**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-K/A**

**(AmendmentNo. 1)**

**(MARK ONE)**

**x**                              AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

**For the Fiscal Year EndedDecember 31, 2006**

**Or**

**o**                                 TransitionReport 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**

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**NEOPHARM, INC.**

(Exact Name of Registrantas Specified in its Charter)

| **DELAWARE**                     |   | **51-0327886**          |
|----------------------------------|--------|-------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer        |
| incorporation or  organization)  |   | Identification  Number) |

 

**1850LAKESIDE DRIVE**

**WAUKEGAN,ILLINOIS 60085**

(Address ofPrincipal Executive Offices) (Zip Code)

**(847) 887-0800**

(Registrant’s TelephoneNumber, Including Area Code)

 

SECURITIES REGISTEREDPURSUANT TO SECTION 12(b) OF THE ACT: **NONE**

SECURITIES REGISTEREDPURSUANT TO SECTION 12(g) OF THE ACT:

**COMMONSTOCK, $.0002145 PAR VALUE**

**PREFERREDSTOCK PURCHASE RIGHTS**

(Title of each class)

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.Yes o  No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section15( d) of the Act.Yes o  No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes x  No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check markwhether registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): 

| Large accelerated filer  o |   | Accelerated  filer  x |   | Non-accelerated  filer  o |
|---------------------------------|--------|----------------------------|--------|--------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes o  No x

The aggregate marketvalue of the registrant’s common stock held by non-affiliates (affiliatesbeing, for these purposes only, directors, executive officers and holders of10% of the registrant’s stock) of the registrant, par value $.0002145 pershare, (based on the closing price of such shares on the NASDAQ on June 30,2006) was $79,872,000.  As of April 20,2007 there were 28,086,688 shares of common stock outstanding.

 

 

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**NEOPHARM,INC.**

**FORM10-K/A**

**EXPLANATORYNOTE**

ThisAmendment No. 1 on Form 10-K/A amends our Annual Report on Form 10-K for theyear ended December 31, 2006 originally filed March 16, 2007 (“Original AnnualReport”) solely to incorporate information previously omitted from Part III,Items 10, 11, 12, 13 and 14. We are also updating the Signature Page andExhibits 31.1 and 31.2. Other than as set forth herein, the registrant has notundertaken to update any information provided in the Original Annual Report.

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**INDEX**
| **PART III** |
|--------------|
| ** **   |
| **ITEM 10.** | ** ** | **DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE** |
| ** **   | ** ** | ** ** |
| **ITEM 11**  | ** ** | **EXECUTIVE  COMPENSATION** |
| ** **   | ** ** | ** ** |
| **ITEM 12**  | ** ** | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS** |
| ** **   | ** ** | ** ** |
| **ITEM 13**  | ** ** | **CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE** |
| ** **   | ** ** | ** ** |
| **ITEM 14**  | ** ** | **PRINCIPAL ACCOUNTING  FEES AND SERVICES** |
| ** **   | ** ** | ** ** |
| ** **   | ** ** | **PART IV** |
| ** **   | ** ** | ** ** |
| **ITEM 15**  | ** ** | **EXHIBITS AND  FINANCIAL STATEMENT SCHEDULES** |
| ** **   | ** ** | ** ** |
| ** **   |

 

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**PART III**

**ITEM10**                **DIRECTORS, EXECTUIVE OFFICERS AND CORPORATE GOVERNANCE**

**ExecutiveOfficers and Directors**

The followingtable sets forth certain information concerning our executive officers anddirectors as of April 20, 2007.

 
| **Name**                 | ** ** | ** ** | ** ** | **Age**                                                                              | ** ** | ** ** | **Position** | ** ** |
|--------------------------|------------|------------|------------|--------------------------------------------------------------------------------------|------------|------------|--------------|------------|
| *Executive Officers*     |       |       |       |                                                                                 |
| Laurence P. Birch        |       | 47         |       | President and Chief  Executive Officer; Acting Chief Financial Officer; and Director |
| Dr. Jeffrey W. Sherman*  |       | 52         |       | Executive Vice  President and Chief Medical Officer                                  |
| Timothy P. Walbert*      |       | 40         |       | Executive Vice President-Commercial  Operations                                      |
| *Non-Employee Directors* |       |       |       |                                                                                 |
| John N. Kapoor           |       | 63         |       | Chairman of the Board  of Directors                                                  |
| Frank C. Becker          |       | 71         |       | Director                                                                             |
| Ronald G. Eidell         |       | 63         |       | Director                                                                             |
| Bernard A. Fox           |       | 53         |       | Director                                                                             |
| Paul E. Freiman          |       | 72         |       | Director                                                                             |
| Erick E. Hanson          |       | 60         |       | Director                                                                             |
| Kaveh T. Safavi          |       | 46         |       | Director                                                                             |

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*As part of arecently implemented management realignment, each of Dr. Sherman and Mr.Walbert have agreed to step down from their respective positions with theCompany and will terminate their employment on an as yet to be determined date.

**ExecutiveOfficers**

*Laurence P. Birch* joined the Company asPresident, Chief Executive Officer and as a director in March 2007 and wasappointed Acting Chief Financial Officer on April 16, 2007.  Prior to joining the Company, Mr. Birch wasSr. Vice President and CFO of Ohio Medical Corporation, a supplier of medicalair pumping systems from 2006 to March 2007. Before that, Mr. Birch served as Sr. Vice President and CFO, and InterimPresident and CEO, of AKSYS, Ltd., a hemodialysis developer and manufacturerfrom 2005 to 2006.  Prior to that, Mr.Birch served as co-founder and managing director of Stratego Partners, a costmanagement consulting firm, from 2003 to 2005, Executive Vice President and CFOof Seurat, Inc., a marketing outsourcing and services company, from 2002 to2003, Sr. Vice President — Business Development and CFO of TechnologySolutions, Inc., a systems integration and consulting company, from 2000 to2002, and CFO of Brigade, Inc., an internet support company, from 1999 to2000.  Mr. Birch began his career withBaxter Healthcare, a manufacturer and supplier of pharmaceuticals and medicaldevices, where, over the course of 13 years, he held a variety of positions.  Mr. Birch is a director of DataTrak International,Inc., a provider of technology and services to the clinical trial industry. Mr.Birch holds a Bachelor of Science-Finance from the University of Illinois and aMBA from Northwestern University — Kellogg Graduate Business ofManagement.  Mr. Birch is also aCertified Public Accountant.

*Dr. Jeffrey W. Sherman, M.D., F.A.C.P.*joined the Company in September 2000 as Executive Vice President and ChiefMedical Officer and will be stepping down from his position with the Company,after a transition period, on a yet to be determined date.  Previously, Dr. Sherman was employed bySearle/Pharmacia where, since joining that company in 1992, he held a varietyof positions, most recently serving as Executive Director, Clinical Research,with his focus being on Oncology Clinical Research and Head of Oncology GlobalMedical Operations in Medical Marketing. Dr. Sherman received his medical degree from The Chicago Medical Schooland is a member of numerous professional societies and a Diplomate of theNational Board of Medical Examiners and the American Board of InternalMedicine.

*Timothy P. Walbert,*Executive VicePresident, Commercial Operations, joined the Company in January 2006, and willbe stepping down from his position with the Company, after a transition period,on a yet to be determined date. Previously, Mr. Walbert held several positions of increasingresponsibility at Abbott Laboratories

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from 2001 untiljoining NeoPharm, most recently serving as Vice President, International Marketing.  From 1998 to 2001, Mr. Walbert was amarketing director for Searle/Pharmacia. Mr. Walbert holds a Bachelor of Arts in Business and Marketing fromMuhlenberg College.

**Non-employeeDirectors**

*John N. Kapoor* has been a Director of theCompany since its formation in 1990 and has served as Chairman from 1990 to2004 and from June 2006 to the present. Dr. Kapoor is the sole shareholder and President of EJ FinancialEnterprises, Inc., a health care consulting and investment company.  In addition, Dr. Kapoor serves as a directorand Chairman of each of Option Care, Inc., a provider of home health careservices, Akorn, Inc., a manufacturer, distributor and marketer of genericophthalmic products, and Introgen Therapeutics, Inc., a gene therapy company.  Dr. Kapoor received a Ph.D. in medicinalchemistry from the State University of New York at Buffalo and a B.S. inpharmacy from Bombay University, India.

*Frank C. Becker* joined the Board inNovember 2004. Mr. Becker is currently the President and a partner atGreenfield Chemical, a pharmaceutical consulting and sourcing company, which hefounded in January 1998.  From 1999 to2002, Mr. Becker served as President and Chief Operating Officer of SicorPharmaceuticals, a maker of injectable pharmaceuticals.  Mr. Becker is a partner in Southport MarinaDevelopment LLC, a firm operating Southport Marina in Kenosha, Wisconsin.  Prior to the foregoing relationships, Mr.Becker spent over 35 years at Abbott Laboratories, most recently as Vice Presidentof Process Research and Chemical Manufacturing. Mr. Becker also serves on the Board of Directors of RegisTechnologies, a provider of synthesis and separation services.  Mr. Becker received his MBA in Financefrom the University of Chicago and a B.S. degree in chemical engineering from PurdueUniversity.

*Ronald G. Eidell* joined the Board inNovember 2004.  He served as interimPresident and CEO of the Company from March 2005 through October2005.  In April 2006, Mr. Eidell wasappointed Senior Vice President—Finance and in August 2006, Senior VicePresident—Chief Financial Officer for Bally Total Fitness Holding Corp., anoperator of health and fitness clubs. Mr. Eidell has been a partner with Tatum LLC, a national professionalservices firm, since October 2004.  Priorto that he served as the Chief Financial Officer of each of Esoterix, Inc., aprovider of medical testing services, from 2001-2003, NovaMed, Inc., ahealthcare provider, from 1998-2001, and Metromail Corporation, a provider ofinformation services, from 1996-1998. His professional experience includes 10 years in public accounting withArthur Andersen and 13 years with R. R. Donnelley where he served as GeneralAuditor, Corporate Controller and Senior Vice President of Finance andTreasurer.  Mr. Eidell received his MBAfrom the University of Chicago, and has a Bachelors of Science in businessadministration from Drexel University, Philadelphia, Pennsylvania, where he nowserves on the Dean’s Advisory Council to the University’s LeBow College ofBusiness.

*Bernard A. Fox* joined the Board inNovember 2004.  Dr. Fox has been Chief ofthe Laboratory of Molecular and Tumor Immunology at the Earle Chiles ResearchInstitute at the Providence Portland Medical Center in Portland, Oregon andalso Associate Professor in the Departments of Molecular Microbiology andImmunology and Environmental & Biomolecular Systems at Oregon Health andScience University School of Medicine in Portland, Oregon since 1994.  Dr. Fox received his post-doctoral trainingas a Staff Fellow in the Surgery Branch, Division of Cancer Treatment, ClinicalOncology Program at the National Cancer Institute at the National Institutes ofHealth in Bethesda, Maryland from 1985 to 1987 and was a Senior Staff Fellowthere from 1987 to 1990.  Dr. Fox is alsoVice President of The International Society for the Biological Therapy ofCancer, is a member of the scientific advisory board of the BiologicalDevelopment Association (Europe), and serves as President and Chief ExecutiveOffice of Ubivac LLC, a development stage biotechnology company.

