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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
                                ---------------
 
(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, 1998
                                       OR
 
  / /    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 33-90516
 
                            ------------------------
 
                                 NEOPHARM, INC.
 
             (Exact Name of Registrant as Specified in its Charter)
 
                  DELAWARE                             51-0327886
      (State or other jurisdiction of        (I.R.S. Employer Identification
       incorporation or organization)                    Number)
                                                          60015
                                                       (Zip Code)
 
                              100 CORPORATE NORTH
                                   SUITE 215
                             BANNOCKBURN, ILLINOIS
            (Address of Principal Executive Offices) (847) 295-8678
              (Registrant's Telephone Number, Including Area Code)
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                       COMMON STOCK, $.0002145 PAR VALUE
                                (Title of class)
        WARRANTS TO PURCHASE SHARES OF COMMON STOCK, $.0002145 PAR VALUE
                                (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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [  ].
 
    The aggregate market value of the Registrant's common stock held by
non-affiliates (affiliates being, for these purposes only, directors, executive
officers and holders of 5% of the registrant's stock) of the registrant, par
value $.0002145 per share, (based on the closing price of such shares on the
American Stock Exchange on March 19, 1999) was $40,926,325. As of March 19, 1999
there were 8,454,621 shares of Common Stock outstanding.
 
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<PAGE>
                          FORM 10-K TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                                                  PAGE
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<S>         <C>                                                                                                <C>
PART I
 
Item 1.     Business.........................................................................................           3
Item 2.     Properties.......................................................................................          18
Item 3.     Legal Proceedings................................................................................          18
Item 4.     Submission of Matters to a Vote of Security Holders..............................................          18
 
PART II
 
Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters............................          19
Item 6.     Selected Financial Data..........................................................................          20
Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations............          20
Item 8.     Financial Statements and Supplemental Data.......................................................          23
Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............          23
 
PART III
 
Item 10.    Directors and Executive Officers of the Registrant...............................................          24
Item 11.    Executive Compensation...........................................................................          26
Item 12.    Security Ownership of Certain Beneficial Owners and Management...................................          27
Item 13.    Certain Relationships and Related Transactions...................................................          29
 
PART IV
 
Item 14.    Exhibits and Financial Statement Schedules.......................................................          31
            Signatures.......................................................................................          33
</TABLE>
 
                                       2
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                                     PART I
 
                                ITEM 1. BUSINESS
 
THE COMPANY
 
    NeoPharm is a pharmaceutical Company engaged in the research and development
of drugs for the diagnosis and treatment of various forms of cancer. Presently
the Company has several drugs which are in varying stages of development: BUdR
(Broxuridine), liposome encapsulated doxorubicin ("LED"), liposome encapsulated
paclitaxel ("LEP"), liposome encapsulated antisense oligodeoxynucleotide
("LE-AON" and with LED and LEP the "Liposome Products"), IL-13 PE38QQR ("IL-13")
and Mesothelin SS-(dsFv)-PE38 ("Mesothelin Mab"). IL-13 and Mesothelin Mab are
both Ligand Target Cytotoxins that specifically target cancer cells and leave
normal cells unaffected. See "NeoPharm Products" below.
 
    The Company has obtained rights to its various products as a result of
agreements and relationships entered into with various third parties including
the National Cancer Institute ("NCI"), the United States Food and Drug
Administration ("FDA"), the National Institute of Health ("NIH") and Georgetown
University. See "Research and Development, Collaborative Relationships and
Licenses" below.
 
    To date, the Company has been engaged primarily in research and development
of its developmental stage products. The Company has developed expertise in
identification, development and preparation for regulatory approval of cancer
drugs for both therapeutic and diagnostic purposes, although the Company has no
products that are currently approved for sale. The Company currently has no
marketing or sales staff and has conducted its activities primarily through
consultants and at university research facilities. The Company will need to hire
additional personnel and gain access to marketing and sales resources in order
to continue the development and commercialization of its products. See
"Marketing and Sales" below.
 
    NeoPharm, Inc. was incorporated in Delaware under the name OncoMed, Inc. in
June 1990, and changed it's name to NeoPharm, Inc. in March, 1995. The Company's
principal offices are located at 100 Corporate North, Suite 215, Bannockburn,
Illinois 60015, and its telephone number is (847) 295-8678.
 
NEOPHARM PRODUCTS
 
    The Company is currently developing six compounds which all target various
forms of cancer. Cancer is the second largest cause of death in the U.S. and
there are a large number of new cases of cancer each year. However, for some
types of cancer, there are no acceptable treatments, while for others, the
currently available treatments are limited due to severe side effects. The
Company's products under development offer either improvements to currently
available technology or new technology that improves the efficacy and reduces
the side effects. Before new drugs can be approved by the U.S. Food and Drug
Administration, they must go through several test phases, from pre-clinical
trials to Phase I to Phase II and Phase III
 
                                       3
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trials. The products which the Company currently has under development are
detailed in the following table:
 
<TABLE>
<CAPTION>
                                                                                                  U.S. PATENT
COMPOUNDS                 USE OR ADVANTAGE             DEVELOPMENT STATUS  CANCER INDICATION        POSITION
-------------  --------------------------------------  ------------------  ------------------  ------------------
<S>            <C>                                     <C>                 <C>                 <C>
 
LED            We believe LED allows cancer patients   Phase I completed,  Breast, Prostate,         2 Patents
               to tolerate higher dosages of           initiated Phase II  Hematological
               chemotherapy providing greater          in June 1998
               therapeutic value in a number of types
               of cancer tumors.
 
LEP            We believe LEP allows cancer patients   Phase I in          Ovarian, Breast,          3 Patents
               to tolerate higher dosages of           September 1998      Lung
               chemotherapy, providing greater
               therapeutic value in a number of types
               of cancer tumors.
 
LE-AON         LE-AON is an antisense drug useful in   Pre-clinical        Head & Neck, Lung,        2 Patents
               enhancing the lethality and             trials ongoing,     Brain
               effectiveness of radiation              initiate Phase I
                                                       in the 2nd
                                                       Quarter, 1999
 
IL-13          IL-13 Chimeric Protein Exotoxin is a    Pre-clinical        Renal Cell, Brain,        2 Patents
Chimeric       genetically engineered compound         trials ongoing,     Kaposi's Sarcoma,
Protein        incorporating a highly toxic material   initiate Phase I    Breast
Exotoxin       that destroys cells once linked to the  in the
               target receptor on its surface.         2(nd)Quarter, 1999
 
Broxine-Registered Trademark- We believe Broxine will prove useful New drug Breast, Colon,           0 Patents
               in characterizing tumor cell growth in  application         Prostate,
               nearly all solid tumors.                pending before the  Hematologic
                                                       FDA
 
Mesothelin     Mesothelin Mab                          Phase I to be       Ovarian,                  5 Patents
Mab (Pending)  specifically targets those tumors that  initiated in 4(th)  Mesotheliomas,
               express Mesothelin Antigen on the       Quarter, 1999       Head & Neck
               surface of the cancer cells
</TABLE>
 
    The Company's short term goal is to use its proprietary technology to
significantly enhance the efficiency and reduce the side effects of currently
available chemotherapy compounds.
 
    The Company's long term goal is to be a leading worldwide oncology drug
development Company. To reach our goals the Company has developed the following
strategies:
 
    - focus its resources exclusively on the expanding cancer market;
 
    - develop a balanced portfolio of anti-cancer drugs based on enhancing
      proven compounds;
 
    - develop novel therapeutic agents and leverage its expertise to identify
      compounds it can license; and
 
    - form strategic alliances with larger pharmaceutical and biotechnology
      companies to obtain financial and marketing support for certain of its
      product development activities.
 
                                       4
<PAGE>
    There can be no assurance that any of the Company's products will receive
necessary regulatory approvals, be successfully commercialized and achieve
market acceptance, or that any products commercialized by the Company will not
be rendered obsolete by other developments in the field of cancer treatment. In
addition, continued development of the Company's products will require the
Company to obtain additional sources of capital and there can be no assurance
that such capital will be available when needed or on terms acceptable to the
Company.
 
    LIPOSOME PRODUCTS.  The Company's Liposome Products consist of spheres of
subcellular size composed primarily of phospholipids, certain of which are the
primary components of living cell membranes, and can be made to contain and
deliver drugs. This membrane encapsulation feature of liposomes enables the
entrapped drug to be circulated in the bloodstream in higher concentrations for
longer periods of time than the free drug. When certain drugs, including
chemotherapeutic agents, are administered in conjunction with liposomes, they
have been shown to produce fewer and less severe local and systemic side
effects. Although liposomes have been investigated and used for many years as
drug delivery systems, the difficulty in producing liposomes on a large scale,
as well as the limited shelf life of many liposomes, have limited their use in
clinical settings.
 
    The Company's LED is currently under development in three Phase II trials.
The Company started a Phase II trial in hormone refractory prostate cancer
patients in June 1998. The Company is also starting an additional trial in
osteosarcoma (bone cancer) at higher doses of LED. These Phase II trials will be
conducted in several cancer centers in the United States. The Company has also
initiated a multi-center Phase II trial of LED in breast cancer patients who
have failed most of the chemotherapy protocols to appreciate the capacity of LED
in overcoming MDR in those patients. The Company also has a clinical trial with
LED in myeloma, a blood cancer. The Company has also initiated a Phase I
clinical study on LEP in September of 1998 for patients with lung cancer. These
trials are on-going at this time. See "Government Regulation", below.
 
    In February, 1999, the Company signed a License Agreement with Pharmacia and
UpJohn ("P&U") to develop and commercialize LEP and LED worldwide. The Company
received a substantial up-front payment upon execution of the License Agreement
and will receive milestone payments as clinical progress occurs under the
License Agreement. The Company will also receive royalties on overseas sales and
a co-promotion profit split on sales in the United States. Pursuant to the
License Agreement, P&U will assume all further responsibility for, and the costs
associated with, the further development and testing of LED and LEP and the
obtaining of all regulatory approvals. In addition, the Company has agreed to
sell $8,000,000 of its common stock to P&U when certain Investigatory New Drug
("IND") applications are transferred to P&U in accordance with a separate Stock
Purchase Agreement at a price per share equal to 110% of the then market price
of the common stock during the sixty (60) day period preceding the transfer of
the INDs.
 
    LIGAND TARGETED CYTOTOXINS.  In October 1997, the Company entered into an
exclusive worldwide licensing agreement with the FDA and the NIH to develop and
commercialize a chimeric human protein known as "IL13-PE38QQR." This is the
fusion of receptor-binding with a derivative of Pseudomonas exotoxin (PE38QQR).
The Company also entered into a Cooperative Research and Development Agreement
("CRADA") with the FDA for the clinical and commercial development of the IL-13
as an anticancer agent. See "Research and Development, Collaborative
Relationships and Licenses" below.
 
    Extensive research by the scientists at FDA and NCI have demonstrated that
some solid human tumors such as kidney cancer (renal cell carcinoma), brain
cancer (glioblastoma), Kaposi's sarcoma and breast carcinoma express high
numbers of IL-13 receptors on their cell surfaces. These receptors sites become
a specific target for the IL-13 chimeric protein for inducing cytotoxicity at
nanogram concentration. On the other hand, normal organs of the body are shown
to exhibit minimal receptors sites thereby sparing these organs from any toxic
effect. The Company expects to scale up the production of this
 
                                       5
<PAGE>
chimeric protein to complete preclinical studies in the second quarter of 1999
to be followed later in the year by Phase I clinical program in humans with
renal cell carcinoma and glioblastoma.
 
    The Company also recently signed and is awaiting confirmation from the NIH
with respect to another CRADA and Licensing Agreement with the NIH for
Mesothelin Mab for head and neck cancer and mesothelioma. Like IL-13, Mesothelin
Mab targets mesothelin receptors on cancer cells and delivers a cytotoxin to
destroy the cancer cell while leaving normal cells alone. Mesothelin Mab is
expected to enter Phase I Clinical Studies in the later part of 1999.
 
    BUDR PRODUCT.  Clinical trials involving prognostic use of BUdR have
indicated that the information regarding tumor cell behavior provided by BUdR
can assist the oncologist in selecting appropriate therapeutic regimens for the
patients and enable better monitoring of the effectiveness of the chosen
therapy.
 
    In December 1996, the Company filed an NDA with the FDA for BUdR as a
prognostic agent in the treatment of breast cancer. The Company's NDA as it
relates to BUdR as a prognostic indication in the treatment of breast cancer was
accepted for review by the FDA and was reviewed by the FDA's Oncology Advisory
Committee ("ODAC") on December 19, 1997, at which time ODAC voted not to
recommend this indication to the FDA for approval. Since the ODAC action, the
Company has met with the FDA to respond to concerns raised by ODAC for the
purpose of continuing to pursue FDA approval. Based on these discussions the
Company is gathering additional data and reanalyzing the existing data in order
to obtain the FDA's approval of the Company's NDA. The original NDA was filed in
December, 1996. The application has already been extended once and the Company
was informed on March 31, 1998 that the time for processing the original
application has expired. The Company is continuing to work with FDA to explore
the requirements for a prognostic application.
 
    In May 1997, the Company entered into a collaboration agreement with BioChem
Therapeutics, Inc., the wholly owned subsidiary of BioChem Pharma, under which
BioChem Pharma will develop, market and distribute BUdR in Canada after receipt
of approval from the Canadian Health Protection Branch ("HPB") of BUdR for
certain specific uses, the applications for which will be submitted by BioChem
Pharma. Upon signing the collaboration agreement, the Company received a
nonrefundable initial payment. The Company may receive additional milestone
payments based upon receipt of various approvals from the FDA and HPB.
 
RESEARCH AND DEVELOPMENT, COLLABORATIVE RELATIONSHIPS AND LICENSES
 
    RESEARCH AND DEVELOPMENT.  During the three year period ended December 31,
1998, the Company has expended the following amounts on research and
development: $1,611,000 for the fiscal year ended December 31, 1998, $1,412,000
for the fiscal year ended December 31, 1997 and $1,100,000 for the fiscal year
ended December 31, 1996. It is anticipated that additional research and
development will be required beyond 1999 and may necessitate the Company's
obtaining additional capital.
 
    COLLABORATIVE RELATIONSHIPS AND LICENSES.  The Company has entered into a
Clinical Trials Agreement ("CTA") with the NCI, a CRADA with the FDA, a
licensing agreement with the NIH and has licensed certain technology relating to
its Liposome Products from Georgetown University. The principal terms of the
foregoing agreements and the license are as follows:
 
    NCI CTA.  In 1992 the Company entered into a CRADA with the NCI. Under the
terms of the NCI CRADA, the Company has exclusive rights to the data generated
with respect to BUdR by NCI for certain indications contained in the CRADA
including tumors mestastic to the brain, astrocytomas, gastrointestinal cancers,
colon cancer, pancreatic cancer, lung cancer, soft tissue sarcomas, head and
neck cancer and leukemia. The NCI CRADA expired on September 13, 1998 and the
Company then entered into a CTA with the NCI effective October 29, 1998. The CTA
covers the same research that was the subject of the NCI CRADA. The CTA provides
for collaboration on the clinical development for BUdR and access to
 
                                       6
<PAGE>
related clinical data required for regulatory approval. Although BUdR is not
covered by patents or patent applications, the Company believes that its
exclusive access to the clinical data collected by NCI represent a significant
competitive advantage for the Company in the development and eventual
commercialization of BUdR.
 
    FDA CRADA.  The Company entered into a CRADA with the FDA in October 1997
covering IL-13. Pursuant to the FDA CRADA, the Company has committed to
commercialize the IL-13 chimeric protein product which it licensed from the NIH
and FDA. The FDA has agreed to collaborate on the clinical development and
commercialization of the licensed product.
 
    The Company is committed to pay $100,000 per year for the reasonable and
necessary expenses incurred by the FDA in carrying out the FDA's
responsibilities under the FDA CRADA. The FDA CRADA has a term of four years.
During 1997 and 1998, the Company expensed $100,000 per year on research and
development costs. The term of the FDA CRADA runs to August 27, 2001.
 
    NIH CRADA AND LICENSING AGREEMENTS.  The Company has entered into an
exclusive worldwide licensing agreement with the NIH and the FDA to develop and
commercialize an IL-13 chimeric protein therapy (the "NIH License"). The NIH
License required a $75,000 non-refundable license issue payment and minimum
annual royalty payments of $10,000, which increase to $25,000 after the first
commercial sale. The NIH License also provides for milestone payments and
royalties based on future product sales. The Company is required to pay the
costs of filing and maintaining product patents on the licensed products. The
Company also recently executed and is awaiting confirmation from the NIH
regarding a second CRADA and a License Agreement with the NIH for Mesothelin
Mab, a compound similar to IL-13 (Ligand Targeted Cytotoxin). The terms and
conditions of the pending Mesothelin Mab Agreements with NIH are substantially
the same as for the NIH Agreement.
 
    GEORGETOWN UNIVERSITY AGREEMENTS.  The Company previously entered into two
license and sponsored research agreements with Georgetown University relating to
LED, LEP, and LE-AON ("the "Georgetown Licenses"). Under the Georgetown
Licenses, and in return for the sponsorship of supportive research, the Company
has exclusive licenses to manufacture and sell LED, LEP, and LE-AON. The Company
will also be obligated to pay Georgetown royalties on commercial sales of the
Liposome Products. In addition, the Company is obligated to make certain advance
royalty payments to Georgetown, which payments will be credited against future
royalties payable under the Company's agreements with Georgetown. The Georgetown
Licenses are generally not terminable by Georgetown, except in the event of
default by the Company. The Company's rights under the Georgetown Licenses with
respect to LED and LEP have recently been sublicensed to P&U. See "NeoPharm
Products-Liposome Products".
 
    Any default and resulting termination of the Georgetown Licenses would be
materially adverse to the Company's liposome program, could require curtailment
or termination of such program and could therefore have a material adverse
effect on the Company's business, financial condition and results of operations.
Dr. Aquilur Rahman, Chief Scientific Officer of the Company, is an Adjunct
Professor of Radiology at Georgetown and Dr. Anatoly Dritschilo, a director of
the Company, is the Chairman of the Department of Radiation Medicine and Medical
Director of the Georgetown University Medical Center in Washington, D.C. See
"Certain Relationships and Related Transactions".
 
