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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)

|ý | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------

For the Fiscal Year Ended December 31, 2001

Or

|o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the Transition Period
From            To

COMMISSION FILE NUMBER 33-90516

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NEOPHARM, INC.(Exact Name of Registrant as Specified in its Charter)

|DELAWARE(State or other jurisdiction
of incorporation or organization) |  | 51-0327886(I.R.S. Employer Identification Number)
|---------------------------------------------------------------------- |  | -------------------------------------------------
|                                                                       |  | 60045(Zip Code)                                  

150 FIELD DRIVE
SUITE 195
LAKE FOREST, ILLINOIS(Address of Principal Executive Offices)

(847) 295-8678(Registrant's Telephone Number, Including Area Code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.0002145 PAR VALUE(Title of class)

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

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

The
aggregate market value of the Registrant's common stock held by non-affiliates (affiliates being, for these purposes only, directors, executive officers and holders of 5%
of the registrant's stock) of the registrant, par value $.0002145 per share, (based on the closing price of such shares on the NASDAQ on March 1, 2002) was $172,803,738. As of March 1,
2002 there were 16,252,529 shares of Common Stock outstanding.

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FORM 10-K TABLE OF CONTENTS

|PART I   |  |                                                                                       |  | Page
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|Item 1.  |  | Business                                                                              |  | 3   
|Item 2.  |  | Properties                                                                            |  | 25  
|Item 3.  |  | Legal Proceedings                                                                     |  | 25  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 25  
|PART II  |  |                                                                                       |  |     
|Item 5.  |  | Market for the Registrant's Common Equity and Related Stockholder Matters             |  | 26  
|Item 6.  |  | Selected Financial Data                                                               |  | 27  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 28  
|Item 8.  |  | Financial Statements and Supplemental Data                                            |  | 32  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |  | 32  
|PART III |  |                                                                                       |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 33  
|Item 11. |  | Executive Compensation                                                                |  | 35  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 36  
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 36  
|PART IV  |  |                                                                                       |  |     
|Item 14. |  | Exhibits and Financial Statement Schedules                                            |  | 37  
|         |  | Signatures                                                                            |  | 38  

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BUSINESS

OVERVIEW

NeoPharm is a biopharmaceutical company engaged in the research, development and commercialization of drugs for the treatment of various cancers. We currently
have a portfolio of eight anti-cancer drugs, six of which are in clinical trials. We have built our drug portfolio based on our two novel proprietary technology platforms: the proprietary
NeoLipid electrostatic liposome drug delivery platform and a tumor-targeting platform.

We
currently have eight products under development. Under our NeoLipid platform, we began Phase I/II clinical trials in March 2001 for LE-AON, our electrostatic
liposome encapsulated gene inhibitor for radiation resistant tumors, and we submitted an investigational new drug application (IND) in March 2001 and initiated Phase I/II clinical trials in
September 2001 for electrostatic liposome encapsulated mitoxantrone, or LEM. Pre-clinical studies are currently in progress for electrostatic liposome encapsulated SN38, or
LE-SN38, and electrostatic liposome encapsulated epirubicin, or LEE. Under our tumor-targeting platform, we are currently in Phase I/II clinical trials for IL13-PE38, a
tumor-targeting product using intratumoral administration for the treatment of brain tumors and systemic administration for the treatment of kidney cancer. We began Phase I/II clinical trials in the
fourth quarter of 2000 for our other tumor-targeting product, SS1 (dsFv)-PE38, for the treatment of various forms of cancer. In addition, in February 1999, we entered into a license agreement
with Pharmacia Corporation ("Pharmacia") to develop and commercialize two of our products: liposome encapsulated doxorubicin, or LED, and liposome encapsulated paclitaxel, or LEP.

As
of March 1, 2002, we had 72 full time employees.

MARKET OVERVIEW

Cancer is the second leading cause of death in the United States. The American Cancer Society estimates that doctors will diagnose 1.3 million new cases of
cancer in the United States in 2002. The National Cancer Institute (NCI) estimates that the annual cost of cancer is approximately $157 billion, including $56 billion in direct medical
costs and $16 billion for morbidity costs, which includes the cost of lost productivity.

Cancer
is characterized by uncontrolled cell division resulting in the growth of a mass of cells commonly known as a tumor. Cancerous tumors can arise in almost any tissue or organ and
cancer cells, if not eradicated, spread, or metastasize, throughout the body. Cancer is believed to occur as a result of a number of factors, including heredity and environmental factors.

For
the most part, cancer treatment depends on the type of cancer and the stage of disease progression. Generally, staging is based on the size of the tumor and whether the cancer has
metastasized. Following diagnosis, solid tumors are typically surgically removed or the patient is given radiation therapy. Chemotherapy is the principal treatment for tumors that are likely to or
have metastasized. Chemotherapy involves the administration of cytotoxic drugs, which are designed to kill cancer cells, or the administration of hormones, which affect the growth of tumors.

Because
in most cases metastatic cancer is fatal, cancer specialists attempt to attack the cancer aggressively and with as many therapies as available and with as much dosage as the
patient can tolerate. Since chemotherapy attacks both normal and cancerous cells, treatment often tends to result in complicating side effects. Additionally, cells which have been exposed to several
rounds of chemotherapy develop a resistance to the cancer drugs that are being administered. This is known as "multi-drug resistance." The side effects of chemotherapy often limit the
effectiveness of treatment. Cancers often recur and mortality rates remain high. Despite the large sums of money spent on cancer research, current treatments are inadequate and improved cancer agents
are needed.

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The
products we currently have under development target a broad range of solid tumors. The table below shows the incidence and mortality estimated for the year 2002 for various types of
solid tumor cancers that our products seek to treat:

Cancer Indication

New Cases

DeathsBreast

205,000

40,000Prostate

189,000

30,200Lung

169,400

154,900Colorectal

148,300

56,600Kidney

31,800

11,600Head and Neck

28,900

7,400Ovarian

23,300

13,900Brain

17,000

13,100




BUSINESS STRATEGY

Our corporate strategy is to become a leader in the research, development and commercialization of new and innovative anti-cancer treatments. Our
strategy involves the following elements:

Focus on the growing cancer market.

The worldwide cancer drug market was estimated at $20 billion in 2001, representing a 4% increase over 2000. Despite the large sums of money spent, cancer
is the second leading cause of death in the
United States, and current treatments remain inadequate. Given the life-threatening nature of cancer and the lack of effective treatments, the FDA has adopted procedures to accelerate the
approval of cancer drugs. We intend to use our expertise in the field of cancer research to target this significant market opportunity for cancer drug development.

Develop our existing product portfolio.

We have a portfolio of eight anti-cancer drugs, six of which have advanced to clinical trials. We intend to further develop six of these products both
by expanding our internal resources and by continuing to collaborate with leading corporate, governmental and educational institutions. We have previously licensed Pharmacia to develop and
commercialize two of these products. We believe this strategy will maximize the commercial value of our products by giving us the option to either directly market our products or to license our
products on more favorable terms.

Create new products by capitalizing on our unique NeoLipid platform.

We intend to use our NeoLipid electrostatic liposome technology platform to create new products in two ways: by extending the patent life of existing cancer drugs
and by utilizing our unique platform to develop new drugs. We believe that several widely used cancer drugs are nearing patent expiration. Many of these drugs, while effective, have been limited in
their use because of adverse side effects and difficulties in administration. Using our NeoLipid technology, we believe opportunities exist for us to increase the usefulness of these compounds as
improved anti-cancer treatments. When a drug is combined with another agent or delivery system in a novel way, its patent life may be extended. We are intending to extend the marketing
exclusivity for paclitaxel, doxorubicin and mitoxantrone through our LEP, LED and LEM products, respectively.

We
believe that our electrostatic liposome technology may provide us with a platform for the development of novel therapeutic agents for cancer drug development. For example, we are
developing

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LE-AON, the encapsulation of a gene therapy which inhibits a protein associated with radiation resistant tumors, to treat various solid tumors.

Reduce risk through a broad portfolio of products.

We are currently developing eight products based on our electrostatic liposome and tumor-targeting platforms. We are developing multiple products simultaneously
in order to reduce the impact of any single product failure. In addition, by broadening our product portfolio, we increase our flexibility to
eliminate products which we determine have less market potential while applying additional resources to products which show promise.

Develop specialized sales and marketing capabilities for the United States and form strategic international collaborations for foreign markets.

Under the terms of our current license agreement with Pharmacia, we will have the right to purchase co-promotion rights for LEP and LED in the United
States. We intend to develop a specialized cancer sales and marketing capability within the United States for LEP, LED and other products that we may develop. With respect to foreign sales, we may
enter into collaborations with established international drug companies.

OUR TECHNOLOGY

NeoLipid Electrostatic Liposome Drug Delivery Platform

Liposomes, microscopic spheres composed of lipid membranes, were discovered in the late 1960's and have been extensively investigated as drug delivery vehicles.
Liposomes were believed to be particularly suitable for the delivery of toxic drugs, such as cancer drugs, because drugs encapsulated in liposomes are preferentially absorbed into certain organs such
as the liver, spleen and gall bladder. Furthermore, liposomes and the cytotoxic agents encapsulated therein, are not readily absorbed by the nervous system or key organs, like the heart, thereby
helping to reduce toxicity.

