in 2001.

   Dacarbazine.  Dacarbazine is a chemotherapy agent used alone or in
combination with other agents to treat Hodgkin's disease, cancer of the nervous
system, soft-tissue sarcoma and malignant skin, islet cell and thyroid cancer.
Bayer AG originally marketed dacarbazine under the brand name DTIC-Dome.
According to IMS, we sold the largest number of units of dacarbazine in 2001 of
any manufacturer.

   Mesna.  Mesna is used to treat the side effects associated, and is currently
sold together with the chemotherapy drug ifosfamide. Bristol-Myers originally
marketed mesna under the brand name Mesnex. We currently are one of only two
generic companies who have received approval from the FDA to sell mesna. We
launched this product in May 2001.

Injectable Anti-infective Products

   We market 15 injectable anti-infective products. According to IMS, we were
the market leader for five of our injectable anti-infective products in terms
of units sold during 2001. Our injectable anti-infective products generated net
sales of approximately $54.7 million in 2001, which represented approximately
28% of our total net sales for that year.

   We believe we offer one of the most comprehensive portfolios of injectable
anti-infective products, including six different classes of antibiotics. We own
and operate one of only two dedicated manufacturing facilities in the United
States for generic cephalosporins. We currently are the only generic competitor
offering first-generation, second-generation and third generation
cephalosporins. Dedicated facilities are required by the FDA for the
manufacture of cephalosporins. According to IMS, the markets for second and
third generation cephalosporins were approximately $100 million and $800
million, respectively, in 2001.

   Our anti-infective products include:

   Vancomycin.  Vancomycin is an antibiotic used to treat some types of Staph
or Strep infections, particularly in-patients who are allergic to penicillins
or cephalosporins, and other infections. Eli Lilly originally marketed
vancomycin under the brand name Vancocin HCL. We currently are one of five
competitors for injectable vancomycin. We are the only generic competitor to
offer a 10-gram formulation of this antibiotic. According to IMS, we sold the
second largest number of units of vancomycin in 2001.

   Doxycycline.  Doxycycline is an antibiotic used to treat anthrax, Rocky
Mountain Spotted Fever, typhus and mycoplasma pneumonia. Pfizer, Inc.
originally marketed doxycycline under the brand name Vibramycin. We currently
manufacture and distribute nearly all of the injectable doxycycline sold in
North America.

   Cefotaxime.  Cefotaxime is a broad spectrum antibiotic in the
third-generation cephalosporin class of antibiotics. It is used to treat
intra-abdominal infections such as peritonitis, central nervous system
infections including meningitis, lower respiratory tract, genitourinary, and
gynecological infections, bacteremia and septicemia, and infections of the
skin, bone and joints. Abbott Laboratories originally marketed this drug under

                                      5

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the brand name Claforan. We initially introduced cefotaxime on a limited basis
in September 2001, and conducted a full launch of the product in February 2002.

   Gentamicin.  Gentamicin is an antibiotic used to treat endocarditis,
septicemia and bacterial, bone, respiratory tract, soft tissue, urinary tract
and other infections. Schering-Plough originally marketed gentamicin under the
brand name Garamycin. We currently are one of six competitors for gentamicin.
According to IMS, we sold the second largest number of units of injectable
gentamicin during 2001.

  Injectable Critical Care Products

   We market 62 injectable critical care products. According to IMS, we were
the market leader for seven of our injectable critical care products in terms
of units sold in 2001. Our injectable critical care products generated net
sales of approximately $100.4 million in 2001, which represented approximately
52% of our total net sales for that year.

   Our critical care products include:

   Heparin.  Injectable heparin is a blood thinner used to prevent and treat
blood clotting, especially in patients during and after surgery. We manufacture
one of the most comprehensive lines of injectable heparin. We currently are one
of seven competitors for injectable heparin and are one of only two companies
currently selling beef lung heparin. According to IMS, we sold the third
largest number of units of injectable heparin during 2001.

   Oxytocin.  Oxytocin is used to induce labor at term and control postpartum
bleeding. Wyeth-Ayerst originally marketed oxytocin under the brand name
Pitocin. We are currently the only manufacturer of generic oxytocin. According
to IMS, we were the market leader for oxytocin in terms of units sold in 2001.

   Haloperidol Decanoate.  Haloperidol is an antipsychotic agent used to treat
psychoses, Tourette's Syndrome and severe behavioral problems in children.
Ortho-McNeil Pharmaceuticals originally marketed haloperidol decanoate under
the brand name Haldol Decanoate.

Generic Injectable Pharmaceuticals Under Development

   Since our acquisition of the Fujisawa generic business in 1998, which
included seven abbreviated new drug applications, or ANDAs, that were pending
with the FDA, we have filed a total of 26 ANDAs for injectable product
candidates with the FDA and received a total of 26 new generic product
approvals. In the year ended December 31, 2001, we received 13 ANDA approvals
and had an additional 14 ANDAs pending with the FDA. We have over 50 product
candidates under development, including 17 oncology, 18 anti-infective and 17
critical care products.

Proprietary Injectable Product

  ABI-007, a Proprietary Injectable Oncology Product Candidate

   We have licensed ABI-007, a patented formulation of paclitaxel, from
American BioScience, Inc. (ABI). Paclitaxel is the active ingredient in Taxol,
the world's largest selling cancer drug marketed by Bristol-Myers. A
multi-center Phase III clinical trial has commenced for ABI-007 for the
treatment of metastatic breast cancer.

   Many oncology drugs, including paclitaxel, are water insoluble and thus
often require toxic solvents to formulate the drugs for injection. Taxol and
its generic equivalents contain the toxic solvent Cremaphor. The toxicity of
Cremaphor limits the dose of Taxol that can be administered, potentially
limiting the efficacy of the drug. Furthermore, patients receiving Taxol
require pre-medication with steroids to prevent the toxic side effects
associated with Cremaphor and, in some cases, require a growth factor such as
G-CSF to overcome low white

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blood cell levels resulting from chemotherapy. The FDA-approved dose of Taxol
is 135-175 mg/m/2/, administered over three to 24 hours using specialized
intravenous tubing. Despite the difficulties associated with administration and
serious dose-limiting toxicities, it is estimated that approximately $1.5
billion of Taxol and its generic equivalents were sold in 2001.

   ABI-007 utilizes a proprietary nanoparticle drug delivery technology to
encapsulate paclitaxel in albumin, a human protein found in blood. Because
ABI-007 is not formulated with Cremaphor, we believe ABI-007 provides several
advantages over Taxol and its generic equivalents, including:

  .   avoiding the need for steroid pre-medication

  .   reducing or eliminating the need for G-CSF support

  .   allowing for more rapid infusion, using standard intravenous tubing

   Three Phase I studies to determine the maximum tolerated dose of ABI-007
have been completed and have found that ABI-007 can be tolerated at much higher
doses than Taxol without the need for steroid pre-medication.

   Enrollment has been completed for two multi-center Phase II trials, in which
ABI-007 was administered at the current maximum FDA-approved dose of Taxol (175
mg/m/2) and at a much higher dose of 300 mg/m/2 over 30 minutes as
mono-therapy, without steroid pre-medication, in patients with metastatic
breast cancer. Data from these Phase II trials will be presented at the
American Society of Clinical Oncology (ASCO) annual meeting in May 2002.

   A randomized Phase III trial in breast cancer patients to directly compare
ABI-007 with Taxol has been initiated and a number of treatment centers have
begun patient enrollment. The actual results achieved in the Phase III clinical
trials may not be reflective of the Phase I or Phase II clinical trial data, or
may fail to demonstrate sufficient safety and efficacy required to obtain the
necessary regulatory approvals or to warrant further product development.

   In November 2001, we signed a license agreement with American BioScience
under which we acquired the exclusive rights to market and sell ABI-007 in
North America, and have paid the up-front licensing fees under that agreement.
This license is perpetual. American BioScience is responsible for substantially
all costs associated with the development of ABI-007, except that we have
agreed to provide up to $2 million of ABI-007 for use in clinical trials. The
cost of the clinical product was charged to research and development expense in
the year ended December 31, 2001. We are required to make milestone payments of
up to (a) $60 million for indications relating to breast, ovarian and lung
cancers and (b) $32.5 million for indications relating to prostate cancer and
other indications agreed upon between American BioScience and us. We also may
be required to make additional milestone payments, of up to an aggregate of
$110 million, based upon the achievement of particular annual sales levels.
Profits from any sales of ABI-007 shall be shared equally after deducting costs
of goods sold, selling expenses and other appropriate deductions. All costs and
expenses related to product recalls and product liability claims generally will
be split equally between American BioScience and us.

   In November 2001, we also entered into a manufacturing agreement with
American BioScience under which we agreed to manufacture ABI-007 for American
BioScience and its licensees for sales outside North America during the term of
the agreement. Under this agreement, we were granted the exclusive right to
manufacture ABI-007 for sales in North America for a period of three years and
the non-exclusive right to manufacture ABI-007 for sales (a) outside North
America and (b) in North America after expiration of the three year exclusivity
period. We will charge American BioScience and its licensees a customary margin
on our manufacturing costs based on whether the product will be used for
clinical trials or commercial sale. The initial term of this agreement is ten
years and may be extended for successive two-year terms by American BioScience.

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Research and Development

   We have approximately 57 employees dedicated to product development,
including more than 20 employees with Ph.D.s, who have expertise in areas such
as pharmaceutical formulation, analytical chemistry and drug delivery. We
operate a research and development facility in a building of approximately
140,000 square feet that we own in Melrose Park, Illinois.

   We have made, and will continue to make, substantial investment in research
and development. Research and development costs for the fiscal year ended
December 31, 2001 were approximately $14.0 million, including stock-based
compensation.

   When developing new products, we consider a variety of factors, including:

  .   potential pricing and gross margins

  .   existing and potential market size

  .   our manufacturing capabilities and access to raw materials

  .   potential development and competitive challenges

  .   whether these products complement our existing products and the
      opportunity to leverage these products with the development of additional
      products

Sales and Marketing

   We employ a sales force comprised of 38 field sales and national accounts
professionals, supported by our customer service and sales support groups. Our
representatives have substantial injectable pharmaceutical sales experience.

   We sell our products primarily to hospitals, long-term care facilities,
alternate care sites, clinics and doctors who administer injectable products in
their offices. Most purchases by these buyers are made through arrangements
with GPOs, which negotiate collective purchasing agreements on behalf of their
members, or through specialty distributors, which specialize in particular
therapeutic categories such as oncology. We have relationships with all of the
major GPOs in the United States, which we believe collectively account for over
95% of all hospital-based pharmaceutical purchases in the United States. We
also have relationships with specialty distributors. Through these agreements,
we believe we have access to nearly 100% of the buyers of injectable products
in the United States.

   We currently derive, and expect to continue to derive, a large percentage of
our revenue from customers that have relationships with a small number of GPOs.
Currently, less than ten GPOs control a large majority of sales to hospital
customers. We have purchasing arrangements with the major GPOs in the United
States, including AmeriNet, Inc., Broadlane Healthcare Corporation, Consorta,
Inc., MedAssets Inc., Novation, LLC, Owen Healthcare, Inc., PACT, LLC and
Premier Purchasing Partners, LP. In order to maintain these relationships, we
believe we need to be reliable in terms of supply, offer a broad product line,
remain price competitive, comply with FDA regulations and provide high-quality
products. Most of our GPO agreements may be terminated on 60 or 90 days' notice.

   Our international sales, outside U.S. and Canada, are approximately 1% of
our total net sales.

Competition

   We face competition from major, brand name pharmaceutical companies as well
as generic manufacturers such as Bedford Laboratories, Elkin-Sinn Laboratories,
Sicor Inc. and Teva Pharmaceutical Industries Ltd. We have experienced
additional competition from brand name competitors that have entered the generic

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pharmaceutical industry by creating generic subsidiaries, purchasing generic
companies or licensing their products prior to or as their patents expire. Many
pharmaceutical companies are developing, or have developed and are marketing,
alternative formulations of paclitaxel, generic versions of Taxol and other
cancer therapies that may compete directly or indirectly with ABI-007.

   Revenue and gross profit derived from sales of generic pharmaceutical
products tend to follow a pattern based on regulatory and competitive factors.
As patents for brand name products and related exclusivity periods expire, the
first generic pharmaceuticals manufacturer to receive regulatory approval for
generic versions of these products is generally able to achieve significant
market penetration and higher margins. As competing generic manufacturers
receive regulatory approvals on similar products, market share, revenue and
gross profit typically decline. The level of market share, revenue and gross
profit attributable to a particular generic pharmaceutical product is normally
related to the number of competitors in that product's market and the timing of
that product's regulatory approval and launch, in relation to competing
approvals and launches. We must continue to develop and introduce new products
in a timely and cost-effective manner and identify niche products with
significant barriers to entry in order to maintain our revenue and gross
margins.

Regulatory Considerations

   Proprietary and generic prescription pharmaceutical products are subject to
extensive pre- and post-market regulation by the FDA, including regulations
that govern the testing, manufacturing, safety, efficacy, labeling, storage,
record keeping, advertising, and promotion of the products under the Federal
Food Drug and Cosmetic Act and the Public Health Services Act, and by
comparable agencies in foreign countries. FDA approval is required before any
dosage form of any new unapproved drug, including a generic equivalent of a
previously approved drug, can be marketed in the United States. All
applications for FDA approval must contain information relating to
pharmaceutical formulation, stability, manufacturing, processing, packaging,
labeling and quality control.

Generic Drug Approval

   The Drug Price Competition and Patent Term Restoration Act of 1984, or the
Hatch-Waxman Act, established abbreviated FDA approval procedures for those
proprietary drugs that are no longer protected by patents and which are shown
to be equivalent to previously approved proprietary drugs. Approval to
manufacture these drugs is obtained by filing an abbreviated new drug
application, or an ANDA. An ANDA is a comprehensive submission that must
contain data and information pertaining to the active pharmaceutical
ingredient, drug product formulation, specifications and stability of the
generic drug, as well as analytical methods, manufacturing process validation
data and quality control procedures. As a substitute for clinical studies, the
FDA may require data indicating that the ANDA drug formulation is equivalent to
a previously approved proprietary drug. In order to obtain an ANDA approval of
strength or dosage form that differs from the referenced brand name drug, an
applicant must file and have granted an ANDA Suitability Petition. A product is
not eligible for ANDA approval if it is not determined by the FDA to be
equivalent to the referenced brand name drug or if it is intended for a
different use. However, such a product might be approved under a New Drug
Application, or an NDA, with supportive data from clinical trials.

   One advantage of the ANDA approval process is that an ANDA applicant
generally can rely upon equivalence data in lieu of conducting pre-clinical
testing and clinical trials to demonstrate that a product is safe and effective
for its intended use. We generally file ANDAs to obtain approval to manufacture
and market our generic products. No assurance can be given that ANDAs submitted
for our products will receive FDA approval on a timely basis, if at all.

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New Drug Approval

   The process required by the FDA before a new drug may be marketed in the
United States generally involves:

  .   completion of pre-clinical laboratory and animal testing

  .   submission of an investigational new drug application, or IND, which must
      become effective before clinical trials may begin

  .   performance of adequate and well-controlled human trials to establish the
      safety and efficacy of the proposed drug product's intended use

  .   submission to and approval by the FDA of an NDA

   Clinical trials are typically conducted in three sequential phases that may
overlap. These phases generally include:

  .   Phase I during which the drug is introduced into healthy human subjects
      or, on occasion, patients, and generally is tested for safety, stability,
      dose tolerance and metabolism

  .   Phase II during which the drug is introduced into a limited patient
      population to determine the efficacy of the product in specific targeted
      diseases, to determine dosage tolerance and optimal dosage and to
      identify possible adverse effects and safety risks

  .   Phase III during which the clinical trial is expanded to a more diverse
      patient group in geographically dispersed trial sites to further evaluate
      clinical efficacy, optimal dosage and safety

   The drug sponsor, the FDA or the Institutional Review Board at each
institution at which a clinical trial is being performed may suspend a clinical
trial at any time for various reasons, including a belief that the subjects are
being exposed to an unacceptable health risk.

   The results of product development, preclinical animal studies and human
studies are submitted to the FDA as part of the NDA. The NDA also must contain
extensive manufacturing information. The FDA may approve or disapprove the NDA
if applicable FDA regulatory criteria are not satisfied or it may require
additional clinical data. Once approved, the FDA may withdraw the product
approval if compliance with pre- and post-market regulatory standards are not
maintained or if problems occur after the product reaches the marketplace. In
addition, the FDA may require post-marketing studies to monitor the effect of
approved products and may limit further marketing of the product based on the
results of these post-marketing studies. The FDA has broad post-market
regulatory and enforcement powers, including the ability to levy fines and
civil penalties, suspend or delay issuance of approvals, seize or recall
products, and withdraw approvals.

   Satisfaction of FDA pre-market approval requirements typically takes several
years and the actual time required may vary substantially based upon the type,
complexity and novelty of the product or disease. Government regulation may
delay or prevent marketing of potential products for a considerable period of
time and impose costly procedures upon a manufacturer's activities. Success in
early stage clinical trials does not assure success in later stage clinical
trials. Data obtained from clinical activities is not always conclusive and may
be susceptible to varying interpretations that could delay, limit or prevent
regulatory approval. Even if a product receives regulatory approval, later
discovery of previously unknown problems with a product may result in
restrictions on the product or even complete withdrawal of the product from the
market.

Manufacturing

   Our manufacturing facilities are located in Melrose Park, Illinois and Grand
Island, New York. These facilities, which include dedicated cephalosporin
powder filling and oncolytic manufacturing suites, have in the aggregate
approximately 277,000 square feet of manufacturing, packaging, laboratory,
office and warehouse space.

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   We can produce a broad range of dosage formulations, including lyophilized
products, liquids, both aseptically filled and terminally sterilized, and
powders. We currently produce approximately 200 million vials per year.

   In addition to manufacturing, we have fully integrated manufacturing support
systems, including quality assurance, quality control, regulatory affairs and
inventory control. These support systems enable us to maintain high standards
of quality for our products and simultaneously deliver reliable services and
goods to our customers on a timely basis.

   We are required to comply with the applicable FDA manufacturing requirements
contained in the FDA's current Good Manufacturing Practice, or GMP,
regulations. GMP regulations require quality control and quality assurance as
well as the corresponding maintenance of records and documentation. Our
manufacturing facilities must meet GMP requirements in order that we can
manufacture our products. We are subject to the periodic inspection of our
facilities, procedures and operations and/or the testing of our products by the
FDA, the Drug Enforcement Administration and other authorities to assess our
compliance with applicable regulations.

   Failure to comply with the statutory and regulatory requirements subjects
the manufacturer to possible legal or regulatory action, including the seizure
or recall of products, injunctions, consent decrees placing significant
restrictions on or suspending manufacturing operations, and civil and criminal
penalties. Adverse experiences with the product must be reported to the FDA and
could result in the imposition of market restriction through labeling changes
or in product removal. Product approvals may be withdrawn if compliance with
regulatory requirements is not maintained or if problems concerning safety or
efficacy of the product occur following approval.

Raw Materials

   The manufacture of our products requires raw materials and other components
that must meet stringent FDA requirements. Some of these raw materials and
other components are currently available only from a limited number of sources.
Additionally, our regulatory approvals for each particular product denote the
raw materials and components, and the suppliers for such materials, we may use
for that product. Even when more than one supplier exists, we may elect to
list, and in some cases have only listed, one supplier in our applications with
the FDA. Any change in a supplier not previously approved must then be
submitted through a formal approval process with the FDA. From time to time, it
is necessary to maintain increased levels of certain raw materials due to the
anticipation of raw material shortages and decreases in competition.

Intellectual Property

   Our success depends on our ability to operate without infringing the patents
and proprietary rights of third parties. We cannot determine with certainty
whether patents or patent applications of other parties will materially affect
our ability to make, use or sell any products. A number of pharmaceutical
companies, biotechnology companies, universities and research institutions may
have filed patent applications or may have been granted patents that cover
aspects of our or our licensors' products, product candidates or other
technologies.

   We rely on trade secrets, unpatented proprietary know-how, continuing
technological innovation and, in some cases, patent protection to preserve our
competitive position. As of December 31, 2001, we owned three patents issued by
the U.S. Patent and Trademark Office covering some processes used in the
manufacture of our products. In addition, ABI-007 is covered by at least six
issued patents owned by American BioScience relating to composition of matter,
method of use and method of preparation.

   Intellectual property protection is highly uncertain and involves complex
legal and factual questions. Our patents and those for which we have or will
license rights may be challenged, invalidated, infringed or circumvented, and
the rights granted in those patents may not provide proprietary protection or
competitive
advantages to us. We and our licensors may not be able to develop patentable
products. Even if patent claims are

                                      11

<PAGE>

allowed, the claims may not issue, or in the event of issuance, may not be
sufficient to protect the technology owned by or licensed to us.

   Third-party patent applications and patents could reduce the coverage of the
patents licensed, or that may be licensed to or owned by us. If patents
containing competitive or conflicting claims are issued to third parties, we
may be enjoined from commercialization of products or be required to obtain
licenses to these patents or to develop or obtain alternative technology. In
addition, other parties may duplicate, design around or independently develop
similar or alternative technologies to ours or our licensors.

   Litigation may be necessary to enforce patents issued or licensed to us or
to determine the scope or validity of another party's proprietary rights. U.S.
Patent Office interference proceedings may be necessary if we and another party
both claim to have invented the same subject matter. We could incur substantial
costs and our management's attention would be diverted if:

  .   patent litigation is brought by third parties

  .   we participate in patent suits brought against or initiated by our
      licensors

  .   we initiate similar suits

  .   we participate in an interference proceeding

   In addition, we may not prevail in any of these actions or proceedings.

Employees

   As of December 31, 2001, we had a total of 940 full-time employees, of which
57 were engaged in research and development, 690 were in manufacturing, 53 were
in sales and marketing and 140 were in administration and finance. None of our
employees are represented by a labor union or subject to a collective
bargaining agreement. We have not experienced any work stoppage and consider
our relations with our employees to be good.