MARKETING AND SALES
 
    The treatment of cancer is a highly specialized activity in which the
treating oncologist tend to be concentrated in major medical centers. The
Company's marketing strategy is designed to enable the Company to operate with a
relatively small direct sales force in the United States. As products receive
regulatory approval, the Company plans to develop a sales force of modest size
to service the over 3,500 practicing oncologists in the United States. The
Company also intends to pursue collaboration agreements with other Companies to
market the Company's products elsewhere in the world.
 
                                       7
<PAGE>
    In May 1997, Neopharm entered into a collaboration agreement with BioChem
Pharma, under which BioChem Pharma will develop, market and distribute BUdR in
Canada after receipt of approval from the Canadian Health Protection Branch
("HPB") of BUdR for certain specific uses, the applications for which will be
submitted by BioChem Pharma.
 
    The Company recently licensed its LEP and LED to P&U in February 1999. As
part of its responsibilities under the License Agreement, P&U will have
obligations to actively market and promote the LED and LEP products throughout
the world once they have been approved for commercial sale, an event that is not
expected to occur for several more years, if ever. Under the provisions of its
License Agreement with P&U, the Company has received the right to co-promote the
product within the United States. See "NeoPharm Products-Lipsome Products."
 
MANUFACTURING
 
    The Company does not intend to establish its own dedicated manufacturing
facilities for the foreseeable future. Rather, the Company's manufacturing
strategy will be to develop manufacturing relationships with established
pharmaceutical manufacturers for production of BUdR, its Liposome Products,
IL-13 and Mesothelin Mab.
 
    There are a number of FDA approved suppliers of raw materials used in the
Company's products in existence. There are also a number of facilities with FDA
Good Manufacturing Practice approval for contract manufacturing of the Company's
proposed products. The Company has a source for the manufacture of BUdR and is
in the process of arranging for sources for the manufacture of certain of its
planned Liposome Products and the IL-13 chimeric protein. The Company believes
that, in the event of the termination of its existing sources for product
supplies and manufacture, the Company will be able to enter into agreements with
other suppliers and/or manufacturers on similar terms. There can be no assurance
that there will be manufacturing capacity available to the Company at the time
the Company is ready to manufacture its products.
 
PATENTS AND PROPRIETARY RIGHTS
 
    It will be the Company's policy to, where possible, file patent applications
to protect technology, inventions and improvements that are important to the
development of its business. Under its agreements with Georgetown University,
the Company has licensed rights to four United States patents and one pending
United States patent application relating to its Liposome Products under
development. Under its agreements with the NIH, the Company has licensed rights
to two United States patent relating to the IL-13 chimeric protein under
development and three United States patents and two pending United States
patents relating to the pending Mesothelin Mab agreements. BUdR is not currently
the subject of patents or patent applications, and the Company does not expect
to obtain patent protection for its BUdR product. The Company's principal
advantage with respect to the development and planned commercialization of BUdR
is its exclusive access under the CRADA to NCI's clinical data regarding the
compound.
 
    The patent position of participants in the pharmaceutical field generally is
highly uncertain, involves complex legal and factual questions, and has recently
been the subject of much litigation. There can be no assurance that any patent
applications relating to the Company's potential products or processes will
result in patents being issued, or that the resulting patents, if any, will
provide protection against competitors who successfully challenge the Company's
patents, obtain patents that may have an adverse effect on the Company's ability
to conduct business, or are able to circumvent the Company's patent position. It
is possible that other parties have conducted or are conducting research and
could make discoveries of compounds or processes that would precede any
discoveries made by the Company, which could prevent the Company from obtaining
patent protection for these discoveries. Finally, there can be no assurance that
others will not independently develop pharmaceutical products similar to or
obsoleting those that the Company is planning to develop, or duplicate any of
the Company's products.
 
                                       8
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    The Company's competitive position is also dependent upon unpatented trade
secrets. In an effort to protect its trade secrets, the Company has a policy of
requiring its employees, Scientific Advisory Board members, consultants and
advisors to execute proprietary information and invention assignment agreements
upon commencement of employment or consulting relationships with the Company.
These agreements provide that all confidential information of the Company
developed or made known to the individual during the course of their
relationship with the Company must be kept confidential, except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets or other
proprietary information in the event of unauthorized use or disclosure of
confidential information. Invention assignment agreements executed by Scientific
Advisory Board members, consultants and advisors may conflict with, or be
subject to, the rights of third parties with whom such individuals have
employment or consulting relationships. In addition, there can be no assurance
that others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets, that such trade secrets will not be disclosed or that the Company can
effectively protect its rights to unpatented trade secrets.
 
    The Company may be required to obtain licenses to patents or proprietary
rights of others. No assurance can be given that any licenses required under any
such patents or proprietary rights would be made available on terms acceptable
to the Company, or at all. If the Company does not obtain such licenses, it
could encounter delays in product market introductions while it attempts to
design around such patents, or could find that the development, manufacture or
sale of products requiring such licenses could be foreclosed. Litigation may be
necessary to defend against or assert such claims of infringement, to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company, or to determine the scope and validity of the proprietary rights of
others. In addition, interference proceedings declared by the United States
Patent and Trademark Office may be necessary to determine the priority of
inventions with respect to patent applications of the Company or its licensors.
Litigation or interference proceedings could result in substantial costs to and
diversion of effort by, and may have a material adverse impact on, the Company.
In addition, there can be no assurance that these efforts by the Company will be
successful.
 
GOVERNMENT REGULATION
 
    INTRODUCTION.  Regulation by governmental authorities in the United States
and foreign countries is a significant factor in the development, manufacture
and marketing of the Company's proposed products and in its ongoing research and
product development activities. The nature and extent to which such regulation
will apply to the Company will vary depending on the nature of any products
which may be developed by the Company. It is anticipated that all of the
Company's products will require regulatory approval by governmental agencies
prior to commercialization. In particular, human therapeutic and some diagnostic
products are subject to rigorous preclinical and clinical testing and other
approval procedures of the FDA and similar regulatory authorities in foreign
countries. Various Federal statutes and regulations also govern or influence
testing, manufacturing, safety, labeling, storage and record-keeping related to
such products and their marketing. The process of obtaining these approvals and
the subsequent compliance with appropriate Federal statutes and regulations
require the expenditure of substantial time and financial resources. Any failure
by the Company or its collaborators to obtain, or any delay in obtaining,
regulatory approval could adversely affect the marketing of any products
developed by the Company, its ability to receive product revenues and its
liquidity and capital resources.
 
    FDA APPROVAL PROCESS.  Prior to commencement of clinical studies involving
human beings, preclinical testing of new pharmaceutical products is generally
conducted on animals in the laboratory to evaluate the potential efficacy and
the safety of the product. The results of these studies are submitted to the FDA
as a part of an investigational new drug ("IND") application, which must become
effective before clinical testing in humans can begin. Typically, clinical
evaluation involves a time consuming and costly three-phase process. In Phase I,
clinical trials are conducted with a small number of subjects to determine the
early
 
                                       9
<PAGE>
safety profile, the pattern of drug distribution and metabolism. In Phase II,
clinical trials are conducted with groups of patients afflicted with a specific
disease in order to determine preliminary efficacy, optimal dosages and expanded
evidence of safety. In Phase III, large-scale, multi-center, comparative trials
are conducted with patients afflicted with a target disease in order to provide
enough data to demonstrate the efficacy and safety required by the FDA. The FDA
closely monitors the progress of each of the three phases of clinical testing
and may, at its discretion, re-evaluate, alter, suspend or terminate the testing
based upon the data which have been accumulated to that point and its assessment
of the risk/benefit ratio to the patient.
 
    The results of the preclinical and clinical testing on a nonbiologic drug
and certain diagnostic drugs are submitted to the FDA in the form of a new drug
application ("NDA") for approval to commence commercial sales. In responding to
an NDA, the FDA may grant marketing approval, request additional information or
deny the application if the FDA determines that the application does not satisfy
its regulatory approval criteria. There can be no assurance that approvals will
be granted on a timely basis, if at all. Similar procedures are in place in
countries outside the United States.
 
    In 1988, the FDA issued "fast-track" regulations intended to accelerate the
approval process for the development, evaluation and marketing of new
therapeutic and diagnostic products used to treat life-threatening and severely
debilitating illnesses, especially those for which no satisfactory alternative
therapies exist. "Fast-track" designation affords the Company early interaction
with the FDA in terms of protocol design and permits, although it does not
require the FDA to grant approval after completion of Phase II clinical trials
(although the FDA may require subsequent Phase III clinical trials or even
post-approval Phase IV efficacy studies). The Company believes that a number of
its product candidates may fall under these regulations, but there can be no
assurance that any of the Company's products will receive this or other similar
regulatory treatment.
 
    In late 1992, legislation imposing FDA user fees on drug manufacturers was
enacted. Such fees will be required for each commercial marketing drug
application submitted by the Company for FDA approval, and annual product and
establishment fees will also be imposed upon approval. The revenues raised from
these fees are earmarked specifically to increase the resources of the FDA, and
by doing so, to increase the speed with which the FDA reviews and approves drug
marketing applications. Currently, the user fee for an NDA is approximately
$260,000, and the statute provides for periodic fee increases. The statute
currently provides small companies (defined as companies with less than 500
employees that are not marketing a prescription drug product) with a reduction
in the initial application fee and contains limited provisions for fee waivers.
During 1996, the Company was granted a waiver of the user fee required with the
filing of the NDA for BUdR.
 
    WAXMAN-HATCH ACT.  The Drug Price Competition and Patent Restoration Act of
1984, also known as the Waxman-Hatch Act, contains provisions pertaining to
marketing exclusivity from generic competition for most non-biological drugs and
patent restoration for most pharmaceutical products. A five-year marketing
exclusivity period is provided for new chemical entities, and a three-year
marketing exclusivity period is provided for approved drugs for which new
clinical investigations are essential to the receipt of FDA approval to market
the product. For purposes of the Waxman-Hatch Act, a new chemical entity is
defined as a drug product that contains an active moiety not previously approved
by the FDA for marketing. The five year exclusivity period would not prevent a
competitive product from being marketed based upon new preclinical and clinical
studies conducted by the competitor.
 
    ORPHAN DRUG ACT.  Under the Orphan Drug Act, the FDA may designate drug
products as orphan drugs if there is no reasonable expectation of recovery of
the costs of research and development from sales in the United States or if such
drugs are intended to treat a rare disease or condition, which is defined as a
disease or condition that affects less than 200,000 persons in the United
States. If certain conditions are met, designation as an orphan drug confers
upon the sponsor marketing exclusivity for seven years following FDA approval of
the product, meaning that the FDA cannot approve another version of the
 
                                       10
<PAGE>
"same" product for the same use during such seven year period. The market
exclusivity provision does not, however, prevent the FDA from approving a
different orphan drug for the same use or the same orphan drug for a different
use. The Orphan Drug Act has been controversial, and many legislative proposals
have from time to time been introduced in Congress to modify various aspects of
the Orphan Drug Act, particularly the market exclusivity provisions. There can
be no assurance that new legislation will not be introduced in the future that
may adversely impact the availability or attractiveness of orphan drug status
for any of the Company's products.
 
    OTHER REGULATIONS.  The Company is also subject to various Federal, state
and local laws, regulations and recommendations relating to safe working
conditions, laboratory manufacturing practices and the use and disposal of
hazardous or potentially hazardous substances, including radioactive compounds
and infectious disease agents, used in connection with the Company's research
work. The extent of government regulation that might result from future
legislation or administrative action cannot be predicted accurately. The Company
has not made and does not anticipate making material capital expenditures with
respect to the protection of the environment.
 
COMPETITION
 
    Competition in the discovery and development of methods for treating cancer
is intense. Numerous pharmaceutical, biotechnology and medical companies and
academic and research institutions in the United States and elsewhere are
engaged in the discovery, development, marketing and sale of products for the
treatment of cancer. These include surgical approaches, new pharmaceutical
products and new biologically derived products. The Company expects to encounter
significant competition for the principal pharmaceutical products it plans to
develop. Companies that complete clinical trials, obtain regulatory approvals
and commence commercial sales of their products before their competitors may
achieve a significant competitive advantage. A number of pharmaceutical
companies are developing new products for the treatment of the same diseases
being targeted by the Company. In some instances, the Company's competitors
already have products in clinical trials. In addition, certain pharmaceutical
companies are currently marketing drugs for the treatment of the same diseases
being targeted by the Company, and may also be developing new drugs to address
these disorders.
 
    The Company believes that its competitive success will be based on its
ability to create and maintain scientifically advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent or
other protection for its products, obtain required regulatory approvals, obtain
orphan drug status for certain products and manufacture and successfully market
its products either independently or through outside parties. Many of the
Company's competitors have substantially greater financial, clinical testing,
regulatory compliance, manufacturing, marketing, human and other resources. In
addition, the Company will continue to seek licenses with respect to key
technologies related to its fields of interest and may face competition with
respect to such efforts.
 
HUMAN RESOURCES
 
    As of March 16, 1999, the Company had six full time employees, and one
part-time employee. The Company currently has consulting agreements with eight
consultants. None of the Company's employees and consultants are represented by
a collective bargaining arrangement, and the Company believes its relationship
with its employees and consultants is satisfactory. The Company intends to
continue to retain consultants and to add personnel in as the business strategy
is implemented.
 
SCIENTIFIC ADVISORY BOARD
 
    The Company has assembled a seven-member Scientific Advisory Board. The
members of the Scientific Advisory Board together provide expertise in areas of
scientific and medical interest to the Company. The Company has entered into
agreements with the Scientific Advisors providing that all
 
                                       11
<PAGE>
inventions made by the Advisors when working for the Company will belong to the
Company; however, most of the members of the Company's Scientific Advisory Board
are employed on a full-time basis by academic or research institutions. The
members of the Scientific Advisory Board are permitted to share information
among themselves regarding the projects that they are working on with the
Company. As of March 16, 1999, the Company had granted options to acquire an
aggregate of 68,324 shares its Common Stock to members of the Scientific
Advisory Board, and pays a retainer to compensate its Scientific Advisory Board
members.
 
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
 
    Statements in this Annual Report on Form 10-K under the caption "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as oral statements that may be made by the Company or
officers, directors or employees of the Company acting on the Company's behalf,
that are not historical fact constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause the actual results of the Company (sometimes
referred to as "we" or "us")to be materially different from the historical
results or from any results expressed or implied by such forward-looking
statements. Such factors include, among others, the following:
 
    WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO JUDGE US.  We are a
development stage Company and our history of operations consists primarily of
the development of our products and the sponsorship of research and clinical
trials. Therefore, we have only a limited history upon which you may judge our
performance and prospects.
 
    WE LACK SIGNIFICANT REVENUES AND ANTICIPATE CONTINUING LOSSES.  We have
incurred significant losses since inception. At December 31, 1998 and December
31, 1997, we had accumulated losses since inception of approximately $9,932,000
and $8,358,000 respectively. We may incur substantial additional operating
losses for at least the next several years as our research and development
efforts expand. We have only generated limited amounts of revenue from our
license fees and we cannot predict when or if we will be able to develop other
sources of revenue or when or if our operations will become profitable, even if
we are able to commercialize some of our products.
 
    OUR PRODUCTS ARE IN THE EARLY STAGE OF DEVELOPMENT AND WE DON'T KNOW IF THEY
WILL BE SUCCESSFULLY DEVELOPED. Our research and development programs are at
various states of development, ranging from the pre-clinical stage, to Phase I
and Phase II clinical trials to a pending new drug application. We will need to
conduct substantial additional research and development in order to develop our
products, and we don't know whether our research and development will lead to
the development of commercially viable products that are shown to be safe and
effective in clinical trials. Our proposed products will also require clinical
testing, regulatory approval and substantial additional investment prior to
commercialization. Our proposed products are subject to the risks of failure
inherent in the development of pharmaceutical products. These risks include the
following:
 
    - some of our products may be found to be unsafe or ineffective, or may fail
      to receive the necessary regulatory clearances in a timely fashion, if at
      all;
 
    - our products, if safe and effective, may be difficult to manufacture on a
      large scale or may be uneconomical to market;
 
    - the proprietary rights of competitors may prevent us from marketing some
      of our products; and
 
    - competitors and other researchers may market more effective or less costly
      products for treatment of the same diseases.
 
                                       12
<PAGE>
    As a result, we do not know whether we will successfully develop any of our
products, receive the required governmental regulatory approvals on a timely
basis, become commercially viable or achieve market acceptance. Also, we have
only limited experience in conducting clinical trials and other aspects of the
regulatory process.
 
    We have experienced delays in our testing and development schedules and our
expected testing and development schedules may not be met. Delays in our testing
and development schedules could have a material adverse effect on our business,
financial condition and results of operations.
 
    WE ARE DEPENDENT UPON DEVELOPING WORKING RELATIONSHIPS WITH OTHERS IN ORDER
TO DEVELOP OUR PRODUCT. In order to successfully develop our products, we must
develop and maintain strategic and collaborative relationships with government
agencies, research institutions, public and private universities and hospitals.
 
    Our failure to develop and maintain any of the following strategic and
collaborative relationships could have a material adverse effect on our
business, financial condition and results of operations:
 
    - Our Broxine-Registered Trademark- product was the subject of a cooperative
      research and development agreement with the National Cancer Institute
      which gave us exclusive rights to data generated by the National Cancer
      Institute for certain cancer indications. That agreement expired on
      September 13, 1998 and was replaced by a clinical trials agreement which
      became effective October 29, 1998. Because our
      Broxine-Registered Trademark- product is not covered by patents or patent
      applications, our exclusive access to the data collected by the National
      Cancer Institute is of significant importance to us for the conduct of
      clinical trials and is a principal advantage over others.
 
    - Our IL-13 product is the subject of a cooperative research and development
      agreement with the FDA that extends through October 2001 and provides us
      with rights to the development of IL-13 with the FDA and to the data
      generated during the term of this agreement. This agreement may be
      terminated by either party upon sixty days advance notice without cause.
      Termination of this agreement would materially adversely affect our
      development program and could require curtailment or termination of that
      program.
 
    - We have also entered into two license and sponsored research agreements
      with Georgetown University relating to our liposomal products. These
      licenses are generally not terminable by Georgetown University except in
      the event of a default by us. Any such default and resulting termination
      of the licenses would be materially adverse to our liposome program and
      could require curtailment or termination of that program, and could
      adversely effect the sublicense agreements that we have entered into with
      Pharmacia & Upjohn Company for two of our liposome compounds.
 