*Paul E. Freiman* joined the Board inNovember 2004.  Mr. Freiman iscurrently the President, Chief Executive Officer and a director ofNeurobiological Technologies, Inc., a biotechnology company, a post he has heldsince May 1997.  Mr. Freiman served asChairman and Chief Executive Officer of Syntex Corporation, a pharmaceuticalcompany, from 1990-1995.  Mr. Freimancurrently serves as Chairman of the Board of SciGen Pte. Ltd., and serves onthe boards of Penwest Pharmaceutical Co., a pharmaceutical company, CalypteBiomedical Corporation, a developer of in vitro testing solutions, and OtsukaAmerica Pharmaceuticals Inc., a pharmaceutical company.  Mr. Freiman has been chairman of thePharmaceutical Manufacturers Association of America (PhRMA) and has alsochaired a number of key PhRMA committees. Mr. Freiman holds a B.S. degree in pharmacy from Fordham Universityand an honorary doctorate from the Arnold & Marie Schwartz College ofPharmacy.

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*ErickE. Hanson* joined the Company as a Director in 1997.  Mr. Hanson currently serves as President,Curascrip Infusion Pharmacy and Vice President of Express Scripts, apublicly-traded pharmaceutical company, a position he had held since October2005, when Express Scripts acquired his prior employer, Priority Healthcarewhere he had been Senior Vice President since 2004.  From 1999 until its acquisition by PriorityHealthcare in 2004, Mr. Hanson was Executive Vice President of IntegrityHealthcare.  From 1995 to 1998, Mr.Hanson served as President and CEO of Option Care, Inc., a provider of homehealth care services.  Prior to joiningOption Care, Mr. Hanson held a variety of executive positions with Caremark,Inc. including Vice President Sales and Marketing.  Mr. Hanson served as President and Chief OperatingOfficer of Clinical Partners Inc. in Boston, Massachusetts from 1989 to1991.  Prior to 1989, Mr. Hanson wasemployed for over 20 years at Anthem, Inc.

*Kaveh T. Safavi* joined the Company as aDirector in 2000.  Dr. Safavi iscurrently Senior Vice President and Chief Medical Officer of ThomsonHealthcare, a provider of decision support solutions for the healthcareindustry, and which is part of The Thomson Corporation, a provider ofvalue-added information, software tools and applications to professionals.  From 2000 until 2002, Dr. Safavi served asVice President of Business and Strategic Development for Alexian Brothers ofIllinois, Inc., a multi-hospital health system in metropolitan Chicago,Illinois.  Prior to that, Dr. Safaviserved as Vice President, Medical Affairs for United Healthcare of Illinois,Inc., a large managed care organization, from 1996 to 1999 and served asPresident of Health Springs Medical Group of Illinois, a primary care grouppractice and physician practice management company, from 1993 to 1995.  Dr. Safavi currently serves as a director atAlexian Brothers Medical Center, a not-for-profit hospital.

**Section16(a) Beneficial Ownership Reporting Compliance**

Ourexecutive officers, directors and 10% stockholders are required under Section16(a) of the Securities Exchange Act of 1934, as amended, to file reports ofownership and changes in ownership with the Securities and ExchangeCommission.  Copies of these reports mustalso be furnished to us.

Basedsolely on our review of copies of reports furnished to us, or writtenrepresentations that no reports were required, we believe that during 2006 ourexecutive officers, directors and 10% stockholders complied with all filingrequirements of Section 16(a) in a timely manner.

**Code ofEthics**

TheCompany has adopted a Code of Business Conduct and Ethics for all directors,officers, employees, agents and representatives of the Company and a Code ofConduct Grievance Procedure.  Links tothese documents, including printable versions, are available on the NeoPharm,Inc. website at www.neopharm.com.  Thedocuments are also available in print upon request.  Any waivers to the Code of Business Conductand Ethics will, to the extent required by applicable law or regulation, bedisclosed on the Company’s website.

**AuditCommittee**

TheAudit Committee currently consists of Messrs. Safavi, Becker, Eidell, Freiman,and Hanson, with Dr. Safavi serving as chairman.  The Board of Directors has determined thateach of the current members of the Audit Committee meets the independencecriteria prescribed by the rules of the Securities and Exchange Commission (“SEC”)for audit committee membership and, with the exception of Mr. Eidell’s serviceon the Audit Committee, is an “independent director” as defined in NASDAQ Rule4200(a)(15).  With respect to Mr. Eidell,the Board has determined that his service on the Audit Committee does notcurrently qualify as an Audit Committee “independent director” because of hisinvolvement in the preparation of the Company’s financial statements whileserving as interim President and CEO of the Company from March 2005 throughOctober 2005.  Nevertheless, because ofMr. Eidell’s knowledge and experience in the field of public accounting, andhis prior service as Chairman of the Audit Committee, the Board elected toutilize an exception to NASDAQ Rule 4200(a)(15) that allows one director,though not qualifying as independent under NASDAQ rules, to be a member of theAudit Committee.  The Board determinedthat the circumstances leading to Mr. Eidell’s no longer being NASDAQindependent, *i.e.*, hiswillingness to provide the Company with continuity of leadership by assumingthe position of President and CEO on an interim basis during the Company’seight month executive search for a permanent President, were not sufficient todeny the Company and its stockholders the knowledge and breadth of experiencethat are gained from Mr. Eidell’s presence on the Audit Committee.  Additionally, the Board has determined thatMr. Eidell qualifies as an audit committee financial expert, as defined by theregulations promulgated by the SEC.

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**StockholderRecommendations for Board Nominees**

OurCorporate Governance Committee evaluates any stockholder recommendations forBoard membership.  The charter for our CorporateGovernance Committee is available on our website at www.neopharm.com.  We did not implement any changes to ourprocess for evaluating stockholder recommendations of director nominees during2006.

**ITEM11.               EXECUTIVE COMPENSATION**

**CompensationDiscussion And Analysis**

***Overview***

Thefollowing compensation discussion describes the material elements ofcompensation awarded to, earned by, or paid to each of our executive officersidentified in the Summary Compensation Table below as one of our named executiveofficers for the fiscal year ending December 31, 2006.  This compensation discussion focuses on theinformation contained in the following tables and related footnotes andnarrative for primarily the last completed fiscal year, but we also describecompensation actions taken before or after the last completed fiscal year tothe extent it enhances the understanding of our executive compensationdisclosure.

Ourcompensation and benefit program for our named executive officers aims toencourage our executive officers to continually work in the best interests ofour stockholders to develop our technology while effectively managing the risksand challenges inherent in a pre-commercialization biotechnology enterprisesuch as the Company.  Specifically, wehave created a compensation package that combines short and long-termcomponents, cash and equity, and fixed and contingent payments, in theproportions we believe are prudent, while still allowing us to attract, retainand motivate our senior management to perform with the goal of enhancingstockholder value.

Givenour overriding objective to correlate individual and Company success, we seekto foster a performance-oriented culture, where individual performance isaligned with organizational objectives. We evaluate and reward our executive officers in light of the Company’soverall performance based on their achievement of pre-determined financialgoals, business goals and personal goals. Performance is reviewed at leastannually through processes discussed below with a focus on the Company’soverall research, clinical, regulatory, financial, and operational performanceand the individual’s contributions to that performance. For the Company in2006, the most important overriding corporate goals were to successfullyconclude our Phase 3 PRECISE trial for Cintredekin Besudotox, our most advanceddrug product candidate, and to advance our preparations for the possible filingof a BLA for that drug in the event the results of the clinical trial warrantedsuch a filing.

***Role of Our Compensation Committee***

OurCompensation Committee approves, administers and interprets our executivecompensation and benefit policies, including administration of our 2006 EquityIncentive Plan and 2006 Employee Stock Purchase Plan. The CompensationCommittee provides its recommendations on executive compensation at Boardmeetings, seeking final approval, and, in-between Board meetings, consults withmanagement, other committees of the Board or other members of the Board, whereappropriate. Our Compensation Committee is appointed by our Board of Directorsand each member qualifies as an independent director as defined under NASDAQlisting standards. Our Compensation Committee is comprised of Mr. Paul Freiman(Chairman), Dr. Bernard Fox, Mr. Frank Becker and Mr. Rick Hanson.

OurCompensation Committee receives significant input on compensation issues fromthe Company’s President and CEO and the Company’s human resources department,which it then analyses and reviews and uses to make recommendations to ourBoard to ensure that our executive compensation and benefit program isconsistent with our compensation philosophy and corporate governanceguidelines. Our executives’ base salaries, target and overachievement annualbonus levels and long-term incentive award values are set at levels believed tobe competitive when measured against a peer group of biotechnology companies.

OurCompensation Committee looks to ensure that the compensation of our namedexecutive officers is aligned with the Company’s corporate strategies, businessobjectives and the long-term interests of the Company’s stockholders, as wellas its corporate governance guidelines by: taking input from management,primarily from the President and CEO, but also reviewing written informationfrom the other members of management on their perception of the Company’sgoals, their performance and recommended compensation packages; conferring as a

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group onindividual compensation packages and the Company’s goals independent ofmanagement; and taking its recommendations to the Company’s Board of Directorsfor approval.

***Use of Survey Data***

Inmaking compensation decisions, the Compensation Committee receives informationthat compares our executive compensation against that paid by a peer group ofpublicly traded companies in the biotechnology and pharmaceutical industrycompiled by our human resources personal and management from the Radford Surveyof over 500 biotechnology companies. This peer group consists of companies which management believes aregenerally comparable to us at the time and against which the Company competesfor executive talent.

Webelieve that information regarding pay practices at other companies is usefulin two respects:  First, we recognizethat our compensation practices must be competitive in the marketplace; andsecond, this marketplace information is one of several factors that we considerin assessing the reasonableness of compensation.  Accordingly, at least annually, we compareour compensation packages with those of other companies in the biotechnologyand pharmaceutical industry, through reviews of this survey data.  However, while such information may be auseful guide for comparative purposes, we believe that a successful compensationprogram also requires the application of judgment and subjective determinationsof individual performance.  Our review ofthis information and these factors forms the basis of our compensationrecommendations.

**Executive Compensation Program**

***Components of our Compensation Program***

Our performance driven compensation program consistsof five components: base salary, annual cash bonuses, long-term incentives,benefits, and severance payments.  Wehave not had any formal or informal policy or target for allocatingcompensation between long-term and short-term compensation, between cash andnon-cash compensation or among the different forms of non-cashcompensation.  Instead, the CompensationCommittee, after reviewing information provided by management, includingrelevant survey data, determines subjectively what it believes to be theappropriate level and mix of the various compensation components.  Ultimately, the Compensation Committee’sobjective in allocating between long-term and currently paid compensation is toensure adequate base compensation to attract and retain personnel, whileproviding incentives to maximize long-term value for our company and ourstockholders.

***Short-term Compensation*.**

Ourshort-term compensation program consists of base salary and the potential toearn cash bonuses

*Base Salary.* Base salary will typically be used torecognize the experience, skills, knowledge and responsibilities required ofeach of our named executive officers, as well as competitive market conditions.  In establishing the 2006 base salaries of thenamed executive officers who were employed in January 2006, our CompensationCommittee took into account a number of factors, including survey data,recommendations of the President and CEO, the executive’s seniority, positionand functional role, accomplishments against personal and group objectives, andthe demand and competitiveness for obtaining such an individual with theirspecific expertise and experience.