While
liposomes were initially viewed as an important advance in drug delivery technology, there have been limited commercial successes. We estimate that in excess of $700 million
has been spent on the research and development of liposomes, resulting in the commercialization of only two liposomal drugs, doxorubicin and amphotercin B.

To
date, liposomes have been commonly produced with uncharged lipids. Attempts at using uncharged liposomes as drug delivery vehicles have resulted in many difficulties, including:



We
believe that our second generation, proprietary electrostatic liposome technology may overcome these limitations. Our electrostatic liposome technology uses charged lipids rather than
neutral lipids. By encapsulating a drug within an oppositely charge liposome, we achieve a powerful electrostatic attraction between these two agents which creates a stable drug formulation. We
believe

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that our proprietary electrostatic liposome technology provides a number of advantages over previous liposome products, including the following:







Tumor-Targeting Platform

The products in our tumor-targeting platform each consist of a single molecule composed of two parts, a tumor-targeting mechanism and a cytotoxic agent. Our tumor
targeting mechanism is a protein or monoclonal antibody that detects and binds to a specific marker on the surface of cancer cells. Since cancer cells may have unique markers on their surface, a
tumor-targeting mechanism with the appropriate specificity for those cells may be used to deliver the cytotoxic agent directly to the tumors. The key to making a useful tumor-targeting drug is the
targeting mechanism that selects tumor cells while ignoring healthy cells.

Two
tumor-targeting products have been approved by the FDA and commercialized for the treatment of cancer: American Home Products Corporation's Mylotarg® in May 2000
for relapsed adult acute myloid leukemia and Ligand Pharmaceuticals Incorporated's Ontak® in February 1999 for

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persistent or recurrent cutaneous T-cell lymphoma. While these drugs are being marketed for leukemia, our tumor-targeting products are being developed for the larger solid tumor market.

We
and our collaborative partners, the FDA and the National Institutes of Health, referred to as NIH, have identified two targeting mechanisms which we believe possess the requisite
characteristics for successful use in tumor-targeting anti-cancer products. Both IL13, and SS1(dsFv), target receptors which are present in significantly higher numbers on solid tumor
cells than on healthy cells. Specifically, IL13 targets receptors in kidney cancer, brain cancer, Kaposi's sarcoma and possibly breast cancer, and SS1(dsFv) targets receptors in ovarian cancer and
head and neck cancers. We use PE38 as the cytotoxic component in both of our tumor-targeting products. We selected PE38 because of its effective cell killing action on a wide variety of tumor types.

Based
upon our pre-clinical studies, we believe our tumor-targeting products may provide the following benefits:



OUR PRODUCTS

We have utilized both our electrostatic liposome platform and our tumor-targeting platform to develop a group of novel anti-cancer products.
Presently, we have six products in clinical trials and two in preclinical development.

NeoLipid Electrostatic Liposome Drug Delivery Platform

Liposome Encapsulated Antisense Oligonucleotides

Product Description.We have developed an electrostatic liposome encapsulated antisense cRaf oligonucleotide,
LE-AON, which we believe inhibits the expression of the cRaf protein and thus may have potential to enhance the effectiveness of radiation in the treatment of certain cancers. cRaf is a
protein which is expressed at higher levels in cancer cells which are resistant to radiation therapy than in healthy cells. By inhibiting expression of this gene, the cell becomes more susceptible to
radiation therapy. In addition, further pre-clinical studies indicate that LE-AON may be effective in enhancing the effect of chemotherapy in the treatment of various forms of
cancer. Our liposomes provide a non-viral method of delivering the gene inhibitor into the cell. An additional advantage of LE-AON is that it can be administered intravenously
and is relatively easy to manufacture.

Development Status.We intend to develop LE-AON as a treatment for radiation resistant tumors and as an
enhancement to standard chemotherapeutic agents. In our pre-clinical studies, intravenous administration of LE-AON appeared to inhibit cRaf gene expression in tumor tissue.
When LE-AON was given in combination with radiation treatment, tumor regression for at least 60 days was observed. We filed an investigational new drug application for
LE-AON for patients with radiation resistant solid tumors in July, 2000, and began Phase I/II clinical trials for LE-AON in the first quarter of 2001.

Liposome Encapsulated Mitoxantrone

Product Description.We recently encapsulated mitoxantrone in our NeoLipid system. Mitoxantrone is used for the treatment of
prostate cancer and multiple sclerosis, but its use is limited

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due to cardiac toxicity. We believe LEM will demonstrate a safety and efficacy advantage over unencapsulated mitoxantrone.

Development Status.We submitted an IND in March 2001 and initiated Phase I/II clinical trials in
September 2001 for LEM. Pre-clinical studies in LEM demonstrated a survival advantage, in addition to a better side effect profile, when compared with unencapsulated mitoxantrone.

Liposome Encapsulated Paclitaxel

Product Description.LEP is an electrostatic liposome encapsulated formulation of the widely-used cancer drug,
paclitaxel. Paclitaxel is marketed by Bristol-Myers Squibb Company under the trade name "Taxol®" and is used in the treatment of a number of tumors, including breast, ovarian and lung
cancer. Despite paclitaxel's wide use and its anti-tumor characteristics, its effectiveness is limited by its side effects, which can include nausea, vomiting, hair loss and nerve and
muscle pain. Because of the chemical characteristics of paclitaxel, it cannot be introduced into the body unless it is first formulated in a toxic mixture of castor oil and ethanol, which requires
premedication of the patient. In addition, paclitaxel must be infused over a period of at least three hours.

We
believe our technology may overcome many of the current limitations of paclitaxel by utilizing cardiolipin, a naturally occurring negatively charged lipid found in cardiac tissue, to
increase the solubility of paclitaxel. We have been able to standardize the preparation of cardiolipin through the development of a proprietary form of synthetic cardiolipin. Using cardiolipin
eliminates the need for administration of castor oil and ethanol and reduces the need for the accompanying premedication. Since paclitaxel has a positive charge and cardiolipin has a negative charge,
cardiolipin electrostatically combines with the paclitaxel to form a stable product that can be freeze dried and easily reconstituted. Based on preclinical studies, we believe another potential
advantage of LEP may be the ability of cardiolipin to overcome multi-drug resistance. As a result, we may be able to significantly increase the effectiveness of LEP against tumors, thereby
maximizing the killing of otherwise resistant cells.

Development Status.LEP is being developed for various solid tumors. We believe LEP is the first, and only, liposomal form of
paclitaxel to enter clinical trials. Enrollment of patients in our Phase I/II clinical trials for LEP was completed in April 2000 by our licensee, Pharmacia. These Phase I/II trials involved
the treatment of 31 cancer patients, none of whom were then responding to other forms of treatment. Phase I/II trials have provided evidence that LEP may be able to be administered at higher levels
than paclitaxel is currently administered, with fewer side effects. Although not designed to measure efficacy, six patients in the Phase I/II trial experienced tumor reductions greater than 35%. The
tumors in twelve other patients did not increase in size after 12 weeks, and in four of these twelve patients, the tumors were still stable in size one year later. Some patients received significantly
more cycles of LEP than can be given with unencapsulated paclitaxel, including two patients who received greater than 30 cycles of LEP. None of the patients showed signs of the nerve and muscle pain
commonly associated with paclitaxel, and most patients did not experience the hair loss or nausea often associated with paclitaxel treatment.

Currently,
our licensee, Pharmacia, is responsible for the commercial development of LEP, including conducting clinical trials and working with the FDA to successfully commercialize the
drug. As of the date of this filing, we are endeavoring to obtain definitive information on the development status of LEP from Pharmacia. See "Collaborative Relationships and
LicensesPharmacia License Agreement".

Liposome Encapsulated Doxorubicin

Product Description.LED is an electrostatic liposome encapsulated formulation of the widely used cancer drug doxorubicin.
Doxorubicin is used to treat a number of cancers including solid tumors and leukemia, a form of blood cancer. Though effective in treating these and other cancers, doxorubicin

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may produce irreversible heart damage. The risk of heart failure increases with increasing total cumulative doses of doxorubicin. Doxorubicin also causes suppression of white blood cell production,
which may limit the dose that may be administered, and produces side effects such as nausea, vomiting and hair loss. Clinical results to date suggest that LED may reduce these side effects. In
addition, since doxorubicin has a positive charge and cardiolipin has a negative charge, cardiolipin electrostatically binds to the doxorubicin to form a stable product that can be freeze dried
and easily reconstituted. We believe LED, unlike other liposomal doxorubicin products currently available, may reduce multi-drug resistance and be easier to manufacture because of its
formulation with cardiolipin.

Development Status.We intend to develop LED for breast, prostate and blood cancers. We completed a Phase I/II trial in
May 1998, which provided evidence that LED demonstrated lower toxicity when compared to unencapsulated doxorubicin and could be given at approximately double the current standard dose for
doxorubicin. In June 1998, Phase II clinical trials for the treatment of advanced prostate cancer in 10 patients were initiated. After four rounds of treatment, the level of prostate specific
antigen, an indicator of the extent of disease progression, decreased by greater than 35% in two patients and stabilized in two other patients. These four patients reported a significant reduction in
pain.