Executive Officers

   The following table sets forth certain information with respect to the
executive officers and certain key employees of the Company as of March 29,
2002:

<TABLE>
<CAPTION>
 Name                      Age                    Position
 ----                      ---                    --------
 <S>                       <C> <C>

 Patrick Soon-Shiong, M.D. 49  President, Chief Executive Officer and Chairman

 Derek J. Brown........... 52  Co-Chief Operating Officer, Chief Financial
                                 Officer, Secretary and Director

 Jeffrey M. Yordon........ 53  Co-Chief Operating Officer and Director

 Jack C. Silhavy.......... 45  Vice President and General Counsel

 Mitchall Clark........... 41  Vice President of Regulatory Affairs

 Mia Igyarto.............. 48  Vice President of Human Resources

 Rajesh Kapoor, Ph.D...... 49  Vice President of Quality Assurance/
                                 Quality Control

 Thomas Shea.............. 63  Vice President of Corporate Marketing

 Dennis Szymanski, Ph.D... 51  Vice President of Product Development

 Sam Trippie.............. 61  Vice President of Manufacturing
</TABLE>

                                      12

<PAGE>

   The following is a brief description of the capacities in which each of the
above executive officers and key employees has served during the past five
years.

   Patrick Soon-shiong, M.D. has served as President of the Company since July
2001 and Chief Executive Officer and Chairman of the Board of Directors of the
Company since its inception in March 1996. From the Company's inception to
August 1997, Dr. Soon-Shiong served as its Chief Financial Officer. Since June
1994, Dr. Soon-Shiong has also served as president, chief financial officer and
a director of ABI. From June 1994 to June 1998, he served as chief executive
officer and chairman of the Board of Directors of VivoRx, Inc., a biotechnology
company. Dr. Soon-Shiong is named as a co-inventor on over 30 issued U.S.
patents. Dr. Soon-Shiong is a fellow of the American College of Surgeons and
the Royal College of Physicians and Surgeons of Canada. Dr. Soon-Shiong holds a
degree in Medicine from the University of the Witwatersrand and a M.S. in
Science from the University of British Columbia.

   Derek J. Brown has served as Co-Chief Operating Officer since June 2000 and
Chief Financial Officer, Secretary and a director of the Company since August
1997. From November 1995 to June 1998, he served as vice president of finance
and administration and as chief financial officer of VivoRx, Inc. Mr. Brown
serves as a director of ABI. Mr. Brown also has over eight years of public
accounting experience, having served as a manager at Price Waterhouse. Mr.
Brown is a Chartered Accountant and holds a Bachelor of Commerce in Economics
and an M.B.A. from the University of the Witwatersrand.

   Jeffrey M. Yordon has served as Co-Chief Operating Officer since June 2000
and a director of the Company since August 1997. From August 1997 to July 2001,
Mr. Yordon served as President of the Company. From January 1994 to June 1996,
Mr. Yordon served as president of Faulding Pharmaceuticals, Inc. Mr. Yordon has
also held various senior management positions at several pharmaceutical
companies, including Gensia, Inc. and LyphoMed, Inc. Mr. Yordon holds a B.S. in
Political Science and Business from Northern Illinois University.

   Jack C. Silhavy has served as Vice President and General Counsel of the
Company since September 1999. From October 1986 to August 1999, Mr. Silhavy
worked as an attorney for Monsanto Company, a diversified company with food
ingredient, pharmaceutical, agricultural and other businesses. He served as
assistant general counsel for Monsanto from May 1992 to August 1999. Mr.
Silhavy holds a B.A. in American Studies from the University of Notre Dame and
a J.D. from Loyola University of Chicago.

   Mitchall Clark has served as the Company's Vice President of Regulatory
Affairs since September 1998. From May 1997 to September 1998, Mr. Clark served
as senior director of regulatory affairs at VivoRx, Inc. Prior to that, he
served as senior director of regulatory affairs from April 1996 to May 1997 at
Faulding, Inc. Mr. Clark holds a B.Pharm. from the University of Nottingham,
United Kingdom.

   Mia Igyarto has served as the Company's Vice President of Human Resources
since July 2001. From March 1995 to July 2001, she served as vice president of
human resources for McWhorter Technologies, Inc., a specialty chemicals company
that was acquired by Eastman Chemical Company in July 2000. She holds a B.S. in
biology from Northern Illinois University and an M.B.A. from Northwestern
University, Kellogg School of Management.

   Rajesh Kapoor, Ph.D. has served as the Company's Vice President of Quality
Assurance/Quality Control since February 2000. From March 1997 to February
2000, Dr. Kapoor was a director of quality assurance/quality control at
American Home Products Corporation, a pharmaceutical company. From November
1995 to March 1997, he served as director of quality assurance/quality control
at Regeneron Pharmaceuticals, Inc., a biotechnology company. From September
1993 to November 1995, Dr. Kapoor served as a manager of quality assurance
development at Bayer Corporation, a pharmaceutical company. Dr. Kapoor holds a
B.S. in Biochemistry from the University of Essex in England, an M.B.A. from
Suffolk University and a Ph.D. in Biochemistry from the University of
Lancaster, England.

                                      13

<PAGE>

   Thomas Shea has served as the Company's Vice President of Corporate
Marketing since April 2000. From June 1998 to April 2000, he served as the
Company's Senior Director of Corporate Marketing. From October 1989 to June
1998, Mr. Shea served as senior director of corporate marketing at Fujisawa
Healthcare, Inc., a pharmaceutical company. Prior to that, he held various
positions at LyphoMed, Inc., a pharmaceutical company, including director of
national accounts and marketing and senior director of corporate marketing. Mr.
Shea holds an M.A. from Catholic University.

   Dennis Szymanski, Ph.D. has served as the Company's Vice President of
Product Development since February 1999. From December 1997 to January 1999,
Dr. Szymanski served as vice president of U.S. research and development at
Pharmascience Laboratories Inc., a pharmaceutical company. From April 1988 to
December 1997, Dr. Szymanski served as vice president of research and
development at Lemmon Company, a pharmaceutical company that was acquired by
Teva Pharmaceuticals USA in 1990. Prior to that, Dr. Szymanski held various
positions at Baxter International, a pharmaceutical company, and G.D. Searle
Pharmaceuticals. Dr. Szymanski holds a B.S. in Pharmacy and a Ph.D. in
Pharmaceutics from Wayne State University.

   Sam Trippie has served as the Company's Vice President of Manufacturing
since June 1998. From September 1992 to June 1998, Mr. Trippie served as vice
president of manufacturing at Fujisawa USA, Inc., a pharmaceutical company.
Prior to that, Mr. Trippie was vice president of manufacturing at Sanofi Animal
Health Ltd. and held various positions in quality assurance and manufacturing
at Baxter International. Mr. Trippie holds a B.S. in Microbiology from the
University of Southwest Louisiana.

Factors That May Affect Future Results Of Operations

Our markets are highly competitive and, if we are unable to compete
successfully, our revenue will decline and our business will be harmed.

   The markets for injectable pharmaceutical products are highly competitive,
rapidly changing and undergoing consolidation. Most of our products are generic
injectable versions of brand name products that are still being marketed by
proprietary pharmaceutical companies. The first company to market a generic
product is often initially able to achieve high sales, profitability and market
share with respect to that product. Prices, revenue and market size for a
product typically decline, however, as additional generic manufacturers enter
the market.

   We face competition from major, brand name pharmaceutical companies as well
as generic manufacturers such as Bedford Laboratories, Elkin-Sinn Laboratories,
Sicor Inc. and Teva Pharmaceutical Industries Ltd. Smaller companies may also
prove to be significant competitors, particularly through collaboration
arrangements with large and established companies. Many of these entities have
significantly greater research and development, financial, sales and marketing,
manufacturing, regulatory and other resources than us. As a result, they may be
able to devote greater resources to the development, manufacture, marketing or
sale of their products, receive greater resources and support for their
products, initiate or withstand substantial price competition, more readily
take advantage of acquisition or other opportunities, or otherwise more
successfully market their products.

   Any reduction in demand for our products could lead to a decrease in prices,
fewer customer orders, reduced revenues, reduced margins, reduced levels of
profitability, or loss of market share. These competitive pressures could
adversely affect our business and operating results.

If we are unable to develop and commercialize new products, our financial
condition will deteriorate.

   Revenue and profit margins for a pharmaceutical product generally decline as
new competitors enter the market. As a result, our future success will depend
on our ability to commercialize the product candidates we are

                                      14

<PAGE>

currently developing, as well as develop new products in a timely and
cost-effective manner. We have over 50 new product candidates under
development. Successful development and commercialization of our product
candidates will require significant investment in many areas, including
research and development and sales and marketing, and we may not realize a
return on those investments. In addition, development and commercialization of
new products are subject to inherent risks, including:

  .   failure to receive necessary regulatory approvals

  .   difficulty or impossibility of manufacture on a large scale

  .   prohibitive or uneconomical costs of marketing products

  .   failure to be developed or commercialized prior to the successful
      marketing of similar or superior products by third parties

  .   acceptance by customers

  .   infringement on the proprietary rights of third parties

  .   new patents for existing products may be granted, which could prevent the
      introduction of newly-developed products for additional periods of time

  .   the FDA may grant another manufacturer a 180-day period of marketing
      exclusivity under the Drug Price Competition and Patent Term Restoration
      Act of 1984, or the Hatch-Waxman Act, as patents or other exclusivity
      periods for brand name products expire

   The timely and continuous introduction of new products is critical to our
business. Our financial condition will deteriorate if we are unable to
successfully develop and commercialize new products.

If sales of our key products decline, our business may be adversely affected.

   Our top product for 2001, heparin, accounted for approximately 13.6% of our
net sales. Our top ten products accounted for approximately 58% of our net
sales in 2001. Our key products could lose market share or revenue by numerous
factors, many of which are beyond our control, including:

  .   lower prices offered on similar products by other manufacturers

  .   substitute or alternative products or therapies

  .   development by others of new pharmaceutical products or treatments that
      are more effective than our products

  .   entrance of new products to our markets

  .   interruptions in manufacturing or supply

  .   changes in the prescribing practices of physicians

  .   changes in third-party reimbursement practices

  .   migration of key customers to other manufacturers or sellers

   Any factor adversely affecting the sale of our key products may cause our
revenues to decline.

If we or our suppliers are unable to comply with ongoing and changing
regulatory standards, sales of our products could be delayed or prevented.

   Virtually all aspects of our business, including the development, testing,
manufacturing, processing, quality, safety, efficacy, packaging, labeling,
record-keeping, distribution, storage and advertising of our products and

                                      15

<PAGE>

disposal of waste products arising from these activities, are subject to
extensive regulation by federal, state and local governmental authorities in
the United States, including the U.S. Food and Drug Administration, or the FDA.
Our business is also subject to regulation in foreign countries. Compliance
with these regulations is costly and time-consuming.

   Our manufacturing facilities and procedures and those of our suppliers are
subject to ongoing regulation, including periodic inspection by the FDA and
foreign regulatory agencies. For example, manufacturers of pharmaceutical
products must comply with detailed regulations governing current good
manufacturing practices, including requirements relating to quality control and
quality assurance. We must spend funds, time and effort in the areas of
production, safety, quality control and quality assurance to ensure compliance
with these regulations. In the recent past, we have received warning letters
from the FDA regarding our Melrose Park, Illinois manufacturing facility. We
cannot assure you that our manufacturing facilities or those of our suppliers
will not be subject to regulatory action in the future.

   Our products generally must receive appropriate regulatory clearance before
they can be sold in a particular country, including the United States. We may
encounter delays in the introduction of a product as a result of, among other
things, insufficient or incomplete submissions to the FDA for approval of a
product, objections by another company with respect to our submissions for
approval, new patents by other companies, patent challenges by other companies,
and changes in regulatory policy during the period of product development or
during the regulatory approval process. The FDA has the authority to revoke
drug approvals previously granted and remove from the market previously
approved products for various reasons, including issues related to current good
manufacturing practices for that particular product or in general. We may be
subject from time to time to product recalls initiated by us or by the FDA and,
in the recent past, we have initiated several product recalls. Delays in
obtaining regulatory approvals, the revocation of a prior approval, or product
recalls could impose significant costs on us and adversely affect our ability
to generate revenue.

   Our inability or the inability of our suppliers to comply with applicable
FDA and other regulatory requirements can result in, among other things,
warning letters, fines, consent decrees restricting or suspending our
manufacturing operations, delay of approvals for new products, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
sales and criminal prosecution. Any of these or other regulatory actions could
materially adversely affect our business and financial condition.

The manufacture of our products is highly exacting and complex, and if we or
our suppliers encounter production problems, our business may suffer.

   All of the products we make are sterile, injectable drugs. We also purchase
such products from other companies. The manufacture of these products is highly
exacting and complex, due in part to strict regulatory requirements and
standards which govern both the manufacture of a particular product and the
manufacture of these types of products in general. Problems may arise during
their manufacture due to a variety of reasons including equipment malfunction,
failure to follow specific protocols and procedures, and environmental factors.
If problems arise during the production of a batch of product, that batch of
product may have to be discarded. This could, among other things, lead to loss
of the cost of raw materials and components used, lost revenue, time and
expense spent in investigating the cause, and, depending on the cause, similar
losses with respect to other batches or products. If such problems are not
discovered before the product is released to the market, recall costs may also
be incurred. To the extent we experience problems in the production of our
pharmaceutical products, this may be detrimental to our business, operating
results and reputation.

If we are unable to maintain our GPO or key customer arrangements, sales of our
products and revenue would decline.

   Almost all injectable pharmaceutical products are sold to customers through
arrangements with group purchasing organizations, or GPOs, and distributors.
The majority of hospitals contract with the GPO of their

                                      16

<PAGE>

choice for their purchasing needs. We currently derive, and expect to continue
to derive, a large percentage of our revenue from customers that have
relationships with a small number of GPOs. Currently, less than ten GPOs
control a large majority of sales to hospital customers. We have purchasing
arrangements with the major GPOs in the United States, including AmeriNet,
Inc., Broadlane Healthcare Corporation, Consorta, Inc., MedAssets Inc.,
Novation, LLC, Owen Healthcare, Inc., PACT, LLC and Premier Purchasing
Partners, LP. In order to maintain these relationships, we believe we need to
be reliable in terms of supply, offer a broad product line, remain price
competitive, comply with FDA regulations and provide high-quality products. The
GPOs with whom we have relationships also have relationships with other
manufacturers that sell competing products and may decide to contract for or
otherwise prefer products other than ours for one or more of these or other
reasons. Most of our GPO agreements may be terminated on 60 or 90 days notice.
If we are unable to maintain our arrangements with GPOs and key customers,
sales of our products and revenue would decline.

If ABI-007 is not developed into a successful commercial product, our future
profitability could be affected and we would be unable to recoup the
investments made to license this product candidate.

   In connection with our agreement to license ABI-007 from ABI, we have paid a
substantial upfront licensing fee, and committed to make milestone and royalty
payments. The inability to successfully develop and commercialize ABI-007 could
cause us to lose some or all of the investment we made to license this product
candidate.

   A multi-center Phase III clinical trial has commenced for ABI-007 for the
treatment of metastatic breast cancer, or breast cancer that has spread to
other parts of the body. American BioScience is responsible for conducting
clinical trials and obtaining necessary regulatory approvals prior to
commercialization of ABI-007. The amount and timing of resources American
BioScience devotes to develop ABI-007 is not within our control. Additionally,
any breach or termination of the ABI-007 license agreement could delay or stop
the commercialization of ABI-007.

   The results from pre-clinical studies and early clinical trials conducted to
date may not be predictive of results to be obtained in later clinical trials.
Clinical trials conducted for ABI-007 may not demonstrate sufficient safety and
efficacy to obtain the necessary regulatory approvals or a commercially viable
product may not result. If the results of Phase III clinical trials are not
satisfactory, American BioScience will need to conduct additional clinical
trials or cease developing ABI-007. The commencement and completion of clinical
trials may be delayed by many factors that are beyond our control, including:

  .   scheduling or other conflicts with participating clinicians and clinical
      institutions

  .   slower than anticipated patient enrollment

  .   difficulty in finding and retaining patients fitting the trial profile

  .   adverse events occurring during the clinical trials

   Even if regulatory approvals are obtained for, and we commercialize,
ABI-007, we may not generate sales sufficient to recoup the investments made to
license ABI-007. In addition, we would need to significantly expand our sales
force to market ABI-007 to oncologists. Further, a number of pharmaceutical
companies are working to develop alternative formulations of paclitaxel,
generic versions of Taxol and other cancer drugs and therapies, any of which
may compete directly or indirectly with ABI-007 and which might adversely
affect the commercial success of ABI-007.

                                      17

<PAGE>

Our strategy to license rights to or acquire and commercialize proprietary
products may not be successful, and we may never receive any return on our
investment in these product candidates.

   Because our research and development activities are not focused on the
development of proprietary products, we intend to license rights to or acquire
proprietary products from third parties. Other companies, including those with
substantially greater financial and sales and marketing resources, will compete
with us to license rights to or acquire these products. We may not be able to
license rights to or acquire these proprietary products on acceptable terms, if
at all. Even if we obtain rights to a pharmaceutical product and commit to
payment terms, including, in some cases, significant up-front license payments,
we may not be able to generate product sales sufficient to create a profit or
otherwise avoid a loss. ABI-007 is the only proprietary product that we have
licensed to date.

   A product candidate may fail to result in a commercially successful drug for
other reasons, including the possibility that the product candidate may:

  .   fail to receive necessary regulatory approvals

  .   be difficult or uneconomical to produce in commercial quantities

  .   be precluded from commercialization by proprietary rights of third parties

  .   fail to achieve market acceptance

   Our marketing strategy, distribution channels and levels of competition with
respect to any licensed or acquired proprietary product may be different than
those of our current products, and we may not be able to compete favorably in
any new proprietary product category.

We may not be able to successfully manage our growth, which could harm our
financial condition.

   Our financial success is dependent in part on our ability to successfully
manage our growth. We have had a history of rapid growth, and our operating
results will depend on our ability to accurately forecast revenues and control
expenses, as well as on a number of external factors. A decline in the growth
rate of our revenues without a corresponding and timely slowdown in expense
growth could have an adverse impact on our business, results of operations,
financial condition or cash flows.

We and some of our officers and directors, including our president and CEO,
have potential conflicts of interest with respect to our past and ongoing
relationships with american bioscience that we may not be able to resolve on
terms favorable to us.

   Conflicts of interest may arise between American BioScience and us in a
number of areas relating to our past and ongoing relationships, including:

  .   intellectual property matters, as well as licensing arrangements we have
      entered, or may enter, into with American BioScience

  .   employee retention and recruiting

  .   loans

  .   payment of dividends

  .   issuances of capital stock

  .   election of directors

  .   business opportunities that may be attractive to both American BioScience
      and us

                                      18

<PAGE>

   Some of our officers and directors may experience conflicts of interest with
respect to decisions involving business opportunities and similar matters that
may arise in the ordinary course of our business or the business of American
BioScience. Our President, Chief Executive Officer and Chairman of our Board of
Directors, Patrick Soon-Shiong, M.D., is also the president, chief financial
officer and a director of American BioScience. Dr. Soon-Shiong also
beneficially owns over 80% of the outstanding capital stock of American
BioScience. Derek J. Brown, our Co-Chief Operating Officer, Chief Financial
Officer and a member of our Board of Directors, is also a director of American
BioScience.

   We expect to resolve potential conflicts of interest on a case-by-case
basis, in the manner required by applicable law and customary business
practices. We entered into an agreement with American BioScience in July 2001
under which we acknowledged and agreed that Dr. Soon-Shiong and Mr. Brown may
devote time to the business of, receive remuneration from and present business
opportunities to American BioScience and that American BioScience's business
and operations may compete with us. This agreement does not ensure the
continued services of either Dr. Soon-Shiong or Mr. Brown. Resolutions of some
potential conflicts of interest are subject to review and approval by our Board
of Directors, including, in some instances, the independent and disinterested
non-executive directors and by our governance committee. We still may be
unable, however, to resolve some potential conflicts of interest with American
BioScience and Dr. Soon-Shiong and, even if we do, the resolution may be less
favorable than if we were dealing with an unaffiliated party because of their
controlling interest in our company. Nothing restricts American BioScience from
competing with us, and American BioScience is not obligated to engage in any
future business transactions with us or license any products it may develop in
the future to us.

We depend heavily on the principal members of our management and research and
development teams, the loss of whom could harm our business.

   We depend heavily on the principal members of our management and research
and development teams, including Dr. Patrick Soon-Shiong, our President and
Chief Executive Officer, Derek Brown, our Co-Chief Operating Officer and Chief
Financial Officer, and Jeffrey Yordon, our Co-Chief Operating Officer. We do
not have employment agreements with any of these individuals, and the loss of
the services of any one of them may significantly delay or prevent the
achievement of our product development or business objectives. Competition
among pharmaceutical and biotechnology companies for qualified employees is
intense, and the ability to attract and retain qualified individuals is
critical to our success. We may not be able to attract and retain these
individuals on acceptable terms or at all, and our inability to do so would
significantly harm our business and reputation.

We depend on third parties to supply raw materials and other components and may
not be able to obtain sufficient quantities of these materials, which will
limit our ability to manufacture our products on a timely basis and harm our
operating results.

   The manufacture of our products requires raw materials and other components
that must meet stringent FDA requirements. Some of these raw materials and
other components are currently available only from a limited number of sources.
Additionally, our regulatory approvals for each particular product denote the
raw materials and components, and the suppliers for such materials, we may use
for that product. Obtaining approval to change, substitute or add a raw
material or component, or the supplier of a raw material or component, can be
time consuming and expensive, as testing and regulatory approval is necessary.
In the past, we have experienced shortages in some of the raw materials and
components we purchase. If our suppliers are unable to deliver sufficient
quantities of these materials on a timely basis or we encounter difficulties in
our relationships with these suppliers, the manufacture and sale of our
products may be disrupted, and our business, operating results and reputation
could be adversely affected.

                                      19

<PAGE>

Other companies may claim that we infringe their intellectual property or
proprietary rights, which could cause us to incur significant expenses or
prevent us from selling our products.

   Our success depends in part on our ability to operate without infringing the
patents and proprietary rights of third parties. The manufacture, use and sale
of new products with conflicting patent rights have been subject to substantial
litigation in the pharmaceutical industry. These lawsuits relate to the
validity and infringement of patents or proprietary rights of third parties.
This is especially true for the sale of generic versions of products for which
the patent covering the brand name product is expiring, an area where
infringement litigation is prevalent. A number of pharmaceutical companies,
biotechnology companies, universities and research institutions may have filed
patent applications or may have been granted patents that cover aspects of our
products or our licensor's products, product candidates or other technologies.