Thebase salary of our named executive officers is reviewed on an annual basis and,assuming overall corporate performance will permit, adjustments are made toreflect performance-based factors, for the Company as well as the executive,and analyzed in light of competitive conditions.  Again, the Compensation Committee receivesthe recommendations of the President and CEO and analyzes those in light of itsassessment of subjective performance criteria, such as an executive’s abilityto motivate others, to develop the skills necessary to mature with the Company,to set realistic goals to be achieved, and to recognize and pursue new businessopportunities that enhance the Company’s growth and success. We do not applyspecific formulas to determine increases, but instead make an evaluation ofeach executive’s contributions to the long-term success of the Company.  We endeavored to have 2006 salaries thatwould be within the 25th and 75th percentiles forour salary levels for the group of peer companies surveyed.  See “-Executive Compensation Decisionsfor 2006,” below.

*Bonuses.* Bonuses generally are based on corporate and individual performancecompared to actual Company progress, targeted performance criteria, and varioussubjective performance criteria.  TheCompensation Committee works with our President and CEO to develop corporateand individual goals that they believe can be reasonably achieved with anappropriate level of effort over the course of the year.  The factors included in our

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performance goals(financial, business and personal) are assigned specific weights and will varyfor each named executive officer.  Werecognize that the relative importance of these factors may change over time inorder to adapt our operations to specific business challenges and to reflectchanging economic and market conditions. Based on the review of their performance, particularly with regard tothe Company goals established for 2005, and the Compensation Committee’srecommendation to the Board of Directors, cash bonuses totaling $229,879 werepaid in January 2006 to those of our named executive officers who were employedat the time, Messrs. Herrera, Ahmad, Sherman and Kenyon, in respect of theirperformance for the fiscal year ended December 31, 2005.  For 2006, our President and CEO’s bonustarget was set at 50% of his base salary with the potential to receive up to100% of his base salary to the extent performance targets were exceeded.  The performance targets for the other namedexecutive officers were set at 30% of their salaries, with a potential toreceive up to 50% of base salary to the extent performance targets wereexceeded.  The payment of bonuses isalways discretionary, however, and actual amounts paid may be more or less thanthe targeted amount. As described in more detail below, for 2006, in light of theCompany’s performance at year-end, no bonuses have been paid to the namedexecutive officers.  See “ExecutiveCompensation Decisions for 2006,” below.

***Long-term Compensation***

*Stock Based Awards.*   Historically, our long-term compensation hasconsisted of stock options. Our option grants are designed to align management’sperformance objectives with the interests of our stockholders. Our CompensationCommittee grants options to the named executive officers, and other selectedemployees, in order to enable them to participate in the long term appreciationof our stockholder value.  We believethat stock options provide a means of aiding in the retention of key executivesas the stock options are subject to vesting over time.  We recognize, however, that for companies atNeoPharm’s stage of development, stock options represent a more speculativeform of compensation which may not maintain or increase in value unless ourdrug product candidates ultimately reach the market and generate sales andprofits.

Ingeneral, stock options are granted once per year, and are subject to vestingbased on the executive’s continued employment. Options granted to the namedexecutive officers in 2006 vest at an annual rate of twenty-five percent (25%)per year over a four year period on the anniversary of the date of grant if theindividual is still providing services to the Company at that time.  The vesting provisions and size of the grantsare designed to encourage the named executive officers to remain with theCompany over a period of time.  Theexercise price of options is the fair market value, as determined by the termsof the applicable incentive plan, of our common stock on the date ofgrant.  Generally, stock grants are madeto our named executives at the year-end Compensation Committee meeting that hasbeen previously calendared, but grants may be made by the CompensationCommittee at other times if, for example, a new hire is made, or an equity planthat is low in available shares at the time of a grant is replenished later inthe year, making available shares to which the individual would otherwise beentitled.

Thefactors considered in determining the size of option grants includerecommendations from the President and CEO, the executive’s position within theCompany or the employee’s grade level, the number of shares available under theapplicable plan, the grant value and Black-Scholes valuation of the grant whencompared to peer group survey data, and the executive’s contributions to boththe creation of value and the long-term success of the Company.

In January2006, options to purchase 75,000 shares were granted to our named executiveofficers employed at that time as a group based on performance in 2005.  In December 2006, options to purchase 355,000shares were granted to our then current named executive officers based onpartial 2006 performance.

Inaddition to equity stock awards, our executive officers are eligible toparticipate in our 2006 Employee Stock Purchase Plan (the “ESPP”). The ESPP isavailable to all employees of the Company and generally permits participants topurchase shares at a discount of approximately 15% from the fair market valueat the beginning or end of the applicable purchase period.  In 2006, our named executive officerspurchased 6,957 shares pursuant to the ESPP.

*Benefits*.   We provide thefollowing benefits to our executives on the same basis as the benefits providedto all employees:

·             401(k) Plan;

·             Health, vision anddental insurance;

·             Term life insurance;and

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·             Short-andlong-term disability.

Under our 401(k)plan, we provide an employer matching contribution in an amount equal to 3% ofeach participant’s compensation (up to a maximum in 2006 of $6,600 peryear).  The Company’s matchingcontribution is fully and immediately vested when made.  In general, we believe these benefits areconsistent with those offered by other companies and specifically with thosecompanies with which we compete for employees.

Eachof our named executive officers received an automobile allowance in 2006 thatranged from $300 to $1,000 per month.  Incertain circumstances, we will provide cash signing bonuses and pay relocationexpenses when executives join us. Whether a signing bonus and relocation expenses are paid and the amountthereof is determined on a case-by-case basis under the specific hiringcircumstances.  For example, we willconsider paying signing bonuses to compensate for amounts forfeited by anexecutive upon terminating prior employment or to create additional incentivefor an executive to join our Company in a position for which there is highmarket demand.  In 2006, we paid each ofMr. Walbert and Mr. Pauli a signing bonus of $50,000.

*Severance and Change-in-Control Arrangements*.  Compensation for named executive officersalso includes severance and change-in-control arrangements, which are reflectedin the employment agreements for our President and CEO, which is the onlyexecutive officer position for which we have had formal written employmentagreements, or in the term sheets pursuant to which offers are made to other executiveofficers.  These arrangements, like otherelements of executive compensation, are structured with regard to practices atcomparable companies for similarly-situated officers and in a manner we believeis likely to attract and retain high quality executive talent.  Changes to existing severance arrangementsare also sometimes negotiated with departing executives in exchange fortransition services and/or general releases. The severance and change-in-control arrangements currently in place withour current executive officers, and the severance arrangement entered into withone of our executive officers who departed in 2006, are described in greaterdetail below under the headings “ — Employment Agreements,” “—SeparationAgreement” and “—Payments Upon Termination or Change of Control.”

**ExecutiveCompensation Decisions for 2006.**

Forfiscal 2006, the Compensation Committee initially recommended, and our Boardinitially approved, incentive compensation bonus awards to our named executiveofficers who were employed in December 2006 which totaled $395,700 andrepresented from 21% to 50% of base salary. Additionally, the Compensation Committee also initially recommended, andthe Board of Directors initially approved, increases in base salaries for thenamed executive officers who were then employed, which increases ranged from 4%to 15.2% over the applicable prior base salaries.  However, the awarding of bonuses and stockawards is always subject to the Company’s overall performance for the entireyear and, shortly after the Compensation Committee and the Board met in earlyDecember 2006 with respect to bonus and salary increases, the Company learnedthat the Phase 3 PRECISE trial for the Company’s lead drug product candidate,Cintredekin Besudotox, had failed to meet its statistical end point.  In light of this set-back to the Company’slead drug product candidate, the Board requested that the Compensation Committeereassess its recommendations regarding bonus and salary increases.  With the newly presented informationregarding the PRECISE results available to it, the Compensation Committeerecommended, and the Board approved, a suspension of payment of all bonuses andsalary increases for the named executive officers and other employees at thedirector level and above pending further assessment of the prognosis forCintredekin Besudotox, with the result that no bonuses for 2006 or pay raisesfor 2007 for this group of employees, which includes the Company’s namedexecutive officers employed at that time, have been made.

**OtherInfluences on Executive Compensation**

*Role of Executive Officers in Determining or RecommendingExecutive and Director Compensation.*  Management plays a significant role in theprocess of setting executive compensation. The most significant aspects of management’s role are:

·                                          evaluatingemployee performance;

·                                          determiningand assembling the survey data for the peer group of companies to whichcomparisons will be made;

7

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·                                          establishingbusiness performance targets and objectives; and

·                                          recommendingsalary and bonus levels and stock-based awards.

Management,and in particular the President and CEO, prepares meeting information for eachCompensation Committee meeting.  OurPresident and CEO also participates in Compensation Committee meetings at theCompensation Committee’s request to provide:

·                                          backgroundinformation regarding each named executive officer’s strategic objectives andprogress toward the attainment of those objectives;

·                                          hisevaluation of the performance of the named executive officers, includinghimself; and

·                                          compensationrecommendations as to senior executive officers, including himself.

Ultimately,however, all compensation recommendations with respect to the Company’sexecutive officers are made by the Compensation Committee after consideringmanagement’s recommendations, survey data, the members’ own experience in theindustry, and engaging in deliberations in executive session without thepresence of members of management.

Managementdoes not play any role in setting non-employee director compensation.  Recommendations with respect to non-employeedirector compensation are made by the Corporate Governance Committee and thenapproved by the Board.  See “ —Compensation of Directors” below.

*Impact of Tax Treatment on Compensation Decisions. *Section 162(m) of the Codegenerally disallows a tax deduction for compensation in excess of $1 millionpaid to our named executive officers. Certain compensation is specifically exempt from the deduction limit tothe extent that it does not exceed $1 million during any fiscal year or is “performancebased” as defined in Section 162(m) of the Code.  The Compensation Committee considers the netcost to the Company, and its ability to effectively administer executivecompensation in the long-term interests of stockholders.  To the extent that awards under the 2006Equity Incentive Plan constitute performance-based awards, the awards shouldqualify as “performance-based compensation” for purposes ofSection 162(m).

*Security Ownership Requirements or Guidelines.*  While we believe it is important for ourexecutives to have an equity stake in our company in order to help align theirinterest with those of our stockholders, we do not currently have any equityownership guidelines for our executive officers.

**CompensationCommittee Report**

TheCompensation Committee has reviewed and discussed the Compensation Discussionand Analysis required by Item 402(b) of Regulation S-K with management.  Based on this review and discussion, theCompensation Committee has recommended to the Board of Directors that theCompensation Discussion and Analysis be included our Annual Report on Form 10-Kfor the year ended December 31, 2006, and in our proxy statement for the 2007annual meeting of shareholders.

Submitted by theCompensation Committee of the Board of Directors

Paul E. Freiman, *Chairman*,

Frank C. Becker,

Bernard A. Fox and

Erick E. Hanson

8

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**ExecutiveCompensation**

***Summary of Compensation*.**

Thefollowing table sets forth certain summary compensation information for thefiscal year ended December 31, 2006, for services rendered by each person whoserved as the principal executive officer or principal financial officer of theCompany at any time during 2006, for the executive officers of the Company whowere serving as executive officers on December 31, 2006, and for one additionalformer executive officer who would have been among our most highly compensatedexecutive officers if he had been serving as an executive officer on December31, 2006.  We refer to these individualsas our “named executive officers.”