Currently,
our licensee, Pharmacia, is responsible for the commercial development of LED, including conducting clinical trials and working with the FDA to successfully commercialize the
drug. As of the date of this filing, we are endeavoring to obtain definitive information on the development status of LED from Pharmacia. See "Collaborative Relationships and
LicensesPharmacia License Agreement".

Liposome Encapsulated SN38

Product Description.SN38 is the major active metabolite of Camptosar, a product marketed by our partner, Pharmacia, for the
treatment of colorectal cancer. Historically, although SN38 is known to be highly toxic to tumor cells, there is no practical way to deliver the drug to destroy tumor cells. Currently, the only way to
deliver SN38 to cancer cells is to administer an irinotecan such as Camptosar, which is then converted into SN38 in the tumor cells, and results in cell death.
Unfortunately, only a small percentage of Camptosar is converted in the tumor, and this leads to some severe side effects. In 2001, we were able to successfully encapsulate SN38 in our NeoLipid
system. Pre-clinical studies are being conducted to evaluate safety and efficacy advantages of LE-SN38 over unencapsulated SN38.

Development Status.Preclinical research is currently underway and we expect to file an IND in the first half of 2002. As a
result, we anticipate the initiation of Phase I clinical trials before the end of 2002.

Liposome Encapsulated Epirubicin

Epirubicin is a drug that is widely used in Europe for the treatment of breast cancer and was recently introduced in the U.S. market by our collaborative partner,
Pharmacia. We believe LEE will demonstrate a safety and efficacy advantage over unencapsulated epirubicin. We have recently encapsulated epirubicin in our liposomes and intend to evaluate its
properties as a treatment for breast cancer. Preclinical studies are currently underway to evaluate the profile of this drug, and we expect to file an IND late in 2002.

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Tumor-Targeting Platform

IL13-PE38

Product Description.IL13-PE38 is a tumor-targeting agent we are developing for the treatment of kidney and brain
cancers. Research by scientists at the FDA and the NIH has demonstrated that some solid tumors express high numbers of IL13 receptors on their cell surfaces in comparison with healthy cells.
IL13-PE38 links the cytotoxin PE38 to the tumor-targeting agent IL13. When administered, IL13-PE38 is expected to target the IL13 receptors, thereby killing the tumor cells
with minimal damage to the healthy cells.

In
September 1997, we entered into an exclusive worldwide licensing agreement with the FDA and the NIH giving us rights to develop and commercialize IL13-PE38. We also
entered into a cooperative
research and development agreement with the FDA for the clinical and commercial development of IL13-PE38 as an anti-cancer agent. We believe this is the first collaboration
between the FDA and a biopharmaceutical company.

Development Status.We are evaluating IL13-PE38 as a treatment for kidney and brain cancers. In preclinical
studies, IL13-PE38 has provided evidence of tumor regression in a number of cancers, which suggests the potential for a favorable toxicity profile. We filed an investigational new drug
application for IL13-PE38 in June 1999 for the treatment of refractory kidney cancer and entered Phase I/II clinical trials in October 1999 for this indication. In our Phase
I/II clinical trials we determined the maximum tolerated dose and schedule and we are currently working to establish the proper dosage level and schedule. We also filed an investigational new drug
application in March 2000 for brain cancer and entered Phase I/II clinical trials for brain cancer in the fourth quarter of 2000. In addition, in late 2001, NeoPharm received orphan drug
designation for IL13-PE38 for the treatment of glioblastoma multiforme and anaplastic astrocytoma, two very deadly forms of brain cancer with practically no effective treatment options.

Preliminary
Phase I/II data from two ongoing clinical trials for the treatment of brain tumors was presented in November 2001. This preliminary data appeared to show that four out
of eleven evaluable patients experienced a significant reduction in the size of their tumors. Patients continue to enroll in these studies as we determine the most effective dose.

SS1(dsFv)-PE38

Product Description.SS1(dsFv)-PE38 links the cytotoxin PE38 to the antibody SS1(dsFv). As is the case with IL13, SS1(dsFv)
targets specific receptors on cancer cells and delivers the cytotoxin directly to the cancer cells with minimal effect on healthy cells. In March 1999, we executed a worldwide exclusive
licensing agreement with the NIH giving us rights to develop and commercialize SS1(dsFv)-PE38. We also entered into a cooperative research and development agreement with the NIH for the clinical and
commercial development of SS1(dsFv)-PE38 as an anti-cancer agent.

Development Status.We are evaluating SS1(dsFv)-PE38 as a treatment for ovarian cancer, head and neck cancer, and
mesothelioma, a type of lung cancer. In March 2000, we filed an investigational new drug application for SS1(dsFv)-PE38 for the treatment of certain common cancers and entered Phase I/II
clinical studies in the fourth quarter of 2000. In preclinical studies, SS1(dsFv)-PE38 demonstrated very specific targeting to receptors for ovarian cancer and head and neck cancers and a high level
of tumor toxicity. Preclinical studies demonstrated a high rate of response in ovarian tumors. In addition, in early 2002, NeoPharm received orphan drug designation for SS1(dsFv)-PE38 for the
treatment of both ovarian cancer and mesothelioma, a virulent and deadly form of lung cancer with practically no effective treatment options.

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Collaborative Relationships and Licenses



In February 1999, we signed a license agreement with Pharmacia giving them certain rights to develop and commercialize LEP and LED worldwide. The license
agreement provides for up to $69 million in payments to us from Pharmacia, as follows:



We
have already received the $9 million non-refundable up-front payment upon execution of the license agreement, the $8 million equity investment, a
$2 million milestone payment in July 1999 for transferring the investigational new drug applications for LED and LEP to Pharmacia, and a $3 million milestone payment in
March 2000 upon initiation of the Phase II clinical trials for LEP. Pharmacia has assumed all further responsibility for, and the costs associated with, the development and testing of LEP and
LED and obtaining all regulatory approvals. We have the right to purchase from Pharmacia co-promotion rights in lieu of receiving royalties on United States sales, for a price based upon a
percentage of Pharmacia's development costs. The co-promote right allows us to collect a larger royalty in exchange for contributing to the promotional expenses of any products developed under the
Agreement. We will also receive a fixed royalty on foreign sales.

We
may terminate the license agreement upon a material breach by Pharmacia and Pharmacia may terminate the agreement upon our material breach. Upon termination of the agreement by either
party, Pharmacia's rights to the relevant licenses granted under the agreement automatically revert to us. If Pharmacia ceases to market, sell or launch the products relating to the licenses granted
under the
agreement in the United States, certain European markets or Japan and upon our request, Pharmacia is required to transfer the regulatory approvals to market the products in those countries, unless
Pharmacia's cessation is due to reasons related to the safety or efficacy of a product.

In
January 2002, Pharmacia informed us that the LEP and LED development programs were experiencing delays. At the time of that meeting, Pharmacia was unable to determine when
Phase II/III studies were expected to begin. We continue to work with Pharmacia to determine the development status of both LEP and LED, but as of the date of this filing, Pharmacia has not provided
us with new target dates for starting Phase II/III clinical trials in these products.



We have entered into two license agreements, two contract research agreements and three sponsored research agreements with Georgetown University relating to
various liposome-related products. Under the Georgetown licenses, and in return for sponsoring related research, we were granted exclusive licenses to manufacture and sell LED, LEP, and
LE-AON. We are obligated to pay royalties to Georgetown on commercial sales of these products. In addition, we are obligated to make certain advance royalty payments, which will be
credited against future royalties. The Georgetown licenses may be terminated in the event of a default. Our rights under the Georgetown licenses with respect to LED and LEP have been sublicensed to
Pharmacia.

Under
the contract research agreements, we pay or reimburse Georgetown for all direct and indirect costs associated with research on specific projects. In return, and upon making various
one-time payments, we retain all rights to all inventions, developments, discoveries and other proprietary ideas which are first conceived, discovered or developed during the conduct of
the research.

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Under the terms of the sponsored research agreement with Georgetown, we have agreed to pay the costs associated with additional research relating to certain proprietary research
information previously developed by Georgetown as well as making certain milestone and royalty payments to Georgetown. In return for this sponsored research, Georgetown has given us a license for
certain existing patent rights now owned by Georgetown as well as a right of first refusal to exclusively license any invention or discovery conceived or reduced to practice during the research. The
terms of any such license would be subject to good faith negotiations.



In September 1997, we entered into an exclusive worldwide licensing agreement with the NIH and the FDA whereby we were granted the right to develop and
commercialize IL13-PE38. The IL13-PE38 license required us to pay NIH an initial $75,000 non-refundable payment and requires minimum annual royalty payments to NIH
of $10,000, which increase to $25,000 after the first commercial sale. The IL13-PE38 license also provides for milestone payments and royalties based on future product sales. The NIH and
FDA may terminate the agreement upon our default in performing any material obligations under the agreement or if they determine that such action is necessary to meet the requirements for public use
specified by federal regulations and we do not reasonably satisfy such requirements. While providing us with an exclusive license, it should be noted that, as is typical in such agreements, neither
the NIH nor the FDA make any representations or warranties in the license agreement as to the validity or enforceability of the licensed rights.