   Future patents issued to third parties may contain claims that conflict with
our products. We are subject to infringement claims from time to time in the
ordinary course of our business, and third parties could assert infringement
claims against us in the future with respect to our current products, products
we may develop or products we may license. Litigation or interference
proceedings could force us to:

  .   stop or delay selling, manufacturing or using products that incorporate
      or are made using the challenged intellectual property

  .   pay damages

  .   enter into licensing or royalty agreements that may not be available on
      acceptable terms, if at all

   Any litigation or interference proceedings, regardless of their outcome,
would likely delay the regulatory approval process, be costly and require
significant time and attention of our key management and technical personnel.

Our inability to protect our intellectual property rights in the United States
and foreign countries could limit our ability to manufacture or sell our
products.

   We rely on trade secrets, unpatented proprietary know-how, continuing
technological innovation and, in some cases, patent protection to preserve our
competitive position. Our patents and those for which we have or will license
rights, including for ABI-007, may be challenged, invalidated, infringed or
circumvented, and the rights granted in those patents may not provide
proprietary protection or competitive advantages to us. We and our licensors
may not be able to develop patentable products. Even if patent claims are
allowed, the claims may not issue, or in the event of issuance, may not be
sufficient to protect the technology owned by or licensed to us. Third party
patents could reduce the coverage of the patents license, or that may be
license to or owned by us. If patents containing competitive or conflicting
claims are issued to third parties, we may be prevented from commercializing
the products covered by such patents, or may be required to obtain or develop
alternate technology. In addition, other parties may duplicate, design around
or independently develop similar or alternative technologies.

   We may not be able to prevent third parties from using our intellectual
property. We generally control and limit access to, and the distribution of,
our product documentation and other proprietary information. Despite our
efforts to protect this proprietary information, however, unauthorized parties
may obtain and use information that we regard as proprietary. Other parties may
independently develop know-how or obtain access to our technologies.

   The laws of some foreign countries do not protect proprietary information to
the same extent as the laws of the United States, and many companies have
encountered significant problems and costs in protecting their proprietary
information in these foreign countries.

                                      20

<PAGE>

   The U.S. Patent and Trademark Office and the courts have not established a
consistent policy regarding the breadth of claims allowed in pharmaceutical
patents. The allowance of broader claims may increase the incidence and cost of
patent interference proceedings and the risk of infringement litigation. On the
other hand, the allowance of narrower claims may limit the value of our
proprietary rights.

If we are unable to integrate potential future acquisitions successfully, our
business may be harmed.

   As part of our business strategy and growth plan, we plan to acquire
businesses, technologies or products that we believe complement our business.
The process of integrating an acquired business, technology or product may
result in unforeseen operating difficulties and expenditures and may require
significant management attention that would otherwise be available for ongoing
development of our existing business. In addition, we may not be able to
maintain the levels of operating efficiency that any acquired company achieved
or might have achieved separately. Successful integration of the companies we
acquire will depend upon our ability to, among other things, eliminate
redundancies and excess costs. As a result of difficulties associated with
combining operations, we may not be able to achieve cost savings and other
benefits that we might hope to achieve with acquisitions. Future acquisitions
could result in potentially dilutive issuances of our equity securities, the
incurrence of debt and contingent liabilities or have an undesirable impact on
our consolidated financial statements.

We are subject to risks associated with international sales and purchases,
which could harm both our domestic and international operations.

   As part of our business strategy and growth plan, we plan to expand our
international sales as we obtain regulatory approvals to market our products in
foreign countries, including countries in the European Union and South America,
as well as expand our purchases of raw materials and finished products
overseas. Expansion of our international operations could impose substantial
burdens on our resources, divert management's attention from domestic
operations and otherwise harm our business. In addition, international
operations are subject to risks, including:

  .   regulatory requirements of differing nations

  .   inadequate protection of intellectual property

  .   difficulties and costs associated with complying with a wide variety of
      complex domestic and foreign laws and treaties

  .   legal uncertainties regarding, and timing delays associated with,
      tariffs, export licenses and other trade barriers

  .   increased difficulty in collecting delinquent or unpaid accounts

  .   adverse tax consequences

  .   currency fluctuations

   Any of these or other factors could adversely affect our ability to compete
in international markets and our operating results.

We may be exposed to product liability claims that could cause us to incur
significant costs or cease selling some of our products.

   We may be held liable for, or incur costs related to, liability claims if
any of our products, or any products that use or incorporate any of our
technologies, cause injury or are found unsuitable during development,
manufacture, sale or use. These risks exist even with respect to products that
have received, or may in the future receive, regulatory approval for commercial
use.

                                      21

<PAGE>

   We currently maintain insurance coverage for product liability claims in the
aggregate amount of $100 million, including primary and excess coverages. Our
product liability insurance may not be adequate and, at any time, insurance
coverage may not be available on commercially reasonable terms or at all. A
product liability claim could result in liability to us greater than our
insurance coverage or assets. Even if we have adequate insurance coverage,
product liability claims or recalls could result in negative publicity or force
us to devote significant time and attention to those matters.

Any claims relating to improper handling, storage or disposal of, or
contamination from, hazardous materials could be costly to resolve.

   Our research and development and manufacturing activities involve the
controlled use of hazardous materials and disposal of chemical, biological and
other hazardous waste. We are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
these materials. Some of our facilities are located in industrial areas and may
experience environmental contamination due to the activities of third parties.
We cannot eliminate the risk of accidental contamination or discharge and any
resulting injury from these materials or areas. In the event of an accident or
contamination, we could be liable for costs and damages or be penalized with
fines, and this liability could exceed our resources. We may have to incur
significant costs to comply with future environmental laws and regulations. New
governmental regulations may have an adverse effect on the research,
development, manufacture and marketing of our products.

The FTC is studying relationships between brand name and generic pharmaceutical
companies and investigating the market for Paclitaxel.

   The U.S. Federal Trade Commission, or the FTC, has instituted an
industry-wide study into whether brand name and generic pharmaceutical
companies have entered into agreements or have used other strategies to delay
introduction of generic versions of proprietary drugs. In early 2001, we were
required to produce documents and other information in connection with the
FTC's study. The FTC has stated that it plans to produce a factual description
of how the 180-day marketing exclusivity and 30-month stay provisions of the
Hatch-Waxman Act have influenced the development of generic drug competition.
The FTC study could affect the manner in which generic drug manufacturers
resolve intellectual property litigation with proprietary pharmaceutical
companies and could increase litigation against pharmaceutical companies.

   In September 2000, American BioScience received a subpoena from the FTC in
connection with its investigation into whether Bristol-Myers Squibb Company and
American BioScience engaged in anti-competitive practices with respect to the
market for paclitaxel. We, as one of ABI's affiliates, were required to respond
to the subpoena. The FTC may bring enforcement actions as to specific
agreements it concludes are anti-competitive.

We face uncertainty related to pricing and reimbursement and health care reform.

   In both domestic and foreign markets, sales of our products will depend in
part on the availability of reimbursement from third-party payers such as
government health administration authorities, private health insurers, health
maintenance organizations and other health care-related organizations.

   Medicare, Medicaid and other reimbursement legislation or programs govern
drug coverage and reimbursement levels in the United States. Federal law
requires all pharmaceutical manufacturers to rebate a percentage of their
revenue arising from Medicaid-reimbursed drug sales to individual states.
Generic drug manufacturers' agreements with federal and state governments
provide that the manufacturer will remit to each state Medicaid agency, on a
quarterly basis, 11% of the average manufacturer price for generic products
marketed under abbreviated new drug applications covered by the state's
Medicaid program. For proprietary

                                      22

<PAGE>

products, which are marketed under new drug applications, manufacturers are
required to rebate the greater of (a) 15.1% of the average manufacturer price
or (b) the difference between the average manufacturer price and the lowest
manufacturer price during a specified period.

   Both the federal and state governments in the United States and foreign
governments continue to propose and pass new legislation, rules and regulations
designed to contain or reduce the cost of health care. Existing regulations
that affect the price of pharmaceutical and other medical products may also
change before any of our products are approved for marketing. Cost control
initiatives could decrease the price that we receive for any product we develop
in the future. In addition, third-party payers are increasingly challenging the
price and cost-effectiveness of medical products and services. Significant
uncertainty exists as to the reimbursement status of newly approved
pharmaceutical products, including injectable products. Our products may not be
considered cost effective or adequate third-party reimbursement may not be
available to enable us to maintain price levels sufficient to realize an
adequate return on our investments.

We may need to change our business practices to comply with changes to, or may
be subject to charges under, the fraud and abuse laws.

   We are subject to various federal and state laws pertaining to health care
fraud and abuse, including anti-kickback, marketing and pricing laws.
Violations of these laws are punishable by criminal and/or civil sanctions,
including, in some instances, imprisonment and exclusion from participation in
federal and state health care programs such as Medicare and Medicaid. If there
is a change in laws, regulations or administrative or judicial interpretations,
we may have to change our business practices, or our existing business
practices could be challenged as unlawful, which could materially adversely
affect our business.

We may become subject to Federal false claims or other similar litigation
brought by private individuals and the government.

   The Federal False Claims Act allows persons meeting specified requirements
to bring suit alleging false or fraudulent Medicare or Medicaid claims and to
share in any amounts paid to the government in fines or settlement. These
suits, known as qui tam actions, have increased significantly in recent years
and have increased the risk that a health care company will have to defend a
false claim action, pay fines and/or be excluded from Medicare and Medicaid
programs. Federal false claims litigation can lead to civil monetary penalties,
criminal fines and imprisonment and/or exclusion from participation in
Medicare, Medicaid and other federally funded health programs. Other alternate
theories of liability may also be available to private parties seeking redress
for such claims. A number of parties have brought claims against numerous
pharmaceutical manufacturers, and we cannot be certain that such claims will
not be brought against us, or if they are brought, that such claims might not
be successful.

Item 2.  Properties

   We operate various facilities in the United States, which have an aggregate
size of approximately 551,000 square feet.

   Our principal executive offices are located in Los Angeles, California. The
facility occupies 5,300 square feet under a lease that expires in December
2006. Our business office is located in Schaumburg, Illinois, and encompasses a
total of 20,700 square feet of space under a lease that expires in June 2005.
Our Raleigh, North Carolina, facility has 1,800 square feet of office space
under a lease that expires in October 2006. Our business office in Ontario,
Canada consists of 6,500 square feet of office space under a lease that expires
in June 2004 and a sublease that expires in May 2004. In Bensenville, Illinois,
we operate a distribution facility of approximately 100,000 square feet under a
lease that expires in September 2004.

   We own two manufacturing facilities, which are located in Melrose Park,
Illinois and Grand Island, New York. We occupy approximately 122,000 square
feet and 155,000 feet of manufacturing, packaging, laboratory,

                                      23

<PAGE>

office and warehouse space at our Illinois and New York facilities
respectively. We operate a research and development facility in a building of
approximately 140,000 square feet that we own in Melrose Park, Illinois.

Item 3.  Legal Proceedings

   From time to time, we may be involved in claims and legal proceedings that
arise in the ordinary course of our business. We are currently party to several
such claims and legal proceedings. We do not believe that the resolution of
these legal proceedings will have a material adverse effect on our business,
our consolidated financial position or results of operations.

Item 4.  Submission of Matters to a Vote of Security Holders

   On December 10, 2001, the majority of our stockholders representing
31,989,440 shares of our capital stock approved by written consent the adoption
of our 2001 Stock Incentive Plan, our 2001 Employee Stock Purchase Plan, and
our current Amended and Restated Certificate of Incorporation.

                                      24

<PAGE>

                                    PART II

Item 5.  Market For Registrant's Common Equity and Related Stockholder Matters

Market for Common Stock

   Our common stock is listed and traded on the NASDAQ National Market under
the symbol "APPX". The following table sets forth the high and low prices for
our common stock as reported by NASDAQ for fiscal year 2001 commencing with our
initial trading date on December 14, 2001:

<TABLE>
<CAPTION>
                                                            Price Per Share
                                                            ---------------
                                                             High     Low
                                                            ------  ------
    <S>                                                     <C>     <C>
    Period from December 14, 2001 through December 31, 2001 $22.00  $17.69
</TABLE>

   On March 25, 2002, the closing price for our common stock, as reported on
NASDAQ, was $17.39 per share. At such date, we had approximately 750 holders of
record of our common stock.

Dividend Policy

   No cash dividends were declared or paid in fiscal 2001 or fiscal 2000. Our
credit facility currently restricts us from paying dividends.

Use of Initial Public Offering Proceeds

   On December 14, 2001, we completed our initial public offering of 9,000,000
shares of common stock at a public offering price of $16.00 per share and
realized an aggregate offering price of $144.0 million. We received net
proceeds of $133.9 million. These proceeds are net of $10.1 million in
underwriting discounts and commissions. Of the net proceeds, we used $37.7
million of the net proceeds to repay in full and terminate our term loan and to
repay amounts outstanding under the revolving credit facility with CIBC. In
addition, expenses of $2.9 million relating to the issuance and distribution of
the securities sold were incurred.

   On January 10, 2002, the underwriters for our initial public offering
exercised in full their option to purchase an additional 1,350,000 shares of
our common stock at the initial public offering price of $16.00 per share in
order to cover over-allotments. As a result of this exercise, we received
proceeds of $20,088,000. This is net of underwriting discounts and commissions
of $1,512,000.

   Also in January 2002, we made an initial license payment of $60,000,000 to
American BioScience. Under this agreement, we acquired the exclusive rights to
market and sell ABI-007 in North America.

   We intend to use the remaining net proceeds for general corporate purposes,
including working capital, capital expenditures, and potential acquisitions and
licensing opportunities. At this time, we do not have any commitments or
agreements with respect to any material acquisition.

                                      25

<PAGE>

Item 6.  Selected Financial Data

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                     -----------------------------------------------
                                                       2001      2000      1999    1998(1)    1997
                                                     --------  --------  --------  --------  -------
                                                          (in thousands, except per share data)
                                                     -----------------------------------------------
<S>                                                  <C>       <C>       <C>       <C>       <C>
CONSOLIDATED STATEMENT OF OPERATIONS
  DATA:
Net sales........................................... $192,029  $165,495  $136,523  $ 65,915  $ 7,574
Cost of sales.......................................  121,619   105,587    91,062    48,764    5,245
Gross margin........................................   70,410    59,908    45,461    17,151    2,329
Operating expenses:
   Research and development costs (exclusive of
     stock-based compensation)......................   13,790    13,016     9,865     3,646      217
   Selling, general and administrative expenses
     (exclusive of stock-based compensation)........   30,911    30,048    23,450    13,267    1,373
   Stock-based compensation (2).....................    2,491       615        88       127       --
   (Gain) loss on litigation settlements, net.......     (750)   28,353        --        --       --
   Equity in net (income) loss of Drug Source Co.,
     LLC............................................   (1,414)      122        --        --       --
       Total operating expenses.....................   45,028    72,154    33,403    17,040    1,590
Operating income (loss).............................   25,382   (12,246)   12,058       111      739
Interest income.....................................    1,204       200       275       344       13
Interest expense....................................   (4,419)   (1,751)   (2,104)   (1,256)      --
Income (loss) before income taxes...................   22,167   (13,797)   10,229      (801)     752
Provision (benefit) for income taxes................    9,539    (5,038)    4,147      (289)     293
Net income (loss)...................................   12,628    (8,759)    6,082      (512)     459
Less imputed preferred stock dividends..............     (951)   (1,000)   (1,000)     (583)      --
Income (loss) applicable to common stock............ $ 11,677  $ (9,759) $  5,082  $ (1,095) $   459
Income (loss) per common share (3):
   Basic............................................ $   0.47  $  (0.43) $   0.23  $  (0.05) $  0.02
   Diluted.......................................... $   0.30  $  (0.43) $   0.14  $  (0.05) $  0.02
Weighted-average common shares outstanding:.........
   Basic............................................   24,718    22,528    21,977    21,542   21,236
   Diluted..........................................   38,948    22,528    35,057    21,542   21,236
OTHER DATA:
EBITDA (4).......................................... $ 34,734  $ (4,485) $ 18,962  $  4,494  $   739
Adjusted EBITDA (4).................................   38,229    29,265    21,132     5,207      739
Cash flow provided by operating activities..........   11,605    18,580     8,186     6,602      683
Cash flow used in investing activities..............   (9,146)  (11,851)   (6,762)  (56,503)      --
Cash flow provided by (used in) financing activities   93,722   (11,661)   (2,489)   55,621       27
CONSOLIDATED BALANCE SHEET DATA:
Working capital..................................... $ 76,421  $ 25,249  $ 31,130  $ 26,844  $   377
Total assets........................................  239,787   122,823   103,015    92,629    2,362
Long-term debt, including current portion...........       --    18,939    23,501    25,000       --
Series A redeemable convertible preferred stock.....       --    12,583    11,583    10,583       --
Total stockholders' equity..........................  130,070    38,699    50,175    42,272      754
</TABLE>
--------
(1) We acquired the Fujisawa generic business on June 1, 1998. This business is
    included in our operations since that date.


                                      26

<PAGE>

(2) We recorded stock-based compensation related to certain stock option
    grants. Stock-based compensation relates to the following (in thousands):

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                 --------------------------
                                                  2001  2000 1999 1998 1997
                                                 ------ ---- ---- ---- ----
    <S>                                          <C>    <C>  <C>  <C>  <C>
    Research and development costs.............. $  182 $ 73 $--  $ -- $--
    Selling, general and administrative expenses  2,309  542  88   127  --
                                                 ------ ---- ---  ---- ---
                                                 $2,491 $615 $88  $127 $--
                                                 ====== ==== ===  ==== ===
</TABLE>

(3) See Note 2 to our consolidated financial statements for an explanation of
    the number of shares used to compute basic and diluted net income (loss)
    per common share.
(4) EBITDA consists of net income (loss) before interest, income taxes,
    depreciation and amortization. Adjusted EBITDA is defined as EBITDA
    adjusted to exclude shares issued to Premier Purchasing Partners, L.P.,
    stock-based compensation and litigation settlements, net. Items excluded
    from EBITDA and adjusted EBITDA are significant components in understanding
    and assessing our financial performance, and EBITDA and adjusted EBITDA
    should not be considered as measures of financial performance under
    generally accepted accounting principles, or GAAP. We present adjusted
    EBITDA to enhance the understanding of our operating results. EBITDA and
    adjusted EBITDA should not be considered in isolation or as alternatives to
    net income, cash flows generated by (used in) our operations, investing or
    financing activities or other financial information presented in the
    consolidated financial statements as indicators of our financial
    performance or liquidity. Because EBITDA and adjusted EBITDA are not
    measurements determined in accordance with GAAP and are therefore
    susceptible to varying calculations, EBITDA and adjusted EBITDA as
    presented may not be comparable to other similarly tested measures of other
    companies.

   The following table reconciles net income (loss) to EBITDA and EBITDA to
   adjusted EBITDA:

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                            --------------------------------
                                             2001     2000     1999    1998
                                            -------  -------  ------- ------
                                                     (in thousands)
   <S>                                      <C>      <C>      <C>     <C>
   Net income (loss)....................... $12,628  $(8,759) $ 6,082 $ (512)
      Depreciation and amortization........   9,352    7,761    6,904  4,383
      Provision (benefit) for income taxes.   9,539   (5,038)   4,147   (289)
      Interest expense, net................   3,215    1,551    1,829    912
                                            -------  -------  ------- ------
   EBITDA..................................  34,734   (4,485)  18,962  4,494
      Common shares issued to Premier......   1,754    4,782    2,082    586
      Stock-based compensation.............   2,491      615       88    127
      Litigation settlements, net..........    (750)  28,353       --     --
                                            -------  -------  ------- ------
   Adjusted EBITDA......................... $38,229  $29,265  $21,132 $5,207
                                            =======  =======  ======= ======
</TABLE>

                                      27

<PAGE>

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

You should read this discussion together with our consolidated financial
statements and accompanying notes included in this Annual Report on Form 10-K.

   Statements contained in this Annual Report on Form 10-K, which are not
historical facts, are forward-looking statements, as the term is defined in the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements, whether expressed or implied, are subject to risks and
uncertainties which can cause actual results to differ materially from those
currently anticipated, due to a number of factors, which include, but are not
limited to:

  .   the impact of competitive products and pricing;

  .   the availability and pricing of raw materials and components used in the
      manufacture of our pharmaceutical products;

  .   the ability to successfully manufacture products in an efficient,
      time-sensitive and cost effective manner;

  .   the acceptance of and demand for our existing and new pharmaceutical
      products;

  .   the impact of laws and regulations, and their interpretations, which
      govern or affect the pharmaceutical industry;

  .   the impact of patents and other proprietary rights licensed or owned by
      us, our competitors and other third parties;

  .   the difficulty in predicting the timing or outcome of product development
      efforts and regulatory approvals;

  .   the actual results achieved in the Phase III clinical trials for ABI-007;

  .   the timing of the completion of Phase III trials for ABI-007;

  .   licenses or acquisitions; and

  .   relationships and agreements with other parties.

   Forward-looking statements also include the assumptions underlying or
relating to any of the foregoing or other such statements. When used in this
report, the words "may," "will," "should," "could," "expect," "plan,"
"anticipate," "believe," "estimate" "predict," "continue", and similar
expressions are generally intended to identify forward-looking statements.

   Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date hereof. We
undertake no obligation to revise or publicly release the results of any
revision to these forward-looking statements. Readers should carefully review
the factors described in Business: Factors that May Affect Our Result of
Operations and other documents the company files from time to time with the
Securities and Exchange Commission, including the Quarterly Reports on Form
10-Q to be filed by the Company in fiscal year 2002.

Overview

   We are a specialty pharmaceutical company that develops, manufactures and
markets injectable pharmaceutical products. Although we plan in the future to
pursue opportunities to manufacture and market proprietary injectable
pharmaceutical products, substantially all of our net sales are derived from
the sale of generic injectable pharmaceutical products.

                                      28

<PAGE>

   We began in 1996 with an initial focus on marketing and distributing in the
United States generic pharmaceutical products manufactured by others. In 1997,
we commenced sales of our first generic injectable product, acyclovir, through
an agreement with Glaxo Wellcome, Inc. We derived revenue during our first two
fiscal years exclusively from sales of products manufactured by others.
Although we continue to sell products manufactured by others, sales from those
products constitute a small percentage of our current revenue.