**SUMMARY COMPENSATION TABLE**
| Name and   Principal Position                   | ** ** | ** ** | ** ** | **Year** | ** ** | **Salary($)** | ** ** | **Bonus($)**(7) | ** ** | **Stock  Awards($)** | ** ** | **Options  Awards**(8) | ** ** | **Non-Equity  Incentive Plan  Compensation** | ** ** | **All Other  Compensation**(9) | ** ** | **Total** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|----------|------------|---------------|------------|-----------------|------------|----------------------|------------|------------------------|------------|---------------------------------------------------|------------|-------------------------------------|------------|-----------|------------|
|                                                           |       |       |       |     |       |          |       |            |       |                 |       |                   |       |                                              |       |                                |       |
| Guillermo A. Herrera,(1)                                       |       | 2006       |       | $425,000 |       | $—       |       | $—         |       | $773,671             |       | $—                |       | $19,290                                           |       | $1,217,961                          |       |
| Former Chief Executive  Officer and President                  |       |       |       |     |       |          |       |            |       |                 |       |                   |       |                                              |       |                                |       |
|                                                           |       |       |       |     |       |          |       |            |       |                 |       |                   |       |                                              |       |                                |       |
| Jeffrey W. Sherman, M.D.,(2)                                   |       | 2006       |       | $275,000 |       | $—       |       | $—         |       | $94,400              |       | $—                |       | $10,824                                           |       | $380,224                            |       |
| Chief Medical Officer and  Executive Vice-President            |       |       |       |     |       |          |       |            |       |                 |       |                   |       |                                              |       |                                |       |
|                                                           |       |       |       |     |       |          |       |            |       |                 |       |                   |       |                                              |       |                                |       |
| Tim Walbert,(3)                                                |       | 2006       |       | $230,154 |       | $50,000       |       | $—         |       | $153,419             |       | $—                |       | $12,088                                           |       | $445,661                            |       |
| Executive Vice President,  Commercial Operations               |       |       |       |     |       |          |       |            |       |                 |       |                   |       |                                              |       |                                |       |
|                                                           |       |       |       |     |       |          |       |            |       |                 |       |                   |       |                                              |       |                                |       |
| Ronald Pauli,(4)                                               |       | 2006       |       | $83,692  |       | $50,000       |       | $—         |       | $24,817              |       | $—                |       | $3,959                                            |       | $162,468                            |       |
| Former Chief Financial  Officer and Secretary                  |       |       |       |     |       |          |       |            |       |                 |       |                   |       |                                              |       |                                |       |
|                                                           |       |       |       |     |       |          |       |            |       |                 |       |                   |       |                                              |       |                                |       |
| Imran Ahmad, Ph.D.,(5)                                         |       | 2006       |       | $99,240  |       | $—       |       | $—         |       | $15,121              |       | $—                |       | $260,958                                          |       | $375,319                            |       |
| Former Chief Scientific  Officer and Executive  Vice President |       |       |       |     |       |          |       |            |       |                 |       |                   |       |                                              |       |                                |       |
|                                                           |       |       |       |     |       |          |       |            |       |                 |       |                   |       |                                              |       |                                |       |
| Lawrence A. Kenyon,(6)                                         |       | 2006       |       | $160,192 |       | $—       |       | $—         |       | $69,246              |       | $—                |       | $191,870                                          |       | $421,308                            |       |
| Former Chief Financial  Officer and Secretary                  |       |       |       |     |       |          |       |            |       |                 |       |                   |       |                                              |       |                                |       |

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(1)             Mr. Herrera is the former President andChief Executive Officer; Mr. Herrera’s employment with the Company ended March23, 2007.

(2)             Dr. Sherman served as the Chief MedicalOfficer and Executive Vice President at December 31, 2006.  On April 19, 2007, the Company announced thatDr. Sherman would be stepping down and that his employment with the Companywould terminate as of a yet to be determined date.

(3)             Mr. Walbert was hired as Executive VicePresident-Commercial Operations on January 17, 2006 and served in that positionon December 31, 2006.  On April 19, 2007,the Company announced that Mr. Walbert would be stepping down and that hisemployment with the Company would terminate as of a yet to be determined date.

(4)             Mr. Pauli is the former Chief FinancialOfficer; Mr. Pauli was hired on August 4, 2006 and left the Company’s employ onMarch 21, 2007.

(5)             Dr. Ahmad is the former Chief ScientificOfficer and Executive Vice President; Dr. Ahmad resigned as of May 3, 2006; allunvested stock options were cancelled as of that date.

(6)             Mr. Kenyon is the former Chief FinancialOfficer: Mr. Kenyon separated from service as an employee as of August 31, 2006and continues to provide consulting services to the Company.

(7)             In light of the Company’s performance in2006, bonuses for 2006 have not been paid. See “—Executive CompensationDecisions for 2006,” above. The amounts reported under this column for Messrs.Pauli and Walbert represent signing bonuses paid each executive upon his hire.

(8)             Amounts reported reflect FAS 123R expenserelated to option awards for 2006; no forfeiture rate assumption is applied.

(9)             The amount reported for Mr. Herrerarepresents the Company’s contribution to his 401K account ($6,600), lifeinsurance premiums paid by the Company ($690), and a monthly car allowance($12,000); the amount reported for Mr. Pauli represents the Company’scontribution to his 401K account ($1,845), a monthly car allowance ($2,000) andlife insurance premiums paid by the Company ($114); the amount reported for Mr.Kenyon represent the Company’s contributions to his 401K account ($6,117),payments made due to his separation as an employee of  the Company ($183,353), and a monthly carallowance ($2,400); the amount reported for Dr. Sherman reflects the Company’scontribution to his 401K account ($6,600), a monthly car allowance ($3,600),and life insurance premiums paid by the Company ($624); the amount reported forMr. Walbert reflects the Company’s contributions to his 401K account ($6,150),a monthly car allowance ($5,750), and life insurance premiums paid by theCompany ($188); the amount reported for Dr. Ahmad represents the Company’scontributions to his 401K account ($4,362), payments made due to histermination from the Company ($255,381), including salary continuation, and amonthly care allowance ($1,215).

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**GRANTSOF PLAN-BASED AWARDS IN 2006**

Thefollowing table sets forth information with respect to each grant of an awardmade to a named executive officer during the fiscal year ended December 31,2006, under any plan, contract, authorization or arrangement pursuant to whichcash, securities, similar instruments or other property may be received. 

 
|                    | ** ** | **Grant**  | ** ** | **Estimated Future Payouts  Under Non-Equity  Incentive Plan Awards(1)** | ** ** | **Estimated Future Payout  Under Equity  Incentive Plan Awards** | ** ** | **All  Other  Stock  Awards;  No. of  Shares  of Stock** | ** ** | **All Other  Option  Awards;  No. of  Securities  Underlying** | ** ** | **Aggregate  Grant  Date Fair  Value of  Stock or  Option** | ** ** | **Exercise  or Base  Price  Option** | ** ** |
|--------------------|------------|------------|------------|--------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Name**           | ** ** | ** ** | ** ** | **Date(2)**                                                              | ** ** | **Threshold**                                                    | ** ** | **Target**                                                         | ** ** | **Maximum**                                                              | ** ** | **Threshold**                                                              | ** ** | **Target**                                | ** ** | **Maximum** | ** ** | **or Units** | ** ** | **Option** | ** ** | **Award(3)** | ** ** | **Awards** | ** ** |
|               |       |       |       |                                                                     |       |                                                             |       |                                                               |       |                                                                     |       |                                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Guillermo Herrera  |       | 12/5/06    |       |                                                                     |       |                                                             |       |                                                               |       |                                                                     |       |                                                                       |       |                                      |       |   |   | 150,000 |   | $699,000 |   | $7.11 |   |
|                    |       | 1/1/06     |       |                                                                     |       | $212,500                                                         |       | $425,000                                                           |       |                                                                     |       |                                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
|               |       |       |       |                                                                     |       |                                                             |       |                                                               |       |                                                                     |       |                                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Jeffrey Sherman    |       | 1/25/06    |       |                                                                     |       |                                                             |       |                                                               |       |                                                                     |       |                                                                       |       |                                      |       |   |   | 25,000 |   | $210,500 |   | $12.46 |   |
|                    |       | 12/5/06    |       |                                                                     |       |                                                             |       |                                                               |       |                                                                     |       |                                                                       |       |                                      |       |   |   | 80,000 |   | $372,800 |   | $7.11 |   |
|                    |       | 1/1/06     |       |                                                                     |       | $82,500                                                          |       | $137,500                                                           |       |                                                                     |       |                                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
|               |       |       |       |                                                                     |       |                                                             |       |                                                               |       |                                                                     |       |                                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Ronald Pauli       |       | 8/28/06    |       |                                                                     |       |                                                             |       |                                                               |       |                                                                     |       |                                                                       |       |                                      |       |   |   | 75,000 |   | $263,250 |   | $5.17 |   |
|                    |       | 12/5/06    |       |                                                                     |       |                                                             |       |                                                               |       |                                                                     |       |                                                                       |       |                                      |       |   |   | 25,000 |   | $116,500 |   | $7.11 |   |
|                    |       | 8/28/06    |       |                                                                     |       | $72,000                                                          |       | $120,000                                                           |       |                                                                     |       |                                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
|               |       |       |       |                                                                     |       |                                                             |       |                                                               |       |                                                                     |       |                                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Tim Walbert        |       | 1/17/06    |       |                                                                     |       |                                                             |       |                                                               |       |                                                                     |       |                                                                       |       |                                      |       |   |   | 75,000 |   | $607,500 |   | $12.02 |   |
|                    |       | 12/5/06    |       |                                                                     |       |                                                             |       |                                                               |       |                                                                     |       |                                                                       |       |                                      |       |   |   | 100,000 |   | $466,000 |   | $7.11 |   |
|                    |       | 1/17/06    |       |                                                                     |       | $72,000                                                          |       | $120,000                                                           |       |                                                                     |       |                                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
|               |       |       |       |                                                                     |       |                                                             |       |                                                               |       |                                                                     |       |                                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Imran Ahmad(4)     |       | 1/1/06     |       |                                                                     |       | $68,100                                                          |       | $113,500                                                           |       |                                                                     |       |                                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
|                    |       | 1/25/06    |       |                                                                     |       |                                                             |       |                                                               |       |                                                                     |       |                                                                       |       |                                      |       |   |   | 25,000 |   | $210,500 |   | $12.46 |   |
|               |       |       |       |                                                                     |       |                                                             |       |                                                               |       |                                                                     |       |                                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Lawrence Kenyon(5) |       | 1/25/06    |       |                                                                     |       | $63,000                                                          |       | $105,000                                                           |       |                                                                     |       |                                                                       |       |                                      |       |   |   | 25,000 |   | $210,500 |   | $12.46 |   |
|                    |            |            |            |                                                                          |            |                                                                  |            |                                                                    |            |                                                                          |            |                                                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |

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(1)             The Company does not define a threshold award level;awards reflect non-equity incentive opportunities granted at the beginning ofthe year or at the time of employment; an executive must be an employee of theCompany at the end of the fiscal year to receive an incentive payout.

(2)             Grant dates of January 1, 2006 reflect timing ofincentive plan awards as provided by Mr. Herrera’s employment agreement oremployment terms as established in writing  for Dr. Sherman and Dr. Ahmad.