    WE REQUIRE SUBSTANTIAL FUNDS AND WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN
THE FUTURE. We require substantial funds to conduct research and development,
pre-clinical and clinical testing and to manufacture and market our proposed
products. Our fixed commitments, including consulting fees, rent, payments under
license agreements and other contractual commitments are substantial and are
likely to increase. Our cash requirements may vary materially from those now
planned. We may seek to satisfy our future funding requirements through
additional public or private offerings of securities, with collaborative
arrangements with corporate partners or from other sources.
 
    Additional financing may not be available when we need it or be on terms
acceptable to us. If adequate financing is not available, we may be required to
delay, scale back or eliminate certain of our research and development programs,
to relinquish rights to some of our technologies, therapeutic and diagnostic
agents, product candidates or products, or to license third parties to
commercialize products or technologies that we would otherwise seek to develop
ourself. If additional capital is raised through the sale of equity or debt
securities, the percentage ownership of our existing stockholders will be
reduced and such securities may have rights, preferences or privileges superior
to those of our current stockholders.
 
                                       13
<PAGE>
    WE DO NOT HAVE MANUFACTURING, MARKETING, OR SALES RESOURCES.  We currently
do not have internal manufacturing, marketing or sales resources. Since we focus
on research and development and have limited resources, we do not anticipate
spending a significant amount of cash to acquire resources and develop
capabilities in these areas. Our manufacturing strategy will be to develop
manufacturing relationships with established pharmaceutical manufacturers for
the production of products. We can give no assurance that we will be able to
enter into manufacturing agreements on commercially reasonable terms, if at all.
 
    WE DO NOT HAVE CLINICAL TESTING OR REGULATORY CAPABILITY.  We currently do
not have internal clinical testing or regulatory capability. If we develop
compounds with commercial potential, we will have to hire additional personnel
skilled in the clinical testing and the regulatory compliance processes. We may
not successfully complete clinical testing of, obtain regulatory approval for,
or manufacture or market any product we may develop, either independently or
pursuant to manufacturing or marketing arrangements. Should we seek to enter
into third-party arrangements, we cannot give any assurance that such
arrangements can be successfully negotiated on commercially reasonable terms, if
at all.
 
    WE MAY NOT BE ABLE TO PROTECT OUR PATENTS AND PROPRIETARY
INFORMATION.  Because of the substantial length of time and expense associated
with bringing new products through development and regulatory approval to the
marketplace, patent and trade secret protection for new technologies, products
and processes is very important to us. We have obtained licenses to ten United
States patent applications and have sixteen other issued or allowed patent
applications outside the United States. With respect to these patents, however,
no assurance can be given that:
 
    - any patents under any pending applications or on future patent
      applications will be issued;
 
    - the scope of any patent protection will exclude competitors or provide
      competitive advantages to us;
 
    - any of our patents that may be issued will be held valid if subsequently
      challenged;
 
    - others will not claim rights in or ownership to the patents and other
      proprietary rights held by us;
 
    - others will not independently develop substantially equivalent proprietary
      information or otherwise obtain access to our know-how; or
 
    - others may be issued patents that require licensing and the payment of
      significant fees or royalties by us.
 
    Further, we may incur substantial costs in defending ourselves in suits that
may be brought against us claiming infringement of the patent rights of others,
in asserting our patent rights in a suit against another party, or in
participating in interference proceedings declared by the United States Patent
and Trademark Office for the purpose of determining the priority of invention in
connection with our patent applications or those of others. If we lose, we may
be forced to seek licenses, which may not be available on commercially
reasonable terms, if at all, or subject us to significant liabilities to a third
party and could, therefore, have a material adverse effect on us.
 
    Our Broxine-Registered Trademark- product is not currently the subject of
patents or patent applications and we do not expect to obtain patent protection
for this product. The lack of patent protection could have a material adverse
effect on our business, financial condition and results of operations.
 
    Finally, we also rely on trade secrets, know-how and technological advantage
to protect the technology we develop. Although we use confidentiality agreements
and employee proprietary information and invention assignment agreements to
protect our trade secrets and other unpatented know-how, these agreements may be
breached by the other party thereto or may otherwise be of limited effectiveness
or enforceability.
 
    CERTAIN OF OUR EXECUTIVE OFFICERS HAVE RELATIONSHIPS WITH OTHER ENTITIES AND
HAVE CONFLICTS OF INTEREST. Messrs. John N. Kapoor, Mahendra Shah and Kevin M.
Harris, who each hold executive positions with us,
 
                                       14
<PAGE>
are also associated with EJ Financial Enterprises, Inc., a healthcare investment
firm which is wholly owned by John N. Kapoor. On July 1, 1994, we entered into a
consulting agreement with EJ Financial. The consulting agreement provides that
we will pay EJ Financial $125,000 per year (paid quarterly) for certain business
and financial services, including having certain officers of EJ Financial serve
as officers of ours without pay. EJ Financial is involved in the management of
healthcare companies in various fields, and Messrs. Kapoor, Shah and Harris are
involved in various capacities with the management and operation of these
companies. The John N. Kapoor Trust, dated September 20, 1989, the beneficiary
of which is Dr. John Kapoor, is a principal shareholder of each of these
companies as well as us. The John N. Kapoor Trust and other entities controlled
by John N. Kapoor beneficially own shares of our common stock, representing
approximately 24% of our outstanding shares of common stock.
 
    Mr. Harris, our Chief Financial Officer, is also the Director of Taxes and
Planning of EJ Financial. Accordingly, Mr. Harris will not devote all of his
working hours to our affairs. In addition, EJ Financial is involved with other
companies in the oncology field. Although these companies are pursuing different
therapeutic approaches for the treatment of cancer, discoveries made by one or
more of these companies could render our products less competitive or obsolete.
 
    WE PREVIOUSLY ENTERED INTO A LINE OF CREDIT WITH A TRUST WHOSE BENEFICIARY
IS OUR PRINCIPAL SHAREHOLDER. On September 30, 1998, the John N. Kapoor Trust
entered into a line of credit agreement with us (the "Line of Credit") pursuant
to which we could borrow up to $3,000,000 at a rate of interest equal to 2% over
the "prime rate" announced from time to time by The Northern Trust Bank of
Chicago. Loans under the credit agreement were secured by a continuing security
agreement which provided the Trust with a security interest in our assets. The
Line of Credit was terminated by its terms in February 1999.
 
    MEMBERS OF OUR SCIENTIFIC ADVISORY BOARD COMMIT ONLY A PORTION OF THEIR TIME
TO OUR BUSINESS AND RESEARCH ACTIVITIES AND WE MAY NOT HAVE RIGHTS TO THEIR
INVENTIONS OR DISCOVERIES. Members of our scientific advisory board are employed
on a full-time basis by academic or research institutions. These individuals
will devote only a portion of their time to our business and research
activities. Except for work performed specifically for and at our direction, the
inventions or processes discovered by our consultants and scientific advisors
will not become our property but will be the intellectual property of other
institutions with which they may have an affiliation. If this happens, we would
have to obtain licenses to such technology from such institutions. In addition,
invention assignment agreements executed by scientific advisory board members
and consultants in connection with their relationships with us may be subject to
the rights of their primary employers or other third parties with whom such
individuals have consulting relationships.
 
    OUR BUSINESS IS DEPENDENT UPON COMPLIANCE WITH GOVERNMENTAL REGULATIONS AND
OBTAINING APPROVALS BY GOVERNMENTAL AGENCIES. Governmental authorities in the
United States and other countries regulate our research, testing, manufacturing,
labeling, distribution, marketing and advertising activities. The FDA and
comparable agencies in foreign countries impose substantial requirements on our
ability to introduce pharmaceutical products through lengthy and detailed
laboratory and clinical testing procedures, sampling procedures, sampling
activities and other costly and time consuming procedures. Our proprietary
products may require substantial clinical trials and FDA review as new drugs.
 
    We cannot predict with certainty if or when we might submit for regulatory
review our products currently under development. Once we submit our potential
products for review, we don't know whether the FDA or other regulatory agencies
will grant approvals for any of our pharmaceutical products on a timely basis or
at all. A delay in obtaining or failure to obtain these approvals may adversely
affect our business. If we fail to comply with regulatory requirements, we could
be subjected to regulatory or judicial enforcement actions, including product
recalls or seizures, injunctions, civil penalties, criminal prosecution,
refusals to approve new products, withdrawal of approvals, and product liability
exposure. Sales of our products outside the United States will be subject to
regulatory requirements governing clinical trials and marketing approval. These
requirements vary widely from country to country and could delay the
introduction of our products in those countries.
 
                                       15
<PAGE>
    THE DEMAND FOR OUR PRODUCTS MAY BE ADVERSELY AFFECTED BY HEALTH CARE REFORM
AND POTENTIAL LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. The continuing effort of
governmental and third-party payors to contain or reduce the costs of health
care may reduce our revenues and profitability. We cannot predict the effect
that health care reforms may have on our business, and it is possible that any
reforms will hurt our business. In addition, in both the United States and
elsewhere, sales of prescription pharmaceuticals are dependent in part on the
availability of reimbursement to the consumer from third-party payors, such as
government and private insurance plans. Third-party payors are increasingly
challenging the prices charged for medical products and services. We cannot be
certain that our current and proposed products will be considered cost-effective
and that reimbursement to the consumer will be available or will be sufficient
to allow us to sell products on a competitive basis.
 
    WE ARE SUBJECT TO REGULATIONS REGARDING HAZARDOUS MATERIALS AND
ENVIRONMENTAL MATTERS. We are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
hazardous materials and certain waste products. We currently maintain a supply
of several hazardous materials at our facilities. While we currently outsource
our research and development programs involving the controlled use of
biohazardous materials, if we conduct such programs, we might be required to
incur significant cost to comply with environmental laws and regulations. In the
event of an accident, we could be held liable for any damages that result, and
such liability could exceed our resources.
 
    WE DON'T HAVE PRODUCT LIABILITY INSURANCE AT THIS TIME.  We currently do not
have any product liability insurance and our business exposes us to potential
product liability risks which are inherent in the testing, manufacturing and
marketing of human therapeutic products. Although we plan to obtain product
liability insurance when and if our products become commercially available,
there can be no assurance that we will be able to obtain or maintain this
insurance on acceptable terms or that any insurance we obtain will provide us
with adequate coverage against potential liabilities. Claims or losses in excess
of any liability insurance coverage we obtain could have a material adverse
effect on our business and prospects.
 
    WE MAY BE AFFECTED BY LITIGATION INVOLVING OUR CHAIRMAN.  John N. Kapoor,
our chairman and principal stockholder, was previously the chairman and
president of Lyphomed Inc. Fujisawa Pharmaceutical Co. Ltd. was a major
stockholder of Lyphomed from the mid-1980s until 1990, at which time Fujisawa
completed a tender offer for the remaining shares of Lyphomed, including the
shares held by Dr. Kapoor. Fujisawa filed suit in federal district court in
Illinois against Dr. Kapoor alleging that between 1980 and 1986, Lyphomed filed
a large number of allegedly fraudulent new drug applications with the FDA, and
that Dr. Kapoor's failure to disclose these violations to Fujisawa constituted a
violation of federal securities laws and the Racketeer Influenced and Corrupt
Organizations Act. Fujisawa also alleged state common-law claims of constructive
trust, fraud, breach of fiduciary duties and breach of warranty against Dr.
Kapoor. In addition to substantial monetary relief in excess of $100,000,000
(which amount could be trebled under RICO), Fujisawa also seeks a constructive
trust on the assets of Dr. Kapoor, which may include Dr. Kapoor's shares of our
common stock or rights to acquire shares of our common stock.
 
    Dr. Kapoor has vigorously defended himself against all these allegations. In
the federal lawsuit, Dr. Kapoor's motion for summary judgement was granted by
the trial court. However, the Seventh Circuit Court of Appeals subsequently
reversed, in part, the trial court's decision, reinstating the RICO claims
against Dr. Kapoor. Dr. Kapoor's subsequent motion for summary judgment was
denied and the matter has been referred to a special master for mediation
discussions. It is anticipated that in the absence of resolution of the matter,
a trial would be held in late 1999 or early in 2000. Fujisawa's claims under
state law against Dr. Kapoor are also pending. A related suit filed by Dr.
Kapoor in Delaware Chancery Court seeking to require Lyphomed to advance to Dr.
Kapoor the cost of his defense to all of Fujisawa's lawsuits was decided in Dr.
Kapoor's favor and that decision was subsequently affirmed by the Delaware
Supreme Court. Finally, a countersuit filed by Dr. Kapoor against Fujisawa in
the Circuit Court of Cook County for breach of contract was dismissed without
prejudice with the court determining that the proper forum for such an action
was as part of the pending federal lawsuit. The decision of the lower court was
affirmed on appeal and Dr. Kapoor has filed a counterclaim for breach of
contract as part of the federal court action.
 
                                       16
<PAGE>
    If a decision is made in favor of Fujisawa, Fujisawa may acquire the right
to control Dr. Kapoor's shares of our common stock, which comprise 24% of our
common stock. This decision could have a material adverse effect on us.
 
    SHARES ELIGIBLE FOR FUTURE SALE COULD ADVERSELY AFFECT OUR STOCK PRICE.  If
our stockholders sell substantial amounts of our common stock, including shares
issued upon the exercise of outstanding options and warrants, in the public
market, the market price of our common stock could fall. These sales might also
make it more difficult to sell our equity or equity related securities in the
future at a time and price that we deem appropriate. Of the 8,454,621 shares of
common stock outstanding as of March 19, 1999, 3,792,746 shares are freely
transferable without restriction or further registration under the Securities
Act. The remaining 4,661,875 shares are "restricted securities," and may only be
sold pursuant to a registration statement under the Securities Act or an
applicable exemption from registration thereunder.
 
    WE ARE CONTROLLED BY OUR OFFICERS AND DIRECTORS.  As of March 19, 1999, our
directors and officers beneficially owned a total of 60.79% of the outstanding
shares of our common stock. Accordingly, our officers and directors, if acting
together, have the ability to elect a majority of our directors and otherwise
control our operations.
 
    WE MAY REDEEM THE REDEEMABLE WARRANTS.  Since July 25, 1997, the redeemable
warrants have been subject to redemption by us at $0.01 per redeemable warrant
on thirty (30) days' prior written notice to the redeemable warrantholders. We
can only redeem the warrants if the average closing sale price of our common
stock as reported on the American Stock Exchange equals or exceeds $5.60 per
share for twenty (20) trading days within a period of thirty (30) consecutive
trading days ending on the fifth trading day prior to the date of the notice of
redemption. If we redeem the redeemable warrants, holders of the redeemable
warrants will lose their rights to purchase shares of our common stock issuable
upon the exercise of the redeemable warrants.
 
    Upon receipt of a notice of redemption, holders would be required to:
 
    - exercise the redeemable warrants and pay the exercise price at a time when
      it may be disadvantageous for them to do so;
 
    - sell the redeemable warrants at the current market price, if any, when
      they might otherwise wish to hold the redeemable warrants; or
 
    - accept the redemption price which is likely to be substantially less than
      the market value of the redeemable warrants at the time of redemption.
 
    Since November 4, 1998, our common stock has traded above $5.60. As a
result, we may redeem the redeemable warrants, if we wish. We are currently
evaluating the merits of calling the redeemable warrants.
 
    HOLDERS OF REDEEMABLE WARRANTS MAY BE RESTRICTED FROM SELLING THE SHARES OF
OUR COMMON STOCK UNDERLYING THE REDEEMABLE WARRANTS. The redeemable warrants are
not exercisable unless, at the time of the exercise, we have a current
prospectus covering the shares of common stock issuable upon exercise of the
redeemable warrants, and such shares have been registered, qualified or deemed
to be exempt under the securities laws of the state of residence of the
exercising holder of the redeemable warrants.   We do not intend to qualify the
redeemable warrants for exercise in the states in which the holders reside. As a
result, holders of the redeemable warrants may be deprived of value. Although we
have agreed to use our best efforts to keep a registration statement covering
the shares of common stock issuable upon exercise of the redeemable warrants
effective for the term of the redeemable warrants, if we fail to do so for any
reason, your ability to resell the shares underlying the redeemable warrants
will be materially adversely effected.
 
    Purchasers may buy redeemable warrants in the aftermarket or may move to
jurisdictions in which the shares underlying the redeemable warrants are not
registered or qualified during the period that the
 
                                       17
<PAGE>
redeemable warrants are exercisable. If this happens, we can't issue shares to
those persons desiring to exercise their redeemable warrants, and holders of
redeemable warrants would have no choice but to attempt to sell the redeemable
warrants in a jurisdiction where such sale is permissible or allow the
redeemable warrants to expire unexercised.
 
    THE YEAR 2000 RISK MAY ADVERSELY AFFECT US.  Many currently installed
computer systems and software products are coded to accept only two digit
entries in the date code field. As a result, software that records only the last
two digits of the calendar year may not be able to distinguish whether "00"
means 1900 or 2000. This may result in software failures or the creation of
erroneous results. We believe that our products and internal systems are
currently year 2000 compliant. We are confirming our year 2000 compliance by
obtaining representations by third party vendors of their products' year 2000
compliance, as well as specific testing of our products. The failure of products
or systems maintained by third parties or our products and systems to be year
2000 complaint could cause us to incur significant expenses to remedy any
problems, or seriously damage our business. We have not incurred significant
costs to date complying with year 2000 requirements, and we do not believe that
we will incur significant costs for such purposes in the foreseeable future.
 
                               ITEM 2. PROPERTIES
 
    The Company's administrative offices are located in approximately 1330
square feet of subleased office space in Bannockburn, Illinois. This subleased
space is provided to the Company at a market rate rent by Option Care, Inc, an
affiliate of the Company's Chairman and principal shareholder, John N. Kapoor.
Until moving to the Bannockburn location in November of 1997, the Company
occupied office space in Lake Forest, Illinois. This space was provided as part
of a consulting agreement with EJ Financial. (See Note 8--"Transactions with
Related Parties" in Notes to Financial Statements).
 
                           ITEM 3. LEGAL PROCEEDINGS
 
    The Company is not a party to any litigation or other legal proceedings.
 
         ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
 
    No matters were submitted to a vote of security holders during the quarter
ended December 31, 1998.
 
                                       18
<PAGE>
                                    PART II
 
   ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                                    MATTERS
 
    From January 25, 1996 until December 2, 1996 the Company's Common Stock was
quoted on the Nasdaq Stock Market's SmallCap Market under the trading symbol
NPRM. Beginning on December 2, 1996, and continuing through the date of this
report, the Common Stock has been traded on the American Stock Exchange ("AMEX")
under the symbol NEO.
 
<TABLE>
<CAPTION>
1997                                                                                                     HIGH         LOW
----------------------------------------------------------------------------------------------------     -----        ---
<S>                                                                                                   <C>          <C>
First Quarter.......................................................................................       9 5/8   6 3/8
Second Quarter......................................................................................       7 1/2   3 1/16
Third Quarter.......................................................................................       5 1/2   3 5/8
Fourth Quarter......................................................................................           9   3 3/4
</TABLE>
 
<TABLE>
<CAPTION>
1998                                                                                                   HIGH        LOW
---------------------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                                  <C>        <C>
First Quarter......................................................................................  5 3/4      3 3/4
Second Quarter.....................................................................................  4 15/16    2 15/16
Third Quarter......................................................................................  4 1/2      2
Fourth Quarter.....................................................................................  13 1/4     3 5/8
</TABLE>
 
    As of March 19, 1999, there were 63 holders of record of the Common Stock,
and the Company estimates that as of such date there were more than 400
beneficial holders of the Common Stock. The Company has never paid a cash
dividend on its Common Stock and has no present intention of paying cash
dividends in the foreseeable future. Any determination in the future to pay
dividends will depend on the Company's financial condition, capital
requirements, results of operations, contractual limitations and other factors
deemed relevant by the Board of Directors.
 
                                       19
<PAGE>
                        ITEM 6. SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                                                                              INCEPTION
                                                            FOR THE YEARS ENDED                             (JUNE 15,1990)
                                                               DECEMBER 31,                                    THROUGH
                                 -------------------------------------------------------------------------   DECEMBER 31,
                                     1994           1995           1996           1997           1998            1998
                                 -------------  -------------  -------------  -------------  -------------  --------------
<S>                              <C>            <C>            <C>            <C>            <C>            <C>
Statement of Operations
  Data:
Revenues.......................  $    --        $    --        $    --        $     550,000  $    --        $      550,000
Operating expenses:
Research and development.......        813,761      1,068,683      1,099,631      1,411,692      1,611,343       7,085,874
General and administrative.....        107,286        244,901        956,924      1,370,486      1,691,132       4,837,984
                                 -------------  -------------  -------------  -------------  -------------  --------------
Loss from operations...........       (921,047)    (1,313,584)    (2,056,555)    (2,232,178)    (3,302,475)    (11,373,858)
Interest income................  $    --        $    --        $     238,275  $     210,501  $      88,752  $      537,528
Interest expense...............       (162,620)      (356,043)       (47,365)      --             --              (735,606)
                                 -------------  -------------  -------------  -------------  -------------  --------------
Interest income
  (expense)--net...............       (162,620)      (356,043)       190,910        210,501         88,752        (198,078)
                                 -------------  -------------  -------------  -------------  -------------  --------------
Loss Before Income Taxes.......  $  (1,083,667) $  (1,669,627) $  (1,865,645) $  (2,021,677) $  (3,213,723) $  (11,571,936)
Income Taxes...................       --             --             --             --           (1,640,000)     (1,640,000)
                                 -------------  -------------  -------------  -------------  -------------  --------------
Net Loss.......................  $  (1,083,667) $  (1,669,627) $  (1,865,645) $  (2,021,677) $  (1,573,723) $   (9,931,936)
                                 -------------  -------------  -------------  -------------  -------------  --------------
                                 -------------  -------------  -------------  -------------  -------------  --------------
Basic and Diluted
Net loss per share.............  $        (.32) $        (.36) $        (.24) $        (.25) $        (.19)
                                 -------------  -------------  -------------  -------------  -------------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                        -------------------------------------------------------------------------
<S>                                     <C>            <C>            <C>            <C>            <C>
                                            1994           1995           1996           1997           1998
                                        -------------  -------------  -------------  -------------  -------------
Balance Sheet Data:
Cash..................................  $       9,205  $         671  $   4,479,041  $   2,776,697  $      40,681
Working capital (deficit).............     (2,137,037)    (4,553,057)     4,013,010      2,348,904      1,077,255
Total assets..........................        112,988        495,891      4,492,208      2,854,499      1,781,548
Line of credit with bank..............        656,452      2,007,652       --             --             --
Loan payable to principal
  stockholder.........................      1,500,000      1,500,000       --             --             --
Deficit accumulated during the
  development stage...................     (2,801,264)      --           (1,865,645)    (3,887,322)    (5,461,045)
Total stockholders' equity (deficit)..     (2,691,773)    (4,361,392)     4,026,177      2,374,072      1,178,122
</TABLE>
 
           ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
    Since the Company's inception in June 1990, NeoPharm has devoted its
resources primarily to fund research and product development programs. The
Company has been unprofitable since inception and has had no revenues from the
sale of products. The Company expects to continue to incur losses as it expands
its research and development activities and sponsorship of clinical trials. As
of December 31, 1998, the Company's accumulated deficit was approximately $5.5
million.
 
                                       20
<PAGE>
RESULTS OF OPERATIONS
 
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
    The Company had no operating revenues during the three fiscal years ended
December 31, 1998 except for a $550,000 payment received from BioChem Pharma in
1997 as part of a licensing and distribution agreement. Interest income for 1998
totaled $88,752. The Company completed its initial public offering in January
1996. Cash in excess of funds needed to retire debt, pay for issuance costs or
pay outstanding payables was invested in short term investments.
 
    The Company incurred research and development expenses of approximately
$1,611,000 in 1998 as compared to approximately $1,412,000 in 1997 and
$1,100,000 in 1996. The increase in 1998 research and development expenses is
primarily due to the increased research activity and the addition of two new
employees related to the Company's Liposome Products. 1998, 1997 and 1996
expenses include payments made by the Company to Georgetown and the NCI pursuant
to the Company's license and sponsored research agreements with Georgetown, its
CRADA with the NCI, payments to U.S. Food and Drug Administration pursuant to
the CRADA, and the NIH pursuant to its license agreement. The Company expects
research and development spending to increase over the next several years. See
"Item 1--Research and Development, Collaborative Relationships and Licenses."
 
    General and administrative expenses increased to approximately $1,691,000 in
1998 from approximately $1,370,000 in 1997. The increase was primarily the
result of increased professional fees of $103,000, executive recruitment costs
of $81,000, increased public relations costs of $29,000, increased insurance
costs of $9,000, increased space costs of $35,000 and an increase in other
miscellaneous expenses of $64,000. General and administrative expenses for 1997
compared to 1996 increased approximately $413,000. This increase was primarily
the result of increased professional fees of $103,000 related to corporate
public filings, increased personel costs and compensation expense related to
non-employee stock options of $144,000 executive relocation expenses of $76,000,
increased travel costs of $37,000 and on increase of miscellaneous office
expense of $53,000.
 
    The Company incurred zero interest expense in both 1998 and 1997. Interest
expense for 1997 compared to 1996 decreased approximately $47,000. The Company
had outstanding debt for a portion of 1996. Proceeds from the initial public
offering, completed in January, 1996, were used to retire both the debt owed to
the principal shareholder and the line of credit provided by Harris Bank and
Trust N.A. The principal stockholder converted the principal of and interest on
the loan into shares of Common Stock and Warrants at the initial public offering
price. Interest expense totaled approximately $356,000 in 1995. The proceeds of
borrowings were used to fund the Company's operations during the period from
1994 to 1996. See "Item 13--Certain Relationships and Related Transactions" and
Note 3 of Notes to the Financial Statements.
 
INCEPTION TO DECEMBER 31, 1998
 
    The Company was taxed as an S Corporation from inception through October 11,
1995 when the S Corporation status was voluntarily terminated. Because the
Company was taxed as an S Corporation, all of its net losses from inception
through October 11, 1995 were passed through to its stockholders. Accordingly,
the Company did not accumulate operating loss carry forwards prior to October
11, 1995. The deficit accumulated while under S Corporation status was
reclassified to Additional Paid-In Capital in 1995. The Company has begun
accruing net operating loss carry forwards.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    At December 31, 1998, the Company has approximately $41 thousand dollars in
cash and cash equivalents and net working capital of approximately $1.1 million.
On October 22, 1998, the Company established a $3,000,000 line of credit (the
"Line of Credit") with the John N. Kapoor Trust dtd. 9/20/89, an
 
                                       21
<PAGE>
entity affiliated with the Company's Chairman. Interest on borrowings on the
Line of Credit were accrued at the rate of 2% over the prime rate of the
Northern Trust Bank. The accrued interest and outstanding principal were repaid
on January 29, 1999 and the line of Credit terminated upon the signing of the
Pharmacia and Upjohn licensing agreement in February 1999. The Company believes
that cash and cash equivalents should be adequate to fund operations for the
next 12 months. However, management can offer no assurances that additional
funding will not be required during that period.
 
    The Company's assets at December 31, 1998 were $1,781,548 compared to
$2,854,499 at December 31, 1997. This decrease in assets was primarily due to a
reduction of cash and cash equivalents of approximately $2,736,000 as a result
of cash used in operating activities of approximately $2,716,000, cash used to
purchase equipment and furniture of approximately $102,000 and cash provided by
issuance of stock of approximately $82,000.
 
    The Company's liabilities at December 31, 1998 increased to approximately
$603,000 from approximately $480,000 at December 31, 1997.
 
    All of the products currently being developed by the Company will require
approval by the FDA before they can be sold commercially in the United States.
The results of the preclinical and clinical testing on a nonbiologic drug and
certain diagnostic drugs are submitted to the FDA in the form of an NDA for
approval to commence commercial sales. In responding to an NDA, the FDA may
grant marketing approval, request additional information or deny the application
if the FDA determines that the application does not satisfy its regulatory
approval criteria.
 
    The Company may seek to satisfy its future funding requirements through
public or private offerings of securities, with collaborative or other
arrangements with corporate partners or from other sources. Additional financing
may not be available when needed or on terms acceptable to the Company. If
adequate financing is not available, the Company may be required to delay, scale
back or eliminate certain of its research and development programs, to
relinquish rights to certain of its technologies, therapeutic and diagnostic
agents, product candidates or products, or to license third parties to
commercialize products or technologies that the Company would otherwise seek to
develop itself.
 
THE YEAR 2000 ISSUE
 
    The year 2000 problem is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. The Company has conducted a review of its computer
systems and management believes that the Year 2000 issue will not materially
impact the Company.
 
    The Company is in the process of identifying and assessing potential
operating and software problems related to the year 2000 issue both internally
and externally. It is the Company's intention to complete the identification
phase by June 30, 1999 and take any required corrective action by September 30,
1999.
 
    The Company has completed an internal review of its hardware and software
used in its operations and has assessed the Year 2000 readiness. Based on this
review, the Company has not identified any material Year 2000 issues. The cost
of this review is expected to be less than $5,000.
 
    Additionally, the Company is in the process of communicating with its
significant vendors, service providers and collaboration partners to determine
if such parties are Year 2000 compliant or have effective plans in place to
address the Year 2000 issue and to determine the extent of the Company's
vulnerability to the failure of third parties to remedy such issues. Based upon
the responses that the Company receives from these third parties, the Company
will assess its risks and develop appropriate contingency plans as needed.
 
                                       22
<PAGE>
    The Company does not expect the impact of the Year 2000 to have a material
adverse impact on the Company's business or results of operations. However, no
assurance can be given that any required changes to the Company's software or
operating systems can be made in a timely fashion or that unanticipated or
undiscovered Year 2000 problems will not arise that could have a material
adverse effect on the Company's business and results of operations. In addition,
there can be no assurance that Year 2000 non-compliance by any of the Company's
significant vendors, service providers or collaboration partners will not have a
material adverse effect on the Company's business or results of operations.
 
               ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
 
    The Financial Statements and Supplementary Data are incorporated herein by
reference to the Company's Financial Statements included as Exhibit 1. The
information is contained as follows:
 
<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                                -----
<S>                                                                                                          <C>
Report of Arthur Andersen LLP, Independent Public Accountants..............................................          35
Balance Sheets.............................................................................................          36
Statements of Operations...................................................................................          37
Statements of Stockholders' Equity (Deficit)...............................................................          38
Statements of Cash Flows...................................................................................          41
Notes to Financial Statements..............................................................................          43
</TABLE>
 
    ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                             FINANCIAL DISCLOSURES
 
    None.
 
                                       23
<PAGE>
                                    PART III
 
          ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
    The directors and executive officers of the Company are as follows:
 
<TABLE>
<CAPTION>
                                                                                                                  POSITION
                                                                                                                    HELD
NAME                                                  AGE                          POSITION                         SINCE
------------------------------------------------      ---      ------------------------------------------------  -----------
<S>                                               <C>          <C>                                               <C>
 
John N. Kapoor, Ph.D.(2)........................          55   Director, Chairman of the Board                         1990
 
Aquilur Rahman, Ph.D............................          56   Director, Chief Scientific Officer                      1990
 
Anatoly Dritschilo, M.D.(1)(2)..................          54   Director                                                1990
 
James M. Hussey (3).............................          39   President, Chief Executive Officer, and Director        1998
 
Erick E. Hanson(1)..............................          52   Director                                                1997
 
Mahendra G. Shah, Ph.D..........................          54   Vice President, Corporate and Business                  1991
                                                               Development
 
Sander A. Flaum.................................          57   Director                                                1998
 
Kevin Harris....................................          38   Chief Financial Officer                                 1998
 
Lewis Strauss, M.D..............................          48   Vice President- Chief Medical Officer                   1998
</TABLE>
 
------------------------
 
(1) Member of the Audit Committee.
 
(2) Member of the Compensation Committee.
 
(3) Mr. Hussey assumed the positions of President, Chief Executive Officer and
    Director of the Company on March 16, 1998. He replaced Dr. William C. Govier
    who served as President, Chief Executive Officer and Director of the Company
    until retiring on January 16, 1998.
 
    All directors hold office until the next annual meeting of the stockholders
and until their successors are duly elected. Officers are appointed to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed.
 
    John N. Kapoor, Ph.D., Chairman of the Board of Directors, has been a
director of the Company since July 1990. Prior to forming the Company, Dr.
Kapoor formed EJ Financial Enterprises, Inc., a health care consulting and
investment Company, in March 1990, of which Dr. Kapoor is currently President.
Dr. Kapoor is presently Chairman of Option Care, Inc., a provider of home health
care services; Chairman of Unimed Pharmaceuticals, Inc., a developer and
marketer of pharmaceuticals for cancer, endocrine disorders and infectious
diseases; and Chairman of Akorn, Inc., a manufacturer, distributor, and marketer
of generic ophthalmic products. Dr. Kapoor received his Ph.D. in medicinal
chemistry from the State University of New York in 1970 and a B.S. in pharmacy
from Bombay University in India.
 
    Aquilur Rahman, Ph.D., joined the Company as Chief Scientific Officer and as
a member of the Board of Directors in July 1990. Dr. Rahman joined the Company
on a full time basis in March 1996. Dr. Rahman is currently adjunct professor of
radiology and was an associate professor of pathology and pharmacology at
Georgetown University until March 1996. Dr. Rahman has more than 15 years of
research experience in developing methods of chemotherapy treatment for cancer.
Dr. Rahman received his Masters of Science in Biochemistry from the University
of Dacca (Bangladesh) in 1964 and his Ph.D. in Pharmaceutics from the University
of Strathclyde (Glasgow, U.K.) in 1972.
 
    Anatoly Dritschilo, M.D., joined the Company as a Member of the Board of
Directors in July 1990. Since August 1979, Dr. Dritschilo has been Chairman of
the Department of Radiation Medicine and
 
                                       24
<PAGE>
Medical Director of the Georgetown University Medical Center in Washington, D.C.
Dr. Dritschilo received his B.S. in Chemical Engineering from the University of
Pennsylvania, his M.S. in Engineering in 1969 from Newark College of
Engineering, and his M.D. in 1973 from the College of Medicine of New Jersey.
 
    James M. Hussey joined the Company in March 1998 as its President, Chief
Executive Officer, and a member of the Board of Directors. Mr. Hussey was
previously the Chief Executive Officer of Physicians Quality Care, a managed
care organization from 1994 to January, 1998. Previous to that, Mr. Hussey held
several positions with Bristol-Myers Squibb from 1984 to 1994, most recently as
the General Manager Midwest Integrated Regional Business Unit. Mr. Hussey
received a B.S. from the College of Pharmacy at Butler University and an M.B.A.
from the University of Illinois.
 
    Erick E. Hanson, joined the Company as a Director in April 1997. Mr. Hanson
is currently President of Hanson and Associates, a consulting firm working with
venture capital companies. Previously, Mr. Hanson served as President and Chief
Executive Officer of OptionCare, Inc., a provider of home health care services.
Prior to joining OptionCare, Inc. Mr. Hanson held a variety of positions with
Caremark, Inc., including from 1991-1995, Vice President Sales and Marketing.
Mr. Hanson served as President and Chief Operating Officer of Clinical Partners,
Inc. in Boston, MA, from 1989-1991 and prior to 1989 was associated with Blue
Cross and Blue Shield of Indiana for over twenty years. Mr. Hanson presently
serves on the Board of Directors for Condell Medical Centers.
 
    Sander A. Flaum, joined the Company as a Director in July 1998. Mr. Flaum is
President and Chief Executive Officer of Robert A. Becker EURO/RSCG, a marketing
and advertising company. Prior to becoming President of Robert A. Becker, Mr.
Flaum was Executive Vice President of Kleinter Advertising and prior to that
served as Marketing Director of Lederle Laboratories, a division of American
Cyanamid where he was employed from 1965-1984.
 
    Mahendra G. Shah, Ph.D., has served as Vice President of Corporate and
Business Development of the Company since October 1991. Dr. Shah is also a Vice
President of EJ Financial Enterprises, Inc., a position he has held since
October 1991. Prior to joining the Company, Dr. Shah was the Senior Director of
New Business Development with Fujisawa USA from January 1987 to October 1991.
Dr. Shah received his M.S. in 1978 and Ph.D. in 1984 in Industrial Pharmacy from
St. John's University and an M.S. in 1969 and a B.S. in 1967 in Pharmaceutical
Chemistry from Gujarat University in India.
 