In
March 1999, we entered into a license agreement with the NIH for SS1(dsFv)-PE38. The SS1(dsFv)-PE38 license required us to pay the NIH an initial $75,000
non-refundable payment and requires minimum annual royalty payments to the NIH beginning on January 1, 2001 of $20,000, which increase to $150,000 per year if we fail to reach
certain benchmarks. The other terms and conditions of the SS1(dsFv)-PE38 license are substantially the same as those of the NIH IL13-PE38 license described above. We have also entered into
a cooperative research and development agreement with the NIH in May 1999, for SS1(dsFv)-PE38.



In August 1997, we entered into a cooperative research and development agreement with the FDA covering the IL13-PE38 product licensed from the
NIH and FDA. Pursuant to the FDA agreement, we agree to commercialize IL13-PE38 and the FDA agrees to collaborate on the clinical development and commercialization of the licensed product.
In January 2001 the agreement was revised and expanded and is now set to expire on December 31, 2003. However, under the revised agreement, we are required to pay $400,000 per year,
through 2003, for expenses incurred by the FDA in carrying out its responsibilities under this agreement. Research and development costs related to this research totaled $100,000 in each of 1997 and
1998, $150,000 in each of 1999 and 2000 and $400,000 in 2001.



In May 1999, we entered into a cooperative research and development agreement with the NCI. Pursuant to the agreement, the Company committed to commercialize the
SS1 (dsFv)-PE38 monoclonal antibody product which it licensed from the NIH and the FDA. The NCI agreed to collaborate on the clinical development and commercialization of the licensed product. The
Company was originally committed to pay $100,000 per year over four years for the reasonable and necessary expenses incurred by the NCI in carrying out their responsibilities under the agreement.
During each of 1999 and 2000, NeoPharm spent $100,000 under this agreement. In 2000, the parties agreed to expand the scope of the agreement and increase the Company's annual funding requirement to
$150,000 for the final two years of the agreement. In 2001, we spent $150,000 under the agreement.

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Amounts
paid to our major research and development collaborators under our various agreements during the last three years, as well as our commitments under these agreements for 2002, are
included in the following table:

|Research and Development Collaboration Expenses
|-----------------------------------------------
|
|
|Georgetown                                     
|FDA                                            
|NCI                                            
|NIH                                            
|Total Collaboration Expenses                   

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Manufacturing

Currently, we do not have the commercial manufacturing capacity for any of the products we are developing. All of our electrostatic liposome products are produced
at the Center for Advanced Drug Development at the University of Iowa Pharmacy School which we believe has sufficient production
capabilities to satisfy our clinical trial needs through the end of Phase I/II clinical testing. While commercial production of LEP and LED is expected to be handled by Pharmacia, we have retained the
right, under the terms of our agreement with Pharmacia, to supply any electrostatic liposome products if we can do so at lower cost.

In
December 2001 we entered into an agreement with Akorn, Inc., an independent public traded company, to secure cGMP manufacturing capacity for both our anticipated Phase
II/III clinical supply requirements as well as our anticipated commercial manufacturing capacity requirements. Under the Agreement, NeoPharm loaned Akorn $3,250,000 to assist in the completion and
validation of Akorn's state-of-the-art lyopholization facility at its plant in Decatur, Illinois. The note is due in December 2006 and the terms of the agreement
call for interest on the note receivable to accrue at the rate NeoPharm receives on its investments in marketable securities, which is less than the interest rate Akorn pays on its other outstanding
debt. In exchange, Akorn has granted NeoPharm the option to secure at least 15% of Akorn's lyophilization manufacturing capacity for up to 15 years, preferred pricing on all NeoPharm products
manufactured at Akorn, and confidential treatment of all trade secrets relating to NeoPharm's Easy-to-Use NeoLipid technology. Akorn anticipates the facility coming online in
2003, at approximately the time that NeoPharm anticipates that we will need to manufacture our lyophilized products for Phase II/III clinical trials. Dr. John N. Kapoor, NeoPharm's Chairman, is
also Chairman and Chief Executive Officer of Akorn, and holds a substantial stock position in both companies. Because of his role in both companies, Dr. Kapoor refrained from participating in
the NeoPharm Board of Directors' deliberation on this transaction (See "Notes to Financial StatementsNote 9").

We
have also entered into an exclusive supply agreement with Avanti Polar Lipids, Inc. providing for the manufacture and supply of synthetic cardiolipin, an important ingredient
in our electrostatic liposome products. Under the terms of the agreement, Avanti has agreed to supply us with synthetic cardiolipin in an amount sufficient to commercialize our electrostatic liposome
products. In addition, Avanti agreed not to sell synthetic cardiolipin to competing third parties. Unless terminated in accordance with its terms, the supply agreement will automatically renew for
additional two year terms on and after the initial expiration date of May 1, 2008. If Avanti elects to terminate the manufacture of synthetic cardiolipin, we have the right to obtain a
non-exclusive license from Avanti to allow us to continue the manufacture of synthetic cardiolipin.

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There
are a number of suppliers of raw materials used in our other products that appear to be acceptable to FDA. There are also a number of facilities for contract manufacturing of our
proposed products that have current Good Manufacturing Practices that appear to be acceptable to FDA. We believe that, in the event of the termination of our existing sources for product supplies and
manufacture, we will be able to enter into agreements with other suppliers or manufacturers on similar terms. However, we cannot assure you that there will be manufacturing capacity available to us at
the time we are ready to manufacture our products.

Research and Development

In 2001 we significantly increased our research and development staff and opened a new 35,500 square foot research and development facility in Waukegan, Illinois,
where we employed 39 individuals as of March 1, 2002. We have incurred research and development expenses of approximately $13,548,000 in 2001, $3,972,000 in 2000 and $3,759,000 in 1999 to
develop our products.

Patents and Proprietary Rights

We have licenses to 19 United States patents or patent applications relating to our products. In addition, we own one issued patent and two pending United States
patent applications covering methods of administering LEP, as well as five United States patent applications relating to our other products in development. We have also filed applications in a number
of foreign jurisdictions which are counterparts of our issued United States patents and patent applications. We believe all of our products under development are protected by patents owned or licensed
to us.

Patent
protection is important to our business. The patent position of companies in the pharmaceutical field generally is highly uncertain, involves complex legal and factual questions,
and has recently been the subject of much litigation. Therefore, we cannot assure you that any patent applications relating to our products or processes will result in patents being issued, or that
the resulting patents, if any, will provide protection against competitors who successfully challenge our patents, obtain patents that may have an adverse effect on our ability to conduct business, or
are able to circumvent our patent position. It is possible that other parties have conducted or are conducting research and could make discoveries of compounds or processes that would precede any of
our discoveries. Finally, there can be no assurance that others will not independently develop similar pharmaceutical products which will compete against ours or cause our products to become obsolete.

Our
competitive position is also dependent upon unpatented trade secrets. In an effort to protect our trade secrets, we have a policy of requiring our employees, scientific advisory
board members, consultants and advisors to execute proprietary information and invention assignment agreements upon commencement of employment or consulting relationships with us. These agreements
provide that all confidential information developed or made known to the individual during the course of their relationship with us must be kept confidential, except in specified circumstances.
However, we cannot assure you that these agreements will provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure of
confidential information. Further, invention assignment agreements executed by scientific advisory board members, consultants and advisors may conflict with, or be subject to, the rights of third
parties with whom such individuals have employment or consulting relationships. In addition, we cannot assure you that others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets, that such trade secrets will not be disclosed or that we can effectively protect our rights to unpatented trade secrets.

We
may be required to obtain licenses to patents or proprietary rights of others. We cannot assure you that any licenses required under any such patents or proprietary rights would be
made available on terms acceptable to us or at all. If we do not obtain such licenses, we could encounter delays in

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product market introductions while we attempt to design around such patents, or could find that the development, manufacture or sale of products requiring such licenses could be foreclosed.
Litigation may be necessary to defend against or assert claims of infringement to enforce patents issued to us or exclusively licensed to us, to protect trade secrets or know-how owned by
us, or to determine the scope and validity of the proprietary rights of others. In addition, we may become involved in oppositions in foreign jurisdictions or interference proceedings declared by the
United States Patent and Trademark Office to determine the priority of inventions with respect to our patent applications or those of our licensors. Litigation, opposition or interference proceedings
could result in substantial costs to and diversion of effort by, and may have a material adverse impact on, us. In addition, we cannot assure you that our efforts in these proceedings will be
successful.

Government Regulation

Regulation by governmental authorities in the United States and foreign countries is a significant factor in the development, manufacture and marketing of our
proposed products and in our ongoing research and product development activities. The nature and extent to which such regulation will apply to us will vary depending on the nature of any products
developed. We anticipate that all of our products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to
rigorous preclinical and clinical testing and other approval procedures of the FDA and similar regulatory authorities in foreign countries. Various federal statutes and regulations also govern or
influence testing, manufacturing, safety, labeling, storage and record-keeping related to such products and their marketing. The process of obtaining these approvals and the subsequent compliance with
the appropriate federal statutes and regulations requires substantial time and financial resources. Any failure by us or our collaborators to obtain, or any delay in obtaining, regulatory approval
could adversely affect the marketing of any products developed by us, our ability to receive product revenues and our liquidity and capital resources.