(3)             Aggregate grant date fair value for option grants tothe named executive officers are based on the Black-Scholes option values atthe time of the original grant.

(4)             Dr. Ahmad resigned as of May 3, 2006; all unvestedstock options were cancelled as of that date.

(5)             Mr. Kenyon separated from service as an employee as ofAugust 31, 2006; per the terms of his option agreements, his option grantscontinue to vest as a consultant under the original terms of the award.

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**OutstandingEquity Awards at December 31, 2006**

The following table shows for the fiscal year endedDecember 31, 2006, certain information regarding outstanding equity awards atfiscal year end for the named executive officers.  There were no Stock Awards made to any of thenamed executive officer for the fiscal year ended December 31, 2006.
|                         | ** ** | ** ** | ** ** | **Option Awards**(1) | ** ** |
|-------------------------|------------|------------|------------|----------------------|------------|
| **Name**                | ** ** | ** ** | ** ** | **Grant Date**  | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (Exercisable)** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (Unexercisable)** | ** ** | **Equity  Incentive  Plan Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options** | ** ** | **Option  Exercise  Price** | ** ** | **Option  Expiration  Date** | ** ** |
|                    |       |       |       |                 |       |   |   |   |   |   |   |   |   |
| Guillermo A. Herrera(2) |       | 10/28/2005 |       | 125,000              |       | 375,000 |   |   |   | $ | 9.06 |   | 10/28/2015 |   |
|                         |       | 12/5/2006  |       |                 |       | 150,000 |   |   |   | 7.11 |   | 12/5/2016 |   |
|                    |       |       |       |                 |       |   |   |   |   |   |   |   |   |
| Jeffrey W. Sherman(3)   |       | 8/28/2000  |       | 164,450              |       |   |   |   |   | $ | 19.17 |   | 8/28/2010 |   |
|                         |       | 2/2/2001   |       | 88,550               |       |   |   |   |   | 22.83 |   | 2/2/2011 |   |
|                         |       | 2/1/2002   |       | 37,375               |       |   |   |   |   | 13.78 |   | 2/1/2012 |   |
|                         |       | 5/8/2003   |       | 23,000               |       |   |   |   |   | 13.13 |   | 5/8/2013 |   |
|                         |       | 2/17/2004  |       | 30,000               |       |   |   |   |   | 19.91 |   | 2/17/2014 |   |
|                         |       | 4/28/2005  |       | 7,275                |       | 21,825 |   |   |   | 7.95 |   | 4/28/2015 |   |
|                         |       | 1/25/2006  |       |                 |       | 25,000 |   |   |   | 12.46 |   | 1/25/2016 |   |
|                         |       | 12/5/2006  |       |                 |       | 80,000 |   |   |   | 7.11 |   | 12/5/2016 |   |
|                    |       |       |       |                 |       |   |   |   |   |   |   |   |   |
| Imran Ahmad(4)          |       |       |       |                 |       |   |   |   |   |   |   |   |   |
|                    |       |       |       |                 |       |   |   |   |   |   |   |   |   |
| Lawrence A. Kenyon(5)   |       | 8/21/2000  |       | 37,950               |       |   |   |   |   | $ | 15.42 |   | 8/29/2007 |   |
|                         |       | 2/2/2001   |       | 31,625               |       |   |   |   |   | 22.83 |   | 8/29/2007 |   |
|                         |       | 2/1/2002   |       | 8,625                |       |   |   |   |   | 13.78 |   | 8/29/2007 |   |
|                         |       | 10/24/2002 |       | 46,000               |       |   |   |   |   | 12.17 |   | 8/29/2007 |   |
|                         |       | 2/17/2004  |       | 20,000               |       |   |   |   |   | 19.91 |   | 8/29/2007 |   |
|                         |       | 4/28/2005  |       | 10,775               |       | 10,775 |   |   |   | 7.95 |   | 8/29/2007 |   |
|                         |       | 1/25/2006  |       |                 |       | 6,250 |   |   |   | 12.46 |   | 8/29/2007 |   |
|                    |       |       |       |                 |       |   |   |   |   |   |   |   |   |
| Ronald Pauli(6)         |       | 8/28/2006  |       |                 |       | 75,000 |   |   |   | $ | 5.17 |   | 8/28/2016 |   |
|                         |       | 12/5/2006  |       |                 |       | 25,000 |   |   |   | 7.11 |   | 12/5/2016 |   |
|                    |       |       |       |                 |       |   |   |   |   |   |   |   |   |
| Tim Walbert(7)          |       | 1/17/2006  |       |                 |       | 75,000 |   |   |   | $ | 12.02 |   | 1/17/2016 |   |
|                         |       | 12/5/2006  |       |                 |       | 100,000 |   |   |   | 7.11 |   | 12/5/2016 |   |
|                         |            |            |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |

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(1)          All outstanding options were underwater as of December31, 2006.

(2)          As a result of Mr. Herrera’s termination ofemployment, the expiration date for his options will be June 21, 2007, which is90 days after the date of his separation from service.

(3)          Dr. Sherman will be leaving the Company as of a yet tobe determined date and his options will expire 90 days after that date.

(4)          All outstanding grants expired ninety (90) days afterDr. Ahmad’s termination of employment.

(5)          The expiration date for Mr. Kenyon’s options is ninety(90) days after the termination of the consulting services provided to theCompany pursuant to his separation agreement. The options shown as outstanding and unexercisable reflect options thatwill continue to vest during Mr. Kenyon’s status as a consultant to theCompany.

(6)          Mr. Pauli’s employment with the Company terminated onMarch 21, 2007, with the result that his options will expire June 19,2007.

(7)          Mr. Walbert will be leaving the Company as of a yet tobe determined date and his options will expire 90 days after that date.

**OptionExercises and Stock Vested in 2006**

For the fiscal year endedDecember 31, 2006, there were no options exercised nor any vesting of stockawards for any of the named executive officers.

**PensionBenefits**

Wedo not provide pension arrangements or post-retirement health coverage for ourexecutive employees.  Our executiveofficers are eligible to participate in our 401(k) defined contribution plan.At our discretion, we may contribute to each participant a matchingcontribution equal to 3% of the participant’s compensation that has beencontributed to the plan, up to a maximum matching contribution in 2006 of$6,600.  All of the named executiveofficers participated in our 401(k) plan during 2006 and received matchingcontributions.

11

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**EmploymentAgreements**

*Mr. Herrera.*  On October 28, 2005, the Company entered intoan employment agreement (the “Herrera Employment Agreement”) with Mr. GuillermoA. Herrera in connection with Mr. Herrera’s appointment as President and ChiefExecutive Officer of the Company.  Underthe terms of the Herrera Employment Agreement, Mr. Herrera was provided with abase salary of $425,000 and a stock grant of 22,075 shares of the Company’sCommon Stock (the “Stock Grant”) under the Company’s 1998 Equity Incentive Plan(the “Plan”), which had a fair market value as of the date of grant of$200,000.  The shares included in theStock Grant became fully vested upon issuance and are non-forfeitable.  Additionally, upon commencing his employment,Mr. Herrera was granted an option to acquire 500,000 shares of the Company’sCommon Stock at an exercise price of $9.06 per share, which was the closing price of the Company’s CommonStock on the date of grant. Mr. Herrera’s stock option was scheduled to vest in four equal annualinstallments of 125,000 shares on each of the first four anniversaries of thestock option grant date provided Mr. Herrera was providing services to theCompany on each such date.  Beginning in2006, Mr. Herrera became eligible to receive a target bonus of up to 50% ofbase salary and an overachievement bonus of up to 100% of the base salary, ineach case based on the achievement by the Company and Mr. Herrera of certainspecific plans and goals established annually by the Compensation Committee inconsultation with Mr. Herrera.

TheHerrera Employment Agreement provided for automatic termination in the event ofMr. Herrera’s death or in the event that he suffered a Disability (as definedin the agreement).  In the event Mr.Herrera’s employment terminated on account of his death or Disability, Mr.Herrera (or his estate) would have been entitled to receive his accrued basesalary through the date of termination. Additionally, the Company could terminate Mr. Herrera’s employment atany time, with or without Cause (as defined in the agreement), effective uponwritten notice and Mr. Herrera could terminate his employment at anytime upon30 days prior written notice.  In theevent of a termination for Cause or upon Mr. Herrera’s termination of hisemployment, Mr. Herrera would be entitled to receive accrued base salarythrough the date of termination.  In theevent of termination without Cause, Mr. Herrera would be entitled to receive acontinuation of his then current base salary for 12 months, subject, however,to set-off for any other earned income and cessation of the salary continuanceupon his accepting another full-time position or upon his providing services toa competing business or breach of the restrictive covenants set forth in theHerrera Employment Agreement.  Inaddition, following a change of control (as defined in the agreement), if Mr.Herrera’s employment was terminated within one (1) year, or he terminated hisemployment for “Good Reason” (as defined in the agreement) within one yearafter a change in control, in addition to a continuation of his base salary for12 months, Mr. Herrera would also have been entitled to a lump sum paymentequal to the prior year’s bonus, if any, plus all of his unvested options wouldhave immediately vested and been exercisable. Mr. Herrera’s employment was terminated without Cause in March 2007 andthe Company is currently paying him the salary continuance described above.

*Mr. Birch.   *On March 23,2007, the Company entered into an employment agreement (the “Birch EmploymentAgreement”) with Mr. Laurence P. Birch in connection with Mr. Birch’sappointment as President and Chief Executive Officer of the Company.  Under the terms of the Birch EmploymentAgreement, Mr. Birch was provided with a base salary of $275,000.  Additionally, upon commencing his employment,Mr. Birch was granted an option to acquire 300,000 shares of the Company’sCommon Stock at an exercise price of $1.90 per share, which was the average of the high and low price of theCompany’s Common Stock on the date of grant. Mr. Birch’s stock option is scheduled to vest in four equal annualinstallments of 75,000 shares on each of the first four anniversaries of thestock option grant date provided Mr. Birch is still providing services to theCompany on each such date.  Additionally,the Company has committed to provide an award of 180,665 shares of restrictedstock (which would vest over four years) to Mr. Birch upon sufficient sharesbecoming available under the 2006 Equity Incentive Plan as a result of thecancellation or termination of prior awards made to others becoming availableunder the plan or the stockholders approving an increase in the number ofshares available under the plan.  Mr.Birch is eligible to receive a target bonus of up to 50% of base salary and anoverachievement bonus of up to 100% of the base salary, in each case based onthe achievement by the Company and Mr. Birch of certain specific plans andgoals established annually by the Compensation Committee in consultation withMr. Birch.