   In June 1998, we acquired Fujisawa USA, Inc.'s generic injectable
pharmaceutical business (Fujisawa generic business) for approximately $75.0
million, of which American BioScience, Inc. (ABI) funded $42.5 million in cash
and its stock in exchange for shares of our preferred stock. We acquired
substantially all of our current facilities in this transaction, including our
manufacturing facilities in Melrose Park, Illinois and Grand Island, New York
and our research and development facility in Melrose Park, Illinois. We also
acquired additional assets in this transaction, including inventories, plant
and equipment and abbreviated new drug applications that were pending with or
approved by the FDA. We derived substantially all of our revenue since this
acquisition from the sale of products manufactured in the facilities we
acquired from Fujisawa.

   Pursuant to an agreement we entered into with ABI in November 2001 to
acquire the exclusive rights to market and sell ABI-007, a proprietary
injectable oncology product candidate that is a patented formulation of
paclitaxel, in North America, we paid $60 million to ABI in January 2002, as
the initial license payment.

   On December 14, 2001, we completed our initial public offering of 9,000,000
shares of common stock at a public offering price and realized an aggregate
offering price of $144,000,000. After underwriting discounts and commission and
expenses of the offering of $13.0 million, we netted $131.0 million from the
offering. Concurrent with offering, all of our outstanding preferred stock was
converted into 14,810,475 shares of our common stock. On January 10, 2002, the
underwriters from our initial public offering exercised in full their option to
purchase an additional 1,350,000 shares of our common stock at the initial
public offering price of $16.00 per share providing additional proceeds of
$20.1 million, net of underwriting discounts and commissions of $1.5 million.

   As of December 31, 2001, ABI owned 66.3% of our outstanding common stock.
After the exercise of the underwriters' overallotment option on January 10,
2002, ABI owns 64.5% of our outstanding common stock.

Results of Operations

   The following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:

<TABLE>
<CAPTION>
                                                         Year ended December 31,
                                                         -----------------------
                                                          2001    2000    1999
                                                         ------  ------  ------
<S>                                                      <C>     <C>     <C>
Statement of Operations Data:
Net sales............................................... 100.0%  100.0%  100.0%
Cost of sales...........................................  63.3%   63.8%   66.7%
                                                         ------  ------  ------
Gross margin............................................  36.7%   36.2%   33.3%
Operating expenses:
   Research and development costs.......................   7.2%    7.9%    7.2%
   Selling, general, and administrative expenses........  16.1%   18.1%   17.2%
   Stock-based compensation.............................   1.3%    0.4%    0.1%
   (Gain) loss on litigation settlements, net........... (0.4)%   17.1%      --
   Equity in net (income) loss of Drug Source Co., LLC.. (0.7)%    0.1%      --
                                                         ------  ------  ------
      Total operating expenses..........................  23.5%   43.6%   24.5%
Income (loss) from operations...........................  13.2%  (7.4)%    8.8%
Interest expense, net................................... (1.7)%  (0.9)%  (1.3)%
                                                         ------  ------  ------
Income (loss) before income taxes.......................  11.5%  (8.3)%    7.5%
Provision (benefit) for income taxes....................   4.9%  (3.0)%    3.0%
                                                         ------  ------  ------
Net income (loss).......................................   6.6%  (5.3)%    4.5%
                                                         ======  ======  ======
</TABLE>

                                      29

<PAGE>

Years Ended December 31, 2001 and 2000

   Net Sales.  Net sales were $192.0 million and $165.5 million for 2001 and
2000, respectively, representing an increase of $26.5 million, or 16.0%. This
increase was due primarily to the launch in 2001 of ten new products. Two of
these products, mesna and haloperidol lactate, which were launched in May 2001
and March 2001, respectively, collectively contributed approximately $15.9
million to net sales for 2001. In addition, sales increased substantially in
2001 for heparin and protamine (the result of our competitor's inability to
supply) and doxycycline and vancomycin (as consequence of demand created by
September 11). These increases were offset by the anticipated decrease in
cisplatin sales, which resulted from the price erosion normally associated with
a new generic product.

   In 2002, we expect unit sales of haloperidol lactate and mesna to increase
and prices to erode as additional competitors enter the market, which is the
typical generic product cycle. Unit sales in 2002 of heparin and doxycycline
are expected to remain strong as we expect to continue to hold a major share of
the market.

   Cost of Sales.  Cost of sales was $121.6 million and $105.6 million in 2001
and 2000, respectively, representing an increase of $16.0 million. This
increase was primarily due to the increase in net sales in 2001. Cost of sales
as a percentage of net sales decreased to 63.3% in 2001 from 63.8% in 2000.

   Research and Development.  Research and development costs were $13.8 million
and $13.0 million in 2001 and 2000, respectively, representing an increase of
$.8 million. This increase was primarily the result of research and development
expenses (product supplied to ABI for clinical trials) for our proprietary
injectable oncology product candidate, ABI-007.

   We anticipate research and development expenses to increase in 2002 as a
result of increasing costs of raw materials used in research and development
activities.

   Selling, General and Administrative.  Selling, general and administrative
expenses were $30.9 million and $30.0 million in 2001 and 2000, respectively,
representing an increase of $.9 million. This increase was primarily due to an
increase of salary and related expenses that resulted from headcount increases,
and the extinguishment of the unamortized deferred loan fees pertaining to our
retired debt. These unfavorable variances were offset by a decrease in bad debt
expense in 2001 and lower commission expense.

   Stock-based Compensation.  Stock-based compensation was $2.5 million and $.6
million in 2001 and 2000, respectively, representing an increase of $1.9
million. This increase was the result of an increase in stock options granted
during 2001 for which the exercise price was less than the estimated fair value
of our common stock on the grant date.

   Litigation Settlements.  The (gain) loss on litigation settlements, net
amounted to $(.7) million in 2001 compared to $28.4 million in 2000. We settled
two lawsuits in 2000 resulting in net expense of $28.4 million. Under the terms
of one of these settlement agreements, we were entitled to receive a payment of
$1.25 million in March 2000 and six quarterly payments of $250,000 beginning in
June 2000, based upon meeting certain conditions of the settlement. We received
all payments due to us under this settlement agreement during 2001 and 2000.

   Equity In Drug Source Co., LLC.  In June 2000, a limited liability company,
Drug Source Co., LLC, was formed to engage in the business of selling raw
materials to the pharmaceutical industry. We own 50% of Drug Source Co., LLC,
and account for this interest on the equity method from which income of $1.4
million in 2001 was recognized compared to a $122,000 loss in 2000.

   Interest Income.  Interest income was $1.2 million and $.2 million in 2001
and 2000, respectively, representing an increase of $1.0 million. This increase
was primarily the result of interest charges on amounts due from ABI beginning
in February 2001.

                                      30

<PAGE>

   Interest Expense.  Interest expense was $4.4 million and $1.8 million in
2001 and 2000, respectively, representing an increase of $2.6 million. This
increase was the result of increased borrowings on our revolving line of credit
during 2001 and imputed interest expense related to the amounts due to VivoRx,
Inc. related to the settlement of litigation, offset in part by lower interest
rates. Our revolving line of credit was paid off with proceeds from our initial
public offering in December 2001.

   Provision for Income Taxes.  Provision (benefit) for income taxes was $9.5
million and $(5.0) million in 2001 and 2000, respectively, representing an
increase of $14.5 million. Our effective tax rates were 43.0% and 36.5% for
2001 and 2000, respectively. The increase in our effective tax rate in 2001 was
primarily due to an increase in non-deductible, stock-based compensation
charges in 2001.

Years Ended December 31, 2000 and 1999

   Net Sales.  Net sales were $165.5 million and $136.5 million in 2000 and
1999, respectively, representing an increase of $29.0 million, or 21.2%. This
increase was primarily a result of $18.7 million in increased sales of
cisplatin in 2000, which we launched in November 1999, and $5.5 million in
sales associated with the introduction of other new products.

   Cost of Sales.  Cost of sales was $105.6 million and $91.1 million in 2000
and 1999, respectively, representing an increase of $14.5 million. This
increase was primarily a result of an increase in our net sales in 2000. Cost
of sales as a percentage of net sales decreased to 63.8% in 2000 from 66.7% in
1999. This decrease was primarily a result of increased sales from higher gross
margin products such as cisplatin in 2000.
   Research and Development.  Research and development costs were $13.0 million
and $9.9 million in 2000 and 1999, respectively, representing an increase of
$3.1 million. This increase was primarily a result of an increase in the number
of products under development and an increase in raw material spending for
these products.

   Selling, General and Administrative.  Selling, general and administrative
expenses were $30.0 million and $23.5 million in 2000 and 1999, respectively,
representing an increase of $6.5 million. This increase was primarily a result
of higher commissions for increased sales of our products and additional
headcount and related expenses, including payroll and related costs, relocation
and recruitment, as we expanded our management team and overall headcount to
support our growth.

   Stock-based Compensation.  Stock-based compensation was $0.6 million in 2000
and $0.1 million in 1999, representing an increase of $0.5 million. This
increase was the result of stock options granted during 2000 for which the
exercise price was less than the estimated fair value of our common stock on
the grant date.

   Litigation Settlement.  We settled two lawsuits in 2000 that resulted in a
net expense of $28.4 million. There were no gains or losses resulting from
litigation in 1999.

   Interest Income.  Interest income was $0.2 million and $0.3 million in 2000
and 1999, respectively, representing a decrease of $0.1 million. This decrease
was a result of a lower average balance of funds invested during 2000.

   Interest Expense.  Interest expense was $1.8 million and $2.1 million in
2000 and 1999, respectively, representing a decrease of $0.3 million. This
decrease was primarily a result of lower average balances on our term loan.

   Provision For Income Taxes.  Provision (benefit) for income taxes was $(5.0)
million and $4.1 million in 2000 and 1999, respectively, representing a
decrease of $9.1 million. This decrease was related to the settlement of two
lawsuits in 2000 for $28.4 million. Our effective tax rates were (36.5)% and
40.5% in 2000 and 1999, respectively. The decrease in our effective tax rate in
2000 was due to the settlement of the two lawsuits offset partially by an
increase in non-deductible, stock-based compensation charges in 2000.

                                      31

<PAGE>

Significant Accounting Policies and Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant estimates in the Company's consolidated
financial statements are discussed below. Actual results could vary from those
estimates.

Revenue Recognition

   We recognize revenue from the sale of a product when that product is shipped
to a customer, acceptance terms are fulfilled and no significant contractual
obligations remain. We sell a majority of our products to wholesalers, who
generally sell our products to hospitals or alternative healthcare facilities
at contractual prices previously agreed upon between us and group purchasing
organizations, or GPOs, on behalf of end users such as hospitals. GPOs enter
into collective purchasing contracts with pharmaceutical suppliers for products
in an effort to secure favorable drug pricing on behalf of their members. We
invoice wholesalers at our wholesale list price. Net sales represent our
wholesale list price offset by wholesaler chargebacks, further adjusted for
estimated discounts and contractual allowances, including GPO fees. Wholesaler
chargebacks represent the difference between the wholesale list price and the
estimated contractual sales price, based upon our historical experience ratings.

   The most significant estimates which affect net sales are our allowances for
doubtful accounts, cash discounts, sales credits and wholesaler chargebacks.
The allowances for doubtful accounts, cash discounts and sales credits are
estimated monthly by applying historical percentages (based on credits issued
for each category), which are reassessed periodically, to the product sales for
the month. The wholesaler chargeback calculation is computed as described in
the preceding paragraph.

Expense Recognition

   Cost of sales represents the costs of the products which we have sold and
consists of labor, raw materials, components, packaging, quality assurance and
quality control, shipping and manufacturing overhead costs and the cost of
finished products purchased from third parties. Our inventories are valued at
the lower of cost or market as determined under the first-in, first-out (FIFO)
method.

   Research and development costs are expensed as incurred and consist
primarily of salaries and other personnel-related expenses, as well as
depreciation of equipment, allocable facility, raw material and production
expenses and contract and consulting fees. We have made, and will continue to
make, substantial investment in research and development to expand our new
product offerings and grow our business.

   Selling, general and administrative expenses consist primarily of salaries,
commissions and other personnel-related expenses, as well as costs for travel,
trade shows and conventions, promotional material and catalogs, advertising and
promotion, allocable facilities and professional fees for general, legal and
accounting services. We believe that our selling, general and administrative
expenses will continue to increase due to the growth of our business and
increased expenses associated with being a public company.

Stock-based Compensation

   Stock-based compensation related to research and development cost and
selling, general and administrative expenses are presented separately in our
consolidated statement of operations. Stock-based compensation represents the
difference between the exercise price of options granted and the deemed fair
value of our common stock on the grant date in accordance with Accounting
Principles Board Opinion No. 25 and its related interpretations. We recognize
stock-based compensation over the option vesting period, typically four years,
on an accelerated basis using the graded vesting method in accordance with
Financial Accounting Standards Board Interpretation No. 28.

                                      32

<PAGE>

   We have recorded deferred stock-based compensation related to unvested
options granted to employees and outside directors. Based upon the number of
unvested options outstanding as of December 31, 2001, we expect to amortize
approximately $4.7 million of deferred stock-based compensation in future
periods as follows: $2.6 million in 2002; $1.4 million in 2003; $0.6 million in
2004; and $0.1 million in 2005. We anticipate that the exercise price of stock
options granted after our December 14, 2001 offering will be at the reported
market price of our common stock and, therefore, no additional deferred
stock-based compensation will result from these option grants.

Liquidity and Capital Resources

   Net cash provided by operating activities was $11.6 million in 2001, $18.6
million in 2000 and $8.2 million in 1999. Operating cash flows have been
impacted primarily by fluctuations in net income and changes in working
capital, primarily in accounts receivable, inventory, accounts payable and
accrued expenses.

   Net cash used in investing activities was $9.1 million in 2001, $11.9
million in 2000 and $6.8 million in 1999. Our investing activities have
primarily consisted of capital expenditures for new manufacturing equipment.

   Net cash provided by (used in) financing activities was $93.7 million in
2001, $(11.7) million in 2000 and $(2.5) million in 1999. Our financing
activities in 2001 included net proceeds received from the sale of common stock
in our initial public offering of $131.0 million, offset by payments on
long-term debt of $18.9 million and loans to ABI of $13.9 million. Our
financing activities in 2000 and 1999 included payments on long-term debt of
$4.6 million and $1.5 million, respectively. Additional financing activities in
2000 and 1999 included loans to ABI of $7.1 million and $1.0 million,
respectively.

   During 1998, we entered into a credit agreement with IBJ Whitehall Business
Credit (IBJ) providing for two term loans totaling $25 million and an
additional $25 million revolving line of credit. We used the term loans
primarily to finance a portion of our acquisition of the Fujisawa generic
business. The loans were secured by substantially all of our assets. The
revolving line of credit was used for working capital and general corporate
purposes. In December, 2001, the IBJ credit facility balance of $34 million was
paid off and replaced by a new credit agreement with a syndicate of banks
headed by the Canadian Imperial Bank of Commerce (CIBC). The CIBC agreement
includes a $50 million revolving line of credit and a $25 million term loan.
The credit facility is secured by substantially all of our assets, is
guaranteed by each of our subsidiaries and our majority stockholder, and
contains various operating and financial covenants. The revolving credit
facility has a term of five years and can be increased to $75 million at our
request. The initial CIBC term loan balance of $25 million, the proceeds of
which were used to repay our indebtedness to IBJ, was repaid and permanently
reduced with proceeds from our initial public offering. The initial CIBC
revolving credit facility balance of $12.7 million was also paid in full with
proceeds from our initial public offering. The $12.7 million balance included
bank fees and financing expenses of $3.7 million incurred in connection with
the new credit agreement. The CIBC credit facility expires in 2006. There were
no outstanding balances due under the CIBC credit facility at December 31, 2001.

   As of December 31, 2001, we were jointly and severally liable with ABI for
payments due to VivoRx, Inc. pursuant to a litigation settlement as follows:
$12.0 million to be paid on or prior to February 26, 2002 and $12.0 million to
be paid prior to February 26, 2003. Under the terms of an agreement between ABI
and us, ABI has agreed to pay this obligation in full. On February 26, 2002,
ABI made the $12.0 million payment due on that date. If ABI fails or is unable
to pay the remaining obligation of $12.0 million due on February 26, 2003, we
will be liable for any amounts that remain unpaid, which could adversely affect
our financial condition.

   See Note 8 to our consolidated financial statements for details of our lease
commitments, which aggregated $6.0 million as of December 31, 2001.

   In November 2001, we entered into a license agreement with ABI for the
exclusive North American manufacturing and sales rights to ABI-007 under which
we made initial license payments totaling $60 million in January 2002. ABI is
responsible for substantially all costs associated with the development of
ABI-007, except

                                      33

<PAGE>

that we have agreed to manufacture up to $2 million of product for use in
clinical trials. We are also required to make milestone payments of up to (a)
$60 million for indications relating to breast, ovarian and lung cancers and
(b) $32.5 million for indications relating to prostate cancer and other
indications agreed upon between ABI and us. We also may be required to make
additional milestone payments, up to an aggregate of $110 million, based upon
the achievement of particular annual sales levels. Profits from any sales of
ABI-007 will be shared equally after deducting costs of goods sold, selling
expenses and other appropriate deductions. All costs and expenses related to
product recalls and product liability claims generally will be split equally
between ABI and us.

   Our capital requirements depend on numerous factors, including the
requirements of our product development and commercialization efforts, need for
capacity expansion and improvement, need for information technology
requirements, and the amount of cash generated by our operations. We believe
that the net proceeds from our December 14, 2001 initial public offering, cash
generated from operations and funds available from our revolving line of credit
will be sufficient to finance our operations and capital expenditures for at
least the next 12 months. We may, however, need to raise additional capital
that may not be available on terms favorable or acceptable to us, if at all. In
the event we engage in future acquisitions, we may have to raise additional
capital through additional borrowings or the issuance of debt or equity
securities. Adequate funds for these purposes may not be available when needed
or on terms acceptable to us. Any additional equity financing may be dilutive
to stockholders, and debt financing, if available, may include restrictive
covenants. If we cannot raise more money when needed, we may have to reduce our
capital expenditures, scale back our development of new products or reduce our
workforce.

Recent Accounting Pronouncements

   In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS No. 141 and SFAS No. 142). Under the
new rules, effective January 1, 2002, goodwill and intangible assets deemed to
have indefinite lives, related to acquisitions prior to June 30, 2001, will no
longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives. The effect of adopting SFAS No. 141 and SFAS
No. 142 is not expected to have any impact on the Company's statement of
operations or financial position.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

   The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our activities
without increasing risk. Some of the securities that we invest in may have
market risk. This means that a change in prevailing interest rates may cause
the fair value of the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at
the prevailing rate and the prevailing rate later rises, the fair value of the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
government and non-government debt securities and money market funds. The
average duration of all our investments has been less than one year. Due to the
short-term nature of these investments, we believe we have no material exposure
to interest rate risk arising from our investments. Therefore, no quantitative
tabular disclosure is presented.

   We have operated primarily in the United States and the majority of our
activities with our collaborators outside the United States to date have been
conducted in U.S. dollars. Accordingly, we have not had any material exposure
to foreign currency exchange rate fluctuations.

Item 8.  Financial Statements and Supplementary Data

   The Consolidated Financial Statements and Financial Statement Schedule are
included in Part IV, Item 14 (a) (1) and (2) of this Annual Report on Form 10-K.

                                      34

<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
American Pharmaceutical Partners, Inc.

   We have audited the accompanying consolidated balance sheets of American
Pharmaceutical Partners, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule 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.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of American Pharmaceutical Partners, Inc. at December 31, 2001 and 2000, and
the consolidated results of its operations and its 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. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

                                          /s/ ERNST & YOUNG LLP

Woodland Hills, California
February 20, 2002

                                      35

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                  December 31,
                                                                                           --------------------------
                                                                                               2001          2000
                                                                                           ------------  ------------
<S>                                                                                        <C>           <C>
                                          ASSETS
Current assets:
    Cash and cash equivalents............................................................. $ 96,688,000  $    501,000
    Accounts receivable, less allowances for doubtful accounts of $400,000 in 2001 and
     $436,000 in 2000 and net chargebacks of $19,271,000 in 2001 and $20,269,000 in
     2000.................................................................................   15,649,000    15,569,000
    Inventories...........................................................................   51,253,000    35,640,000
    Prepaid expenses and other current assets.............................................    2,469,000       851,000
    Deferred income taxes.................................................................    9,222,000     8,214,000
                                                                                           ------------  ------------
       Total current assets...............................................................  175,281,000    60,775,000
Deferred income taxes.....................................................................    4,758,000     7,982,000
Property, plant and equipment, net........................................................   53,821,000    53,611,000
Investment in Drug Source Co., LLC........................................................    1,512,000        98,000
Product license rights, net of accumulated amortization of $30,000 in 2001................      270,000            --
Deferred financing costs, net of accumulated amortization of $-- in 2001 and $287,000 in
 2000.....................................................................................    4,145,000       357,000
                                                                                           ------------  ------------
       Total assets....................................................................... $239,787,000  $122,823,000
                                                                                           ============  ============
                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable...................................................................... $ 10,593,000  $  9,136,000
    Accrued expenses......................................................................   16,438,000    12,719,000
    Distribution payable to American BioScience, Inc......................................   60,000,000            --
    Current portion of liability to VivoRx, Inc...........................................   11,829,000     9,670,000
    Current maturities of long-term debt..................................................           --     4,001,000
                                                                                           ------------  ------------
       Total current liabilities..........................................................   98,860,000    35,526,000
Liability to VivoRx, Inc., less current portion...........................................   10,857,000    20,684,000
Long-term debt, less current maturities...................................................           --    14,938,000
Other.....................................................................................           --       393,000
Commitments and contingencies
Series A redeemable convertible preferred stock--no par value; none authorized, issued and
 outstanding in 2001; 2,821,035 shares authorized, issued and outstanding in 2000.........           --    12,583,000
Stockholders' equity:
    Common stock--$.001 par value; 100,000,000 shares authorized, 48,272,628 shares
     issued and outstanding in 2001; none authorized, issued and outstanding in 2000......       48,000            --
    Common stock--no par value; none authorized, issued and outstanding in 2001;
     100,000,000 shares authorized; 22,836,548 shares issued and outstanding in 2000......           --     9,268,000
    Preferred stock--no par value; 6,000,000 shares authorized, none issued and
     outstanding in 2001; none authorized, issued and outstanding in 2000.................           --            --
    Series B convertible preferred stock--no par value; none authorized, issued and
     outstanding in 2001; 4,231,585 shares authorized, issued and outstanding in 2000.....           --    15,000,000
    Series C convertible preferred stock--no par value; none authorized, issued and
     outstanding in 2001; 1,410,530 shares authorized, issued and outstanding in 2000.....           --     5,000,000
    Series D convertible preferred stock--no par value; none authorized, issued and
     outstanding in 2001; 6,347,325 shares authorized, issued and outstanding in 2000.....           --    22,500,000
    Amounts due from American BioScience, Inc.............................................  (20,957,000)   (7,105,000)
    Deferred stock-based compensation.....................................................   (4,713,000)     (944,000)
    Additional paid-in capital............................................................  149,041,000            --
    Retained earnings (deficit)...........................................................    6,658,000    (5,019,000)
    Other comprehensive loss..............................................................       (7,000)       (1,000)
                                                                                           ------------  ------------
       Total stockholders' equity.........................................................  130,070,000    38,699,000
                                                                                           ------------  ------------
       Total liabilities and stockholders' equity......................................... $239,787,000  $122,823,000
                                                                                           ============  ============
</TABLE>

                            See accompanying notes.