The
development, manufacture, marketing and distribution of drug products is extensively regulated by the FDA in the U.S. and similar regulatory agencies in other countries. The steps
ordinarily required before a new drug may be marketed in the U.S., which are similar to steps required in most other countries, include:



Preclinical
tests include laboratory evaluation of product chemistry toxicity and formulation, as well as animal studies. The results of preclinical testing are submitted to the FDA as
part of an investigational new drug application. A 30-day waiting period after the filing of each investigational new drug application is required prior to the commencement of clinical
testing in humans. At any time during this 30-day period or at any time thereafter, the FDA may halt proposed or ongoing clinical trials until the FDA authorizes trials under specified
terms. The investigational new drug application process may be extremely costly and substantially delay development of our products. Moreover, positive results of preclinical tests will not
necessarily indicate positive results in subsequent clinical trials.

Clinical
trials to support new drug applications are typically conducted in three sequential phases, although the phases may overlap. During Phase I, clinical trials are conducted with a
small number of subjects to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side

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effects associated with increasing doses. Phase II usually involves studies in a limited patient population to:



If
a compound is found to be potentially effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further demonstrate clinical
efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical trial sites.

After
successful completion of the required clinical trials, a new drug application is generally submitted. The FDA may request additional information before accepting a new drug
application for filing, in which case the application must be resubmitted with the additional information. Once the submission has been accepted for filing, the FDA reviews the application and
responds to the applicant. FDA
requests for additional information or clarification often significantly extend the review process. The FDA may refer the new drug application to an appropriate advisory committee for review,
evaluation and recommendation as to whether the application should be approved, but the FDA is not bound by the recommendation of an advisory committee.

If
the FDA evaluations of the new drug application and the manufacturing facilities are favorable, the FDA may issue an approval letter or an "approvable" letter. An approvable letter
will usually contain a number of conditions that must be met in order to secure final approval of the new drug application and authorization of commercial marketing of the drug for certain
indications. The FDA may also refuse to approve the new drug application or issue a "not approvable" letter outlining the deficiencies in the submission and often requiring additional testing or
information.

On
November 21, 1997, President Clinton signed into law the Food and Drug Administration Modernization Act. That act codified the FDA's policy of granting "fast track" approval
for cancer therapies and other therapies intended to treat severe or life threatening diseases and having potential to address unmet medical needs. Previously, the FDA approved cancer therapies
primarily based on patient survival rates or data on improved quality of life. The FDA considered evidence of partial tumor shrinkage, while often part of the data relied on for approval, insufficient
by itself to warrant approval of a cancer therapy, except in limited situations. Under the FDA's new policy, which became effective on February 19, 1998, the FDA has broadened authority to
consider evidence of partial tumor shrinkage or other clinical outcomes for approval. This new policy is intended to facilitate the study of cancer therapies and shorten the total time for marketing
approvals. We intend to take advantage of this policy; however, it is too early to tell what effect, if any, these provisions may have on the approval of our products.

Under
the Orphan Drug Act, the FDA may designate drug products as orphan drugs if there is no reasonable expectation of recovery of the costs of research and development from sales in
the United States or if such drugs are intended to treat a rare disease or condition, which is defined as a disease or condition that affects less than 200,000 persons in the United States. If certain
conditions are met, designation as an orphan drug confers upon the sponsor marketing exclusivity for seven years following FDA approval of the product, meaning that the FDA cannot approve another
version of the "same" product for the same use during such seven year period unless the FDA finds that the sponsor is not able to supply adequate quantities of the drug. The market exclusivity
provision does not, however, prevent the FDA from approving a different orphan drug for the same use or the same orphan drug for a different use. The Orphan Drug Act has been controversial, and many
legislative proposals have from time to time been introduced in Congress to modify various aspects of the Orphan Drug Act, particularly the market exclusivity provisions. We cannot assure you that new
legislation will not be

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introduced in the future that may adversely impact the availability or attractiveness of orphan drug status for any of our products.

Sales
outside the United States of products we develop will also be subject to regulatory requirements governing human clinical trials and marketing for drugs. The requirements vary
widely from country to country, but typically the registration and approval process takes several years and requires significant
resources. In most cases, if the FDA has not approved a product for sale in the United States the product may be exported for sale outside of the United States only if it has been approved in any one
of the following countries: the European Union, Canada, Australia, New Zealand, Japan, Israel, Switzerland and South Africa. There are specific FDA regulations that govern this process.

We
are also subject to various Federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices and the use and
disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research work. We cannot accurately predict the
extent of government regulation that might result from future legislation or administrative action.

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RISK FACTORS

You should carefully consider the following risk factors, in addition to the other information set forth in this prospectus, before purchasing shares of our
common stock. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as the value of an investment in our common stock. This investment
involves a high degree of risk.

RISKS RELATED TO OUR BUSINESS

If we lose or are unable to secure collaborative partners, or if our collaborators do not apply adequate resources to our collaborations or mishandle the development of our
products, our product development efforts and profitability may suffer.

Our business strategy includes entering into collaborations with academic, governmental and corporate partners, primarily pharmaceutical companies, for the
research, development, manufacturing, marketing and other commercialization activities relating to our products. We have entered into an important license agreement with Pharmacia covering our LEP and
LED products. The success of this license depends for the most part on Pharmacia's efforts. Adverse developments in our relationship with Pharmacia, or failure by Pharmacia to properly develop our
technology, can have a significant and adverse effect on us and our stock price. Pursuant to our agreement with Pharmacia, we have granted them an exclusive worldwide license to manufacture, develop,
use, market and sell LEP and LED. We will receive royalties on any foreign sales, and in the United States we have the right to purchase co-promotion rights for these products from
Pharmacia, instead of receiving royalties. As a result of our agreement with Pharmacia, we are dependent on Pharmacia to fund testing, to make regulatory filings and to manufacture and market LEP and
LED and potentially any future products resulting from this license.

The
resources dedicated by Pharmacia and our other partners to our respective collaborations are not within our control. If any collaborator breaches or terminates their agreement with
us, fails to conduct their collaborative activities in a timely manner, fails to devote sufficient resources to our collaborations, or mishandles the development of our products, the commercialization
of our products
could be slowed down or halted. We cannot assure you that Pharmacia or our other collaborative partners will not change their strategic focus, or pursue alternate technologies or develop competitive
products, either on their own or in collaboration with others, as a means for treating the diseases targeted by these collaborative programs. Our revenues and earnings also will be dependent on the
effectiveness of our collaborative partners in marketing any successfully developed products and our marketing efforts, if we choose to develop our own sales and marketing force.

We
cannot assure you that our collaborations with Pharmacia or others will continue or succeed or that we will receive any further research funding or milestone or royalty payments. If
our partners do not develop products under these collaborations, we cannot assure you that we would be able to do so on our own. Disputes may arise between us and Pharmacia, or our other
collaborators, as to a variety of matters, including financial or other obligations under our contracts, the most promising scientific or regulatory route to pursue or ownership of intellectual
property rights. These disputes may be both expensive and time consuming and may result in delays in the development and commercialization of our products. Any delay by Pharmacia would delay our
receipt of not only our milestone payments, but also royalties, if any.

If we are unsuccessful in developing our products, our ability to generate revenues may be significantly impaired.

Our research and development programs are at various stages and we have not successfully completed the development of nor have we received regulatory approval for
any products. If we, or our collaborators, do not successfully complete development of or receive regulatory approvals for our product candidates, our ability to generate revenues from operations will
be significantly impaired and

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our stock price will be harmed. We will need to conduct substantial additional clinical research in order to develop our products. We do not know whether our research and development will lead to
commercially viable products that will be approved by the United States Food and Drug Administration, referred to as the FDA. Our products will also require additional clinical testing, regulatory
approval and substantial additional investment prior to commercialization. Our products are subject to the risks of failure inherent in the development of pharmaceutical products. These risks include
the following:



As
a result of these and other factors, we do not know whether we will successfully develop any of our products, or if our products will become commercially viable or achieve market
acceptance.

We have a history of operating losses and an accumulated deficit as of December 31, 2001 of $42,408,481; we expect to continue to incur losses for the near future and
may never be profitable.

We have only a limited history and our operations consist primarily of the development of our products and the sponsorship of research and clinical trials. Until
1999, when we received $11,000,000 in payments from Pharmacia, we had incurred losses every year since we began operations and as of December 31, 2001, our accumulated deficit was $42,408,481.
We have not generated revenues from the sale of our products and it is possible that revenues from product sales will never be achieved. Until we executed our agreement with Pharmacia, we generated
only limited amounts of revenue from our license fees and it is possible that additional license revenue will not be significant. We cannot predict when or if we will be able to develop other sources
of revenue or when or if our operations will become profitable, even if we are able to commercialize some of our products.

Our business is subject to extensive governmental regulation, which can be costly, time consuming and subject us to unanticipated delays; even if we obtain regulatory approval
for some of our products, those products may still face regulatory difficulties.