TheBirch Employment Agreement provides for automatic termination in the event ofMr. Birch’s death or in the event that he suffers a Disability (as defined inthe agreement).  In the event Mr. Birch’semployment terminates on account of his death or Disability, Mr. Birch (or hisestate) would be entitled to receive his accrued base salary through the dateof termination.  Additionally, theCompany may terminate Mr. Birch’s employment at any time, with or without Cause(as defined in the agreement), effective upon written notice and Mr. Birch may 

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terminate his employment at anytime upon 30 days priorwritten notice.  In the event of atermination for Cause or upon Mr. Birch’s election to terminate his employment,Mr. Birch would be entitled to receive accrued base salary through the date oftermination.  In the event of terminationby the Company without Cause after Mr. Birch has been with the Company for sixmonths, Mr. Birch would be entitled to receive a continuation of his thencurrent base salary for 12 months, subject, however, to cessation of the salarycontinuance upon his accepting another full-time position or breach of therestrictive covenants set forth in the Birch Employment Agreement.  In addition, following a change of control(as defined in the agreement), if Mr. Birch’s employment was terminated withinone (1) year, or he terminated his employment for “Good Reason” (as defined inthe agreement) within one year after a change in control, in addition to the 12month’s of salary continuance, Mr. Birch would also be entitled to a lump sumpayment equal to the prior year’s bonus, if any, plus all of his unvestedoptions and restricted stock would become immediately vested and exercisable.

*Other Named Executive Officers.*  Each of the named executive officers, otherthan Mr. Herrera, accepted employment with the Company on the basis of a termsheet which set forth the salary and benefits to be provided by the Company,including, but not limited to, an undertaking by the Company to provide salarycontinuation payments, under certain circumstances, upon a termination of theindividual’s employment with the Company as a result of termination or a changeof control, at the salary level in existence at the date of termination.

Pursuantto the terms of employment for each of Timothy Walbert, Executive VicePresident-Commercial Operations in 2006, and Mr. Ron Pauli, our former ChiefFinancial Officer, both of whom were hired in 2006, each received a base salaryof $240,000, a sign-on bonus of $50,000, and eligibility for a target bonus ofup to 30% of base salary and an overachievement bonus of up to 50% of basesalary.  Upon a termination of employmentby the Company without cause, at any time after six months of employment, orwithin twelve months of a change of control (as defined in the 1998 EquityIncentive Plan for Mr. Walbert and in the 2006 Equity Incentive Plan for Mr.Pauli), each of Messrs. Walbert and Pauli would be entitled to receive acontinuation of their then current salary for six months.

Dr.Jeffrey Sherman, Executive Vice President and Chief Medical Officer in 2006,had a base salary in 2006 of $275,000 and, in accordance with the terms of hisemployment, was eligible for discretionary stock options and a bonus of up to amaximum of 50% of base salary.  Under theterms of his amended offer sheet, if the Company terminates Dr. Sherman’semployment, his salary will be continued for a period of six months.

Dr.Imran Ahmad, our former Executive Vice president and Chief Scientific Officer,had a base salary in 2006 of $227,000 and would have been eligible for stockoptions and a bonus of up to a maximum of 50% of his base salary.  Upon severance of employment by either partyDr. Ahmad was eligible for continuation of salary for 12 months.  See “- Payments Upon Termination orChange in Control — Summary of Actual Payments Upon Termination of Employmentin 2006.”

LawrenceKenyon, our former Chief Financial Officer, was paid a base salary in 2006 of$210,000 and, as provided in his employment term sheet, would have receivedsalary continuation for six months if his employment were terminated by theCompany.  Upon Mr. Kenyon’s departure,the Company entered into a separation agreement and mutual release of claimswhich provided for nine months severance in exchange for on-going consultingservices.  See “— Separation Agreement,”and “- Payments Upon Termination or Change in Control — Summary of ActualPayments Upon Termination of Employment in 2006.”

Foreach of the named executive officers, our equity incentive plans provide forvesting of all unvested options upon the occurrence of a change of control asdefined in the applicable plan.  Each ofour named executive officers was also eligible to receive the benefitsgenerally made available to our employees and officers.

**Separation Agreement.**

OnJune 13, 2006, the Company entered into a separation agreement and release ofall claims (the “Separation Agreement”) with Mr. Lawrence A. Kenyon, our formerChief Financial Officer and Secretary of the Company.  Pursuant to the Separation Agreement, whichtook effect upon Mr. Kenyon’s termination of employment with the Company onAugust 31, 2006, for a period of nine (9) months after August 31, 2006, Mr.Kenyon receives salary continuation based upon his last monthly salary of$17,500, payment or reimbursement for medical and dental coverage for Mr.Kenyon and his family, and options previously granted to Mr. Kenyon continue tovest.  The salary continuation and otherbenefits are subject to forfeiture if Mr. Kenyon provides services to certaincompeting businesses without the Company’s consent.  In exchange for those benefits, and again fora period of nine (9) months after his resignation became effective, Mr. Kenyonprovides on-going 

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consulting services to the Company and has agreed toabide by certain non-compete, non-solicitation and confidentialityprovisions.  The Separation Agreementalso contains a mutual release of all claims by the parties.

**Payments Upon Termination or Change in Control**

The following tables set forth information regardingpotential payments and benefits that each named executive officer who wasserving as an executive officer on December 31, 2006 would receive upontermination of employment or a change of control of NeoPharm under specifiedcircumstances, assuming that the triggering event in question occurred onDecember 29, 2006, the last business day of the fiscal year.

**Summaryof Potential Payments Upon Termination or Change of Control**
| **Name(1)**           | ** ** | ** ** | ** ** | **Termination  For Cause(2)** | ** ** | **Voluntary  Termination  for Good  Reason by  Executive(3)** | ** ** | **Retirement** | ** ** | **Death** | ** ** | **Disability** | ** ** | **Termination  w/o Cause by  NeoPharm(4)** | ** ** | **Voluntary  Termination  w/o Good  Reason by  Executive** | ** ** | **Change  of  Control(5)** | ** ** |
|-----------------------|------------|------------|------------|------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------|------------|-----------|------------|----------------|------------|------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------|------------|
|                  |       |       |       |                               |       |                                                                    |       |           |       |      |       |           |       |                                                 |       |                                                                 |       |
| Guillermo A.  Herrera |       | $          | 0          |                               | $          | 850,000                                                                 |       | $              | 0          |      | $          | 0              |       | $                                                    | 0          |                                                                 | $          | 425,000                    |       | $ | 0 |   | $ | 850,000 |   |
|                  |       |       |       |                               |       |                                                                    |       |           |       |      |       |           |       |                                                 |       |                                                                 |       |
| Jeffrey W.  Sherman   |       | $          | 137,500    |                               | $          | 0                                                                       |       | $              | 0          |      | $          | 0              |       | $                                                    | 0          |                                                                 | $          | 137,500                    |       | $ | 0 |   | $ | 137,500 |   |
|                  |       |       |       |                               |       |                                                                    |       |           |       |      |       |           |       |                                                 |       |                                                                 |       |
| Timothy Walbert       |       | $          | 0          |                               | $          | 0                                                                       |       | $              | 0          |      | $          | 0              |       | $                                                    | 0          |                                                                 | $          | 120,000                    |       | $ | 0 |   | $ | 120,000 |   |
|                  |       |       |       |                               |       |                                                                    |       |           |       |      |       |           |       |                                                 |       |                                                                 |       |
| Ronald Pauli(6)       |       | $          | 0          |                               | $          | 0                                                                       |       | $              | 0          |      | $          | 0              |       | $                                                    | 0          |                                                                 | $          | 0                          |       | $ | 0 |   | $ | 0 |   |
|                  |       |       |       |                               |       |                                                                    |       |           |       |      |       |           |       |                                                 |       |                                                                 |       |

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(1)             Mr. Kenyon and Dr. Ahmad are not reporteddue to their separation from service with the Company during 2006; the amountspaid to these  individuals as a result oftheir separation is reported in the “Summary of Actual Payments UponTermination of Employment in 2006”  tablebelow.  Each of the other named executiveofficers has either already left the Company’s employ subsequent to December 31,2006, or has agreed to leave the Company’s employ in 2007, in each case withouttriggering any change of control payment provisions.

(2)             Mr. Sherman’s employment term sheetprovides for the payment of six (6) months salary continuance if the Companyterminates his employment.

(3)             The amount reported for Mr. Herrerareflects one year of full salary and 100% of his maximum bonus opportunity perthe terms of his employment agreement.

(4)             The amounts for Messrs. Herrera, Shermanand Walbert reflect one year, six months and six months, respectively, ofsalary per the terms of their employment agreement/term sheets.

(5)             The amount reported for Mr. Herrerareflects one year of full salary and 100% of his maximum bonus opportunity perthe terms of his employment agreement; the amounts reported for Messrs. Walbertand Sherman reflect six months of salary per their respective term sheets; allexecutives would be paid their severance only if terminated following a changeof control.

(6)             Mr. Pauli, who joined the Company onAugust 4, 2006, was required to be employed for six months before he couldqualify for any severance payment from the Company.

Thefollowing table sets forth for each named executive officer whose employmentwith us terminated during the last fiscal year, information regarding actualpayments and benefits received by such named executive officer in connectionwith termination of employment.

**Summaryof Actual Payments Upon Termination of Employment in 2006**
| **Name**        | ** ** | ** ** | ** ** | **Cash  Payments** | ** ** | **Value of  Benefits** | ** ** | **Non-Employee  Options Expense(1)** | ** ** |
|-----------------|------------|------------|------------|--------------------|------------|-----------------------------|------------|-------------------------------------------|------------|
|            |       |       |       |               |       |                        |       |
| Dr. Imran Ahmad |       | $          | 255,381    |               |       |                        |       |                                      |
|            |       |       |       |               |       |                        |       |
| Lawrence Kenyon |       | $          | 165,209    |               | $          | 14,011                      |       | $                                         | 4,133      |   |
|            |       |       |       |               |       |                        |       |
|                 |            |            |            |                    |            |                             |            |                                           |            |  |  |  |

----

(1)             Theamount in this column for Mr. Kenyon represents the amount of compensationexpense booked for FAS 123R purposes for options which have continued to vestunder the terms of Mr. Kenyon’s consulting agreement.

**FuturePerformance Bonus Eligibility**

Inaccordance with the terms of his employment, the maximum annual cash bonus for2007, as a percentage of 2007 annual base salary, is set at 100% of base salaryfor Mr. Birch, based upon performance criteria established by the CompensationCommittee and the Company’s overall performance.  It is to be expected that if other executiveofficers are hired during 2007, they would also have eligibility to obtain aperformance bonus, however, 

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none of the executive officers is guaranteed abonus.  The Compensation Committee maymake actual cash bonus awards that may be greater or less than the maximumannual cash bonus based on overall corporate performance and individualperformance.

**Retention Bonus Arrangements**

On April 16, 2007, the Board of Directors, acting onthe recommendation of management, modified the bonus program with respect toall employees, including, but not limited to, the then currently employedexecutive officers of the Company.  Underthe revised bonus plan, each employee employed as of April 1, 2007, who isstill employed by the Company at December 31, 2007, will be entitled to receiveone-third (1/3rd)of their target bonus award (the “Retention Bonus”) as a result of remainingwith the Company without reference to individual or Company performance.  Any employee leaving the employ of theCompany prior to that date for any reason, including, but not limited to, resignationor termination, will not be eligible for any part of the Retention Bonus.  The remaining two-thirds (2/3rds) of thetarget bonus, as well as any overachievement bonus, would continue to besubject to the Company’s performance and the individual’s attaining theirpersonal performance goals.

**StockOption Grants**

Asreported in the “Grants of Plan Based-Awards in 2006” table above, we havegranted stock options to our executive officers at various times during 2006 inconnection either with an annual review or upon their initial employment by theCompany.  All stock options grantedduring 2006 to our executive officers vest as to 25% of the shares on each ofthe first four anniversaries of the grant date, provided the individual isstill providing services to the Company at the applicable vesting date.  Unless otherwise noted, all stock options aregranted at the closing price of the Company’s stock on the date of grant, withthe exception that options granted under the 2006 Equity Incentive Plan aregranted with an exercise price equal to the average of the high and low priceper share of our common stock reported by NASDAQ on the grant date.