                                      36

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

                     CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                           ----------------------------------------
                                                               2001          2000          1999
                                                           ------------  ------------  ------------
<S>                                                        <C>           <C>           <C>
Net sales................................................. $192,029,000  $165,495,000  $136,523,000
Cost of sales.............................................  121,619,000   105,587,000    91,062,000
                                                           ------------  ------------  ------------
Gross margin..............................................   70,410,000    59,908,000    45,461,000
Operating expenses:
   Research and development costs.........................   13,790,000    13,016,000     9,865,000
   Selling, general, and administrative expenses..........   30,911,000    30,048,000    23,450,000
   Stock-based compensation...............................    2,491,000       615,000        88,000
   (Gain) loss on litigation settlements, net.............     (750,000)   28,353,000            --
   Equity in net (income) loss of Drug Source Co., LLC....   (1,414,000)      122,000            --
                                                           ------------  ------------  ------------
       Total operating expenses...........................   45,028,000    72,154,000    33,403,000
                                                           ------------  ------------  ------------
Income (loss) from operations.............................   25,382,000   (12,246,000)   12,058,000
Interest Income (includes $1,104,000 from American
  BioScience,Inc. in 2001, none in 2000 and 1999).........    1,204,000       200,000       275,000
Interest expense..........................................   (4,419,000)   (1,751,000)   (2,104,000)
                                                           ------------  ------------  ------------
Income (loss) before income taxes.........................   22,167,000   (13,797,000)   10,229,000
Provision (benefit) for income taxes......................    9,539,000    (5,038,000)    4,147,000
                                                           ------------  ------------  ------------
Net income (loss).........................................   12,628,000    (8,759,000)    6,082,000
Imputed preferred stock dividends.........................     (951,000)   (1,000,000)   (1,000,000)
                                                           ------------  ------------  ------------
Income (loss) applicable to common stock.................. $ 11,677,000  $ (9,759,000) $  5,082,000
                                                           ============  ============  ============
Income (loss) per common share:
   Basic.................................................. $       0.47  $      (0.43) $       0.23
                                                           ============  ============  ============
   Diluted................................................ $       0.30  $      (0.43) $       0.14
                                                           ============  ============  ============
The fair value of common shares earned by Premier has been
  deducted from net sales as follows:..................... $  1,754,000  $  4,782,000  $  2,082,000
                                                           ============  ============  ============
Research and development costs include purchases from Drug
  Source Co., LLC as follows:............................. $  1,066,000  $         --  $         --
                                                           ============  ============  ============
The composition of stock-based compensation is as follows:
   Research and development costs......................... $    182,000  $     73,000  $         --
   Selling, general and administrative expenses...........    2,309,000       542,000        88,000
                                                           ------------  ------------  ------------
                                                           $  2,491,000  $    615,000  $     88,000
                                                           ============  ============  ============
</TABLE>

                            See accompanying notes.

                                      37

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                 Years Ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                                        Common Stock           Common Stock          Series B Convertible
                                                      $0.001 Par Value         No Par Value             Preferred Stock
                                                     ------------------ -------------------------  ------------------------
                                                       Shares   Amount    Shares        Amount       Shares       Amount
                                                     ---------- ------- -----------  ------------  ----------  ------------
<S>                                                  <C>        <C>     <C>          <C>           <C>         <C>
Balance at December 31, 1998........................         -- $    --  21,090,140  $    255,000   4,231,585  $ 15,000,000
Issuance of common stock earned by Premier..........         --      --   1,129,647     2,714,000          --            --
Exercise of stock options...........................         --      --      18,750         1,000          --            --
Grants of stock options.............................         --      --          --        29,000          --            --
Amortization of deferred stock-based compensation...         --      --          --            --          --            --
Comprehensive income:
   Net income.......................................         --      --          --            --          --            --
   Foreign currency translation gain................         --      --          --            --          --            --
Comprehensive income................................         --      --          --            --          --            --
Imputed preferred stock dividends...................         --      --          --            --          --            --
                                                     ---------- ------- -----------  ------------  ----------  ------------
Balance at December 31, 1999........................         --      --  22,238,537     2,999,000   4,231,585    15,000,000
Issuance of common stock earned by Premier..........         --      --     570,351     4,750,000          --            --
Exercise of stock options...........................         --      --      27,660        28,000          --            --
Grants of stock options, net of forfeitures.........         --      --          --     1,491,000          --            --
Amortization of deferred stock-based compensation...         --      --          --            --          --            --
Net advances to American BioScience, Inc............         --      --          --            --          --            --
Comprehensive income (loss):
   Net loss.........................................         --      --          --            --          --            --
   Foreign currency translation loss................         --      --          --            --          --            --
Comprehensive income (loss).........................         --      --          --            --          --            --
Imputed preferred stock dividends...................         --      --          --            --          --            --
                                                     ---------- ------- -----------  ------------  ----------  ------------
Balance at December 31, 2000........................         --      --  22,836,548     9,268,000   4,231,585    15,000,000
Issuance of common stock earned by Premier..........         --      --     161,955     1,906,000          --            --
Exercise of stock options...........................      7,300      --   1,274,025       139,000          --            --
Grants of stock options, net of forfeitures.........         --      --          --     6,260,000          --            --
Amortization of deferred stock-based compensation...         --      --          --            --          --            --
Net advances to American BioScience, Inc............         --      --          --            --          --            --
Payment by American BioScience, Inc. of share of
 liability to VivoRx, Inc., net of related deferred
 income taxes.......................................         --      --          --     4,026,000          --            --
Issuance of warrants................................         --      --          --       393,000          --            --
Exercise of warrants................................    182,325      --          --            --          --            --
Recapitalization of company in Delaware............. 24,272,528  24,000 (24,272,528)  (21,992,000)         --            --
Conversion of preferred stock into common stock..... 14,810,475  15,000          --            --  (4,231,585)  (15,000,000)
Net proceeds from sale of common stock in initial
 public offering....................................  9,000,000   9,000          --            --          --            --
Accrual of distribution to American BioScience, Inc.
 for product license rights.........................         --      --          --            --          --            --
Comprehensive income:
   Net income.......................................         --      --          --            --          --            --
   Foreign currency translation loss................         --      --          --            --          --            --
Comprehensive income................................         --      --          --            --          --            --
Imputed preferred stock dividends...................         --      --          --            --          --            --
                                                     ---------- ------- -----------  ------------  ----------  ------------
Balance at December 31, 2001........................ 48,272,628 $48,000          --  $         --          --  $         --
                                                     ========== ======= ===========  ============  ==========  ============
</TABLE>
<TABLE>
<CAPTION>
                                                       Series C Convertible
                                                         Preferred Stock
                                                     -----------------------
                                                       Shares      Amount
                                                     ----------  -----------
<S>                                                  <C>         <C>
Balance at December 31, 1998........................  1,410,530  $ 5,000,000
Issuance of common stock earned by Premier..........         --           --
Exercise of stock options...........................         --           --
Grants of stock options.............................         --           --
Amortization of deferred stock-based compensation...         --           --
Comprehensive income:
   Net income.......................................         --           --
   Foreign currency translation gain................         --           --
Comprehensive income................................         --           --
Imputed preferred stock dividends...................         --           --
                                                     ----------  -----------
Balance at December 31, 1999........................  1,410,530    5,000,000
Issuance of common stock earned by Premier..........         --           --
Exercise of stock options...........................         --           --
Grants of stock options, net of forfeitures.........         --           --
Amortization of deferred stock-based compensation...         --           --
Net advances to American BioScience, Inc............         --           --
Comprehensive income (loss):
   Net loss.........................................         --           --
   Foreign currency translation loss................         --           --
Comprehensive income (loss).........................         --           --
Imputed preferred stock dividends...................         --           --
                                                     ----------  -----------
Balance at December 31, 2000........................  1,410,530    5,000,000
Issuance of common stock earned by Premier..........         --           --
Exercise of stock options...........................         --           --
Grants of stock options, net of forfeitures.........         --           --
Amortization of deferred stock-based compensation...         --           --
Net advances to American BioScience, Inc............         --           --
Payment by American BioScience, Inc. of share of
 liability to VivoRx, Inc., net of related deferred
 income taxes.......................................         --           --
Issuance of warrants................................         --           --
Exercise of warrants................................         --           --
Recapitalization of company in Delaware.............         --           --
Conversion of preferred stock into common stock..... (1,410,530)  (5,000,000)
Net proceeds from sale of common stock in initial
 public offering....................................         --           --
Accrual of distribution to American BioScience, Inc.
 for product license rights.........................         --           --
Comprehensive income:
   Net income.......................................         --           --
   Foreign currency translation loss................         --           --
Comprehensive income................................         --           --
Imputed preferred stock dividends...................         --           --
                                                     ----------  -----------
Balance at December 31, 2001........................         --  $        --
                                                     ==========  ===========
</TABLE>

                            See accompanying notes.

                                      38

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                 Years Ended December 31, 2001, 2000 and 1999
<TABLE>
<CAPTION>
                                      Series D Convertible                    Amounts Due
                                         Preferred Stock       Additional         From         Deferred    Retained
                                    ------------------------    Paid-in         American     Stock-based   Earnings
                                      Shares       Amount       Capital     Bioscience, Inc. Compensation  (Deficit)
                                    ----------  ------------  ------------  ---------------- ------------ -----------
<S>                                 <C>         <C>           <C>           <C>              <C>          <C>
Balance at December 31, 1998.......  6,347,325  $ 22,500,000  $         --    $         --   $  (127,000) $  (342,000)
Issuance of common stock
 earned by Premier.................         --            --            --              --            --           --
Exercise of stock options..........         --            --            --              --            --           --
Grants of stock options............         --            --            --              --       (29,000)          --
Amortization of deferred
 stock-based compensation..........         --            --            --              --        88,000           --
Comprehensive income:
   Net income......................         --            --            --              --            --    6,082,000
   Foreign currency translation
    gain...........................         --            --            --              --            --           --

Comprehensive income...............         --            --            --              --            --           --
Imputed preferred stock dividends..         --            --            --              --            --   (1,000,000)
                                    ----------  ------------  ------------    ------------   -----------  -----------
Balance at December 31, 1999.......  6,347,325    22,500,000            --              --       (68,000)   4,740,000
Issuance of common stock earned
 by Premier........................         --            --            --              --            --           --
Exercise of stock options..........         --            --            --              --            --           --
Grants of stock options, net of
 forfeitures.......................         --            --            --              --    (1,491,000)          --
Amortization of deferred stock-
 based compensation................         --            --            --              --       615,000           --
Net advances to American
 BioScience, Inc...................         --            --            --      (7,105,000)           --           --
Comprehensive income (loss):
   Net loss........................         --            --            --              --            --   (8,759,000)
   Foreign currency translation
    loss...........................         --            --            --              --            --           --

Comprehensive income (loss)........         --            --            --              --            --           --
Imputed preferred stock dividends..         --            --            --              --            --   (1,000,000)
                                    ----------  ------------  ------------    ------------   -----------  -----------
Balance at December 31, 2000.......  6,347,325    22,500,000            --      (7,105,000)     (944,000)  (5,019,000)
Issuance of common stock earned
 by Premier........................         --            --            --              --            --           --
Exercise of stock options..........         --            --        23,000              --            --           --
Grants of stock options, net of
 forfeitures.......................         --            --            --              --    (6,260,000)          --
Amortization of deferred stock-
 based compensation................         --            --            --              --     2,491,000           --
Net advances to American
 BioScience, Inc...................         --            --            --     (13,852,000)           --           --
Payment by American BioScience,
 Inc. of share of liability to
 VivoRx, Inc., net of related
 deferred income taxes.............         --            --            --              --            --           --
Issuance of warrants...............         --            --            --              --            --           --
Exercise of warrants...............         --            --            --              --            --           --
Recapitalization of company in
 Delaware..........................         --            --    21,968,000              --            --           --
Conversion of preferred stock into
 common stock...................... (6,347,325)  (22,500,000)   56,019,000              --            --           --
Net proceeds from sale of common
 stock in initial public offering..         --            --   131,031,000              --            --           --
Accrual of distribution to American
 BioScience, Inc. for product
 license rights....................         --            --   (60,000,000)             --            --           --
Comprehensive income:
   Net income......................         --            --            --              --            --   12,628,000

   Foreign currency translation
    loss...........................         --            --            --              --            --           --

Comprehensive income...............         --            --            --              --            --           --
Imputed preferred stock dividends..         --            --            --              --            --     (951,000)
                                    ----------  ------------  ------------    ------------   -----------  -----------
Balance at December 31, 2001.......         --  $         --  $149,041,000    $(20,957,000)  $(4,713,000) $ 6,658,000
                                    ==========  ============  ============    ============   ===========  ===========
</TABLE>
<TABLE>
<CAPTION>

                                        Other
                                    Comprehenive
                                    Income (Loss)    Total
                                    ------------- ------------
<S>                                 <C>           <C>
Balance at December 31, 1998.......   $(14,000)   $ 42,272,000
Issuance of common stock
 earned by Premier.................         --       2,714,000
Exercise of stock options..........         --           1,000
Grants of stock options............         --              --
Amortization of deferred
 stock-based compensation..........         --          88,000
Comprehensive income:
   Net income......................         --       6,082,000
   Foreign currency translation
    gain...........................     18,000          18,000
                                                  ------------
Comprehensive income...............         --       6,100,000
Imputed preferred stock dividends..         --      (1,000,000)
                                      --------    ------------
Balance at December 31, 1999.......      4,000      50,175,000
Issuance of common stock earned
 by Premier........................         --       4,750,000
Exercise of stock options..........         --          28,000
Grants of stock options, net of
 forfeitures.......................         --              --
Amortization of deferred stock-
 based compensation................         --         615,000
Net advances to American
 BioScience, Inc...................         --      (7,105,000)
Comprehensive income (loss):
   Net loss........................         --      (8,759,000)
   Foreign currency translation
    loss...........................     (5,000)         (5,000)
                                                  ------------
Comprehensive income (loss)........         --      (8,764,000)
Imputed preferred stock dividends..         --      (1,000,000)
                                      --------    ------------
Balance at December 31, 2000.......     (1,000)     38,699,000
Issuance of common stock earned
 by Premier........................         --       1,906,000
Exercise of stock options..........         --         162,000
Grants of stock options, net of
 forfeitures.......................         --              --
Amortization of deferred stock-
 based compensation................         --       2,491,000
Net advances to American
 BioScience, Inc...................         --     (13,852,000)
Payment by American BioScience,
 Inc. of share of liability to
 VivoRx, Inc., net of related
 deferred income taxes.............         --       4,026,000
Issuance of warrants...............         --         393,000
Exercise of warrants...............         --              --
Recapitalization of company in
 Delaware..........................         --              --
Conversion of preferred stock into
 common stock......................         --      13,534,000
Net proceeds from sale of common
 stock in initial public offering..         --     131,040,000
Accrual of distribution to American
 BioScience, Inc. for product
 license rights....................         --     (60,000,000)
Comprehensive income:
   Net income......................         --      12,628,000
                                                  ------------
   Foreign currency translation
    loss...........................     (6,000)         (6,000)
                                                  ------------
Comprehensive income...............         --      12,622,000
Imputed preferred stock dividends..         --        (951,000)
                                      --------    ------------
Balance at December 31, 2001.......   $ (7,000)   $130,070,000
                                      ========    ============
</TABLE>
                            See accompanying notes.

                                      39

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                       Years Ended December 31,
                                                                               ---------------------------------------
                                                                                   2001          2000         1999
                                                                               ------------  ------------  -----------
<S>                                                                            <C>           <C>           <C>
Cash flows from operating activities:
Net income (loss)............................................................. $ 12,628,000  $ (8,759,000) $ 6,082,000
Adjustments to reconcile net income (loss) to net cash provided by operating
 activities:
    Depreciation..............................................................    8,422,000     7,632,000    6,776,000
    Amortization..............................................................      930,000       129,000      128,000
    Imputed interest on liability to VivoRx, Inc..............................    2,332,000            --           --
    Stock-based compensation..................................................    2,491,000       615,000       88,000
    Loss on disposal of property, plant and equipment.........................      214,000       291,000           --
    Deferred income taxes.....................................................     (358,000)  (12,437,000)  (1,512,000)
    Equity in net (income) loss of Drug Source Co., LLC.......................   (1,414,000)      122,000           --
    Common stock earned by Premier............................................    1,754,000     4,782,000    2,082,000
    Changes in operating assets and liabilities:
       Accounts receivable, net of chargebacks................................      (80,000)   (2,051,000)  (9,351,000)
       Inventories............................................................  (15,613,000)   (6,815,000)    (829,000)
       Prepaid expenses and other current assets..............................   (1,618,000)     (185,000)    (116,000)
       Accounts payable and accrued expenses..................................    5,317,000     4,902,000    4,838,000
       Liability to VivoRx, Inc...............................................   (3,400,000)   30,354,000           --
                                                                               ------------  ------------  -----------
       Net cash provided by operating activities..............................   11,605,000    18,580,000    8,186,000

CASH FLOWS FROM INVESTING ACTIVITIES:
    Investment in Drug Source Co., Inc........................................           --      (220,000)          --
    Purchases of property, plant and equipment................................   (8,846,000)  (11,631,000)  (6,762,000)
    Purchase of product license rights........................................     (300,000)           --           --
                                                                               ------------  ------------  -----------
    Net cash used in investing activities.....................................   (9,146,000)  (11,851,000)  (6,762,000)

CASH FLOWS FROM FINANCING ACTIVITIES:
    Payments on long-term debt................................................  (18,939,000)   (4,562,000)  (1,499,000)
    Proceeds from the exercise of stock options...............................      162,000        28,000        1,000
    Increase in amounts due from American BioScience, Inc.....................  (13,852,000)   (7,127,000)    (991,000)
    Payment of deferred financing costs.......................................   (4,689,000)           --           --
    Proceeds from the sale of common stock, net...............................  131,040,000            --           --
                                                                               ------------  ------------  -----------
Net cash provided by (used in) financing activities...........................   93,722,000   (11,661,000)  (2,489,000)
                                                                               ------------  ------------  -----------
Increase (decrease) in cash and cash equivalents..............................   96,181,000    (4,932,000)  (1,065,000)
Foreign currency translation (gain) loss......................................        6,000         5,000      (18,000)
Cash and cash equivalents at beginning of period..............................      501,000     5,428,000    6,511,000
                                                                               ------------  ------------  -----------
Cash and cash equivalents at end of period.................................... $ 96,688,000  $    501,000  $ 5,428,000
                                                                               ============  ============  ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
    Interest.................................................................. $  2,423,000  $  2,007,000  $ 2,081,000
    Income taxes (including in lieu of payments to American BioScience,
     Inc.)....................................................................    7,764,000     7,003,000    5,244,000

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
 FINANCING ACTIVITIES
    Accrual of distribution payable to American BioScience Inc. for product
     license rights........................................................... $ 60,000,000  $         --  $        --
    Payment by American BioScience, Inc. of share of liability to VivoRx,
     Inc., net of related deferred tax asset of $2,574,000....................    4,026,000            --           --
    Imputed preferred stock dividends.........................................      951,000     1,000,000    1,000,000
    Conversion of series A,B,C and D preferred stock into common stock........   56,034,000            --           --
</TABLE>

                            See accompanying notes.

                                      40

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 2001


1.  DESCRIPTION OF BUSINESS

   American Pharmaceutical Partners, Inc. (Company) is a majority owned
subsidiary of American BioScience, Inc. (ABI), a California corporation. The
Company was incorporated in the state of California on March 26, 1996. On
December 10, 2001, the Company reincorporated in the state of Delaware. At
December 31, 2001, ABI owned 31,989,440 shares (66.3%) of the Company's common
stock.

   The Company is a specialty pharmaceutical company that develops,
manufactures, and markets injectable pharmaceutical products, with a primary
focus in the areas of oncology, infectious disease, and critical care. The
majority of the Company's products are used in hospital or urgent care clinical
settings and are primarily contracted and distributed through group purchasing
organizations and drug wholesalers.

   On June 1, 1998, we acquired Fujisawa USA, Inc.'s generic injectable
pharmaceutical business (Fujisawa Acquisition), of which ABI funded $42,500,000
in cash and its stock in exchange for shares of the Company's Series B, C and D
preferred stock. The Company has derived substantially all of its revenue since
this acquisition from the sale of products manufactured in facilities acquired
from Fujisawa.

   A subsidiary of the Company owns a 50% share of Drug Source Co., LLC. Drug
Source Co., LLC is a joint venture with three other partners established in
June 2000 to purchase raw materials for resale to pharmaceutical companies,
including the Company. The Company's equity in the net income (loss) of Drug
Source Co., LLC is classified in operating expenses in the accompanying
consolidated statements of operations.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Basis of Consolidation

   The consolidated financial statements include the assets, liabilities, and
results of operations of the Company and its subsidiaries. The investment in
Drug Source Co. LLC is accounted for using the equity method. All material
intercompany balances and transactions have been eliminated.

  Fiscal Year

   The Company uses a 52-week, 53-week fiscal year that ends on the Saturday
nearest to December 31. For clarity of presentation, all periods are presented
as if the year ended on December 31. Each of the years ended December 31, 2001,
2000, and 1999 contained 52 weeks.

  Cash and Cash Equivalents

   It is the Company's policy to reflect as cash equivalents all highly liquid
investments that have a maturity of three months or less at the time of
acquisition.