    Kevin M. Harris has served as Chief Financial Officer and Secretary of the
Company since June 1998. Mr. Harris is also Director of Taxes and Planning at
E.J. Financial Enterprises, Inc. a health care consulting and investment
Company. Prior to joining E.J. Financial Enterprises in 1997, Mr. Harris was
Vice-President of Finance of Duo-Fast Corporation. Previously, Mr. Harris worked
eleven years in public accounting, including six years with Arthur Andersen &
Company. Mr. Harris received a B.Sc. in accounting from Illinois State
University in 1983 and a M.S. from DePaul University in 1988. Mr. Harris is a
Certified Public Accountant and a Certified Financial Planner.
 
    Lewis Strauss, M.D., joined the Company as Chief Medical Officer, in April,
1998. After completing his medical training at Cornell Medical College and his
pediatric residency at The John Hopkins School of Medicine in Baltimore, Dr.
Strauss served as a Pediatric Oncologist at John Hopkins Oncology Center
(1980-1991) and at Northwestern University (1991-1997).
 
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
    Based solely on a review of the copies of such reports furnished to the
Company or written representations that no other reports were required, the
Company believes that during the 1998 fiscal year, all filing requirements
applicable to its officers, directors and greater that 10% beneficial owners
were complied with, with the exception that (i) the Initial Statement Of
Beneficial Ownership Of Securities on Form 3, required to be filed by each of
James M. Hussey, President and Chief Executive Officer of the
 
                                       25
<PAGE>
Company, Dr. Louis C. Strauss, Chief Medical Officer for the Company and Sander
A. Flaum, Director of the Company, were not filed within 10 days of each of
those individuals assuming their respective offices, (ii) Dr. Dritschilo did not
timely file a Form 4 report relating to transfers which has been made for estate
planning purposes, and (iii) Mr. Harris did not timely file a Form 4 report
regarding his initial acquisition of shares. Each of the aforementioned
individuals has now made the required filings.
 
                        ITEM 11. EXECUTIVE COMPENSATION
 
    The following table summarizes the total compensation for services rendered
to the Company for the fiscal year ended December 31, 1998, by those persons
holding the position of Chief Executive Officer and for each executive officer
who received more than $100,000 in salary and bonus in 1998.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                                                     LONG TERM
                                                      ANNUAL COMPENSATION                       COMPENSATION AWARDS
                                    --------------------------------------------------------  -----------------------
                                                                ANNUAL                        RESTRICTED
                                                             COMPENSATION     OTHER ANNUAL      STOCK
NAME AND PRINCIPAL POSITION         FISCAL YEAR    SALARY      BONUS($)     COMPENSATION($)    AWARD($)   OPTIONS(#)
----------------------------------  -----------  ----------  -------------  ----------------  ----------  -----------
<S>                                 <C>          <C>         <C>            <C>               <C>         <C>
 
William C. Govier.................        1998   $    5,800    $       0       $        0     $        0           0
Chief Executive Officer and               1997   $  138,600    $       0       $        0     $        0           0
President (1)                             1996      121,000    $  39,600       $        0     $        0           0
 
James M. Hussey...................        1998   $  197,900    $  90,000       $     7100     $  187,500     400,000(4)
Chief Executive Officer and
President (1)
 
Aquilur Rahman....................        1998   $  178,000    $  54,000       $     9600     $        0           0
Chief Scientific Officer                  1997   $  167,000    $  51,000                0              0      50,000(3)
                                          1996   $  144,100    $  45,000                0              0           0
 
Lewis Straus M.D..................        1998   $  110,000    $  16,800       $   20,000     $   35,000      20,000(5)
Chief Medical Officer (2)
</TABLE>
 
------------------------
 
(1) Dr. Grovier resigned as President, Chief Executive Officer and a Director
    effective January 18, 1998. Effective March 16, 1998, Mr. James M. Hussey
    succeeded Dr. Govier as President and Chief Executive Officer and was
    appointed to fill the vacancy in the Board of Directors created by Dr.
    Govier's departure.
 
(2) Dr. Stauss joined the Company as Chief Medical Officer on April 6, 1998.
 
(3) The stock options became exercisable for 50% of the covered shares on August
    13, 1997 and the remaining shares became exercisable August 15, 1998 in
    accordance with the terms of the 1995 Stock Option Plan.
 
(4) The stock options became exercisable for 25% of the covered shares on
    January 16, 1999 and will become exercisable with respect to an additional
    25% on each anniversary of such date
 
(5) The stock options become exercisable for 25% of the covered shares on April
    6, 1999. And will become exercisable with respect to an additional 25% on
    each anniversary of such date.
 
                                       26
<PAGE>
                       OPTION GRANTS IN LAST FISCAL YEAR
 
    The following table sets forth information with respect to grants of options
to purchase Common Stock granted to the Named Executive Officers during the
fiscal year ended December 31, 1998:
 
                               INDIVIDUAL GRANTS
 
<TABLE>
<CAPTION>
                                                                                                       POTENTIAL REALIZABLE
                                                                                                         VALUE AS ASSUMED
                                                           % OF TOTAL                                 ANNUAL RATES OF STOCK
                                                             OPTIONS                                    PRICE APPRECIATION
                                                           GRANTED TO      EXERCISE                      FOR OPTION TERM
                                              GRANTED     EMPLOYEES IN     PRICE PER   EXPIRATION   --------------------------
NAME                                        OPTIONS (#)    FISCAL YEAR       SHARE        DATE           5%           10%
------------------------------------------  -----------  ---------------  -----------  -----------  ------------  ------------
<S>                                         <C>          <C>              <C>          <C>          <C>           <C>
James M. Hussey...........................     400,000          71.81%     $    4.75      1/16/08   $  1,194,900  $  3,028,111
Lewis Strauss.............................      20,000           3.59%     $    3.75      4/06/08   $     47,167  $    119,531
</TABLE>
 
                   AGGREGATED OPTION EXERCISES IN LAST FISCAL
                    YEAR, AND FISCAL YEAR-END OPTION VALUES
 
    The following table sets forth information with respect to stock options
exercised during the fiscal year ended December 31, 1998, and the value at
December 31, 1998 of unexercised stock options held by our executive officers:
 
                         FISCAL YEAR END OPTION VALUES
 
<TABLE>
<CAPTION>
                                                                                           NUMBER OF           VALUE OF
                                                                                          UNEXERCISED        UNEXERCISED
                                                                                       OPTIONS AT FISCAL    OPTIONS IN-THE
                                                                                           YEAR-END             MONEY
                                                        SHARES                           EXERCISABLE/     AT FISCAL YEAR-END
                                                      ACQUIRED ON        REALIZED       UNEXERCISEABLE       EXERCISABLE/
NAME                                                 EXERCISE (#)        VALUE($)             (#)         UNEXERCISEABLE($)*
-------------------------------------------------  -----------------  ---------------  -----------------  ------------------
<S>                                                <C>                <C>              <C>                <C>
 
William C. Govier................................              0                 0                0/0      $           0/$0
 
James M. Hussey..................................              0                 0          0/400,000      $   0/$2,950,000
 
Aquilur Rahman...................................              0                 0           50,000/0      $     0/$256,250
 
Lewis Strauss....................................              0                 0           0/20,000      $     0/$167,500
</TABLE>
 
------------------------
 
*   Represents the fair market value at December 31, 1998, of the common stock
    underlying the options minus the exercise price.
 
    ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
    The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of March 19, 1999 for (i) all people
that beneficially own more than 5% of the Company's outstanding common stock,
(ii) all directors, (iii) all executive officers and (iv) all executive officers
and directors as a group. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Percentage of beneficial
ownership is based on 8,454,621 shares of common stock outstanding as of March
19, 1999, plus 559,004 shares subject to warrants and options that are
considered to be beneficially owned by certain of the persons listed. Shares of
common stock subject to options or warrants
 
                                       27
<PAGE>
exercisable or convertible within 60 days of March 19, 1999 are deemed
outstanding for computing the percentage of the person or group holding such
options or warrants.
 
<TABLE>
<CAPTION>
                                                                         AMOUNT AND NATURE OF
                                                                             PERCENTAGE OF         PERCENTAGE OF
                                                                              BENEFICIAL        SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER                                                     OWNERSHIP(3)              OWNED
-----------------------------------------------------------------------  ---------------------  -------------------
<S>                                                                      <C>                    <C>
 
John N. Kapoor.........................................................         2,146,957(1)             23.82%
  EJ Financial Enterprises, Inc.
  225 E. Deerpath, Suite 250
  Lake Forest, IL 60045
 
John N. Kapoor 1994-A..................................................         1,550,453(2)             17.20%
  Annuity Trust
  225 E. Deerpath, Suite 250
  Lake Forest,IL 60045
 
Aquilur Rahman.........................................................           915,540                10.16%
  100 Corporate North, Suite 215
  Bannockburn, IL 60015
 
Anatoly Dritschilo.....................................................           259,136                 2.87%
  100 Corporate North, Suite 215
  Bannockburn, IL 60015
 
James M. Hussey........................................................           166,373                 1.85%
  100 Corporate North, Suite 215
  Bannockburn, IL 60015
 
Erick E. Hanson........................................................             2,000                  .02%
  100 Corporate North, Suite 212
  Bannockburn, IL 60015
 
Sander Flaum...........................................................             2,000                  .02%
  100 Corporate North, Suite 215
  Bannockburn, IL 60015
 
William C. Govier......................................................           233,134                 2.59%
  225 E. Deerpath, Suite 250
  Lake Forest,IL 60045
 
Mahendra Shah..........................................................           187,106                 2.08%
  225 E. Deerpath, Suite 250
  Lake Forest,IL 60045
 
Kevin M. Harris........................................................               600                  .01%
  225 E. Deerpath, Suite 250
  Lake Forest,IL 60045
 
Lewis Strauss..........................................................            15,862                  .18%
  100 Corporate North, Suite 215
  Bannockburn, IL 60015
 
All officers and a directors as group (10 persons).....................         5,479,161                60.79%
</TABLE>
 
------------------------
 
(1) Includes 620,059 shares held by John N. Kapoor Trust, dtd 9/20/89, of which
    Dr. Kapoor is the sole trustee and sole beneficiary and 904,812 shares held
    by EJ Financial/NEO Management, L.P. (the
 
                                       28
<PAGE>
    "Limited Partnership") of which John N. Kapoor is the Managing General
    Partner. The address of the John N. Kapoor Trust and the Limited Partnership
    is 225 East Deerpath, Suite 250, Lake Forest, Illinois 60045. The John N.
    Kapoor Trust also owns warrants to purchase 287,004 shares of common stock,
    which are assumed to have been exercised for purposes of disclosing the
    ownership indicated. The amount shown also includes 300,000 shares of common
    stock which are held by the John N. Kapoor Charitable Trust of which Dr.
    Kapoor and his spouse are co-trustees. Dr. Kapoor disclaims beneficial
    ownership of the shares held by the charitable trust.
 
(2) The sole trustee of the John N. Kapoor 1994-A Annuity Trust is Editha
    Kapoor, Dr. Kapoor's spouse. Mrs. Kapoor also serves as trustee for four
    trusts which have been established for their children and which collectively
    own 310,848 shares. In addition, Ms. Kapoor serves as co-trustee with Dr.
    Kapoor of the John N. Kapoor Charitable Trust which shares are not included
    in the reported shares.
 
(3) Does not include shares held by family members of officers or directors, or
    trusts established for the family members of officers or director, provided
    that such officers or directors do not have or share voting or investment
    power with such family members or trusts and such officers or directors have
    disclaimed beneficial ownership over such shares.
 
            ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    In November, 1997 the Company relocated its principal corporate office to
space subleased from Option Care, Inc. Mr. Hanson, a director of the Company,
was formerly President, CEO and a Director of Option Care. In addition, Dr.
Kapoor, Chairman of the Company's Board of Directors, is a director and
principal shareholder of Option Care. Dr. Kapoor holds 57.5% of the outstanding
shares of Option Care, Inc. The sublease was negotiated at arms length. The
Company expensed approximately $38,700 for rent under the Option Care sublease
during 1998.
 
    On July 1, 1994, the Company entered into a Consulting Agreement with EJ
Financial Enterprises, Inc. ("EJ Financial"). The Consulting Agreement provides
that the Company will pay EJ Financial $125,000 per year (paid quarterly) for
certain business and financial services, including having certain officers of EJ
Financial serve as officers of the Company. Dr. John Kapoor, the Company's
Chairman of the Board is the president and a director of EJ Financial. Dr.
Mahendra Shah, Vice President of the Company, is also a Vice President of EJ
Financial. Mr. Kevin Harris, Chief Financial Officer of the Company, is Director
of Taxes and Planning of EJ Financial. Dr. Kapoor, Dr. Shah and Kevin Harris are
paid by EJ Financial. They do not receive compensation from the Company. These
charges reflect the increased need for EJ Financial's services in connection
with the operation of NeoPharm as a publicly-held Company. Unless terminated by
the parties, the management services agreement with EJ Financial automatically
renews in June of each year for a one year term.
 
    On October 22, 1998, the Company established a $3,000,000 line of credit
(the "Line of Credit") with the John N. Kapoor Trust dtd 9/20/89 (the "Trust")
the sole trustee and sole beneficiary of which is John N. Kapoor, the Company's
Chairman. Interest on borrowings on the Line of Credit accrued at the rate of 2%
over the prime rate charged by the Northern Trust Bank. The accrued interest and
outstanding principal became due and payable at the earlier of October 1, 2001
or the date on which the Company completed a public or private offering of debt
or equity securities or a licensing agreement for its products. There were no
borrowings on the Line of Credit during 1998 and borrowings of $250,000 in 1999.
The Line of Credit was terminated in February 1999 as a result of the Company
entering in a license agreement with Pharmacia & Upjohn and the Line of Credit
was thereupon repaid in the amount of $250,000 of principal and $1,100 of
interest.
 
    Dr. Aquilur Rahman, Chief Scientific Officer and a Director of the Company,
was formerly an associate professor of pathology and pharmacology at Georgetown
University. Dr. Anthony Dritschilo, a Director of the Company, is currently
chairman of the Department of Radiation Medicine and Medical Director of the
Georgetown Medical Center in Washington, D.C. As a result of their respective
positions
 
                                       29
<PAGE>
with Georgetown University both Dr. Rahman and Dr. Dritschilo entered into
agreements with Georgetown relating to the ownership of inventions and other
intellectual property developed while in Georgetown's employ. As part of their
agreements with Georgetown University, Dr. Rahman and Dritschilo have advised
the Company that Georgetown University will share with each of them payments
which Georgetown receives from the Company under the License Agreements between
the Company and Georgetown. While there were no royalty or other payments to
Georgetown University by the Company in 1998, as a result of the Company
entering into a License Agreement with Pharmacia & Upjohn in February 1999, a
payment of $800,000 was recently made to Georgetown University and, assuming
regulatory approval is obtained in the future for the Company's LED and LEP
compounds, additional royalty payments, which could be substantial, would be
made by the Company to Georgetown in the future which the Company understands
Georgetown would then share with the foregoing named individuals.
 
    In connection with the Company's initial public offering, the Company
adopted a policy whereby any further transaction between the Company and its
officers, directors, principal shareholders and any affiliates of the foregoing
persons will be on terms no less favorable to the Company than could reasonably
be obtained in arm's length transactions with independent third parties, and
that any such transactions also be approved by a majority of the Company's
disinterested outside directors.
 
                                       30
<PAGE>
                                    PART IV
              ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
(a) Exhibits
 
<TABLE>
<C>        <S>
      3.1  Certificate of Incorporation, as amended filed with the Commission as Exhibit 3.1 to
           the Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated
           by reference.
 
      3.2  Bylaws of the Registrant, as amended filed with the Commission as Exhibit 3.2 to the
           Company's Registration Statement on Form S-1 (File No. 33- 90516), is incorporated by
           reference.
 
      4.1  Specimen Common Stock Certificate filed with the Commission as Exhibit 4.1 to the
           Company's Registration Statement on Form S-1 (File No. 33- 90516), is incorporated by
           reference.
 
      4.2  Specimen Warrant Certificate filed with the Commission as Exhibit 4.2 to the
           Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by
           reference.
 
      4.3  Form of Representative's Warrant Agreement between the Registrant and the
           Representative, including form of Representative's Warrant filed with the Commission
           as Exhibit 4.3 to the Company's Registration Statement on Form S-1 (File No.
           33-90516), is incorporated by reference.
 
      4.4  Form of Warrant Agreement between the Registrant, the Representative and Harris Trust
           and Savings Bank, including form of Warrant filed with the Commission as Exhibit 4.4
           to the Company's Registration Statement on Form S-1 (File No. 33-90516), is
           incorporated by reference.
 
     10.1  1995 Stock Option Plan, with forms of Incentive and Nonstatutory Stock Option
           Agreements filed with the Commission as Exhibit 10.1 to the Company's Registration
           Statement on Form S-1 (File No. 33-90516), is incorporated by reference.
 
     10.2  1995 Director Option Plan, with form of Director Stock Option Agreement filed with
           the Commission as Exhibit 10.2 to the Company's Registration Statement on Form S-1
           (File No. 33-90516), is incorporated by reference.
 
     10.3  Form of Director and Officer Indemnification Agreement. filed with the Commission as
           Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File No. 33-90516),
           is incorporated by reference.
 
     10.4  Cooperative Research and Development Agreement between the Company and the National
           Cancer Institute dated September 13, 1993 filed with the Commission as Exhibit 10.4
           to the Company's Registration Statement on Form S-1 (File No. 33-90516), is
           incorporated by reference.
 
     10.5  License Agreement between the Company and Georgetown University dated July, 1990
           filed with the Commission as Exhibit 10.5 to the Company's Registration Statement on
           Form S-1 (File No. 33-90516), is incorporated by reference.
 
     10.6  License Agreement between the Company and Georgetown University dated April 18, 1994
           filed with the Commission as Exhibit 10.6 to the Company's Registration Statement on
           Form S-1 (File No. 33-90516), is incorporated by reference.
 