**Compensationof Directors**

***General***

Thecompensation paid to non-employee directors of the Board is determined by theBoard of Directors based upon the recommendation of the Corporate GovernanceCommittee, all the members of which are independent directors.  Under the Board Compensation Plan recommendedby the Corporate Governance Committee and approved by the Board for the 2006-2007Board term, compensation is paid to non-employee directors as follows:

*Board Membership. *Arestricted stock grant having a value of $50,000 is awarded upon eachnon-employee Director’s election to the Board of Directors at the AnnualMeeting.  For the 2006-2007 Board Term,the non-employee Directors were Messrs. Becker, Eidell, Fox, Freiman, Hanson,Kapoor and Safavi.  The shares ofRestricted Stock do not vest until one year after the date of grant.  Non-employee directors elected during the yearto fill vacancies receive *pro rata*grants.

*Board Chairman. *Inaddition to the restricted stock grant for Board membership, the individualserving as Chairman of the Board, currently Dr. Kapoor, receives an additionalrestricted stock grant with a value at the time of grant of $20,000.  These shares also vest one year after thedate of the grant.  In addition, theindividual serving as the Chairman of the Board receives a cash payment of$48,000 per year (payable in four installments of $12,000 per quarter).

*Corporate Governance Committee Members. *Directors serving asmembers of the Corporate Governance Committee (currently Becker, Fox, Freiman,and Safavi) receive cash compensation of $20,000 per year (payable in fourinstallments of $5,000 per quarter).  Theindividual serving as the Chairman of the Corporate Governance Committee,currently Mr. Hanson, receives cash compensation of $45,000 per year (payablein four installments of $11,250 per quarter).

*Audit Committee Members. *Directors serving as members of the Audit Committee(currently Backer, Eidell, Freiman, and Hanson) receive cash compensation of$20,000 per year (payable in four installments of $5,000 per quarter).  The individual serving as Chairman of theAudit Committee, currently Dr. Safavi, receives cash compensation of $40,000per year (payable in four installments of $10,000 per quarter).

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*Compensation Committee Members. *Directors serving asmembers of the Compensation Committee (currently Becker, Fox, and Hanson)receive cash compensation of $8,000 (payable in four installments of $2,000 perquarter).  The individual serving as Chairmanof the Compensation Committee, currently Mr. Freiman, receives annual cashcompensation of $20,000 (payable in four installments of $5,000 per quarter).

The following table sets forth the compensation paidto our non-employee directors, including annual board and committeeretainer fees, for the fiscal year ended December 31, 2006:

**DirectorCompensation**

 
| **Name(1)**                  | ** ** | ** ** | ** ** | **Fees Earned  or Paid   in Cash** | ** ** | **Restricted  Stock  Awards** | ** ** | **Option  Awards** | ** ** | **Non-Equity  Incentive  Plan  Compensation** | ** ** | **Change in  Pension  Value  and  Nonqualified  Deferred   Comp  Earnings** | ** ** | **All   Other  Compensation** | ** ** | **Total** | ** ** |
|------------------------------|------------|------------|------------|--------------------------------------------------------|------------|-------------------------------|------------|--------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------|------------|
|                         |       |       |       |                                                   |       |                          |       |               |       |                                          |       |                                                                                            |       |                               |       |
| Frank C. Becker(2)(3)(4)     |       | $48,000    |       | $58,872                                                |       | —                        |       | —             |       | —                                        |       | —                                                                                          |       | $106,872                           |       |
|                         |       |       |       |                                                   |       |                          |       |               |       |                                          |       |                                                                                            |       |                               |       |
| Ronald G. Eidell(2)          |       | $20,000    |       | $49,622                                                |       | —                        |       | —             |       | —                                        |       | —                                                                                          |       | $69,622                            |       |
|                         |       |       |       |                                                   |       |                          |       |               |       |                                          |       |                                                                                            |       |                               |       |
| Bernard A. Fox(3)(4)         |       | $28,000    |       | $49,724                                                |       | —                        |       | —             |       | —                                        |       | —                                                                                          |       | $77,724                            |       |
|                         |       |       |       |                                                   |       |                          |       |               |       |                                          |       |                                                                                            |       |                               |       |
| Paul E.  Freiman(2)(3)4)(5)  |       | $60,000    |       | $49,724                                                |       | —                        |       | —             |       | —                                        |       | —                                                                                          |       | $109,724                           |       |
|                         |       |       |       |                                                   |       |                          |       |               |       |                                          |       |                                                                                            |       |                               |       |
| Erick E.  Hanson(2)(3)(4)(6) |       | $53,000    |       | $49,724                                                |       | —                        |       | —             |       | —                                        |       | —                                                                                          |       | $102,724                           |       |
|                         |       |       |       |                                                   |       |                          |       |               |       |                                          |       |                                                                                            |       |                               |       |
| John N. Kapoor(7)            |       | $48,000    |       | $60,464                                                |       | —                        |       | —             |       | —                                        |       | —                                                                                          |       | $108,464                           |       |
|                         |       |       |       |                                                   |       |                          |       |               |       |                                          |       |                                                                                            |       |                               |       |
| Kaveh T. Safavi(2)(4)(8)     |       | $60,000    |       | $49,724                                                |       | —                        |       | —             |       | —                                        |       | —                                                                                          |       | $109,724                           |       |

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(1)             Doesnot include Mr. Herrera, our former President and CEO, because, as an employeeof the Company, he did not receive separate compensation for his services as adirector.  Mr. Herrera’s compensation isset forth in the Summary Compensation Table above.

(2)             Messrs.Becker, Eidell, Freiman, Hanson, and Safavi serve as members of the AuditCommittee of the Board of Directors.

(3)             Messrs.Becker, Fox, Freiman, and Hanson serve as members of the Compensation Committeeof the Board of Directors.

(4)             Messrs.Becker, Fox, Freiman, Hanson and Safavi serve as members of the CorporateGovernance Committee of the Board of Directors.

(5)             Mr.Freiman serves as the Chairman of the Compensation Committee of the Board ofDirectors.

(6)             Mr.Hanson serves as the Chairman of the Corporate Governance Committee of theBoard of Directors.

(7)             Dr.Kapoor serves as the Chairman of the Board of Directors.

(8)             Dr.Safavi serves as the Chairman of the Audit Committee of the Board of Directors.

**CompensationCommittee Interlocks and Insider Participation**

TheCompensation Committee consists of Messrs. Becker, Fox, Freiman, and Hanson. Nomember of the Compensation Committee was at any time during the fiscal yearended December 31, 2006, or formerly, an officer or employee of NeoPharm, Inc.or any subsidiary of NeoPharm, Inc., nor has any member of the CompensationCommittee had any relationship with NeoPharm, Inc. during the fiscal year endedDecember 31, 2006 requiring disclosure under Item 404 of the Regulation S-Kunder the Securities Exchange Act of 1934.

Noneof our executive officers has served as a director or member of thecompensation committee (or other committee serving an equivalent function) ofany other entity, one of whose executive officers served as a director ormember of the Compensation Committee of NeoPharm, Inc.

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**ITEM12.    SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND  RELATED STOCKHOLDER MATTERS.**

Except asotherwise noted, the following table sets forth certain information regardingbeneficial ownership of shares of the Common Stock as of April 20, 2007 (unlessotherwise noted) by (i) all those known by the Company to be beneficial ownersof more than 5% of its outstanding Common Stock, (ii) each director of theCompany, (iii) each of the named executive officers, and (iv) all executivesand directors as a group.  Unlessotherwise noted, each person’s address is in care of NeoPharm, Inc., 1850Lakeside Drive, Waukegan, Illinois 60085. 
| **Name**                                                      | ** ** | ** ** | ** ** | **Amount and Nature of  Beneficial Ownership(1)** | ** ** | **Percent of  Class** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------|------------|----------------------------|------------|
|                                                          |       |       |       |                                                                  |       |
| John N. Kapoor, Ph.D.                                         |       | 5,403,738  | (2)        | 19.22                                                                 | %          |
| John N. Kapoor 1994A  Annuity Trust                           |       | 1,955,935  | (3)        | 6.96                                                                  |       |
| Nikos Hecht                                                   |       | 2,525,110  | (4)        | 8.99                                                                  |       |
| GAM Holding AG                                                |       | 1,706,797  | (5)        | 6.07                                                                  |       |
| Jeffrey W. Sherman,  M.D.                                     |       | 367,456    | (6)        | 1.29                                                                  |       |
| Timothy Walbert                                               |       | 19,750     | (7)        | *                                                                     |       |
| Frank C. Becker                                               |       | 50,462     |       | *                                                                     |       |
| Ronald G. Eidell                                              |       | 101,841    | (8)        | *                                                                     |       |
| Bernard A. Fox                                                |       | 16,030     |       | *                                                                     |       |
| Paul E. Freiman                                               |       | 15,430     |       | *                                                                     |       |
| Erick E. Hanson                                               |       | 57,681     | (9)        | *                                                                     |       |
| Kaveh T. Safavi, M.D.                                         |       | 52,284     | (10)       | *                                                                     |       |
| Laurence P. Birch                                             |       | -0-        |       | *                                                                     |       |
| Guillermo Herrera                                             |       | 191,751    | (11)       | *                                                                     |       |
| Imran Ahmad, Ph.D.                                            |       | -0-        |       | *                                                                     |       |
| Lawrence A. Kenyon                                            |       | 172,000    | (12)       | *                                                                     |       |
| Ronald Pauli                                                  |       | 2,000      |       | *                                                                     |       |
| All executive officers  and directors as a group (14 persons) |       | 6,450,423  | (13)       | 22.29                                                                 |       |

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*            Indicates ownership ofless than 1%.

(1)             Basedon 28,086,688 shares of Common Stock outstanding as of April 20, 2007.  Beneficial ownership is determined inaccordance with the rules of the Securities and Exchange Commission (the “Commission”)and generally includes voting or investment power with respect tosecurities.  Shares of Common Stocksubject to options or warrants exercisable or convertible within 60 days aredeemed outstanding for purposes of computing the percentage of the person orgroup holding such options.

(2)             Includes21,412 shares that may be acquired pursuant to vested options, 1,509,085 sharesheld by the John N. Kapoor Trust, dated 9/20/89 (the “JNK Trust”), of which Dr.Kapoor is the sole trustee and sole beneficiary, and 1,144,586 shares held byEJ Financial/NEO Management, L.P. (the “Limited Partnership”) of which John N.Kapoor is Managing General Partner.  Theamount shown also includes:  379,500shares which are held by the John and Editha Kapoor Charitable Foundation (the “CharitableTrust”), of which Dr. Kapoor is the sole trustee; 1,955,935 shares which areowned by the John N. Kapoor 1994-A Annuity Trust (the “Annuity Trust”) of whichthe sole trustee is Mr. Rao Akella, who is an employee of EJ FinancialEnterprises, Inc., of which Dr. Kapoor is the sole shareholder and President;and 393,220 shares which are owned by four trusts which have been establishedfor Dr. Kapoor’s children (the “Children’s Trusts”) of which the sole trusteeis Mr. Akella.  Dr. Kapoor does not haveor share voting, investment or dispositive power with respect to the sharesowned by the Annuity Trust (the shares held by the Annuity Trust are alsoreported separately as the Annuity Trust is the owner of 5% or more of theCommon Stock) or the Children’s Trusts and Dr. Kapoor disclaims beneficialownership of these shares as well as the shares held by the Charitable Trust.