Public health authorities in the United States and other countries regulate the research, testing, manufacturing, labeling, distribution, marketing and
advertising activities with respect to all of our products. The FDA and comparable agencies in foreign countries impose substantial burdens on our ability and the ability of others to introduce
pharmaceutical products to the public, including lengthy and detailed clinical testing procedures to demonstrate safety and efficacy and manufacturing procedures to insure compliance with good
manufacturing practices. This process can last many years,

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be very costly and still be unsuccessful. All clinical, manufacturing, labeling and other information developed for proprietary products will be required to be filed with the FDA in new drug
applications for review and be subject to approval by that agency. We cannot assure you that this lengthy regulatory review process will result in the approval and subsequent marketing of our
products.

Once
we submit our products for review, we do not know whether the FDA or other regulatory agencies will grant approvals for any of our products on a timely basis or at all. The FDA can
delay, limit or not grant approval for many reasons, including:



The
process of obtaining approvals in foreign countries is subject to delay and failure for the same reasons.

The
FDA's policy of granting "fast track" approval for cancer therapies may reduce the risk of delays in the approval process of our products, but the policy may also expedite the
regulatory approval of our competitors' products. In addition, any marketed product and its manufacturer continue to be subject to strict regulation. Any unforeseen problems with an approved product
or delays in receiving regulatory approval as fast as previously received approvals, or failing to receive such approval, would delay or prevent product commercialization and harm our business and
stock price. Approval of a product could also depend on post-marketing studies. Even if our products are approved by the FDA, but we fail to comply with FDA marketing, manufacturing and
other regulatory requirements applicable to regulated products, we could be subjected to regulatory or judicial enforcement actions, including product recalls or seizures, injunctions, civil
penalties, criminal prosecution, refusals to approve new products, withdrawal of approvals, and product liability exposure.

Competition in the biopharmaceutical field is intense and subject to rapid technological change, which could result in our competitors developing products superior to ours.

The extent to which any of our products achieve market acceptance will depend, in part, on competitive factors. Competition in our industry is intense, and it is
increased by the rapid pace of technological development. Existing products or new products developed by our competitors may be more effective or have fewer side effects, or be more effectively
marketed and sold, than any that we may develop. Many of our competitors have substantially greater research and development capabilities and experience and greater manufacturing, marketing, financial
and managerial resources than do we. Competitive products may render our technology and products obsolete or noncompetitive prior to our recovery of research, development or commercialization expenses
incurred with respect to any of our products.

We may need to raise additional capital in the future.

We require substantial funds to conduct research and development, preclinical and clinical testing and to manufacture and market our potential products. Our fixed
commitments, including consulting fees, rent, payments under license agreements and other contractual commitments are substantial and are likely to increase. Our cash requirements may vary materially
from those now planned. Our future revenues may not be sufficient to fund our operations.

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We
may need additional financing depending on a number of factors, including the following:



Additional
financing may not be available when we need it or be on terms acceptable to us. If adequate financing is not available, we may be required to delay, scale back or eliminate
certain of our research and development programs, to relinquish rights to some of our technologies or products, or to license to third parties to commercialize products or technologies that we would
otherwise seek to develop ourselves. We could also be required to cease operations. If additional capital is raised through the sale of equity, our stockholders' ownership interest could be diluted
and such securities may have rights, preferences or privileges superior to those of our other stockholders. The terms of any debt securities we sell to raise additional capital may place restrictions
on our operating activities.

We depend on third parties for a variety of functions, including the research and development, manufacturing, clinical testing and regulatory compliance of our products. We
cannot assure you that these arrangements will allow us to successfully develop and manufacture our products.

We rely, in part, on third parties to perform a variety of functions, including research and development, clinical trials and regulatory affairs management and
production of our products. As of March 1, 2002, we have only 72 full-time employees. We currently do not possess the internal infrastructure to
independently conduct clinical testing or meet other regulatory responsibilities. If we develop compounds with commercial potential, we will either have to hire additional personnel skilled in the
clinical testing and the regulatory compliance processes or engage third parties to perform such services. We currently are a party to several agreements which place substantial responsibility on
third parties for clinical development of our products. We also in-license technology from governmental and academic institutions in order to minimize investments in early research, and we
enter into collaborative arrangements with certain of these entities with respect to clinical trials of products. We cannot assure you that we will be able to maintain any of these relationships or
establish new ones on beneficial terms, that we can enter into these arrangements without undue delays or expenditures, or that these arrangements will allow us to compete successfully.

We
do not have any manufacturing capacity for any products we are developing and do not intend to develop manufacturing capacity in the future. Currently, all of our electrostatic
liposome products are produced at the Center for Advanced Drug Development which is affiliated with the University of Iowa Pharmacy School. The center has indicated that it is currently able to meet
our needs for research and clinical trials, but we cannot be sure that they will be able to do so on a time or cost-effective basis in the future or that suitable alternatives can be found
in a timely manner, or at all. Any failure to obtain adequate supplies of our products could delay or prevent our product development efforts. In order to commercialize our products successfully, we
or our collaborators must be able to manufacture products in commercial quantities in compliance with the FDA's current good manufacturing practices,

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at acceptable costs and in a timely manner. As our products have never been produced in commercial quantities, we cannot be sure that the ease of manufacture, stability, cost and yield we have
experienced in small-scale production can be duplicated.

We do not have marketing or sales resources, which makes us dependent on third parties to successfully commercialize our products.

We have no experience in sales, marketing or distribution. To date, our focus has been on research and development and we currently do not have internal marketing
or sales resources. If we receive the required regulatory approvals, we expect to market and sell our products principally through distribution co-marketing, co-promotion or
licensing arrangements with third parties. Our agreement with Pharmacia grants Pharmacia exclusive worldwide marketing rights with respect to LED and LEP, although we have the option in the United
States to purchase co-promotion rights for these products from Pharmacia, in lieu of receiving royalty payments. To the extent that we enter into distribution, co-marketing,
co-promotion or licensing arrangements with third parties for the marketing and sale of our products, any revenues we receive will depend primarily on the efforts of these third parties.
We will not control the amount and timing of marketing resources such third parties devote to our products. In addition, if we market products directly, significant additional expenditures and
management resources will be required to develop an internal sales force. We have no experience in establishing or maintaining an effective sales and marketing effort. We cannot assure you that we
would be able to establish a successful sales force should we choose to do so.

If sufficient quantities of the materials needed to make our products are not available, product development and commercialization could be slowed or stopped.

We cannot assure you that sufficient quantities of the materials needed to make our products will be available to support the continued research, development or
commercial manufacture of our products. We currently obtain synthetic cardiolipin, an important ingredient in our liposome products, from a single source, Avanti Polar Lipids, Inc. We have
entered into an exclusive supply agreement with Avanti that will supply us with all of our synthetic cardiolipin requirements. However, we cannot assure you that Avanti will be able to supply
sufficient quantities of synthetic cardiolipin that meet all FDA manufacturing requirements. In the event that Avanti elects to terminate this supply agreement or cannot supply sufficient quantities
to us, we have a right under the agreement to obtain a non-exclusive license from Avanti that will allow us to continue the manufacture of synthetic cardiolipin. In such an event, we
cannot assure you that we will have the capability to manufacture sufficient quantities of synthetic cardiolipin or that we will be able to obtain an alternate supplier.

FDA
regulatory requirements applicable to pharmaceutical products tend to make changes in suppliers costly and time consuming. The unavailability of adequate commercial quantities, the
termination of existing supply agreements, the supplier's inability to provide materials due to the failure to meet FDA regulatory requirements, the inability to develop alternative sources, a
reduction or interruption in supply or a significant increase in the price of materials could impair our ability to manufacture and commercialize our products, which could adversely affect our
business.

Our lack of operating experience may cause us difficulty in managing our growth.

We have no experience in selling pharmaceutical products and in manufacturing or procuring products in commercial quantities in compliance with FDA rules and only
limited experience in negotiating, establishing and maintaining collaborative relationships and conducting later-stage phases of the regulatory approval process. Our ability to manage our growth, if
any, will require us to improve and expand our management and our operational and financial systems and controls. If our management is unable to manage growth effectively, our business and financial
condition would be adversely affected. In addition, if rapid growth occurs, it may strain our operational, managerial and financial resources, which are limited.

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If we are unable to protect our proprietary rights, we may not be able to compete effectively or operate profitably.

Because of the substantial length of time and expense associated with bringing new products through development and regulatory approval to the marketplace, patent
and trade secret protection for new
technologies, products and processes is essential to us. We have obtained licenses to 19 United States patents or patent applications relating to our products, and we own one issued patent and two
pending United States patent applications covering methods of administering LEP, as well as five United States patent applications relating to our other products in development. With respect to these
patents and patent applications, however, no assurance can be given that:



We
also rely on trade secrets, know-how and technological advantages to protect the technology we develop. Although we use confidentiality agreements and employee proprietary
information and invention assignment agreements to protect our trade secrets and other unpatented know-how, these agreements may be breached or may otherwise be of limited effectiveness or
enforceability. Litigation to protect our trade secrets and other unpatented know-how could result in significant costs to us as well as the diversion of management's attention away from
our business. Adverse determinations in any such proceedings or unauthorized disclosure of our trade secrets could adversely affect our business. In addition, the laws of certain foreign countries do
not protect our intellectual property rights to the same extent as the laws of the United States. We cannot assure you that we will be able to protect our intellectual property in these markets.

The use of our technologies could potentially conflict with the rights of others.