  Accounts Receivable and Concentration of Credit Risk

   The Company has executed contracts, varying between one and six years, with
group purchasing organizations and individual hospital groups to supply the
Company's products to hospitals and alternate site customers. As is traditional
in the pharmaceutical industry, the Company sells a significant portion of its
products to wholesalers who, in turn, fulfill the Company's contracts. Four
wholesalers each individually comprise from

                                      41

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

15% to 27% of the Company's sales annually and, collectively, comprised 83%,
86%, and 72% of the Company's sales for the years ended December 31, 2001,
2000, and 1999, respectively.

   Accounts receivable primarily represent receivables from wholesalers and
other direct customers. These four wholesalers described above represent
approximately 84% and 78% of accounts receivable at December 31, 2001 and 2000,
respectively. The remaining receivables are from other wholesalers, hospitals
and other end users. Receivables from export accounts represent approximately
8% and 7% of net accounts receivable at December 31, 2001 and 2000,
respectively.

   The Company performs ongoing credit evaluations of its customers' financial
condition, and generally does not require collateral. Allowances are maintained
for potential credit losses and such losses have been within management's
expectations.

  Inventories

   Inventories are valued at the lower of cost or market as determined under
the first-in, first-out (FIFO) method.

  Property, Plant and Equipment

   Property, plant and equipment is stated on the basis of cost or allocated
acquisition value. Provisions for depreciation are computed for financial
reporting purposes using the straight-line method over the estimated useful
life of the related asset as follows:

<TABLE>
                     <S>                        <C>
                     Buildings and improvements 10-30 years
                     Machinery and equipment...  3-10 years
                     Furniture and fixtures....   5-7 years
</TABLE>

  Deferred Financing Costs

   Expenses incurred in connection with obtaining the Company's credit facility
were deferred and are being amortized over the life of the facility using the
straight-line method. Deferred financing costs are stated net of accumulated
amortization in the consolidated balance sheets.

  Product License Rights

   In June 2001, the Company purchased license rights to acyclovir and
etoposide for $300,000. These license rights are being amortized over five
years using the straight-line method. Product license rights are stated net of
accumulated amortization in the consolidated balance sheets.

  Revenue Recognition

   The Company recognizes revenue upon shipment of products to customers, upon
fulfillment of acceptance terms, if any, and when no significant contractual
obligations remain. Adjustments to net sales are made for estimated wholesaler
chargebacks (as more fully described below), contractual allowances and early
payment discounts.

   The fair value of common stock earned by Premier Purchasing Partners, L.P.
(Premier) (see Note 11) and administrative fees payable to Premier are deducted
from net sales. The Company provides for returns at the time

                                      42

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of sale based on estimated product returns. The Company's revenue recognition
policies are in compliance with Securities and Exchange Commission Staff
Accounting Bulletin No. 101.

   Shipping and handling fees billed to customers are recognized in net sales.
Shipping and handling costs are included in cost of sales.

  Chargeback Liabilities, Net of Advances

   The majority of the Company's products are distributed through independent
wholesalers. Sales to wholesalers are transacted at the Company's wholesale
list price. The wholesalers generally sell to a hospital, alternative
healthcare facility, or an independent pharmacy at a contractual price
previously established between the end users and the Company.

   At the time the wholesaler sells the product to the end user at the contract
price, the wholesaler charges the Company back for the difference between the
list price and the contract price. When the Company records the sale, a
receivable from the wholesaler is established at the Company's list price.
However, it is known from experience that most of these sales prices will
eventually be reduced (through the chargebacks) to the contract price.
Therefore, at the time of the sale, a liability is recorded for the difference
between the list price and the average contract price. This liability is
estimated by calculating, by product code, the average number of units that
will be sold on contract and multiplying that number by the weighted average
contract price. Thus, a contra asset is established, reducing the amount of the
receivable from the wholesaler by the difference between the list price and the
ultimate selling price, the average contract price. In addition, cash advance
credits are also periodically issued to wholesalers as a standard trade
practice.

  Income Taxes

   Through December 14, 2001, for federal and, where applicable, state income
tax purposes, taxable income of the Company has been included in the
consolidated income tax returns of ABI. However, since ABI's ownership interest
in the Company has dropped below 80%, due to the Company's initial public
offering on December 14, 2001, the Company no longer qualifies to be included
in the consolidated tax return of ABI in accordance with Internal Revenue
Service regulations. The Company's provision for income taxes is computed on a
separate return basis in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). All allocated
income taxes of the Company have been accounted for through the intercompany
account with ABI.

  Research and Development Costs

   Costs relating to the research and development of new products are charged
to expense as incurred.

  Stock-Based Compensation

   As permitted by Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), the Company accounts
for stock options granted to its employees and outside directors using the
intrinsic value method. Certain of the Company's stock options have been
granted with exercise prices below the fair value of the Company's common stock
as estimated by the Company's management for financial reporting purposes. For
these stock options, the Company has recorded deferred stock-based compensation
for the difference between their exercise prices and such estimated fair values
which is being

                                      43

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

amortized to expense on an accelerated basis using the graded vesting method
over the stock options' vesting period in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 28.

  Use of Estimates

   The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements. Estimates also affect the reported
amounts of revenues and expenses during the reporting period. The Company
routinely estimates chargeback liabilities and other sales allowances. Actual
results could differ from those estimates.

  Fair Value of Financial Instruments

   The Company's financial instruments consist mainly of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and
its credit facility. Cash equivalents include short-term investments with
maturities of three months or less. The fair value of substantially all
financial instruments of the Company approximates their carrying value due to
the short-term nature of these financial instruments. The interest rates on
borrowings under the Company's bank credit facility are adjusted periodically
to market rates.

   The Company has not used any derivatives or other foreign currency hedging
instruments and, accordingly, Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," has had no
effect on the Company's consolidated financial statements.

  Per Share Information

   Basic income (loss) per common share is computed by dividing net income
(loss) applicable to common stock by the weighted-average number of common
shares outstanding plus the number of common shares earned by, but not yet
issued to Premier (see Note 11). Dilutive income per common share is computed
by dividing net income applicable to common stock by the weighted-average
number of common shares used for the basic calculations plus potentially
dilutive shares for the portion of the year that the shares were outstanding.
Potentially dilutive common shares result from outstanding stock options and
warrant, and Series B, Series C and Series D convertible preferred stock. The
assumed conversion of Series A convertible preferred stock is anti-dilutive.

                                      44

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Calculations of basic and diluted income per common share information are
based on the following:

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                                 -------------------------------------
                                                                    2001         2000         1999
                                                                 -----------  -----------  -----------
<S>                                                              <C>          <C>          <C>
Basic and dilutive numerator:
   Net income (loss)............................................ $12,628,000  $(8,759,000) $ 6,082,000
   Less dividends on series A convertible preferred stock.......    (951,000)  (1,000,000)  (1,000,000)
                                                                 -----------  -----------  -----------
   Net income (loss) applicable to common stock................. $11,677,000  $(9,759,000) $ 5,082,000
                                                                 ===========  ===========  ===========
Denominator:
   Weighted-average common shares outstanding...................  24,656,000   22,248,000   21,092,000
   Weighted-average common shares earned by, but not issued to,
     Premier....................................................      62,000      280,000      885,000
                                                                 -----------  -----------  -----------
   Weighted common shares--Basic................................  24,718,000   22,528,000   21,977,000
Net effect of dilutive securities:
   Stock options................................................   2,665,000           --    1,086,000
   Warrant......................................................     167,000           --        5,000
   Weighted-average conversion of convertible preferred stock:
       Series B.................................................   4,023,000           --    4,232,000
       Series C.................................................   1,341,000           --    1,410,000
       Series D.................................................   6,034,000           --    6,347,000
                                                                 -----------  -----------  -----------
   Weighted common shares--Diluted..............................  38,948,000   22,528,000   35,057,000
                                                                 ===========  ===========  ===========
Income (loss) per common share--Basic........................... $      0.47  $     (0.43) $      0.23
                                                                 ===========  ===========  ===========
Income (loss) per common share--Diluted......................... $      0.30  $     (0.43) $      0.14
                                                                 ===========  ===========  ===========
</TABLE>

  Recent Accounting Pronouncements

   In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.141, BUSINESS COMBINATIONS, and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS No. 141 and SFAS No. 142). Under the
new rules, effective January 1, 2002, goodwill and intangible assets deemed to
have indefinite lives, related to acquisitions prior to June 30, 2001, will no
longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives. The effect of adopting SFAS No. 141 and SFAS
No. 142 is not expected to have any impact on the Company's statement of
operations or financial position.

                                      45

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


3.  TRANSACTIONS WITH AMERICAN BIOSCIENCE, INC.

  Loans to American Bioscience, Inc.

   A summary of activity in the loans to American BioScience Inc. account,
which is classified as a deduction from stockholders equity in the accompanying
consolidated balance sheet, is as follows:

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                             -------------------------------------
                                                                2001         2000         1999
                                                             -----------  -----------  -----------
<S>                                                          <C>          <C>          <C>
Balance at beginning of year................................ $ 7,105,000  $   (22,000) $(1,013,000)
Payments on behalf of American BioScience, Inc.:
   New product development (principally related to ABI-007).   4,865,000    3,197,000    3,834,000
   Income taxes.............................................   5,735,000   10,560,000    1,655,000
   Liability to VivoRx, Inc.................................   4,600,000           --           --
   Interest charged to American BioScience, Inc.............   1,104,000           --           --
   Other....................................................   5,865,000    4,373,000      746,000
In lieu of income tax liability.............................  (7,764,000)  (7,003,000)  (5,244,000)
Repayments by American BioScience, Inc......................    (553,000)  (4,000,000)          --
                                                             -----------  -----------  -----------
                                                             $20,957,000  $ 7,105,000  $   (22,000)
                                                             ===========  ===========  ===========
</TABLE>

   Payments on behalf of ABI's new product development activities include the
Company's manufacturing costs related to ABI's products in development,
payments made to third parties for ABI's clinical studies and outside testing,
and charges for Company services of employees related to ABI's products in
development.

   On July 24, 2001, the Company received a $22,000,000 demand promissory note
from ABI (Demand Note). This note was amended in October, 2001 to $23,000,000.
The Demand Note bears interest at a rate equal to the Company's rate of
interest on its term loans (7.25% at December 31, 2001). For the period from
February 1, 2001 through July 23, 2001, the amounts due from ABI bore interest
at a rate equal to the Company's rate of interest on its revolving line of
credit. Previously, the amounts due from ABI did not bear interest.

   In connection with the execution of the Demand Note, as security for payment
of the obligations under the Demand Note, the Company entered into a pledge
agreement with ABI under which ABI pledged and granted to the Company a
security interest in shares of the Company's common stock held by it having a
fair market value equal to 120% of the balance of the Demand Note.

  Vivorx, Inc. Settlement

   As of December 31, 2001, the Company is jointly and severally liable for the
remaining outstanding portion of ABI's share of the VivoRx, Inc. settlement,
$24,000,000, as more fully described in Note 15. The allocation of the
settlement obligation was primarily based on ABI obtaining clear title and
ownership to its intellectual property, including the intellectual property
underlying ABI's ABI-007 product candidate currently in Phase III clinical
trials. Notwithstanding the agreed upon allocation of the settlement obligation
between ABI and the Company (limiting the Company's share to $3,400,000), the
Company recorded the present value of the entire settlement of $30,354,000 in
the year ended December 31, 2000, which is included in (gain) loss on
litigation settlements, net, in the accompanying consolidated statement of
operations. As ABI makes the payments to VivoRx, the liability to VivoRx in the
Company's consolidated balance sheet will be reduced and a corresponding
capital contribution will be recorded net of related deferred income taxes.

                                      46

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company expects that ABI will have sufficient liquid assets to fulfill
its portion of the liability to VivoRx. The amount due from ABI is classified
as a deduction from stockholders' equity in the accompanying consolidated
balance sheet. In July, 2001, ABI agreed that if, after the effective date of
the Company's initial public offering of its common stock, it fails to timely
make any of the settlement payments due to VivoRx, ABI will surrender to the
Company shares of the Company's common stock having a fair market value of 120%
of the unpaid amount.

  Guarantee of Borrowings

   In December 2001, ABI guaranteed all borrowings outstanding under the
Company's credit facility that is described in Note 7.

  Product License Agreement

   In November 2001, the Company entered into a license agreement with ABI
under which the Company acquired the exclusive rights to manufacture, market
and sell ABI-007 in North America, and which provides for initial license
payments of $60,000,000. This license is perpetual. American BioScience is
responsible for substantially all costs associated with the development of
ABI-007, except that the Company has agreed to provide up to $2,000,000 of
ABI-007 for use in clinical trials. The cost of the clinical product was
charged to research and development expense in the year ended December 31,
2001. The Company also is required to make milestone payments of up to (a)
$60,000,000 for indications related to breast, ovarian and lung cancers and (b)
$32,500,000 for indications relating to prostate cancer and other indications
agreed upon between ABI and the Company. The Company also may be required to
make additional milestone payments of up to an aggregate of $110,000,000 based
upon the achievement of particular annual sales levels. Profits from any sales
of ABI-007 will be shared equally with ABI after deducting costs of goods sold,
selling expenses and other appropriate deductions. All costs and expenses
related to product recalls and product liability claims generally will be split
equally between ABI and the Company.

   The initial license payment has been accounted for as a distribution of
Company's stockholders' equity to ABI. As of December 31, 2001, the entire
$60,000,000 had been accrued as a distribution payable to ABI. The $60,000,000
was paid to ABI in January 2002.

4.  INVENTORIES

   Inventories consist of the following:

<TABLE>
<CAPTION>
                                         December 31,
                                    -----------------------
                                       2001        2000
                                    ----------- -----------
                    <S>             <C>         <C>
                    Finished goods. $15,792,000 $11,988,000
                    Work in process   7,958,000   8,021,000
                    Raw materials..  27,503,000  15,631,000
                                    ----------- -----------
                                    $51,253,000 $35,640,000
                                    =========== ===========
</TABLE>

                                      47

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


5.  PROPERTY, PLANT, AND EQUIPMENT

   Property, plant, and equipment consist of the following:

<TABLE>
<CAPTION>
                                                 December 31,
                                          --------------------------
                                              2001          2000
                                          ------------  ------------
          <S>                             <C>           <C>
          Land........................... $  2,384,000  $  2,384,000
          Building and improvements......   33,344,000    32,282,000
          Machinery and equipment........   32,465,000    27,611,000
          Furniture and fixtures.........    4,363,000     3,594,000
          Construction in progress.......    7,446,000     5,567,000
                                          ------------  ------------
                                            80,002,000    71,438,000
          Less allowance for depreciation  (26,181,000)  (17,827,000)
                                          ------------  ------------
                                          $ 53,821,000  $ 53,611,000
                                          ============  ============
</TABLE>
6.  ACCRUED LIABILITIES

   Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                December 31,
                                           -----------------------
                                              2001        2000
                                           ----------- -----------
             <S>                           <C>         <C>
             Payroll and employee benefits $ 6,207,000 $ 4,481,000
             Legal........................   1,015,000     254,000
             Insurance....................   1,183,000   1,084,000
             Sales and marketing..........   4,812,000   4,412,000
             Accrued state income taxes...   2,211,000     288,000
             Other........................   1,010,000   2,200,000
                                           ----------- -----------
                                           $16,438,000 $12,719,000
                                           =========== ===========
</TABLE>

7.  CREDIT FACILITY

   Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                      December 31,
                                                    ----------------
                                                    2001    2000
                                                    ---- -----------
          <S>                                       <C>  <C>
          Tranche A term loan......................  $-- $16,200,000
          Tranche B term loan......................   --   2,738,000
          Other....................................   --       1,000
                                                      --  18,939,000
          Less current maturities of long-term debt   --  (4,001,000)
                                                    ---- -----------
                                                     $-- $14,938,000
                                                    ==== ===========
</TABLE>

   During 1998, the Company entered into a credit facility providing for two
term loans totaling $25,000,000 and a revolving line of credit agreement for an
amount not to exceed $25,000,000. In December 2001, this credit

                                      48

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

facility was replaced by a new credit facility with another lender. The new
facility consists of a $25,000,000 term loan and a $50,000,000 revolving line
of credit. Proceeds of the Company's initial public offering were used to
retire the new term loan and pay off all outstanding amounts under the new
revolving line of credit. The revolving line of credit can be increased to
$75,000,000 at the Company's request. The new credit facility expires December
14, 2006.

   Under the former credit agreement, the Company was required to make a
mandatory prepayment of the term loans within 90 days of the end of each fiscal
year in an amount equal to the lesser of $5,000,000 or 50% of excess cash flow
(as defined). For the year ended December 31, 2000, the lender agreed to waive
the mandatory prepayment in full.

   Under the former credit agreement, the Company could elect the interest
rates on the term loans to be from either prime plus .75% or LIBOR plus 2.75%.
The weighted average interest rate on the outstanding term loans was 7.5%, 9.4%
and 8.5% for the year ended December 31, 2001, 2000 and 1999, respectively. The
Company could elect the interest rate on borrowings under the revolving line of
credit to be either prime plus .25% or LIBOR plus 2.25% prior to Amendment Four
to the credit agreement, dated July 24, 2001. From July 24, 2001 to the
termination date, the available Revolving credit line rates were prime plus
..50% or LIBOR plus 2.5%.

   The new credit facility's interest rate for the revolving line is the
greater of prime plus .50% or the Federal funds rate plus .50%. The Company
also has the option of converting revolving line loans to the Eurocurrency
Rate, as defined.

   There were no outstanding balances under the revolving lines of credit at
December 31, 2001 and 2000. During the years ended December 31, 2001 and 2000,
the highest outstanding revolving loan balances were $19.6 million and $4.1
million respectively.

   The loans under the credit facility are collateralized by substantially all
of the Company's assets. Under the credit facility, the Company is prohibited
from paying dividends and is subject to various covenants and restrictions. At
December 31, 2001, the Company was in compliance with all covenants.

   The credit facility limits the aggregate undrawn amount of all letters of
credit and assesses fees on the face amount of commercial and standby letters
of credit. A fee is assessed at 3.75% of the face amount of commercial and
standby letters of credit, respectively. The letters of credit are payable on
demand. There were no amounts outstanding under letters of credit at December
31, 2001.

   During the year ended December 31, 2001, no interest expense was
capitalized. Interest expense of $226,000 and $27,000 was capitalized during
the years ended December 31, 2000 and 1999, respectively, as part of a major
construction project.

8.  LEASES AND COMMITMENTS

   The Company has entered into various operating lease agreements for
warehouses, office space, automobiles, communications, data processing
equipment and software, and office equipment. Rental expense amounted to
$1,643,000, $1,284,000 and $915,000 for the years ended December 31, 2001,
2000, and 1999, respectively.

                                      49

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   As of December 31, 2001, future annual minimum lease payments related to
these noncancelable operating leases are as follows:

<TABLE>
<CAPTION>
                             Year         Amount
                             ----       ----------
                             <S>        <C>
                             2002...... $2,108,000
                             2003......  1,776,000
                             2004......  1,350,000
                             2005......    517,000
                             2006......    237,000
                             Thereafter     47,000
                                        ----------
                                        $6,035,000
                                        ==========
</TABLE>

9.  EMPLOYEE BENEFIT PLAN

   The Company sponsors a 401(k) defined-contribution plan (401(k) Plan)
covering substantially all eligible employees. Employee contributions to the
401(k) Plan are voluntary. The Company contributes an amount equal to 50% of a
covered employee's eligible contribution not to exceed 6% of a participant's
compensation. Employer contributions vest over a period of three years.
Participants may contribute up to 15% of their salary up to the annual tax
deferred contribution limit allowed by the Internal Revenue Service. The
Company's total matching contributions to the 401(k) Plan were $962,000,
$799,000 and $732,000 for the years ended December 31, 2001, 2000, and 1999,
respectively. The Company may contribute additional amounts to the 401(k) Plan
at its discretion. These discretionary employer contributions vest over a
period of six years. No discretionary contributions have been made to the
401(k) Plan by the Company.

10.  EMPLOYEE STOCK PURCHASE PLAN

   In December 2001, the Company's Board of Directors adopted the 2001 Employee
Stock Purchase Plan which is intended to qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code. An aggregate of 2,000,000
shares of the Company's common stock are reserved for issuance, and the Plan
provides for annual increases in the number of shares of the Company's common
stock, subject to the 2001 Employee Stock Purchase Plan, equal to the lesser of
1,500,000 shares, a number of shares equal to 2% of the total number of shares
outstanding or a number of shares as determined by the Company's Board of
Directors.

11.  SERIES A REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

  Common Stock

   In March 1996, the Company sold 20,000,000 shares of common stock to ABI for
$1,000. In October 1996, the Company sold 1,052,640 shares to Premier
Purchasing Partners, L.P. (Premier), a hospital group purchasing organization,
for $100.

   Pursuant to an agreement that expired March 31, 2001, Premier earned, at no
cost, additional common shares of the Company's common stock based upon the
level of sales by the Company to Premier's partners. As of December 31, 2001,
1,861,953 shares had been earned by and issued to Premier.

   The Company accrued for the shares, at their estimated fair value, as
Premier earned the shares. The estimated fair value of shares earned by Premier
amounted to $1,754,000, $4,782,000, and $2,082,000 for the

                                      50

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

years ended December 31, 2001, 2000, and 1999, respectively, and have been
classified as a reduction of net sales in the accompanying statements of
operations.

  Reincorporation

   On December 10, 2001, the Company reincorporated in Delaware, and filed a
certificate of incorporation authorizing the issuance of up to 100,000,000
shares of common stock and up to 6,000,000 shares of preferred stock effective
upon the closing of the Company's initial public offering. The existing
stockholders received shares of common stock and preferred stock of the
Delaware corporation in exchange for their shares of common stock and preferred
stock of the California corporation.

  Initial Public Offering

   On December 14, 2001, the Company completed an initial public offering of
its common stock selling 9,000,000 shares of common stock at a price of $16.00
per share. Gross proceeds of the offering amounted to $144,000,000 of which the
Company received net proceeds of $133,920,000, after $10,080,000 in
underwriting discounts and commissions and other expenses of $2,879,000
relating to the offering.

  Shares Reserved for Issuance

   As of December 31, 2001, 6,297,765 common shares are reserved for the
exercise of stock options, and 2,000,000 common shares are reserved for
issuance for the employee stock purchase plan.