     10.7  Loan Repayment Note, dated June 18, 1990, by and between the Company and the John N.
           Kapoor Trust filed with the Commission as Exhibit 10.7 to the Company's Registration
           Statement on Form S-1 (File No. 33-90516), is incorporated by reference.
</TABLE>
 
                                       31
<PAGE>
<TABLE>
<C>        <S>
     10.8  Consulting Agreement, dated July 1, 1994, by and between the Company and EJ Financial
           Services, Inc. filed with the Commission as Exhibit 10.8 to the Company's
           Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference.
 
    10.09  Harris Bank and Trust Company Loan Agreement dated March 16, 1995, as amended on
           October 5, 1995. filed with the Commission as Exhibit 10.10 to the Company's
           Registration Statement on Form S-1 (File No. 33-90516), is incorporated by reference.
 
    10.10  Option Agreement, dated as of August 13, 1996, between the Company and John N. Kapoor
           and Anatoly Dritschilo, incorporated by reference to Exhibit 10.11 of the Company's
           report on Form 10-K for the fiscal year ended December 31, 1996.
 
    10.11  Cooperative Research and Development Agreement between the Company and the Food and
           Drug Administration dated August 27, 1997.
 
    10.12  License Agreement between the Company and the National Institute of Health dated
           September 23, 1997.
 
    10.13  Employment agreement between James M. Hussey and the Company dated March 16, 1998.
 
    10.14  1998 Equity Incentive Plan filed with the Commission on October 30, 1998 as Exhibit
           4.1 to the Company's Registration Statement on Form S-8 (File No. 333-66365), is
           incorporated by reference.
 
    10.15  Collaboration Agreement by and between the Company and BioChem Therapeutic Inc. dated
           May 12, 1997.
 
    10.16  License Agreement by and between the Company and Pharmacia and Upjohn Company dated
           February 19, 1999, filed with the Commission as Exhibit 10.1 of the Company's report
           on Form 8-K (File No.33-09516), is incorporated by reference.
 
    10.17  Stock Purchase Agreement by and between the Company and Pharmacia and Upjohn Company
           dated February 19, 1999, filed with the Commission on as Exhibit 10.2 of the
           Company's report on Form 8-K (File No. 33-09516), is incorporated by reference.
 
    10.18  Amendment No. 1 dated January 22, 1999 to the License Agreement between the Company
           and Georgetown University dated January, 1990.
 
    10.19  Amendment No. 1 dated January 22, 1999 to the License Agreement between the Company
           and Georgetown University dated April 18, 1994.
 
    10.20  Line of Credit Agreement, dated as of September 30, 1998, by and between Registrant
           and the John N. Kapoor Trust dated September 20, 1989 filed with the Commission on
           November 16, 1998 as exhibit 10.15 to the Registrant's report on Form 10-Q (File No.
           33-09516), is incorporated by reference.
 
     11.1  Calculation of Earnings Per Share.
 
       27  Financial Data Schedule
</TABLE>
 
(b) Financial Statements
 
    (1) FINANCIAL STATEMENTS
 
    The financial statements filed as part of this Registration Statement are
listed in the Index to Financial Statements of the Company on Page 34.
 
                                       32
<PAGE>
                                   SIGNATURES
 
    PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
<TABLE>
<S>                             <C>  <C>
                                NEOPHARM, INC.
 
                                By:             /s/ JAMES M. HUSSEY
                                     -----------------------------------------
                                                  James M. Hussey
                                       PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
 
    PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
 
<TABLE>
<CAPTION>
          SIGNATURE                       TITLE                    DATE
------------------------------  --------------------------  -------------------
 
<C>                             <S>                         <C>
      /s/ JOHN N. KAPOOR
------------------------------  Director, Chairman of the     March 26, 1999
        John N. Kapoor            Board
 
      /s/ AQUILUR RAHMAN
------------------------------  Director, Chief Scientific    March 26, 1999
        Aquilur Rahman            Officer
 
    /s/ ANATOLY DRITSCHILO
------------------------------  Director                      March 26, 1999
      Anatoly Dritschilo
 
                                Director, President, and
     /s/ JAMES M. HUSSEY          Chief Executive Officer
------------------------------    (Principal Executive        March 26, 1999
       James M. Hussey            Officer)
 
     /s/ ERICK E. HANSON
------------------------------  Director                      March 26, 1999
       Erick E. Hanson
 
                                Chief Financial Officer
     /s/ KEVIN M. HARRIS          Principal Financial
------------------------------    Officer and Principal       March 26, 1999
       Kevin M. Harris            Accounting Officer)
 
       /s/ SANDER FLAUM
------------------------------  Director                      March 26, 1999
         Sander Flaum
</TABLE>
 
                                       33
<PAGE>
                         INDEX TO FINANCIAL STATEMENTS
 
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                                -----
<S>                                                                                                          <C>
Report of Arthur Andersen LLP, Independent Public Accountants..............................................          35
Balance Sheets.............................................................................................          36
Statements of Operations...................................................................................          37
Statements of Stockholders' Equity (Deficit)...............................................................          38
Statements of Cash Flows...................................................................................          41
Notes to Financial Statements..............................................................................          43
</TABLE>
 
                                       34
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Stockholders of NeoPharm, Inc.:
 
    We have audited the accompanying balance sheets of NeoPharm, Inc. (a
Delaware corporation in the development stage) as of December 31, 1997 and 1998,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1998 and
for the period from inception (June 15, 1990) to December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NeoPharm, Inc. as of
December 31, 1997 and 1998, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1998 and for the period
from inception (June 15, 1990) to December 31, 1998, in conformity with
generally accepted accounting principles.
 
                                          ARTHUR ANDERSEN LLP
 
Chicago, Illinois
February 22, 1999
 
                                       35
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,
                                                                                        --------------------------
<S>                                                                                     <C>           <C>
                                                                                            1997          1998
                                                                                        ------------  ------------
ASSETS
Current assets:
  Cash and cash equivalents...........................................................  $  2,776,697  $     40,681
  Notes receivable--shareholder.......................................................        52,634            --
  Deferred taxes (Note 5).............................................................            --     1,640,000
                                                                                        ------------  ------------
    Total current assets..............................................................     2,829,331     1,680,681
Equipment and furniture:
  Equipment...........................................................................        32,492        82,690
  Furniture...........................................................................        26,231        78,877
  Less accumulated depreciation.......................................................       (33,555)      (60,700)
                                                                                        ------------  ------------
    Total equipment and furniture, net................................................        25,168       100,867
                                                                                        ------------  ------------
    Total assets......................................................................  $  2,854,499  $  1,781,548
                                                                                        ------------  ------------
                                                                                        ------------  ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Obligations under research agreements...............................................       150,000       260,000
  Accounts payable....................................................................       275,427       275,926
  Accrued compensation................................................................        55,000        67,500
                                                                                        ------------  ------------
    Total current liabilities.........................................................       480,427       603,426
                                                                                        ------------  ------------
Commitments and contingencies (Notes 6 and 7)
Stockholders' equity:
  Common stock, $.0002145 par value; 15,000,000 shares authorized, 8,195,810 and
    8,341,779 shares issued and outstanding as of December 31, 1997 and 1998,
    respectively......................................................................         1,758         1,789
  Additional paid-in capital..........................................................     6,259,636     6,637,378
  Deficit accumulated during the development stage....................................    (3,887,322)   (5,461,045)
                                                                                        ------------  ------------
    Total stockholders' equity........................................................     2,374,072     1,178,122
                                                                                        ------------  ------------
    Total liabilities and stockholders' equity........................................  $  2,854,499  $  1,781,548
                                                                                        ------------  ------------
                                                                                        ------------  ------------
</TABLE>
 
    The accompanying notes to financial statements are an integral part of these
balance sheets.
 
                                       36
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                                     INCEPTION
                                                                                                     (JUNE 15,
                                                                  FOR THE YEARS ENDED                  1990)
                                                                     DECEMBER 31,                     THROUGH
                                                      -------------------------------------------   DECEMBER 31,
                                                          1996           1997           1998            1998
                                                      -------------  -------------  -------------  --------------
<S>                                                   <C>            <C>            <C>            <C>
Revenues............................................  $          --  $     550,000  $          --   $    550,000
Expenses:
Research and development............................      1,099,631      1,411,692      1,611,343      7,085,874
General and administrative..........................        956,924      1,370,486      1,691,132      4,837,984
  Total expenses....................................      2,056,555      2,782,178      3,302,475     11,923,858
      Loss from operations..........................     (2,056,555)    (2,232,178)    (3,302,475)   (11,373,858)
Interest income.....................................        238,275        210,501         88,752        537,528
Interest expense....................................        (47,365)            --             --       (735,606)
    Interest income (expense)--net..................        190,910        210,501         88,752       (198,078)
Loss before income taxes............................  $  (1,865,645) $  (2,021,677) $  (3,213,723)  $(11,571,936)
Income taxes........................................             --             --     (1,640,000)    (1,640,000)
Net income/(loss)...................................  $  (1,865,645) $  (2,021,677) $  (1,573,723)  $ (9,931,936)
Net income/(loss) per share
  Basic.............................................  $        (.24) $        (.25) $        (.19)
  Diluted...........................................  $        (.24) $        (.25) $        (.19)
Weighted average shares outstanding
  Basic.............................................      7,803,412      8,146,746      8,213,980
  Diluted...........................................      8,312,378      8,939,143      8,757,187
</TABLE>
 
  The accompanying notes to financial statements are an integral part of these
                                  statements.
 
                                       37
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
 
                 FOR THE PERIOD FROM INCEPTION (JUNE 15, 1990)
                           THROUGH DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
                                                                                               DEFICIT
                                                           COMMON STOCK       ACCUMULATED       TOTAL
                                                       ---------------------   ADDITIONAL      DURING      STOCKHOLDERS'
                                                                      PAR       PAID-IN      DEVELOPMENT      EQUITY
                                                         SHARES      VALUE      CAPITAL         STAGE       (DEFICIT)
                                                       ----------  ---------  ------------  -------------  ------------
<S>                                                    <C>         <C>        <C>           <C>            <C>
Balance at inception, June 15, 1990..................          --  $      --  $         --  $          --   $       --
Initial issuance of stock for cash on June 21, 1990
  ($.0002145 per share)..............................   3,263,888        700            --             --          700
Services contributed to Company by related party.....          --         --        13,542             --       13,542
Net loss.............................................          --         --            --       (188,441)    (188,441)
                                                       ----------  ---------  ------------  -------------  ------------
Balance at December 31, 1990.........................   3,263,888        700        13,542       (188,441)    (174,199)
                                                       ----------  ---------  ------------  -------------  ------------
Services contributed to Company by related party.....          --         --        25,000             --       25,000
Net loss.............................................          --         --            --       (468,771)    (468,771)
                                                       ----------  ---------  ------------  -------------  ------------
Balance at December 31, 1991.........................   3,263,888        700        38,542       (657,212)    (617,970)
                                                       ----------  ---------  ------------  -------------  ------------
Services contributed to Company by related party.....          --         --        25,000             --       25,000
Net loss.............................................          --         --            --       (567,962)    (567,962)
                                                       ----------  ---------  ------------  -------------  ------------
Balance at December 31, 1992.........................   3,263,888        700        63,542     (1,225,174)  (1,160,932)
                                                       ----------  ---------  ------------  -------------  ------------
Services contributed to Company by related party.....          --         --        25,000             --       25,000
Net loss.............................................          --         --            --       (492,423)    (492,423)
                                                       ----------  ---------  ------------  -------------  ------------
Balance at December 31, 1993.........................   3,263,888        700        88,542     (1,717,597)  (1,628,355)
                                                       ----------  ---------  ------------  -------------  ------------
Issuance of stock pursuant to exercise of stock
  options............................................   1,398,810        300         7,449             --        7,749
Services contributed to Company by related party.....          --         --        12,500             --       12,500
Net loss.............................................          --         --            --     (1,083,667)  (1,083,667)
                                                       ----------  ---------  ------------  -------------  ------------
Balance at December 31, 1994.........................   4,662,698      1,000       108,491     (2,801,264)  (2,691,773)
                                                       ----------  ---------  ------------  -------------  ------------
</TABLE>
 
  The accompanying notes to financial statements are an integral part of these
                                  statements.
 
                                       38
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
            STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
 
                 FOR THE PERIOD FROM INCEPTION (JUNE 15, 1990)
                           THROUGH DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
                                                                                               DEFICIT
                                                           COMMON STOCK       ACCUMULATED       TOTAL
                                                       ---------------------   ADDITIONAL      DURING      STOCKHOLDERS'
                                                                      PAR       PAID-IN      DEVELOPMENT      EQUITY
                                                         SHARES      VALUE      CAPITAL         STAGE       (DEFICIT)
                                                       ----------  ---------  ------------  -------------  ------------
<S>                                                    <C>         <C>        <C>           <C>            <C>
Balance at December 31, 1994.........................   4,662,698      1,000       108,491     (2,801,264)  (2,691,773)
                                                       ----------  ---------  ------------  -------------  ------------
Issuance of stock pursuant to exercise of stock
  options............................................      37,302          8            --             --            8
Net loss.............................................          --         --            --     (1,669,627)  (1,669,627)
Reclassification of the deficit accumulated as the
  result of the termination of the Company's S
  Corporation status.................................          --         --    (4,470,891)     4,470,891           --
                                                       ----------  ---------  ------------  -------------  ------------
Balance at December 31, 1995.........................   4,700,000      1,008    (4,362,400)            --   (4,361,392)
                                                       ----------  ---------  ------------  -------------  ------------
Conversion of interest and loan payable to principal
  stockholder into common stock ($3.525 per share)...     574,008        123     2,023,262             --    2,023,385
Issuance of stock pursuant to the Company's public
  offering net of costs incurred.....................   2,772,260        595     7,896,521             --    7,897,116
Issuance of stock pursuant to exercise of stock
  options............................................      84,000         18       259,304             --      259,322
Net Loss.............................................          --         --            --     (1,865,645)  (1,865,645)
Issuance of options to non-employees.................          --         --        73,391             --       73,391
                                                       ----------  ---------  ------------  -------------  ------------
Balance at December 31, 1996.........................   8,130,268  $   1,744  $  5,890,078  $  (1,865,645)  $4,026,177
                                                       ----------  ---------  ------------  -------------  ------------
</TABLE>
 
  The accompanying notes to financial statements are an integral part of these
                                  statements.
 
                                       39
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
            STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
 
                 FOR THE PERIOD FROM INCEPTION (JUNE 15, 1990)
                           THROUGH DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
                                                                                               DEFICIT
                                                           COMMON STOCK       ACCUMULATED       TOTAL
                                                       ---------------------   ADDITIONAL      DURING      STOCKHOLDERS'
                                                                      PAR       PAID-IN      DEVELOPMENT      EQUITY
                                                         SHARES      VALUE      CAPITAL         STAGE       (DEFICIT)
                                                       ----------  ---------  ------------  -------------  ------------
<S>                                                    <C>         <C>        <C>           <C>            <C>
Balance at December 31, 1996.........................   8,130,268  $   1,744  $  5,890,078  $  (1,865,645)  $4,026,177
                                                       ----------  ---------  ------------  -------------  ------------
Issuance of stock pursuant to exercise of stock
  options............................................      55,542         12       175,166             --      175,178
Issuance of stock pursuant to restricted stock
  grants.............................................      10,000          2        48,748             --       48,750
Net Loss.............................................          --         --            --     (2,021,677)  (2,021,677)
Issuance of options to non-employees.................          --         --       145,644             --      145,644
                                                       ----------  ---------  ------------  -------------  ------------
Balance at December 31, 1997.........................   8,195,810  $   1,758  $  6,259,636  $  (3,887,322)  $2,374,072
                                                       ----------  ---------  ------------  -------------  ------------
Issuance of stock pursuant to exercise of stock
  options............................................      22,500          5        82,339             --       82,344
Issuance of stock Pursuant to Restricted stock
  Grants.............................................      74,235         16       263,109             --      263,125
Exercise of warrants.................................      49,234         10           (10)            --           --
Net loss.............................................          --         --            --     (1,573,723)  (1,573,723)
Issuance of options to non-employees.................          --         --        32,304             --       32,304
                                                       ----------  ---------  ------------  -------------  ------------
Balance at December 31, 1998.........................   8,341,779  $   1,789  $  6,637,378  $  (5,461,045)  $1,178,122
                                                       ----------  ---------  ------------  -------------  ------------
                                                       ----------  ---------  ------------  -------------  ------------
</TABLE>
 
    The accompanying notes to financial statements are an integral part of these
statements.
 
                                       40
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                                     INCEPTION
                                                                                                     (JUNE 15,
                                                                  FOR THE YEARS ENDED                  1990)
                                                                     DECEMBER 31,                     THROUGH
                                                      -------------------------------------------   DECEMBER 31,
                                                          1996           1997           1998            1998
                                                      -------------  -------------  -------------  --------------
<S>                                                   <C>            <C>            <C>            <C>
Cash flows used in operating activities:
Net loss............................................  $  (1,865,645) $  (2,021,677) $  (1,573,723)  $ (9,931,936)
Adjustments to reconcile net loss to net cash used
  by operating activities:
Depreciation and amortization.......................          6,279          6,727         27,145         72,499
Gain on disposal of equipment.......................             --             --             --           (408)
Deferred income taxes...............................             --             --     (1,640,000)    (1,640,000)
Services contributed (non-cash) by related party....             --             --             --        101,042
Interest payable to principal shareholder converted
  to stock..........................................        523,385             --             --        523,385
Compensation expense from non-employee stock
  option............................................         73,391        145,644         32,304        251,339
Restricted stock grants in lieu of cash
  compensation......................................             --         48,750        263,125        311,875
(Increase)Decrease in other assets..................             --        (52,634)        52,634        (11,100)
(Decrease)Increase accounts payable and accrued
  liabilities.......................................       (883,600)        14,396        122,999        603,426
                                                      -------------  -------------  -------------  --------------
      Net cash and cash equivalents used in
        operating activities........................     (2,146,190)    (1,858,794)    (2,715,516)    (9,719,878)
                                                      -------------  -------------  -------------  --------------
Cash flows used in investing activities:
Purchase of equipment and furniture.................        (10,663)       (18,728)      (102,844)      (162,669)
Proceeds from disposal of equipment.................             --             --             --            810
                                                      -------------  -------------  -------------  --------------
Net cash and cash equivalents used in investing
  activities........................................        (10,663)       (18,728)      (102,844)      (161,859)
                                                      -------------  -------------  -------------  --------------
Cash flows from financing activities:
Proceeds from loan payable to principal
  stockholder.......................................             --             --             --      1,500,000
Advance on line of credit...........................        107,000             --             --      2,114,652
Reduction in line of credit.........................     (2,114,652)            --             --     (2,114,652)
Costs incurred related to the initial public
  offering..........................................       (201,885)            --       (484,955)    (1,173,276)
Proceeds from initial public offering...............      8,585,438             --             --      8,585,438
Proceeds from issuance of common stock..............        259,322        175,178        567,299      1,010,256
                                                      -------------  -------------  -------------  --------------
      Net cash and cash equivalents provided by
        financing activities........................      6,635,223        175,178         82,344      9,922,418
                                                      -------------  -------------  -------------  --------------
Net increase (decrease) in cash.....................      4,478,370     (1,702,344)    (2,736,016)        40,681
Cash and cash equivalents, beginning of period......            671      4,479,041      2,776,697             --
                                                      -------------  -------------  -------------  --------------
Cash and cash equivalents, end of period............  $   4,479,041  $   2,776,697  $      40,681   $     40,681
                                                      -------------  -------------  -------------  --------------
                                                      -------------  -------------  -------------  --------------
Supplemental disclosure of cash paid for:
Interest............................................  $     113,846  $      84,585  $          --   $    212,222
Income taxes........................................             --             --             --             --
</TABLE>
 
  The accompanying notes to financial statements are an integral part of these
                                  statements.
 