(3)             Thesole trustee of the John N. Kapoor 1994-A Annuity Trust (the “Annuity Trust”)is Mr. Rao Akella, who also serves as trustee for four trusts which have beenestablished for the children of Dr. Kapoor (the “Childrens’ Trusts”) and whichcollectively own 393,220 shares.  Mr.Akella is an employee of EJ Financial Enterprises, Inc., of which Dr. Kapoor isthe sole shareholder and President.  Theshares held by the Children’s Trusts are not included in the shares reported bythe Annuity Trust.

(4)             Beneficialownership of the shares has been reported on a Schedule 13G filed January 19,2007 by Mr. Nikos Hecht as the managing member of each of Aspen Advisors (whichreports beneficial ownership of 262,890 shares) and Sporis Advisors (whichreports beneficial ownership of 1,322,100 shares) and as the sole member of themanaging member of Sporis Capital (which reports beneficial ownership withSportis Partners, of 940,110 shares) and as the owner of a majority of themembership interests in each of Sporis Capital, Aspen Advisors and SporisAdvisors.  The principal address for Mr.Hecht 

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and Aspen Advisors is 152W. 57th Street, New York, NY 10019.  Theprincipal address of each of Sporis Advisors, Sporis Partners and SporisCapital is 314 S.  Galena Street, Suite300, Aspen, CO 816111.

(5)             Theaddress for GAM Holding AG (“GAM”) is Klaustrasse 10, 8008 Zurich,Switzerland.  Ownership is as reported byGAM on a Schedule 13G filed on January 12, 2007.  GAM states in its Schedule 13G filing that,as of December 31, 2006, the Company’s shares are held by its subsidiaries, GAMInternational Management Limited and GAM London Ltd., and that:  “No subsidiary of GAM holds more than 5% ofthe outstanding voting securities.”

(6)             Includes364,175 shares that may be acquired pursuant to options exercisable as of April27, 2007 or that will become exercisable within 60 days of April 27, 2007.

(7)             Includes18,750 shares that may be acquired pursuant to options exercisable as of April27, 2007 or that will become exercisable within 60 days of April 27, 2007.

(8)             Includes80,000 shares that may be acquired pursuant to options exercisable as of April27, 2007 or that will become exercisable within 60 days of April 27, 2007.

(9)             Includes33,637 shares that may be acquired pursuant to options exercisable as of April27, 2007 or that will become exercisable within 60 days of April 27, 2007.

(10)       Includes27,312 shares that may be acquired pursuant to options exercisable as of April27, 2007 or that will become exercisable within 60 days of April 27, 2007.

(11)       Includes125,000 shares that may be acquired pursuant to options exercisable as of April27, 2007 or that will become exercisable within 60 days of April 27, 2007.

(12)       Includes172,000 shares that may be acquired pursuant to options exercisable as of April27, 2007 or that will become exercisable within 60 days of April 27, 2007.

(13)       Includes842,286 shares that may be acquired pursuant to options exercisable as of April27, 2007 or that become exercisable within 60 days of April 27, 2007.

**EquityCompensation Plans**

The followingtable sets forth certain information as of December 31, 2006, with respect tocompensation plans under which shares of NeoPharm, Inc.’s Common Stock may beissued.

**EquityCompensation Plan Information**

 
| **Plan category**                                  | ** ** | ** ** | ** ** | **Number of securities to be  issued upon exercise of  outstanding options** | ** ** | **Weighted-average  exercise price of  outstanding options** | ** ** | **Number of securities  remaining available  for future issuance(2)** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
|                                                    |       |       |       |                                                                                                                 |       |                                                                        |       |
| Equity  compensation plans approved by stockholders(1)  |       | 2,765,808  |       | $                                                                                                                    | 15.00      |                                                                        | 360,593    |                                                                                           |
|                                                    |       |       |       |                                                                                                                 |       |                                                                        |       |
| Equity  compensation plans not approved by stockholders |       | —     |       | —                                                                                                               |       | —                                                                      |       |
| Total                                                   |       | 2,765,808  |       | $                                                                                                                    | 15.00      |                                                                        | 360,593    |                                                                                           |

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(1)             Includesthe 1998 Equity Incentive Plan (the “1998 Plan”) and the 2006 Equity IncentivePlan (the “2006 Plan”).  The 1998 Planwas replaced in June 2006 by the 2006 Plan. Accordingly, no further equity derivative securities can be issued underthe 1998 Plan.  The 1998 Plan and the 2006Plan are each described in more detail in Note 6 in the Notes to ConsolidatedFinancial Statements in this Annual Report on Form 10-K.

(2)             Underthe terms of the 2006 Plan, securities will again become available for issuanceunder the 2006 Plan if the previously granted options or other awards expirewithout being exercised or are cancelled or terminated for any reason otherthan expiration or termination of the 2006 Plan.

**ITEM 13****                                     CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE**

**Certain Relationships And RelatedTransactions**

There were notransactions since January 1, 2006 through the date of this report, or anycurrently proposed transactions, in which the Company was or is to be aparticipant and the amount involved exceeds $120,000, and in which any relatedperson had or will have a direct or indirect material interest except for thecompensation matters described elsewhere in this report.

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TheCompany has not yet adopted a written related-person transactions policy.  However, our Audit Committee has beendelegated the authority to review all related party transactions for potentialconflict of interest situations and, as appropriate, approves or disapprovessuch related party transactions.  Nomember of the Audit Committee who has any interest in a specific related partytransaction may participate in the review of such transaction.  During the upcoming year, the Audit Committeewill give full consideration to the adoption of a formal policy regardingrelated-person transactions and, if adopted, promptly post it on the Company’swebsite.

During2006, the Company paid $80,000 to The Thomson Corporation for investorrelations services and technical literature. In August 2006, The Thomson Corporation acquired Solucient, LLC, ahealthcare information and business intelligence company at which Dr. Kaveh T.Safavi, a director of the Company, has been employed since 2002, currently asits Senior Vice President and Chief Medical Officer.  The Company’s transactions with The ThomsonCorporation were conducted without any involvement by Dr. Safavi and theCompany believes that such transactions were conducted at arms’ length and uponthe same terms that would have been obtained absent any relationship with Dr.Safavi.

**Board Determination of Independence**

Under applicable rules of the NASDAQ Stock Market, adirector will only qualify as an “independent director” if, in the opinion ofour board of directors, that person does not have a relationship which wouldinterfere with the exercise of independent judgment in carrying out theresponsibilities of a director.  Ourboard of directors has determined that none of Frank Becker, Ronald Eidell,Bernard Fox, Paul Freiman, Erick Hanson and Kaveh Safavi has a relationshipwhich would interfere with the exercise of his or her independent judgment incarrying out the responsibilities of a director and, therefor, that each ofthese directors is an “independent director’ as defined under NASDAQ Rule4200(a)(15).

Indetermining the independence of Mr. Eidell, our board of directors took intoconsideration NASDAQ’s recent interpretation of Rule 4200(a)(15) which nolonger considers a director’s service as an interim officer of the Company fora period of less than one year, nor the receipt of cash and equity compensationfor such service, as disqualifications from a determination of independence,though his assistance in the preparation of the Company’s financial statementswhile serving as interim President and CEO from March 2005 until October 2005does not allow him to be considered as an independent member of the AuditCommittee.

TheBoard of Directors has determined that each of the current members of theCompensation Committee and Corporate Governance Committee meets theindependence requirements applicable to those committees prescribed by theNASDAQ.  In addition, the Board ofDirectors has determined that each member of the Audit Committee meets thecriteria for independence established by the Securities and ExchangeCommission  (“SEC”) and that all themembers of the Audit Committee are independent directors for NASDAQ purposes,with the exception of Mr. Eidell who has been appointed to the Audit Committeepursuant to an NASDAQ approved exception. See Item 10 - “Audit Committee.”

**ITEM 14.               PRINCIPALACCOUNTING FEES AND SERVICES**

**PrincipalAccounting Fees and Services**

Theaggregate fees billed for professional services rendered by KPMG LLP for fiscalyears 2006 and 2005 were as follows:

|                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Audit fees(1)          |       | $        | 457,505    |     | $          | 420,255 |   |
| Audit related  fees(2) |       | 91,200   |       | 163,200  |       |
| Tax fees(3)            |       |     |       | 16,400   |       |
| All other fees         |       | —   |       | —   |       |
| Total                  |       | $        | 548,705    |     | $          | 599,855 |   |

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(1)         Audit fees consisted offees for the audit of our financial statements for fiscal years 2006 and 2005,respectively, and reviews of our quarterly financial statements.

(2)         Audit related feesinclude fees paid to KPMG during fiscal years 2006 and 2005 for services thatare reasonably related to the performance of the audit or review of thefinancial statements.  Such fees are notincluded in Audit fees and consist of the review of registration statements andthe issuance of comfort letters and consents. Also included in audit related fees are fees for accounting adviceprovided by KPMG.

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(3)         Tax fees consisted of taxfees for preparation of tax returns.  Wedid not pay any tax fees in the fiscal year ended December 31, 2006.

**AuditCommittee Pre-Approval Policies and Procedures**

TheAudit Committee has adopted policies and procedures that require pre-approvalof all audit, audit-related, tax and other services rendered by the Company’sindependent registered public accounting firm. Under the policy, an auditor services schedule is prepared at thebeginning of each year that describes each type of service to be provided bythe independent registered public accounting firm and the projected fees foreach such service.  The Audit Committeereviews and approves in advance, as appropriate, each service listed on theauditor services schedule and the projected fees for each such service.  Projected fee amounts listed on the auditorservices schedule may be updated, as appropriate in the Audit Committee’sdiscretion, at each regularly scheduled meeting of the Audit Committee.  The Audit Committee may also pre-approveparticular services on a case-by-case basis. The policy allows the Audit Committee to delegate pre-approval authorityto one or more members of the Audit Committee. Any decisions made by the designated pre-approval member are reported,for informational purposes only, to the full Audit Committee at its nextmeeting.

**PART IV**

**ITEM 15.****                      EXHIBITS ANDFINANCIAL STATEMENT SCHEDULES**

Thefollowing documents are being filed as part of this report on Form 10-K/A:

(3)         Exhibits:
| Exhibit  Number | ** ** | ** **                                                                                                                                                    | **Description of Document** | ** ** | ** ** |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------|------------|------------|
|            |       |                                                                                                                                                          |                                  |
| 31.1            |       | Certification Pursuant to Rule 13(a)-14(a) of the Securities Exchange  Act of 1934, as amended, as pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 |                                  |

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned hereunto duly authorized.
|        | NEOPHARM, INC. |
|--------|----------------|
|   |           |   |
|   |           |   |
|   | By:            | /s/ Laurence P. Birch |
|   |           | Laurence P. Birch, |
|   |           | President and Chief Executive Officer (Principal  Executive Officer) |
|   |           | and Acting Chief Financial Officer (Principal  Financial Officer) |

 

Dated:  April 27, 2007

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