Our commercial success depends to a large extent on our ability to operate without infringing the patents and proprietary rights of others. We may incur
substantial costs in defending ourselves in suits that may be brought against us claiming infringement of the patent rights of others, in asserting our
patent rights in a suit against another party, or in participating in opposition proceedings in foreign jurisdictions to determine the validity of our patents, or interference proceedings declared by
the United States Patent and Trademark Office for the purpose of determining the priority of invention in connection with our patent applications or those of others. If we lose, we may be prohibited
from pursuing research, development or commercialization of our products or be forced to seek licenses, which may not be available on commercially reasonable terms, if at all, or be subjected to
significant liabilities to third parties. Any of these events could have a material adverse effect on us.

Certain of our executive officers have conflicting obligations and may not devote sufficient time to our business.

Dr. John N. Kapoor, our chairman, is also associated with EJ financial Enterprises, Inc., a health care investment firm which is wholly owned by
him, and therefore will have conflicts of interest in allocating his time among various business activities and may have legal obligations to multiple entities.

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On July 1, 1994, we entered into a consulting agreement with EJ Financial. The consulting agreement provides that we will pay EJ Financial $125,000 per year (paid quarterly) for certain
management consulting services, which is based on anticipated time spent by EJ Financial personnel on the Company's affairs. EJ Financial is involved in the management of health care companies in
various fields, and Dr. Kapoor is involved in various capacities with the management and operation of these companies. In addition, EJ Financial is involved with other companies in the cancer
field. Although these companies are pursuing different therapeutic approaches for the treatment of cancer, discoveries made by one or more of these companies could render our products less competitive
or obsolete. Further, in December 2001, we entered into a loan agreement with Akorn, Inc., a company controlled by Dr. Kapoor, to obtain manufacturing rights at Akorn's lyophilization facility.
See "BusinessManufacturing."

If we lose key management and scientific personnel or are unable to attract and retain the talent required for our business, our business could be harmed.

We are highly dependent on the principal members of our management and scientific staff, including our President, Mr. James M. Hussey. The inability to
replace Mr. Hussey might delay product development or the achievement of our strategic objectives. In addition, our success will depend on our ability to attract and retain qualified
scientific, technical and managerial personnel. There is intense competition for qualified staff and we cannot assure you that we will be able to retain existing personnel or attract and retain
qualified staff in the future.

Our scientific advisors commit only a portion of their time to our business and research activities and we may not have rights to their inventions or discoveries.

Due to limited internal staff and resources, we rely heavily on scientific consultants to advance our research and development programs. Members of our scientific
advisory board are employed on a full-time basis by academic or research institutions. These individuals will devote only a portion of their time to our business and research activities.
In addition except for work performed specifically for and at our direction, the inventions or processes discovered by our consultants and scientific advisors will not become our property but will be
the intellectual property of other institutions with which they may have an affiliation. If this happens, we would have to obtain licenses to such technology from such institutions. Invention
assignment agreements executed by scientific advisory board members and consultants in connection with their relationships with us may be subject to the rights of their primary employers or other
third parties with whom such individuals have consulting relationships.

The demand for our products may be adversely affected by health care reform and potential limitations on third-party reimbursement.

In recent years, there have been numerous proposals to change the health care system in the United States. Some of these proposals have included measures that
would limit or eliminate payments for medical procedures and treatments or subject the pricing of pharmaceuticals to government control. We cannot predict the effect that health care reforms may have
on our business, and it is possible that any reforms will hurt our business. In addition, in both the United States and elsewhere, sales of prescription pharmaceuticals are dependent in part on the
availability of reimbursement to the consumer from third-party payors, such as government and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical
products and services with respect to new drug products in particular. If we or any of our collaborators succeed in bringing one of our products to the market, we cannot be certain that our products
will be considered cost-effective and that reimbursement to the consumer will be available or will be sufficient to allow us or our collaborators to sell our products on a competitive
basis.

24

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Physicians, patients, payors, or the medical community in general may be unwilling to accept, utilize or recommend any of our products, and the failure to achieve market
acceptance will harm our business.

Even if approved for marketing, our products may not achieve market acceptance. The degree of market acceptance of our products will depend upon a number of
factors, including:



We deal with hazardous materials and must comply with environmental laws and regulations, which can be expensive and restrict how we do business. We could also be liable for
damages, penalties or other forms of censure if we are involved in a hazardous waste spill or other accident.

We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and certain
waste products. We might be required to incur significant cost to comply with environmental laws and regulations. In the event of an accident, even by a third party, we could be held liable for any
damages that result, and such liability would probably exceed our current insurance coverage and financial resources.

We may have product liability exposure and insurance against such claims may not be available to us at reasonable rates or at all.

We currently do not have any product liability insurance and our business exposes us to potential product liability risks which are inherent in the testing,
manufacturing and marketing of human therapeutic products. Although we plan to obtain product liability insurance when and if our products become commercially available, we cannot assure you that we
will be able to obtain or maintain this insurance on acceptable terms or that any insurance we obtain will provide us with adequate coverage against potential liabilities. Claims or losses in excess
of any liability insurance coverage we obtain could have a material adverse effect on our business.

ITEM 2. PROPERTIES

The Company's administrative offices are located in approximately 13,037 square feet of leased office space in Lake Forest, Illinois. Prior to moving to the
current Lake Forest location in December 2000, the Company subleased approximately 2,158 square feet of space at a market rate rent from Option Care, Inc, an affiliate of the Company's Chairman
and principal shareholder, John N. Kapoor. (See Note 9"Transactions with Related Parties" in Notes to Financial Statements). Additionally, the Company has leased a 35,500 square
foot research and development facility in Waukegan, Illinois. We consider these facilities as suitable and adequate for our current and immediate future needs.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any litigation or other legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

No matters were submitted to a vote of security holders during the quarter ended December 31, 2001.

25

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PART II

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

From January 25, 1996 until December 2, 1996 the Company's Common Stock was quoted on the Nasdaq Stock Market's SmallCap Market under the trading
symbol NPRM. From December 2, 1996 until April 13, 2000 the Common Stock was traded on the American Stock Exchange under the symbol NEO. Beginning on April 14, 2000, and
continuing through the date of this report, the Common Stock has been traded on the Nasdaq National Market under the symbol NEOL. The following table provides the high and low sales prices as reported
on the exchange on which the Company's stock was listed for the periods indicated.

|2000           |  | High   |  | Low   
|-------------- |  | ------ |  | ------
|First Quarter  |  | 29.545 |  | 16.705
|Second Quarter |  | 16.062 |  | 14.817
|Third Quarter  |  | 37.330 |  | 16.364
|Fourth Quarter |  | 36.705 |  | 20.000



|2001           |  | High   |  | Low   
|-------------- |  | ------ |  | ------
|First Quarter  |  | 34.489 |  | 13.239
|Second Quarter |  | 25.573 |  | 17.557
|Third Quarter  |  | 22.955 |  | 12.318
|Fourth Quarter |  | 27.000 |  | 11.818

As
of March 1, 2002, there were 44 holders of record of the Common Stock, and the Company estimates that as of such date there were more than 2,100 beneficial holders of the
Common Stock. The Company has never paid a cash dividend on its Common Stock and has no present intention of paying cash dividends in the foreseeable future. Any determination in the future to pay
cash dividends will depend on the Company's financial condition, capital requirements, results of operations, contractual limitations and other factors deemed relevant by the Board of Directors.

26

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ITEM 6. SELECTED FINANCIAL DATA

|                                                                                                                           |  | For the Years Ended December 31, |           
|-------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----------
|
|Statement of Operations Data:                                                                                              |  |                                  |           
|Revenues                                                                                                                   |  | $                                | 550,000   
|Operating expenses:                                                                                                        |  |                                  |           
|Research and development                                                                                                   |  |                                  | 1,411,692 
|General and administrative                                                                                                 |  |                                  | 1,370,486 
|Income/(loss) from operations                                                                                              |  |                                  | (2,232,178
|Other income                                                                                                               |  | $                                |          
|Other expense                                                                                                              |  |                                  |          
|Other income (expense)-net                                                                                                 |  |                                  |          
|Interest income                                                                                                            |  | $                                | 210,501   
|Interest expense                                                                                                           |  |                                  |          
|Interest income (expense)-net                                                                                              |  |                                  | 210,501   
|Income/(loss) before income taxes                                                                                          |  | $                                | (2,021,677
|Income taxes                                                                                                               |  |                                  |          
|Income/(loss) before cumulative effect of accounting change                                                                |  | $                                | (2,021,677
|Cumulative effect of accounting change (see Note 5"Change in Stock Compensation Method" in Notes to Financial Statements) |  |                                  |          
|Net income/(loss)                                                                                                          |  | $                                | (2,021,677
|Basic net income/(loss) per share                                                                                          |  | $                                | (.25      
|Diluted net income/(loss) per share                                                                                        |  | $                                | (.25      



|                           |  | December 31, |           
|-------------------------- |  | ------------ | ----------
|
|Balance Sheet Data:        |  |              |           
|Cash & cash equivalents    |  | $            | 2,776,697 
|Working capital            |  |              | 2,348,904 
|Total assets               |  |              | 2,854,499 
|Accumulated deficit        |  |              | (3,887,322
|Total stockholders' equity |  |              | 2,374,072 

27

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

Overview

Since we began doing business in June 1990, we have devoted our resources primarily to funding research and product development programs. We expect to
continue to incur losses as we expand our research and development activities and sponsorship of clinical trials. As of December 31, 2001, we had an accumulated deficit of approximately
$42,408,000.