                                       41
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                            STATEMENTS OF CASH FLOWS
 
                                  (CONTINUED)
 
    Supplemental disclosure of non-cash transactions:
 
    In 1996, the Company converted the $2,023,385 loan and $523,385 of accrued
interest expense owed to the principal shareholder into 574,008 shares of common
stock and 143,502 warrants to purchase common stock. The loan and accrued
interest were converted at the initial public offering price.
 
    In 1997, two consultants to the Company each received 5,000 shares of
restricted common stock as compensation. These grants were valued at the closing
price of the traded common shares on the date of the grants.
 
    In 1998, the Company granted 69,235 shares of restricted common stock to
employees as compensation. The Company also donated a total of 5,000 shares of
restricted common stock to two charitable organizations on behalf of a
consultant who provided services to the Company. Additionally, holders of the
Company's Representatives warrants that were issued as part of the initial
public offering exercised on a cashless basis 49,234 of the 135,000 outstanding
warrants. Each warrant entitles the holder to two shares of common stock for an
exercise price of $9.80. The cashless exercise of these warrants resulted in a
charge of $484,955 to Additional Paid In Capital as cost related to the initial
public offering.
 
  The accompanying notes to financial statements are an integral part of these
                                  statements.
 
                                       42
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                         NOTES TO FINANCIAL STATEMENTS
 
                               DECEMBER 31, 1998
 
1. ORGANIZATION AND BUSINESS:
 
    NeoPharm, Inc. (the "Company"), a Delaware corporation in the development
stage, was incorporated on June 15, 1990, under the name of OncoMed, Inc. In
March 1995, the Company changed its name to NeoPharm, Inc. The Company is
developing products to provide therapeutic and prognostic benefits in the
treatment of various forms of cancer. The Company has one product which is the
subject of a Cooperative Research and Development Agreement ("CRADA") with the
National Cancer Institute ("NCI"), a unit of the National Institute of Health
("NIH") and a product, licensed from the NIH, that is the subject of a CRADA
with the United States Food and Drug Administration ("FDA"). The Company also
has rights to products developed under license and sponsored research agreements
with Georgetown University ("Georgetown").
 
    The Company is in the development stage that requires substantial capital
for research, product development and market development activities. The Company
has not yet initiated marketing of a commercial product. The Company has filed
one New Drug Application ("NDA") with the FDA for BUdR (Broxuridine) in a
prognostic application. This and other proposed products will require clinical
testing, regulatory approval and substantial additional investment prior to
commercialization. The future success of the Company is dependent on its ability
to obtain additional working capital to develop, manufacture and market its
products and, ultimately, upon its ability to attain future profitable
operations. There can be no assurance that the Company will be able to obtain
necessary financing or regulatory approvals to be able to successfully develop,
manufacture and market its products, or attain successful future operations.
Insufficient funds could require the Company to delay, scale back or eliminate
one or more of its research and development programs or to license third parties
to commercialize products or technologies that the Company would otherwise seek
to develop without relinquishing its rights thereto. Accordingly, the
predictability of the Company's future success is uncertain.
 
    The Company's rights to its products are subject to the terms of its
agreements with NCI, NIH, FDA and Georgetown. Termination of any, or all, of
these agreements would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, uncertainty exists
as to the Company's ability to protect its rights to patents and its proprietary
information. There can also be no assurance that research and discoveries by
others will not render some or all of the Company's programs or products
noncompetitive or obsolete. Nor can there be any assurance that unforeseen
problems will not develop with the Company's technologies or applications, or
that the Company will be able to address successfully technological challenges
it encounters in its research and development programs. Although the Company
plans to obtain product liability insurance, it currently does not have any nor
is there any assurance that it will be able to attain or maintain such insurance
on acceptable terms or with adequate coverage against potential liabilities.
 
2. SIGNIFICANT ACCOUNTING POLICIES:
 
RESEARCH AND DEVELOPMENT
 
    Research and development costs are expensed when incurred. These costs
include, among other things, consulting fees and costs reimbursed to Georgetown
pursuant to the agreements as described in Note 6. Payments related to the
acquisition of technology rights, for which development work is in process, are
expensed and considered a component of research and development costs. The
Company also allocates
 
                                       43
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1998
 
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
indirect costs, consisting primarily of operational costs for administering
research and development activities, to research and development expenses.
 
CASH AND CASH EQUIVALENTS
 
    The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
 
EQUIPMENT AND FURNITURE
 
    Equipment and furniture are recorded at cost and are depreciated using an
accelerated method over the estimated useful economic lives of the assets
involved. The estimated useful lives employed in computing depreciation are five
years for computer equipment and seven years for furniture. Maintenance and
repairs that do not extend the life of assets are charged to expense when
incurred.
 
INCOME PER SHARE
 
    In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings Per Share, which establishes standards for computing
and presenting earnings per share for publicly held common stock or potential
common stock. Effective December 31, 1997, the Company adopted the principles of
Statement No. 128 in calculating and presenting its earnings per share. The
computation of net earnings (loss) per share is based on the weighted average
common shares outstanding during the periods, and includes, when dilutive,
common stock equivalents consisting of warrants and stock options.
 
                                       44
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1998
 
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
    The following table sets forth the computation of the basic and diluted loss
per share from continuing operations:
 
<TABLE>
<CAPTION>
                                                                           1996           1997           1998
                                                                       -------------  -------------  -------------
<S>                                                                    <C>            <C>            <C>
Numerator:
  Net loss from continuing operations................................  ($  1,865,645) ($  2,021,677) ($  1,573,723)
                                                                       -------------  -------------  -------------
                                                                       -------------  -------------  -------------
Denominator:
  Denominator for basic loss per share
  Weighted average shares............................................      7,803,412      8,146,746      8,213,980
 
Effect of dilutive securities:
    Stock options....................................................        508,966        445,742        467,379
    Warrant exercise.................................................              0        346,655         75,829
                                                                       -------------  -------------  -------------
Dilutive potential common shares.....................................        508,966        792,397        543,207
 
  Denominator for diluted loss per share-
  Weighted average shares and assumed
  Conversions........................................................      8,312,378      8,939,143      8,757,187
                                                                       -------------  -------------  -------------
                                                                       -------------  -------------  -------------
  Basic (loss) per share.............................................  $       (0.24) $       (0.25) $       (0.19)
                                                                       -------------  -------------  -------------
                                                                       -------------  -------------  -------------
  Diluted (loss) per share...........................................  $       (0.24) $       (0.25) $       (0.19)
                                                                       -------------  -------------  -------------
                                                                       -------------  -------------  -------------
</TABLE>
 
    Options to purchase 99,925, 255,962 and 242,521 shares of common stock were
outstanding as of December 31, 1996, 1997 and 1998, respectively but were not
included in the computation of diluted earnings per share because the options
exercise prices were greater than the average market price of the common shares
and, therefore, would be antidilutive. The Company's warrants first became
exercisable on January 25, 1997. The underlying Representatives warrants to
purchase 135,000 shares of common stock were not included in the computation of
diluted earnings per share because the warrant exercise price was greater than
the average market price of the common shares and, therefore would be
antidilutive. For additional disclosure regarding the stock options and
warrants, see Notes 4 and 9.
 
MANAGEMENT'S USE OF ESTIMATES
 
    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
 
STOCK-BASED COMPENSATION
 
    Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). As provided by SFAS 123, the Company has elected to continue to account
for its stock-based compensation programs according to the
 
                                       45
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1998
 
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". Accordingly, compensation expense has been recognized to
the extent of employee or director services rendered based on the intrinsic
value of compensatory options or shares granted under the plans. The Company has
adopted the disclosure provisions required by SFAS 123 (see "Note 4--Stock
Options" in Notes to Financial Statements).
 
RECLASSIFICATION
 
    Certain amounts in previously issued financial statements have been
reclassified to conform to 1998 classifications.
 
SEGMENT REPORTING
 
    The Company currently operates under a single segment.
 
3. DEBT:
 
    On June 18, 1990, the Company executed a loan agreement with Dr. John N.
Kapoor, a principal stockholder. The loan agreement allowed the Company to
borrow up to $1,500,000. Funds borrowed under the agreement incurred interest at
the lesser of 10% or the prime rate as determined by the Northern Trust Bank.
The Company had borrowed funds up to the maximum of $1,500,000 at December 31,
1995.
 
    Interest on borrowed funds accrued until the second anniversary of the
funding. Thereafter, principal and interest were to be repaid in 12 quarterly
installments. Any principal payment not paid within 5 days of the date when due
was subject to additional interest of 15% per annum.
 
    From June 1990 through April 1994, the Company financed its operations by
borrowing under this loan agreement. No payments of interest or principal were
made during this period. In January of 1996, in accordance with the agreement
between the principal stockholder and the Company, with the completion of the
initial public offering, the principal stockholder converted the outstanding
loan balance, plus accrued interest through November 30, 1995, into shares of
the Company's common stock and common stock purchase warrants at a per share
conversion price equal to the offering price, $3.525 per share, $.10 per
warrant. The Company issued 574,008 shares and 143,502 warrants.
 
    During 1995 and early 1996, the Company maintained a line of credit with
Harris Bank with maximum borrowings of $2,500,000. The line of credit was
personally guaranteed by the principal stockholder. In early 1996, the Company
paid all outstanding balances and closed the line of credit.
 
    On October 22,1998, the Company established a $3,000,000 line of credit with
the John N. Kapoor Trust dtd. 9/20/89, an entity affiliated with the Company's
Chairman. Interest on borrowings on the line of credit will accrue at the rate
of 2% over the prime rate of the Northern Trust Bank. The accrued interest and
outstanding principal becomes due and payable the earlier of October 1, 2001 or
the date upon which the Company completes a public or private offering of debt
or equity securities or a licensing agreement for its products. There were no
borrowings on this line of credit at December 31, 1998.
 
                                       46
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1998
 
4. STOCK OPTIONS
 
OPTION AGREEMENTS
 
    The Company adopted a stock plan in 1990. The Company granted options under
the plan to purchase 1,460,978 shares. The options have an exercise price of
$.0002145 per share with the exception of options to purchase 248,676 shares
issued in December 1993, which have an exercise price of $.03217 per share.
Effective January 1995, this plan has been terminated. No additional grants will
be made under this plan.
 
    On January 25, 1995, the board of directors approved the NeoPharm, Inc. 1995
Stock Option Plan (the "Plan"), which provided for the grant of up to 900,000
options to acquire the Company's common stock. The board of directors amended
the Plan on May 16, 1997, increasing the number of options to 1,400,000. The
option prices shall be not less than 85 percent of the fair market value of the
stock as determined by the Administrator pursuant to the Plan. The board also
approved the NeoPharm, Inc. 1995 Director Option Plan, which provides for the
grant of up to 100,000 options to acquire the Company's common stock. The option
prices shall be the fair market value on the date of grant. Vesting under these
plans range from 0 to 4 years and all options expire after 10 years. Effective
July 23, 1998 the 1995 Stock Option Plan and the 1995 Directors Option Plan were
suspended. No additional grants will be made under either plan.
 
    On July 23, 1998, the board of directors approved the NeoPharm, Inc. 1998
Equity Incentive Plan (the "1998 Plan"), which provides for the grant of options
to acquire up to 2,000,000 shares of the Company's common stock. Additionally,
250,000 of the 2,000,000 shares can be used for restricted stock grants to
employees and consultants. The option prices shall be not less than 85% of the
fair market value of the stock as determined by the Administrator pursuant to
the 1998 Plan. The consideration paid for shares of restricted stock shall not
be less that the par value of the Company's common stock.
 
    The Company accounts for the plans under APB Opinion No. 25, under which no
compensation cost has been recognized for stock option awards to employees. Had
compensation cost for such stock option awards under the plans been determined
consistent with FASB Statement No. 123, the Company's net income and earnings
per share would have been reduced to the following pro forma amounts:
 
<TABLE>
<CAPTION>
                                                                              1996         1997         1998
                                                                           -----------  -----------  -----------
<S>                                              <C>                       <C>          <C>          <C>
Net Income/(Loss):                               As Reported                (1,865,645)  (2,021,677)  (1,573,723)
                                                 Pro Forma                  (2,061,099)  (2,379,751)  (1,827,864)
Primary EPS:                                     As Reported                      (.24)        (.25)        (.19)
                                                 Pro Forma                        (.26)        (.29)        (.22)
Fully Diluted EPS:                               As Reported                      (.24)        (.25)        (.19)
                                                 Pro Forma                        (.26)        (.29)        (.22)
</TABLE>
 
    Included in the grants described above are options to purchase 413,824
shares granted to non-employees. The Company accounts for these options using a
fair value method with the fair value of these options determined at the date of
grant. From inception through December 31, 1995 the Company deemed the fair
value of these options on the date of grant to be nominal, and no expense was
recorded. For the year ended December 31, 1996, 1997 and 1998, the fair value
was calculated using the Black-Scholes pricing model, and an expense of $73,391,
$145,644 and $32,304 was recorded respectively.
 
                                       47
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1998
 
4. STOCK OPTIONS (CONTINUED)
    A summary of stock option activity is as follows:
 
<TABLE>
<CAPTION>
                                                                                         OPTIONS OUTSTANDING
                                                                                   --------------------------------
                                                                                    NUMBER OF     EXERCISE PRICE
GRANT/EXERCISE DATE                                                                  SHARES          PER SHARE
---------------------------------------------------------------------------------  -----------  -------------------
<S>                                                                                <C>          <C>
Grants:
  1990...........................................................................   1,184,324   $          .0002145
  1992...........................................................................      27,978              .0002145
  1993...........................................................................     248,676                .03217
                                                                                   -----------  -------------------
Balance at December 31, 1993.....................................................   1,460,978   $  .0002145-$.03217
                                                                                   -----------  -------------------
Exercises:
  November 17, 1994--issued Jan. 1995............................................  (1,398,810)  $  .0002145-$.03217
  November 17, 1994--issued Jan. 1995............................................     (37,302)  $          .0002145
                                                                                   -----------  -------------------
Balance at December 31, 1994.....................................................      24,866   $            .03217
                                                                                   -----------  -------------------
Grants:
  February, 1995.................................................................     308,000   $              3.50
  May, 1995......................................................................      10,000                  3.50
  September, 1995................................................................     100,000                  3.50
  November, 1995.................................................................     100,000                  3.50
                                                                                   -----------  -------------------
Balance at December 31, 1995.....................................................     542,866   $      .03217-$3.50
                                                                                   -----------  -------------------
Grants:
  May, 1996......................................................................      30,000   $              6.00
  August, 1996...................................................................     260,000   $              7.00
Exercises:
  June, 1996.....................................................................     (19,000)  $              3.50
  July, 1996.....................................................................     (43,000)                 3.50
  August, 1996...................................................................     (10,000)                 3.50
  September, 1996................................................................      (2,000)                 3.50
  December, 1996.................................................................     (10,000)               .03217
                                                                                   -----------  -------------------
Balance at December 31, 1996.....................................................     748,866   $.03217,3.50,6.00,7.00
                                                                                   -----------  -------------------
Grants:
  January, 1997..................................................................       1,000   $              7.38
  April, 1997....................................................................       2,000                  7.00
  May, 1997......................................................................       5,000                  4.88
  August, 1997...................................................................       5,000                  4.94
Exercises:
  June, 1997.....................................................................      (7,000)  $              3.50
  July, 1997.....................................................................     (15,000)                 3.50
  October, 1997..................................................................      (9,042)         3.50, .03217
  November, 1997.................................................................      (1,500)                 3.50
  December, 1997.................................................................     (23,000)                 3.50
Cancellations: July 1997.........................................................     (15,000)                 7.00
                                                                                   -----------  -------------------
Balance at December 31, 1997.....................................................     691,324   $      .03217--7.38
                                                                                   -----------  -------------------
</TABLE>
 
                                       48
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1998
 
4. STOCK OPTIONS (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                         OPTIONS OUTSTANDING
                                                                                   --------------------------------
                                                                                    NUMBER OF     EXERCISE PRICE
GRANT/EXERCISE DATE                                                                  SHARES          PER SHARE
---------------------------------------------------------------------------------  -----------  -------------------
<S>                                                                                <C>          <C>
Grants:
  January, 1998..................................................................     400,000   $              4.75
  April, 1998....................................................................      20,000                  3.75
  July, 1998.....................................................................      37,000                 3.875
  September, 1998................................................................     100,000                  2.25
Exercises:
  December, 1998.................................................................     (22,500)  $       3.50-4.9375
Cancellations:
  April, 1998....................................................................     (50,000)                 7.00
                                                                                   -----------  -------------------
Balance at December 31, 1998.....................................................   1,175,824   $       2.25--$7.00
                                                                                   -----------  -------------------
                                                                                   -----------  -------------------
</TABLE>
 
    Options eligible for exercise on December 31, 1993 included 1,212,302
options at an exercise price of $.0002145 and 248,676 options at an exercise
price of $.03217. Options eligible for exercise on December 31, 1994 included
24,866 options at an exercise price of $.03217. Options eligible for exercise on
December 31, 1995 included 24,866 options at an exercise price of $.03217 and
518,000 options at an exercise price of $3.50. Options eligible for exercise on
December 31, 1996 included 14,866 at an exercise price of $.03217 and 444,000
options at an exercise price of $3.50. Options eligible for exercise on December
31, 1997 included 9,324 at an exercise price of $.03217, 394,000 options at an
exercise price of $3.50, 15,000 options at an exercise price of $6.00, 124,500
options at an exercise price of $7.00, and 1000 options at an exercise price of
$7.375. Options eligible for exercise on December 31, 1998 include 9,324 options
at an exercise price of $0.03217, 374,000 options at an exercise price of $3.50,
2500 options at an exercise price of $4,875, 30,000 options at an exercise price
of $6.00, 197,000 options at an exercise price of $7.00 and 1000 options at an
exercise price of $7.375.
 