  Warrant

   Pursuant to an obligation arising from services performed related to the
financing of the Fujisawa Acquisition, the Company issued a warrant to an
investment banking firm to purchase up to an aggregate of 234,126 shares of
common stock at an exercise price of $3.54 per share. The fair value of the
warrant, $393,000 based upon the Black-Scholes option pricing model, was
recorded as deferred financing costs as of the date of the Fujisawa
Acquisition. The warrant was exercised on December 13, 2001, and the holder of
the warrant received 182,325 shares. The remaining 51,801 warrants were
tendered to the Company as payment for the shares issued and were retired upon
receipt.

  Preferred Stock

   In June 1998, the Company sold 2,821,035 shares of Series A convertible
preferred stock for $10,000,000 to an unrelated party. Also, during 1998, the
Company entered into a Stock Purchase Agreement with ABI whereby the Company
sold 4,231,585 shares of Series B convertible preferred stock for $15,000,000,
1,410,530 shares of Series C convertible preferred stock for $5,000,000, and
6,347,325 shares of Series D convertible preferred stock for consideration of
ABI's issue of preferred stock, amounting to $22,500,000, in connection with
the Fujisawa Acquisition.

   On December 14, 2001, in conjunction with the Company's initial public
offering, all the outstanding shares of Series A, B, C, and D preferred stock
were converted into an aggregate of 14,810,475 shares of $0.001 par value
common stock.

   The Company is authorized to issue up to 6,000,000 shares of preferred stock
that is not designated as a particular class. The Company's Board of Directors
may authorize and cause the issuance of the undesignated

                                      51

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

preferred stock in one or more series, determine the powers, preferences and
rights and the qualifications, limitations or restrictions granted to or
imposed upon any wholly unissued series of undesignated preferred stock and to
fix the number of shares constituting any series and the designation of the
series, without any further vote or action by our stockholders.

  Voting Rights

   The holders of our common stock are entitled to one vote for each share held
of record upon such matters and in such manner as may be provided by law.

  Dividends

   The Company's credit facility prohibits the payment of dividends. In the
event there is a liquidation, dissolution or wind up of the Company, the
holders of our common stock are entitled to share ratably in all assets
remaining after payment of liabilities and liquidation preferences of any
outstanding shares of preferred stock. Holders of our common stock have no
preemptive rights or rights to convert their common stock into any other
securities.

   The imputed dividends on the Series A redeemable convertible preferred stock
were not paid since such dividends were never declared and these shares were
automatically converted to common stock at the closing of the Company's initial
public offering.

  Registration Rights

   Following the closing of the initial public offering on December 14, 2001,
the holders of 37,907,393 shares of our common stock, which include shares held
by ABI are entitled to registration rights with respect to their shares.
Beginning six months after the offering, the holders of these shares may
require the Company to register all or part of their shares. In addition, these
holders may require the Company to include their shares in future registration
statements that the Company files and may require the Company to register their
shares on Form S-3. Upon registration, these shares will be freely tradable in
the public market without restriction.

   Generally, all expenses in effecting these registration statements, with the
exception of underwriting discounts and selling commissions, will be borne by
the Company. These registration rights are subject to some conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in a registration. The Company agreed to
indemnify the holders of these registration rights, and each selling holder has
agreed to indemnify the Company, against liabilities under the Securities Act,
the Securities Exchange Act or other applicable federal or state law.

12.  STOCK OPTIONS

  1997 Stock Option Plan

   During 1998, the Company's Board of Directors authorized the 1997 Stock
Option Plan (1997 Plan). Under the 1997 Plan, options to purchase shares of the
Company's common stock may be granted to certain employees and directors with
an exercise price equal to the estimated fair market value of the Company's
common stock on the date of grant. The stock options have a term of 10 years,
with a vesting period of four years. In accordance with the terms of the 1997
Plan, options granted to employees on or before December 1, 1999, vested

                                      52

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

immediately upon the completion of the initial public offering by the Company
on December 14, 2001. No further options will be granted under the 1997 Plan.

  2001 Stock Incentive Plan

   In December 2001, the Company's Board of Directors authorized the 2001 Stock
Incentive Plan (2001 Plan). The 2001 Plan provides for the grant of incentive
stock options to employees, including officers and employee directors,
non-qualified stock options to employees, directors and consultants, and other
types of awards. All future option grants will be made solely under the 2001
Plan. The Company has reserved 3,000,000 shares of its common stock for
issuance under the 2001 Plan and, as of December 31, 2001, there were 2,202,826
additional options available for grant under the 2001 Plan.

   The Company's Board of Directors or a committee designated by the Board of
Directors administers the 2001 Plan and has authority to determine the terms
and conditions of awards, including the types of awards, the number of shares
subject to each award, the vesting schedule of the awards and the selection of
grantees.

   The exercise price of all options granted under the 2001 Plan will be
determined by the Company's Board of Directors or a committee designated by the
Company's Board of Directors, but in no event will this price be less than the
fair market value of the Company's common stock on the date of grant, unless
otherwise determined by the Board of Directors with respect to non-qualified
stock options.

  2001 Non-Employee Director Stock Option Program

   The 2001 Non-Employee Director Stock Option Program (2001 Program) was
adopted as part, and is subject to the terms and conditions, of the 2001 Plan.
The 2001 Program establishes an automatic option grant program for the grant of
awards to non-employee directors.

   The 2001 Program will be administered by the Board of Directors or a
committee designated by the Board of Directors. Also, the Board of Directors or
a committee designated by the Board of Directors will determine the terms and
conditions of awards, and construe and interpret the terms of the program and
awards granted under the program. Non-employee directors may also be granted
additional incentive awards, subject to the discretion of the Board of
Directors or a committee designated by the Board of Directors.

  Stock Option Grants to Non-Employee Directors

   Effective October 30, 1998, the Company approved the grant of an option to
purchase 75,000 shares of its common stock at $0.05 per share to a non-employee
director. Half of the options vested immediately and the remaining options
vested over two years. No compensation expense associated with these options
was recorded for the year ended December 31, 2001. Compensation expense of
$83,000 and $86,000 associated with these options was recorded for the years
ended December 31, 2000 and 1999, respectively.

   Additionally, the Company approved on November 23, 1999, the grant of
options as of December 10, 1998, to two non-employee directors to purchase
25,000 shares of its common stock at $3.00 per share. Options for 1,000 shares
were vested immediately upon grant and the remaining options vest ratably for
board meetings attended by the option holders after December 10, 1998.

                                      53

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Stock Option Activity

   Stock option activity is as follows:

<TABLE>
<CAPTION>
                                            Number of Options
             ------------------------------------------------------------------------------
                                       Exercise Price                                           Weighted-
             -------------------------------------------------------------------             Average Exercise
               $0.05       $3.00     $4.00     $6.00   $10.00   $15.00   $16.00    Total          Price
             ----------  ---------  --------  -------  -------  -------  ------- ----------  ----------------
<S>          <C>         <C>        <C>       <C>      <C>      <C>      <C>     <C>         <C>
OPTIONS
Outstanding
 at January
 1, 1999....  1,287,500  1,822,700        --       --       --       --       --  3,110,200       $1.78
  Granted...         --     38,100   337,400       --       --       --       --    375,500        3.90
  Exercised.    (18,750)        --        --       --       --       --       --    (18,750)       0.05
  Forfeited.         --   (209,800)   (4,800)      --       --       --       --   (214,600)       3.02
             ----------  ---------  --------  -------  -------  -------  ------- ----------       -----
Outstanding
 at
 December
 31, 1999...  1,268,750  1,651,000   332,600       --       --       --       --  3,252,350        1.95
  Granted...         --         --   620,514       --       --       --       --    620,514        4.00
  Exercised.    (18,750)    (8,875)      (35)      --       --       --       --    (27,660)       1.00
  Forfeited.         --   (109,350)  (63,775)      --       --       --       --   (173,125)       3.37
             ----------  ---------  --------  -------  -------  -------  ------- ----------       -----
Outstanding
 at
 December
 31, 2000...  1,250,000  1,532,775   889,304       --       --       --       --  3,672,079        2.24
  Granted...         --         --     4,600  721,500  290,700  115,900  144,300  1,277,000        8.85
  Exercised. (1,250,000)   (26,025)   (5,300)      --       --       --       -- (1,281,325)       0.13
  Forfeited.         --    (73,925) (106,290) (31,200)    (800)  (1,100)      --   (213,315)       4.11
             ----------  ---------  --------  -------  -------  -------  ------- ----------       -----
Outstanding
 at
 December
 31, 2001...         --  1,432,825   782,314  690,300  289,900  114,800  144,300  3,454,439       $5.29
             ==========  =========  ========  =======  =======  =======  ======= ==========       =====
</TABLE>

   The weighted average fair value of options granted was $9.70, $2.45 and
$0.77 for the years ended December 31, 2001, 2000 and 1999, respectively.

   The following table summarizes information about all stock options
outstanding as of December 31, 2001:

<TABLE>
<CAPTION>
                                   Options Outstanding                  Options Exercisable
                      --------------------------------------------- ---------------------------
                                    Weighted-         Weighted-                   Weighted-
                      Number of Average Remaining  Average Exercise Number of  Average Exercise
Exercise Price Ranges  Shares   Contractual Life        Price        Shares         Price
--------------------- --------- ----------------- ----------------- --------- -----------------
<S>                   <C>       <C>               <C>               <C>       <C>
   $ 0.00--$3.50..... 1,432,825        6.2             $ 3.00       1,413,325       $3.00
   $ 3.51--$5.50.....   782,314        7.9               4.00         264,467        4.00
   $ 5.51--$8.50.....   690,300        9.1               6.00          75,000        6.00
   $ 8.51--$12.50....   289,900        9.6              10.00              --          --
   $12.51--$16.00....   259,100        9.7              15.56              --          --
                      ---------        ---             ------       ---------       -----
                      3,454,439        7.7             $ 5.36       1,752,792       $3.28
                      =========        ===             ======       =========       =====
</TABLE>

                                      54

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Stock-based Compensation

   In connection with the granting of certain options to certain employees, the
amount of related compensation to be recognized was determined by the Company
to be the difference between the stock option exercise price and the fair value
of the Company's common stock at that date as estimated by the Company's
management for financial reporting purposes. For these stock options, the
related compensation was recorded as deferred stock-based compensation that is
classified as a reduction of stockholders' equity and is being amortized to
expense on an accelerated basis using the graded vesting method over the
related stock options' vesting periods in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 28. Such expense amounted to
$2,491,000, $532,000 and $2,000 for the years ended December 31, 2001, 2000 and
1999, respectively. The remaining amount of stock-based compensation during the
years ended December 31, 2000 and 1999 relates to the stock options granted to
a non-employee director.

  Pro Forma Information About Stock Options

   For the purposes of determining the pro forma effect under SFAS No. 123 of
stock options granted to employees and directors options, the fair value of
each option is estimated on the date of grant based on the Black-Scholes option
pricing model assuming, among other things, no dividend yield, a risk-free
interest rates ranging from 4.4% to 5.5%, volatility of 70%, 83% and 62% for
the years ended December 31, 2001, 2000 and 1999, respectively, and an expected
life of five years.

   If the Company had accounted for its stock options in accordance with SFAS
No. 123 over the stock options' normal vesting periods, the pro forma net
income (loss) and related pro forma per share information would have been as
follows:

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                          -----------------------------------
                                             2001        2000         1999
                                          ----------- -----------  ----------
   <S>                                    <C>         <C>          <C>
   Pro forma net income (loss)........... $12,453,000 $(8,800,000) $5,887,000
   Pro forma net income (loss) per share:
      Basic.............................. $      0.47 $     (0.44) $     0.22
      Diluted............................ $      0.30 $     (0.44) $     0.14
</TABLE>

   The pro forma disclosure is not likely to be indicative of pro forma results
that may be expected in future years because of the fact that options vest over
several years; pro forma compensation expense is recognized as the options vest
and additional awards may also be granted.

                                      55

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


13.  INCOME TAXES

   Deferred tax assets and liabilities consist of the following:

<TABLE>
<CAPTION>
                                                       December 31,
                                                 ------------------------
                                                    2001         2000
                                                 -----------  -----------
      <S>                                        <C>          <C>
      Deferred tax assets:
      Inventory................................. $ 1,113,000  $ 1,420,000
         Depreciation...........................   1,058,000      263,000
         Customer discounts.....................     368,000      383,000
         Liability to VivoRx....................   8,961,000   10,512,000
         Other accruals and reserves............   3,464,000    3,969,000
                                                 -----------  -----------
             Total deferred tax assets..........  14,964,000   16,547,000
      Deferred tax liabilities:
         Organization costs.....................    (233,000)    (349,000)
         Other accruals and reserves............    (751,000)      (2,000)
                                                 -----------  -----------
             Total deferred tax liabilities.....    (984,000)    (351,000)
                                                 -----------  -----------
             Net deferred tax asset............. $13,980,000  $16,196,000
                                                 ===========  ===========
</TABLE>

The provision for income tax consists of the following:

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                       -------------------------------------
                                                          2001         2000         1999
                                                       ----------  ------------  -----------
<S>                                                    <C>         <C>           <C>
Current:
   Federal............................................ $7,764,000  $  5,811,000  $ 4,422,000
   State..............................................  2,123,000     1,588,000    1,183,000
   Foreign............................................     10,000            --       54,000
                                                       ----------  ------------  -----------
       Total current..................................  9,897,000     7,399,000    5,659,000
Deferred:
   Federal............................................   (302,000)   (1,604,000)  (1,200,000)
   State..............................................    (56,000)     (321,000)    (312,000)
   Liability to VivoRx................................         --   (10,512,000)          --
                                                       ----------  ------------  -----------
       Total deferred.................................   (358,000)  (12,437,000)  (1,512,000)
                                                       ----------  ------------  -----------
       Total provision (benefit) for income taxes..... $9,539,000  $ (5,038,000) $ 4,147,000
                                                       ==========  ============  ===========
</TABLE>

   The amount of allocated current liability for income taxes of the Company
accounted through the due from ABI account is $7,764,000 and $7,003,000, for
the years ended December 31, 2001 and 2000, respectively.

                                      56

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                        ----------------------
                                                         2001     2000    1999
                                                        ----     -----    ----
  <S>                                                   <C>      <C>      <C>
  Tax provision at statutory federal rate.............. 35.0%     (34.0)% 34.0%
  State income taxes, net of federal income tax benefit  6.1       (4.3)   6.2
  Nondeductible expenses...............................  1.9        1.8    0.3
                                                         ----    -----    ----
  Effective tax rate................................... 43.0%     (36.5)% 40.5%
                                                         ====    =====    ====
</TABLE>

   The Company has been included in the consolidated federal and certain state
income tax returns of ABI. Due to the Company's initial public offering of the
Company's common stock on December 14, 2001, ABI's ownership interest in the
Company has dropped below 80%. As a result, the Company no longer qualifies to
be included in the consolidated tax return of ABI in accordance with Internal
Revenue Service regulations and will file its federal and state income tax
returns on a separate basis for periods subsequent to December 14, 2001.

14.  REGULATORY MATTERS

   The Company is subject to regulatory oversight by the United States Food and
Drug Administration (FDA) and other regulatory authorities with respect to the
development and manufacturing of its products. Failure to comply with
regulatory requirements can have a significant effect on the Company's business
and operations. Current management has designed a system of controls to attempt
to ensure compliance with regulatory requirements.

15.  LITIGATION

  Vivorx, Inc. and Vivorx Diabetes, Inc.

   During 1999, VivoRx brought an action against ABI, the Company and the
Company's chairman and chief executive officer relating to the development of
the businesses of ABI and the Company while the Company's chairman and chief
executive officer was also serving as the chief executive officer and chairman
of VivoRx.

   This action was settled in February 2001 with ABI obtaining clear title and
ownership to its intellectual property, including the intellectual property
underlying ABI's ABI-007 product candidate. Under the settlement, the Company
is jointly and severally liable with ABI to pay VivoRx the remaining
obligations under the settlement agreement as follows: $12,000,000 in February
2002 and $12,000,000 in February 2003. The respective boards of directors of
the Company and of ABI, in consultation with litigation counsel, passed
resolutions allocating $3,400,000 of the total settlement obligation of
$34,000,000 to the Company and the remaining $30,600,000 to ABI. The allocation
of the settlement was primarily based upon ABI obtaining clear title and
ownership to its intellectual property, including the intellectual property
underlying ABI's ABI-007 product candidate, and, accordingly, being the primary
beneficiary of the settlement.

   Notwithstanding the agreed upon allocation of the settlement obligation
between ABI and the Company, the Company recorded the entire present value of
$30,354,000 of the litigation settlement with VivoRx as an expense of the
Company for the year ending December 31, 2000. This loss is included in
litigation settlements, net in the accompanying consolidated statements of
operations.

  Other

   A complaint was filed against the Company related to a manufacturing and
distribution agreement. In response, the Company filed a cross-complaint. The
parties reached a settlement in March 2000, resulting in a

                                      57

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

gain of $750,000 and $2,018,000 during the years ended December 31, 2001 and
2000, respectively. These gains are included in litigation settlements, net in
the accompanying consolidated statement of operations.

   The Company is from time to time subject to claims and litigation arising in
ordinary courses of business. These claims have included assertions that the
Company's products infringe existing patents and also claims that the use of
the Company's products has caused personal injuries. The Company intends to
defend vigorously any such litigation that may arise under all defenses that
would be available to the Company. In the opinion of management, the ultimate
outcome of such proceedings will not have a material adverse effect on the
consolidated financial position or results of operation of the Company.

16.  NET SALES BY PRODUCT

   Net sales by product line is as follows:

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                    ----------------------------------------
                                                        2001          2000          1999
                                                    ------------  ------------  ------------
<S>                                                 <C>           <C>           <C>
Oncology........................................... $ 31,179,000  $ 36,558,000  $ 13,267,000
Anti-infective.....................................   54,721,000    46,987,000    39,216,000
Critical care......................................  100,397,000    79,232,000    77,365,000
Contract manufacturing.............................    6,416,000     6,525,000     7,858,000
Other..............................................    1,070,000       975,000       899,000
                                                    ------------  ------------  ------------
                                                     193,783,000   170,277,000   138,605,000
Less fair value of common shares earned by Premier.   (1,754,000)   (4,782,000)   (2,082,000)
                                                    ------------  ------------  ------------
                                                    $192,029,000  $165,495,000  $136,523,000
                                                    ============  ============  ============
Estimated net sales to the Company's wholesalers of
  products resold to Premier's members included in
  above amounts.................................... $ 53,881,000  $ 51,153,000  $ 39,578,000
                                                    ============  ============  ============
</TABLE>

                                      58

<PAGE>

                    AMERICAN PHARMACEUTICAL PARTNERS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


17.  UNAUDITED QUARTERLY FINANCIAL DATA

   Selected quarterly data for 2001 and 2000 are as follows (in thousands
except per share data):

<TABLE>
<CAPTION>
                                                        2001
                                           -------------------------------
                                            First  Second   Third  Fourth
                                           ------- ------- ------- -------
     <S>                                   <C>     <C>     <C>     <C>
     Net sales............................ $39,034 $48,074 $49,290 $55,631
     Gross margin......................... $11,868 $18,273 $16,212 $24,057
     Net income........................... $   797 $ 3,845 $ 2,671 $ 5,315
     Net income applicable to common stock $   547 $ 3,595 $ 2,421 $ 5,114
     Income per common share:
        Basic............................. $  0.02 $  0.16 $  0.10 $  0.18
        Diluted........................... $  0.01 $  0.09 $  0.06 $  0.12
</TABLE>

<TABLE>
<CAPTION>
                                                            2000
                                              --------------------------------
                                               First  Second   Third   Fourth
                                              ------- ------- ------- --------
 <S>                                          <C>     <C>     <C>     <C>
 Net sales................................... $39,185 $41,971 $41,504 $ 42,835
 Gross margin................................ $16,023 $15,672 $14,646 $ 13,567
 Net income (loss)........................... $ 3,923 $ 2,227 $ 2,090 $(16,999)
 Net income (loss) applicable to common stock $ 3,673 $ 1,977 $ 1,840 $(17,249)
 Income (loss) per common share:
    Basic.................................... $  0.16 $  0.09 $  0.08 $  (0.76)
    Diluted.................................. $  0.10 $  0.05 $  0.05 $  (0.76)
</TABLE>

18.  EVENTS SUBSEQUENT TO DECEMBER 31, 2001

   On January 10, 2002, the underwriters for the Company's initial public
offering exercised in full their option to purchase an additional 1,350,000
shares of the Company's common stock at the initial public offering price of
$16.00 per share in order to cover over-allotments. As a result of this
exercise, the Company received net proceeds of $20,088,000, after underwriting
discounts and commissions of $1,512,000.

   In January 2002, the Company made the initial license payment of $60,000,000
to ABI, which had been accrued as of December 31, 2001 pursuant to the November
2001 license agreement under which the Company acquired the exclusive rights to
market and sell ABI-007 in North America.

Item 9.  Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

   None

                                      59

<PAGE>

                                   PART III

Item 10.  Directors and Executive Officers of the Registrant

   The directors and their ages and positions with the Company as of March 29,
2002 are:

<TABLE>
<CAPTION>
        Name                   Age                  Position
        ----                   ---                  --------
<S>                            <C> <C>
Patrick Soon-Shiong, M.D.      49  President, Chief Executive Officer and
                                     Chairman of the Board of Directors
Derek J. Brown                 52  Co-Chief Operating Officer, Chief Financial
                                     Officer, Secretary and Director
Jeffrey M. Yordon              53  Co-Chief Operating Officer and Director
David S. Chen, Ph.D. (1)(2)(3) 53  Director
Stephen D. Nimer, M.D. (2)(3)  47  Director
Ann D. Rhoads (1)(3)           36  Director
</TABLE>
--------
(1) Member of the audit committee.
(2) Member of the compensation committee.
(3) Member of the governance committee.

   Patrick Soon-Shiong, M.D. has served as President since July 2001 and Chief
Executive Officer and Chairman of the board of directors of the Company since
its inception in March 1996. From its inception to August 1997, Dr. Soon-Shiong
served as the Chief Financial Officer of the Company. Since June 1994,
Dr. Soon-Shiong has also served as president, chief financial officer and a
director of American BioScience, Inc. From June 1994 to June 1998, he served as
chief executive officer and chairman of the board of directors of VivoRx, Inc.,
a biotechnology company. Dr. Soon-Shiong is named as a co-inventor on over 30
issued U.S. patents. Dr. Soon-Shiong is a fellow of the American College of
Surgeons and the Royal College of Physicians and Surgeons of Canada. Dr.
Soon-Shiong holds a degree in Medicine from the University of the Witwatersrand
and a M.S.C. in Science from the University of British Columbia.