    The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for the option grants in 1996, 1997 and 1998 respectively:
risk-free interest rates of 6.45 percent, 6.58 percent and 5.50 percent;
expected dividend yields of 0.00 percent; expected life of 5 years; expected
volatility of 76.21 percent, 79.93 percent and 89.82 percent.
 
5. FEDERAL INCOME TAXES:
 
    From inception through October 11, 1995, the Company operated as an S
Corporation for income tax purposes. Losses incurred during this period are
reported on the stockholders' tax return, and are not available to the Company
as a net operating loss carryforward.
 
    On October 11, 1995, the Company voluntarily terminated its S Corporation
election. Since that time, losses incurred represent net operating loss
carryforwards which can be used to offset future taxable income. Total net
operating loss carryforwards were approximately $5,330,000 and approximately
$8,582,000 as of December 31, 1997 and 1998, respectively. Additionally, the
Company has general business credit carry forwards of approximately $128,000. In
accordance with the provisions of Statement of Financial Accounting Standard No.
109, a 100% valuation allowance had been established on the net
 
                                       49
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1998
 
5. FEDERAL INCOME TAXES: (CONTINUED)
operating loss tax asset due to the uncertainty of its realization as of
December 31, 1997. Based on subsequent events which are discussed further in
footnote 10, the valuation allowance was reduced and the tax benefit related to
a portion of the general business credits and net operating loss carry forwards
was recognized as of December 31, 1998.
 
6. COMMITMENTS:
 
LICENSE AND RESEARCH AGREEMENTS
 
    From time to time the Company enters into license and research agreements
with third parties. At December 31, 1998, the Company had five agreements in
effect as described below.
 
NATIONAL CANCER INSTITUTE
 
    The Company entered into a CRADA with NCI. Pursuant to the agreement, the
Company committed to commercialize certain products received from NCI. The
Company agreed to provide product to support NCI sponsored clinical trials and
use its best efforts to file an NDA. NCI agreed to collaborate on the clinical
development of the products and to provide access to the data necessary to
obtain pharmaceutical regulatory approval.
 
    During the years ended December 31, 1998, 1997 and 1996, the Company paid
approximately $0, $102,000 and $0, respectively, for product used in clinical
trials. The Company is committed to pay NCI $120,000 per year for reasonable and
necessary expenses incurred by NCI in carrying out NCI's responsibilities under
the CRADA. During 1998, 1997 and 1996, the Company expensed, as research and
development costs, the $120,000 payable to NCI for these expenses. NCI was
required to provide the Company an accounting of the use of funds. Any amounts
not expended at the end of the agreement were refundable to the Company. All
amounts were expended pursuant to the CRADA.
 
    The CRADA expired on September 13, 1998. The Company then entered into a
Clinical Trials Agreement ("CTA") with the NCI. The CTA covers the same research
that were the subject of the NCI CRADA. The CTA provides for collaboration on
the clinical development of the products and access to clinical data necessary
for future regulatory approval. The Company has no further financial obligations
to NCI other than an agreement to provide supplies of test product for the
covered clinical protocols.
 
U.S. FOOD AND DRUG ADMINISTRATION
 
    In 1997 the Company entered into a CRADA with the FDA. Pursuant to the
CRADA, the Company committed to commercialize the IL-13 chimeric protein product
which it licensed from the NIH and FDA. The FDA agreed to collaborate on the
clinical development and commercialization of the licensed product.
 
    The Company is committed to pay $100,000 per year for the reasonable and
necessary expenses incurred by the FDA in carrying out the FDA's
responsibilities under the CRADA. The CRADA has a term of four years. During
1998 and 1997, the Company expensed $100,000 per year as research and
development costs. The CRADA will expire on August 27, 2001.
 
                                       50
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1998
 
6. COMMITMENTS: (CONTINUED)
NATIONAL INSTITUTE OF HEALTH
 
    The Company entered into an exclusive worldwide licensing agreement with the
NIH and the FDA to develop and commercialize an IL-13 chimeric protein therapy.
The agreement required a $75,000 non-refundable license issue payment and
minimum annual royalty payments of $10,000 which increases to $25,000 after the
first commercial sale. The agreement further provided for milestone payments and
royalties based on future product sales. The Company is required to pay the
costs of filing and maintaining product patents on the licensed products. The
agreement shall extend to the expiration of the last to expire of the patents on
the licensed products, if not terminated earlier. The agreement may be
terminated by mutual consent of NIH and the Company. Either party may terminate
if the other party breaches a material term or condition and such breach is not
cured within a certain period of time. Also, either Party may unilaterally
terminate by giving advanced notice. During 1998 and 1997, the Company expensed
approximately $117,000 and $10,000 respectively on research and development
costs.
 
BIOCHEM PHARMA
 
    The Company entered into a collaboration agreement with BioChem
Therapeutics, Inc., the wholly owned subsidiary of BioChem Pharma, under which
BioChem will have an exclusive license to develop, market and distribute
broxuridine in Canada. The agreement required BioChem to make an initial
non-refundable up-front payment of $550,000 and subsequent milestone-based
payments. The Company and BioChem will share product revenue from any future
sales of broxuridine in Canada.
 
PHARMACIA AND UPJOHN
 
    Subsequent to year end, the Company entered into a Licensing Agreement on
February 19, 1999 with Pharmacia and Upjohn to license LEP and LED worldwide.
The Company received certain upfront and milestone payment opportunities and
royalties on sales outside the United States and co-promotion profit splits on
sales within the United States. The Company also has the option to license two
additional products in its liposomal drug delivery platform from the Pharmacia
and Upjohn product portfolio.
 
GEORGETOWN UNIVERSITY
 
    The Company entered into two license and research agreements with Georgetown
whereby the Company obtained an exclusive worldwide license to use certain
technologies. In exchange for the grant of these exclusive licenses, the Company
will pay Georgetown, beginning with the first commercial sale of a product
incorporating the licensed technologies, a royalty on net sales by the Company
of products incorporating any of such technologies. The royalty will be payable
for the life of the related patents.
 
    During the years ended December 31, 1998, 1997 and 1996, the Company paid
and expensed approximately $123,000, $247,000 and $204,000 respectively,
pursuant to the license and research agreements.
 
OTHER
 
    The Company entered into consulting arrangements with members of its
Scientific Advisory Board who are also employed on a full-time basis by academic
or research institutions. Since inception through
 
                                       51
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1998
 
6. COMMITMENTS: (CONTINUED)
December 31, 1998, members of the Scientific Advisory Board were issued options
(see Note 4) to purchase an aggregate 68,324 shares of Company stock at the fair
market value at the date of grant. Additionally, the Scientific Advisory Board
members received aggregate payments of approximately $88,000 since the inception
of these consulting arrangements for work performed and expenses incurred
through December 31, 1998.
 
    The Company is obligated for rental payments under a sublease arrangement
with OptionCare, Inc. for office space in Bannockburn, Illinois. Until moving to
the Bannockburn location in November of 1997, the Company occupied office space
in Lake Forest, Illinois. This space was provided as part of a consulting
agreement with EJ Financial. (See Note 8). This sublease expired on November 30,
1998. The Company continues to sublease the same space on comparable terms under
a month to month lease.
 
7. CONTINGENCIES
 
    The pharmaceutical industry has traditionally experienced difficulty in
maintaining product liability insurance coverage at desired levels. To date, no
significant product liability suit has ever been filed against the Company.
However, if a suit were filed and a judgment entered against the Company that
significantly exceeded the policy limits, it could have a material adverse
effect upon the Company's operations and financial condition.
 
    Currently, the Company is not a party to any litigation or other legal
proceedings.
 
8. TRANSACTIONS WITH RELATED PARTIES
 
    The Company receives management services from EJ Financial Enterprises, Inc.
("EJ Financial"), a healthcare consulting and investment firm in which Dr.
Kapoor is the principal stockholder. From inception through June 30, 1994, EJ
Financial charged the Company $25,000 per year for services provided plus actual
expenses incurred. Through June 30, 1994, no payment for these services was
made, but rather was treated as additional capital contributions by Dr. Kapoor
in the accompanying statements of stockholders' equity (deficit). Effective July
1, 1994, EJ Financial increased its charge for management services provided to
$125,000 per year plus actual expenses. The agreement reflected an increased
need for technical support in the areas of research and development and
operations. Charges to the Company are based on actual time spent by EJ
Financial personnel on the Company's affairs. Management believes that the cost
for management services allocated to the Company represents the cost of the
services provided. From inception through December 31, 1998, the Company
expensed approximately $562,900 for management services and $266,800 as
reimbursement of actual expenses incurred by EJ Financial that directly related
to the Company.
 
    The Company subleases office space from Option Care Inc., a home infusion
company in which Dr. Kapoor, the Company's Chairman, is a major stockholder.
From inception through December 31, 1998, the Company expensed approximately
$38,700 for rent under the Option Care subleases.
 
    From June 1990 through April 1994, the Company financed its operations by
borrowing under a loan agreement with Dr. Kapoor, a principal shareholder. No
payments of interest or principal were made during this period. In January 1996,
in accordance with the agreement between the principal stockholder and the
Company, with the completion of the initial public offering, the principal
stockholder converted
 
                                       52
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1998
 
8. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
the outstanding loan balance of $1,500,000 plus accrued interest through
November 30, 1995 of $523,385 into shares of the Company's common stock and
common stock purchase warrants at a per share conversion price equal to the
offering price, $3.525 per share, $.10 per warrant. The Company issued 574,008
shares and 143,502 warrants.
 
    From October, 1998 through February, 1999 the Company had a $3,000,000 line
of credit in place with the John N. Kapoor Trust dtd 9/20/89, an entity
affiliated with the Company's Chairman. The Company borrowed $250,000 on the
line of credit on January 8, 1999. The $250,000 plus all accrued interest was
repaid on January 29, 1999. The line of credit terminated upon the signing of
the licensing agreement on February 19, 1999 (See Note 10).
 
    The Company's Chief Scientific Officer, Dr. Aquilur Rahman, was employed on
a full-time basis by Georgetown until joining the Company in March 1996. As was
previously mentioned, Georgetown and the Company are parties to license and
sponsored research agreements for product research and development (see Note 6).
During 1998, 1997 and 1996, the Company expensed approximately $123,000,
$247,000 and $204,000 related to work performed and expenses incurred by
Georgetown. Since inception through December 31, 1998, the Company has expensed
approximately $2,119,000 under the agreements. Additionally, Dr. Rahman received
options in June 1990 (See Note 4) to purchase 932,540 shares of Company stock at
the fair market value on the date of the grant of the options.
 
    On July 16, 1997, the Company loaned $50,000 to Dr. Rahman pursuant to a
promissory note. The note accrued interest at a rate of 9%. The principal
together with accrued interest of $3,255 was repaid on April 6, 1998.
 
    Prior to February 1996, the Company's former President and Chief Executive
Officer ("CEO"), William C. Govier, was a consultant to the Company on clinical
trials and NDA filing matters, both as an individual and as a consultant with
Aegis Technology, Inc. ("Aegis"), an entity co-founded by Govier. Dr. Govier
retired from the Company on January 16, 1998. As the Company's President and
CEO, Govier received options in December 1993, to purchase 233,134 shares of
Company stock at the fair market value on the date of grant, which were later
fully exercised (See Note 4). His colleague and co-founder of Aegis, Gail
Salzberg, also received options in December 1993 (see Note 4) to purchase 15,542
shares of Company stock at the fair market value on the date of grant, of which
7,770 options were 100% vested and 7,772 options vested upon future performance
of services. The Company expensed approximately $1,095,800 since inception
through December 31, 1998, related to work performed and expenses incurred by
Govier, his colleague and Aegis. During 1998, 1997 and 1996, the Company
expensed approximately $232,300, $262,500 and $159,500 respectively, related to
these arrangements.
 
9. STOCKHOLDERS' EQUITY
 
    In January 1995, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of common stock to 15,000,000 shares.
In October 1995, the Company amended its Certificate of Incorporation to convert
each 1.28681 shares of outstanding Common Stock into one share of Common Stock
and to restate the par value of the Common Stock from $0.000333 per share to
$0.000429 per share. The reverse stock split has been reflected retroactively in
these financial statements for all periods presented.
 
                                       53
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1998
 
9. STOCKHOLDERS' EQUITY (CONTINUED)
    In January 1996, the Company completed a public offering of newly issued
1,350,000 shares of common stock and 675,000 warrants, for proceeds of
approximately $8,585,000 net of expenses. On March 8, 1996 the Company issued
36,130 shares of common stock and 18,565 warrants related to the underwriter's
over-allotment option for proceeds of approximately $267,000, net of expenses.
Additionally, the Company issued 574,008 shares and 143,502 warrants upon
conversion of its debt (see note 3). Since July 25, 1997, the warrants have been
subject to redemption at $0.01 per warrant on thirty (30) days prior written
notice to the warrant holders. However, the warrants can only be redeemed if the
average closing price of the Company's stock as reported on AMEX equals or
exceeds $5.60 per share for twenty (20) trading days within a period of thirty
(30) consecutive trading days ending on the fifth trading day prior to the date
of the notice of redemption. Each warrant can be converted into two shares of
common stock at $4.90 per share.
 
    In connection with the public offering, the Company issued 135,000
Representative's warrants to the underwriter. The warrants can be converted into
270,000 shares of common stock at $4.90 per share and/or 67,500 underlying
warrants at $0.14 per warrant. The underlying warrants in turn can be converted
into 135,000 shares of common stock at $6.86 per share.
 
    On August 14, 1996, the Company's Board of Directors declared a two-for-one
stock split of issued and outstanding Common Stock for stockholders of record as
of the close of business on August 26, 1996. Accordingly, all numbers of common
shares and per share data have been restated to reflect the stock split. The par
value of common stock has been adjusted from $0.000429 per share to $0.0002145
per share.
 
10. SUBSEQUENT EVENTS
 
PHARMACIA AND UPJOHN LICENSE AGREEMENT
 
    On February 19, 1999, the Company entered into an exclusive world wide
license agreement with Pharmacia and Upjohn Company ("PNU"). Pursuant to the
agreement, the Company granted PNU an exclusive worldwide license to develop,
use, manufacture, distribute, market, and sell the Company's Liposomal
Encapsulated Doxorubicin ("LED") and Liposomal Encapsulated Paclitaxel ("LEP")
products for all approved indications. All of the development costs, clinical
and pre-clinical, regulatory and manufacturing scale up expenses for LED and LEP
incurred after the date of the agreement shall be borne by PNU.
 
    The Company received a nonrefundable license fee upon signing the agreement.
Upon the transfer of the U.S. Investigational New Drug ("IND") applications for
LED and LEP to PNU, PNU shall purchase $8,000,000 of the Company's newly issued
common stock. The share price shall be equal to 110% of the average closing
price of the Company's Common Stock for the 60 day period preceding the PNU
purchase date. The Company shall receive milestone payments upon the completion
of each phase of clinical development and upon regulatory approval for both LED
and LEP.
 
    Beginning with the first commercial sale of LED and/or LEP, the Company
shall receive a royalty, based on a percentage of net product sales, for a
period of ten years. The Company may elect up to 90 days prior to the NDA filing
of each product, to forgo royalties on product sales in the United States and
instead receive a co-promotion profit split on those sales. If the co-promotion
election is made, the
 
                                       54
<PAGE>
                                 NEOPHARM, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1998
 
10. SUBSEQUENT EVENTS (CONTINUED)
Company will be required to reimburse PNU for a portion of the development costs
for LEP and/or LED respectively.
 
    The agreement may be terminated by the Company at any time in the event of a
continuing material breach by PNU. PNU may terminate the agreement at any time
without penalty; however, all amounts paid to the Company prior to the date of
termination would be non-refundable. Further, PNU must transfer back to the
Company all rights to LEP and LED upon termination of the agreement.
 
AMENDMENT OF GEORGETOWN AGREEMENTS
 
    The Company has two license and research agreements with Georgetown
University that cover the use of certain technologies used in the Company's LED
and LEP products (See Note 6). In January 1999, the Company and Georgetown
University agreed to amend the agreements to reduce the level of future
sublicense royalties on LEP and LED sales payable to Georgetown in return for a
one time sublicense fee of $800,000. The Company made the $800,000 payment to
Georgetown in March 1999, after the execution of the PNU agreement.
 
NATIONAL INSTITUTE OF HEALTH
 
    On March 5, 1999, the Company signed and forwarded to the NIH an exclusive
worldwide licensing Agreement with the NIH to develop and commercialize a
Mesothelium Antigen Therapy (Mesothelin Mab) and is awaiting confirmation from
the NIH indicating their acceptance of the agreement. The agreement requires a
$75,000 non-refundable license issue payment and a minimum annual royalty
payment of $20,000 per year beginning January 1, 2001. The agreement further
provides for milestone payments and royalties based on future product sales. The
Company is required to pay the costs of filing and maintaining product patents
on the licensed products. The agreement, once it is executed by the NIH, shall
extend to the expiration of the last to expire of the patents on the licensed
products, if not terminated earlier. The agreement may be terminated by mutual
consent of NIH and the Company. Either party may terminate if the other party
breaches a material term or condition and such breach is not cured within a
certain period of time. Also, each party may unilaterally terminate by giving
advanced notice.
 
                                       55