   Derek J. Brown has served as the Co-Chief Operating Officer since June 2000
and Chief Financial Officer, Secretary and a director of the Company since
August 1997. From November 1995 to June 1998, he served as vice president of
finance and administration and as chief financial officer of VivoRx, Inc. Mr.
Brown serves as a director of American BioScience, Inc. Mr. Brown also has over
eight years of public accounting experience, having served as a manager at
Price Waterhouse. Mr. Brown is a Chartered Accountant and holds a Bachelor of
Commerce in Economics and an M.B.A. from the University of the Witwatersrand.

   Jeffrey M. Yordon has served as Co-Chief Operating Officer since June 2000
and a director of the Company since August 1997. From August 1997 to July 2001,
Mr. Yordon served as President of the Company. From January 1994 to June 1996,
Mr. Yordon served as president of Faulding Pharmaceuticals, Inc. Mr. Yordon has
also held various senior management positions at several pharmaceutical
companies, including Gensia, Inc. and LyphoMed, Inc. Mr. Yordon holds a B.S. in
Political Science and Business from Northern Illinois University.

   David S. Chen, Ph.D. has served as a director since June 1998. Since June
1998, Dr. Chen has been chairman of Cypac Investment Management Limited. He
served as chief executive officer from July 1996 to February 2000 and chief
financial officer from May 1991 to February 1994 of Central Investment Holdings
Company. Dr. Chen holds a B.S. in Agricultural Economics from National Taiwan
University, an M.B.A. from California State University at Long Beach and a
Ph.D. in Business Administration from Nova University, Florida.

   Stephen D. Nimer, M.D. has served as a director since May 2001. Dr. Nimer
has been associated with Memorial Sloan-Kettering Cancer Center since 1993 and
has been Head of the Division of Hematologic Oncology since 1996 and Chief of
the Hematology Service since 1993. He has also taught medicine at Cornell
University School of Medicine since 1993. Dr. Nimer holds an M.D. from the
University of Chicago and a B.S. in biology from Massachusetts Institute of
Technology.

                                      60

<PAGE>

   Ann D. Rhoads has served as a director since May 2001. From July 1998 to
July 2000, Ms. Rhoads has served as senior vice president of Premier, Inc., a
group purchasing organization, and since July 2000 she has served as its chief
financial officer. From July 1993 to July 1998, she served as vice president of
Sprout Group, a venture capital firm. Ms. Rhoads holds a B.S. in Business from
the University of Arkansas and an M.B.A. from Harvard University.

   Each of the directors named above holds office until the Company's next
annual meeting of stockholders and until their successors are duly elected and
qualified.

   Information regarding the executive officers of the Company is incorporated
by reference to the information contained under the caption "Executive Officers
of the Registrant" in Part I of this report.

Relationships Among Directors or Executive Officers

   There are no family relationships among any of the directors or executive
officers of the Company.

Section 16(a) Beneficial Ownership Reporting Compliance

   Section 16(a) of the Exchange Act of 1934, as amended requires the Company's
directors, executive officers and persons who own more than 10% of common stock
of the Company (collectively, "Reporting Persons") to file reports of ownership
and changes in ownership of common stock of the Company. Reporting Persons are
required by Securities and Exchange Commission regulations to furnish the
Company with copies of all Section 16(a) reports they file. Based solely on its
review of the copies of such reports received or written representations from
certain Reporting Persons, the Company believes that during the fiscal year
ended December 31, 2001 all Reporting Persons complied with all applicable
filing requirements, except that one Form 5 was inadvertently filed late by
each of Mr. Nimer, Mr. Chen and Mr. Frank F.C. Kung (formerly a director of the
Company).

Item 11.  Executive Compensation.

Summary Compensation Table

   The following table sets forth certain information concerning compensation
of (i) each person that served as Chief Executive Officer during the last
fiscal year and (ii) the four other most highly compensated executive officers
whose aggregate cash compensation exceeded $100,000 during the last fiscal year
(collectively, the "Named Executive Officers"):

<TABLE>
<CAPTION>
                                                                    Long-Term
                                            Annual Compensation    Compensation
                                         ------------------------- ------------
                                         Fiscal         Bonus and   Securities
                                          Year  Salary  Commission  Underlying
Name                                      (1)    ($)     ($) (2)   Options (#)
----                                     ------ ------- ---------- ------------
<S>                                      <C>    <C>     <C>        <C>
Patrick Soon-Shiong, M.D................  2001  329,029  275,000     135,000
  President and                           2000  307,307  337,500     125,000
  Chief Executive Officer                 1999  298,846  268,750          --

Derek J. Brown..........................  2001  264,616  200,000     125,000
  Co-Chief Operating Officer,             2000  247,500  216,000     125,000
  Chief Financial Officer and Secretary   1999  240,000  112,500          --

Jeffrey M. Yordon.......................  2001  264,616  200,000     225,000
  Co-Chief Operating Officer              2000  247,500  216,000     125,000
                                          1999  240,000  100,000          --

Jack C. Silhavy (3).....................  2001  179,531   50,406      10,000
  Vice President and General Counsel      2000  172,792   16,210          --
                                          1999   52,312       --      25,000

Sam Trippie.............................  2001  191,806   47,244       4,000
  Vice President of Manufacturing         2000  181,707   54,512       6,000
                                          1999  179,378   30,286          --
</TABLE>

                                      61

<PAGE>

--------
(1) Compensation reported for the fiscal years ending December 31, 1999,
    December 31, 2000, and December 31, 2001.
(2) Includes bonus amounts earned in the fiscal year.
(3) Mr. Silhavy became an employee of the Company in September 1999.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values

   The following table sets forth certain information with respect to stock
options exercised by the Named Executive Officers during fiscal year ending
December 31, 2001, including the aggregate value of gains on the date of
exercise. In addition, the table sets forth the number of shares covered by
stock options as of December 31, 2001, and the value of "in-the-money" stock
options, which represents the difference between the exercise price of a stock
option and the market price of the shares subject to such option on December
31, 2001.

<TABLE>
<CAPTION>
                                                        Number of Securities
                                                       Underlying Unexercised     Value of Unexercised
                                                             Options at          In-the-Money Options at
                             Shares                     December 31, 2001 (#)   December 31, 2001 ($) (2)
                          Acquired on      Value      ------------------------- -------------------------
Name                      Exercise (#) Realized($)(1) Exercisable Unexercisable Exercisable Unexercisable
----                      ------------ -------------- ----------- ------------- ----------- -------------
<S>                       <C>          <C>            <C>         <C>           <C>         <C>
Patrick Soon-Shiong, M.D.   500,000      2,975,000      31,250       228,750      525,000     3,573,000
Derek J. Brown...........   500,000      2,975,000      56,250       193,750      895,000     3,055,000
Jeffrey M. Yordon........   250,000      1,487,500      56,250       293,750      895,000     4,535,000
Jack C. Silhavy..........        --             --      12,500        22,500      210,000       318,000
Sam Trippie..............        --             --      31,500         8,500      559,200       118,800
</TABLE>
--------
(1) The value realized upon the exercise of stock options represents the
    positive spread between the exercise price of stock options and the fair
    market value of the shares subject to such options on the exercise date.
(2) The value of "in-the-money" stock options represents the positive spread
    between the exercise price of options and the fair market value of the
    underlying shares subject to those options on December 31, 2001.

Compensation of Directors

   Directors who are also employees of the Company receive no additional
compensation for their services as directors. Our non-employee directors do not
receive a fee for attendance in person at meetings of the board of directors or
committees of the board of directors, but they are reimbursed for travel
expenses and other out-of-pocket costs of attending board and committee
meetings. In addition, non-employee directors of the Company are eligible to
receive options and shares of common stock directly under the Company's 2001
non-employee director stock option program. Non-employee directors are eligible
to be granted an initial option to purchase 7,500 shares of common stock upon
their initial appointment to the board of directors with subsequent annual
option grants to purchase 3,000 shares of common stock, both at an exercise
price per share equal to the fair market value of the common stock at the date
of grant. Directors who are also employees of the Company are eligible to
receive options and shares of common stock directly under the Company's 2001
stock incentive plan.

Employment Contracts, Termination of Employment and Change of Control
Arrangements

   In November 2001, the Company entered into a compensation protection
agreement with each of Derek J. Brown, Jeffrey M. Yordon and Jack C. Silhavy.
These agreements have been filed with the SEC on November 20, 2001 as exhibits
to Amendment No. 1 to Form S-1. Under these agreements, if the Company
terminates a protected officer's employment for any reason other than for
cause, disability, retirement, death or good reason within 12 months following
a change of control of the Company, or if that officer's employment is
terminated without cause prior to a change of control of the Company, then the
Company must pay that officer (a) his accrued compensation, including unpaid
base salary, pro rata bonus, vacation pay and reimbursement for reasonable and
necessary expenses incurred on the Company's behalf during the period up to the
termination

                                      62

<PAGE>

date, and (b) twice the sum of his annual base salary and annual bonus. In
addition, upon termination of a protected officer's employment within 12 months
of a change of control of the Company, the Company must provide that officer
with benefits for a period of two years after the date of termination, and any
unvested stock options held by that officer will immediately vest. Each of
these agreements have three year terms subject to automatic annual extensions.

Compensation Committee Interlocks and Insider Participation

   No interlocking relationship exists between any member of board of directors
or compensation committee of the Company and any member of the board of
directors or compensation committee of any other company, nor has such
interlocking relationship existed in the past.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder
        Matters.

   The following table sets forth certain information with respect to the
beneficial ownership of common stock of the Company as of March 25, 2002, for
(i) each person who is known by the Company to beneficially own more than 5% of
common stock of the Company, (ii) each of the directors, (iii) each of the
named executive officers appearing in the Summary Compensation Table below (the
"Named Executive Officers") and (iv) all of the directors and executive
officers as a group.

<TABLE>
<CAPTION>
                                                                      Common Stock Beneficially Owned(1)
                                                                      ----------------------------------
                                                                                     Option   Percent of
                                                                       Number of     Shares     Class
Directors and Named Executive Officers                                  Shares        (2)        (%)
--------------------------------------                                 ----------    -------  ----------
<S>                                                                   <C>           <C>       <C>
Patrick Soon-Shiong, M.D. (3)........................................ 32,585,690     96,250     65.39
Ann D. Rhoads (4)....................................................  2,914,593         --      5.86
Derek J. Brown.......................................................    612,500    112,500      1.23
Jeffrey M. Yordon....................................................    362,500    112,500         *
Sam Trippie..........................................................     33,000     33,000         *
David S. Chen, Ph.D..................................................     25,000     25,000         *
Jack C. Silhavy......................................................     12,500     12,500         *
Stephen D. Nimer, M.D................................................         --         --        --
All named executive officers and directors as a group (eight persons) 36,545,783         --     72.91
5% Stockholders
---------------
American BioScience, Inc. (5)........................................ 31,989,440         --     64.32
Biotechnology Development Fund, L.P..................................  2,821,035         --      5.67
Premier Purchasing Partners, L.P. (7)................................  2,914,593         --      5.86
</TABLE>
--------
*  Represents beneficial ownership of less than 1% of issued and outstanding
   common stock on March 25, 2002.
(1) Beneficial ownership as reported in the above table has been determined in
    accordance with Rule 13d-3 of the Securities Exchange Act of 1934. The
    percentage of shares beneficially owned is based on 49,735,063 shares of
    common stock outstanding as of March 25, 2002. Except as indicated in the
    footnotes to this table, such persons have sole voting and investment power
    with respect to all shares of common stock of the Company shown as
    beneficially owned by them.
(2) Includes shares of common stock subject to options that are currently
    exercisable or exercisable within 60 days after March 25, 2002, which are
    deemed to be outstanding and beneficially owned by the person holding such
    options for the purpose of computing the number of shares beneficially
    owned and the percentage ownership of such person, but are not deemed to be
    outstanding for the purpose of computing the percentage ownership of any
    other person.

                                      63

<PAGE>

(3) Includes 31,989,440 shares held of record by American BioScience, Inc., of
    which Dr. Soon-Shiong is the president and chairman of the board of
    directors, and in such capacity may be deemed to have shared voting and
    investment power over the shares. Dr. Soon-Shiong disclaims beneficial
    ownership of these shares except to the extent of his pecuniary interest in
    this entity.
(4) Includes 2,914,593 shares held of record by Premier Purchasing Partners,
    L.P. Ms. Rhoads is the Chief Financial Officer and Vice President -
    Strategic Initiatives, of Premier, Inc. and in such capacity may be deemed
    to have shared voting and investment power over the shares. Premier, Inc.
    is the sole member of Premier Plans, LLC, and may be deemed to have
    indirect beneficial ownership of the shares directly held by Premier
    Purchasing Partners, L.P. Ms. Rhoads disclaims beneficial ownership of
    these shares except to the extent of her pecuniary interest in this entity.
(5) Includes 31,989,440 shares held of record by American BioScience, Inc. The
    business address of American BioScience, Inc. is 2730 Wilshire Boulevard,
    Suite 110, Santa Monica, California 90403. Themba Trust, organized under
    the laws of the Isle of Man, holds a majority of the outstanding capital
    stock of American BioScience, Inc. Themba Trust and its trustee Steven H.
    Hassan may be deemed to have shared voting and investment power over the
    shares directly owned by American BioScience, Inc. Dr. Soon-Shiong and his
    spouse are beneficiaries of Themba Trust. Mr. Hassan disclaims beneficial
    ownership of these shares except to the extent of his pecuniary interest in
    this entity. This information is based on a Schedule 13G filed with the
    Securities and Exchange Commission on February 14, 2002.
(6) Includes 940,345 shares held of record by Biotechnology Development Fund,
    L.P. and 1,880,690 shares held of record by Biotechnology Development Fund
    III, L.P., each of which BioAsia Investments, LLC, a California limited
    liability company, is the general partner. These entities may be deemed to
    share voting and investment power over the shares. The business address of
    BioAsia Investments, LLC is 575 High Street, Suite 201, Palo Alto,
    California 94301. This information is based on a Schedule 13G filed with
    the Securities and Exchange Commission on February 14, 2002.
(7) Premier Plans, LLC is the general partner of Premier Purchasing Partners,
    L.P., and may be deemed to have indirect beneficial ownership of the shares
    directly held by Premier Purchasing Partners, L.P. Premier, Inc. is the
    sole member of Premier Plans, LLC, and may also be deemed to have indirect
    beneficial ownership of the shares directly held by Premier Purchasing
    Partners, L.P. The business address of each of Premier Purchasing Partners,
    L.P., Premier Plans, LLC and Premier, Inc. is 12225 El Camino Real, San
    Diego, California 92130.

Item 13.  Certain Relationships and Related Transactions.

   The following is a description of certain transactions and relationships
entered into or existing during the fiscal year ended December 31, 2001 between
the Company and certain affiliated parties. The Company believes that the terms
of such transactions were no less favorable to the Company than could have been
obtained from an unaffiliated party.

   The Company has entered into indemnification agreements with Mr.
Soon-Shiong, Mr. Brown, Mr. Yordon, Mr. Silhavy and each nominee for election
to the board of directors. The indemnification agreements require the Company
to indemnify these individuals to the fullest extent permitted by Delaware law.

   The Company has entered into compensation protection agreements with Derek
J. Brown, Jeffrey M. Yordon and Jack C. Silhavy. See "Employment Contracts,
Termination of Employment and Change of Control Arrangements" above.

                                      64

<PAGE>

                                    PART IV

Item 14.  Exhibits, Financial Statement Schedule and Reports on Form 8-K

a. (1)  Financial Statements

   The following consolidated financial statements of American Pharmaceutical
Partners, Inc. are included in Part II, Item 8 of this Report:

<TABLE>
<S>                                                                                                                <C>
   Report of Ernst & Young LLP, Independent Auditors
   Consolidated Balance Sheets at December 31, 2001 and 2000
   Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999
   Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2000
     and 1999
   Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999
   Notes to Consolidated Financial Statements
</TABLE>

   (2) Financial Statement Schedule

   The following consolidated financial statement schedule of American
Pharmaceutical Partners, Inc. is included in Part IV, Item 14 of this Report:

   Schedule II.  Valuation and Qualifying Accounts and Reserves

   All other schedules are omitted because the required information is not
present or is not present in amounts sufficient to require submission of the
schedule or because the information required is given in the consolidated
financial statements or the notes thereto.

   (3) Exhibits

<TABLE>
<CAPTION>
Exhibit
Number                                             Description
------                                             -----------
<C>      <S>

 3.1(1)  Amended and Restated Certificate of Incorporation of the Registrant
 3.2(1)  Bylaws of the Registrant
 4.1     Reference is made to Exhibits 3.1 and 3.2
 4.2(2)  Specimen Stock Certificate of the Registrant
 4.3(3)  First Amended Registration Rights Agreement, dated as of June 1, 1998, between the Registrant
           and certain holders of the Registrant's capital stock
10.1(4)  Form of Indemnification Agreement between the Registrant and each of its executive officers and
           directors
10.2(3)  1997 Stock Option Plan
10.3(3)  2001 Stock Incentive Plan, including forms of agreements thereunder
10.4(3)  2001 Employee Stock Purchase Plan, including forms of agreements thereunder
10.6(3)  Office Lease Agreement dated January 29, 1999 between the Registrant and Woodfield Executive
           Center, Inc.
10.7(3)  Lease Agreement dated December 4, 2000, between the Registrant and AMB Property II, L.P.
10.8(4)  Tax Sharing and Indemnification Agreement dated July 25, 2001, between the Registrant and
10.9(4)  Agreement, dated as of July 25, 2001, between the Registrant and American BioScience, Inc.
10.10(4) Agreement, dated as of July 25, 2001, between the Registrant and American BioScience, Inc.
10.11(2) License Agreement, dated as of November 20, 2001, between the Registrant and American
           BioScience, Inc.
10.12(2) Manufacturing Agreement, dated as of November 20, 2001, between the Registrant and American
           BioScience, Inc.
10.13(4) Compensation Protection Agreement, dated as of November 20, 2001, between the Registrant and
           Derek J. Brown
10.14(4) Compensation Protection Agreement, dated as of November 20, 2001, between the Registrant and
           Jeffrey M. Yordon
</TABLE>

                                      65

<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number                                             Description
------                                             -----------
<C>      <S>

10.15(4) Compensation Protection Agreement, dated as of November 20, 2001, between the Registrant and
         Jack C. Silhavy
10.16(1) Corporate Agreement, dated as of December 12, 1997, between the Registrant and Premier
         Purchasing Partners, L.P., including an amendment thereunder
10.17(2) Group Purchasing Agreement, dated as of December 12, 1997,between the Registrant and Premier
         Purchasing Partners, L.P., including an amendment thereunder
10.18(1) Pledge Agreement, dated as of November 20, 2001, between the Registrant and American
           BioScience, Inc.
10.19(5) Credit Agreement, dated as of December 14, 2001, between the Registrant, Canadian Imperial Bank
           of Commerce, Bank of America, N.A., UBS Warburg LLC, and the several lenders from time to
           time parties thereto
21.1(1)  List of Subsidiaries of the Registrant
23.1     Consent of Ernst & Young LLP, Independent Auditors
</TABLE>

--------

(1) Incorporated by reference to Registrant's Registration Statement filed on
    Form S-1/A, file number 333-70900, filed with the Securities and Exchange
    Commission on December 11, 2001.

(2) Incorporated by reference to Registrant's Registration Statement filed on
    Form S-1/A, file number 333-70900, filed with the Securities and Exchange
    Commission on December 13, 2001.

(3) Incorporated by reference to Registrant's Registration Statement filed on
    Form S-1, file number 333-70900, filed with the Securities and Exchange
    Commission on October 3, 2001.

(4) Incorporated by reference to Registrant's Registration Statement filed on
    Form S-1/A, file number 333-70900, filed with the Securities and Exchange
    Commission on November 20, 2001.

(5) Previously filed with Registrant's annual report on Form 10-K for the
    fiscal year ending December 31, 2001, filed on April 1, 2002.

(b)  Reports on Form 8-K

   No Reports on Form 8-K were filed during the last quarter ended December 31,
2001.

                                      66

<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to a report
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Los Angeles, State of California on the 29th day of April 2002.

                                          AMERICAN PHARMACEUTICAL PARTNERS, INC.

                                          By:  /s/  PATRICK SOON-SHIONG,
                                            M.D.
                                             -----------------------------------
                                                 Patrick Soon-Shiong, M.D.
                                                  Chief Executive Officer

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

          Signature                          Title                  Date
          ---------                          -----                  ----

/s/  PATRICK SOON-SHIONG, M.D.   Chief Executive Officer and   April 29, 2002
------------------------------     Chairman of the Board of
   Patrick Soon-Shiong, M.D.       Directors (Principal
                                   Executive Officer)

     /s/  DEREK J. BROWN         Chief Operating Officer and   April 29, 2002
------------------------------     Director (Principal
         Derek J. Brown            Financial and Accounting
                                   Officer)

   /s/  JEFFREY M. YORDON        Chief Operating Officer and   April 29, 2002
------------------------------     Director
       Jeffrey M. Yordon

  /s/  DAVID S. CHEN, PH.D.      Director                      April 29, 2002
------------------------------
      David S. Chen, Ph.D.

 /s/  STEPHEN D. NIMER, M.D.     Director                      April 29, 2002
------------------------------
     Stephen D. Nimer, M.D.

     /s/  ANN D. RHOADS          Director                      April 29, 2002
------------------------------
         Ann D. Rhoads

                                      67

<PAGE>

                              FINANCIAL SCHEDULE

          SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
                A                      B           C         D          E
                                   Balance at                       Balance at
                                  Beginning of    (1)       (2)       End of
 Year Ended December 31,             Period    Additions Deductions   Period
 -----------------------          ------------ --------- ---------- ----------
 <S>                              <C>          <C>       <C>        <C>
 Allowance for doubtful accounts:
    2001.........................   $436,000    222,000   258,000    $400,000
    2000.........................   $279,000    467,000   310,000    $436,000
    1999.........................   $254,000     26,000     1,000    $279,000
</TABLE>
--------
(1) Provision for bad debts charged to expense.
(2) Accounts receivable written-off or collections.

                                      68