Results of Operations



Operating revenues during the three fiscal years ended December 31, 2001, 2000 and 1999, were $0, $3,000,000, and $11,000,000, respectively. Operating
revenue in 2000 consisted of a milestone payment from our partner, Pharmacia, upon initiation of Phase II clinical trials for LEP. 1999 operating revenue consisted of a $9,000,000
non-refundable license fee from Pharmacia upon execution of the LEP/LED license agreement, as well as a $2,000,000 milestone payment for transferring the investigational new drug
applications for LEP and LED to Pharmacia. Potential total milestone payments of $47,000,000 from Pharmacia are still available under the agreement.

We
incurred research and development expenses of approximately $14,814,000 in 2001 as compared to $3,792,000 in 2000 and $3,759,000 in 1999. In 2001, we significantly increased our
ability to accelerate the development progress of our products through the development of our own research and development facility in Waukegan, Illinois, as well as the addition of our own internal
clinical research group to monitor the numerous Phase I clinical trials being conducted on our products. As a result, research and development expenses increased in 2001 due to increased spending of
approximately $5,376,000 for the preclinical and clinical development of our products as a result of expanded research collaborations and conducting more Phase I/II clinical trials, increased
payroll and consulting related expenses of approximately $3,324,000 from the increases in our clinical and pre-clinical research and development staff, expenses of approximately $1,050,000
incurred in the operation of our new research and development facility, which began operations during the first quarter of 2001 and an expense of approximately $1,267,000 to establish the valuation
allowance on the loan made to Akorn, Inc. (See "BusinessManufacturing" and "Notes to Financial StatementsNote 9"). Research and development expenses increased in 2000
due to an increase in spending of $700,000 related primarily to the development of our LE-AON, LEM, LEE, LE-SN38, IL13-PE38 and SS1(dsFv)-PE38 products, and
increased payroll, consulting and related expenses of $500,000 due to increased staffing requirements.
Due to the assumption of all future expenses related to the development of LEP and LED by Pharmacia, research and development expenses for these products decreased by $1,170,000 in 2000.

28

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Amounts
paid to our major research and development collaborators under our various agreements during the last three years, as well as our commitments under these agreements for 2002, are
included in the following table:

|Research and Development Collaboration Expenses
|-----------------------------------------------
|
|
|Georgetown                                     
|FDA                                            
|NCI                                            
|NIH                                            
|Total Collaboration Expenses                   

---

We
incurred general and administrative expenses of approximately $4,414,000 in 2001 as compared to $3,041,000 in 2000 and $2,447,000 in 1999. The increase in general and administrative
expenses in 2001 was primarily due to increased payroll and consulting expenses of approximately $738,000 related to increases in staff, increased rent expense of approximately $126,000 as a result of
moving into new, larger offices in 2001, increased depreciation expense of approximately $91,000 from the purchase of new furniture and equipment used in our new offices, increased insurance expense
of approximately $83,000 due to an increase in levels of insurance for various policies and an increase in other miscellaneous office expenses of approximately $335,000. General and administrative
expenses increased in 2000 primarily as a result of an increase in payroll, consulting and related expenses of $200,000 due to increased staffing requirements, increased registration fees of $90,000
from the increase in the Company's authorized shares, increased insurance costs of $70,000 to increase the amount of insurance coverage, increased printing expenses of $60,000, increased travel
expenses of $50,000, moving expenses of $50,000 and an increase in other miscellaneous office expenses of approximately $70,000.

Interest
income for 2001, 2000 and 1999 totaled approximately $5,797,000, $3,322,000, and $627,000, respectively. The increase in interest income over the last three years reflects
higher levels of cash equivalent investments resulting from the proceeds received from the sale of 3,480,000 shares of the Company's common stock completed in October 2000.



At December 31, 2001, we had approximately $106,526,000 in cash and cash equivalents and net working capital of approximately $120,306,000, as compared
with $139,777,000 and $139,842,000, respectively, at December 31, 2000. We believe that our cash and cash equivalents should be adequate to fund operations for the next 12 months.
However, we can offer no assurances that additional funding will not be required during that period. All excess cash has been invested in short-term investments and marketable securities
with less than two years to maturity.

Our
assets at December 31, 2001 were approximately $129,195,000 compared to $140,532,000 at December 31, 2000. This decrease in assets was primarily due to a decrease of
cash and cash equivalents of approximately $11,416,000 as a result of cash used in operating activities for the year. In 2002, we anticipate a significant increase in cash used in operating activities
as a result of our planned increase in research and development spending.

The
Company invested approximately $2,600,000 in furniture, equipment and leasehold improvements in 2001 for our new corporate offices, as well as for our new research and development

29

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facility. As a result of the relocation of the Company's corporate offices to larger, more functional space in Lake Forest, Illinois to accommodate the larger staff, the Company invested
approximately $250,000 in office furniture and equipment in 2000. The Company anticipates making further investments in scientific equipment in 2002 to further equip the Company's new research and
development facility in Waukegan, Illinois.

On
October 22, 1998, we established a $3,000,000 line of credit (the "Line of Credit") with the John N. Kapoor Trust dtd. 9/20/89, an entity affiliated with our Chairman. Interest
on borrowings on the Line of Credit was accrued at the rate of 2% over the prime rate of the Northern Trust Bank. We borrowed $250,000 on the Line of Credit on January 8, 1999. The $250,000
plus all accrued interest was repaid on January 29, 1999. The Line of Credit terminated upon the signing of the Pharmacia licensing agreement on February 19, 1999.

Our
liabilities at December 31, 2001 increased to approximately $1,852,000 from approximately $440,000 at December 31, 2000. This increase was attributable to an increase
in accrued clinical trial expenses at year-end of approximately $633,000 for our ongoing and newly initiated Phase I/II clinical trial programs, an increase in accrued compensation of
approximately $222,000 in 2001 from the increase in staff in 2001, an increase in trade payables of approximately $213,000 and an increase in accrued expenses of approximately $344,000.

We
may seek to satisfy our future funding requirements through public or private offerings of securities, with collaborative or other arrangements with corporate partners or from other
sources. Additional financing may not be available when needed or on terms acceptable to us. If adequate financing is not available, we may be required to delay, scale back or eliminate certain of our
research and development programs, relinquish rights to certain of our technologies, cancer drugs or products, or license third parties to commercialize products or technologies that we would
otherwise seek to develop ourselves.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board Issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," effective for fiscal years beginning after June 15, 1999, which requires an entity to recognize all derivatives as either assets or liabilities
in the balance sheet and to measure those instruments at fair value. In June 1999, the Financial Accounting Standards Board Issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," effective for all fiscal quarters beginning after June 15, 2000. SFAS No. 137 allows companies
that have not applied early adoption of SFAS No. 133 to delay implementation until quarters beginning after
June 15, 2000. Implementation of SFAS No. 133/SFAS No. 137 had no material impact on the Company's 2001 financial statements since it has already been adopted.

On
July 20, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141") and
Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). These pronouncements change the accounting for business combinations,
goodwill, and intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and further clarifies the criteria to
recognize intangible assets separately from goodwill. The requirements of SFAS No. 141 are effective for any business combination accounted for by the purchase method that is completed after
June 30, 2001. SFAS No. 142 states goodwill and indefinite lived intangible assets are no longer amortized but are reviewed for impairment annually (or more frequently if impairment
indicators arise). Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives and assessed for impairment under the provisions of
SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of."

30

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The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, companies are required to adopt the pronouncement in their fiscal year beginning after December 15, 2001. We believe that the provisions of SFAS No. 142, described
above will have no impact on our financial position and results of operations.

Forward Looking Statements

This annual report on Form 10-K includes forward looking statements within the meaning of The Private Securities Litigation Reform Act of 1995.
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These
forward-looking statements are subject to a number of risks, uncertainties and assumptions about us, including, among other things:



In
addition, in this annual report, the words "believe," "may," will," "estimate," "continue," "anticipate," "intend," "expect" and similar expressions, as they relate to us, our
business or our management, are intended to identify forward-looking statements.

We
do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this annual report. In
light of these risks and uncertainties, the forward-looking events and circumstances discussed in this annual report may not occur and actual results could differ materially from those anticipated or
implied in the forward-looking statements.

31

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The Financial Statements and Supplementary Data are incorporated herein by reference to the Company's Financial Statements included as Exhibit 1. The
information is contained as follows:

|                                                              |  | Page
|------------------------------------------------------------- |  | ----
|Report of Arthur Andersen LLP, Independent Public Accountants |  | 39  
|Balance Sheets                                                |  | 40  
|Statements of Operations                                      |  | 41  
|Statements of Stockholders' Equity (Deficit)                  |  | 42  
|Statements of Cash Flows                                      |  | 43  
|Notes to Financial Statements                                 |  | 45  

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND  FINANCIAL DISCLOSURES

None.

32

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PART III

ITEM 10. MANAGEMENT

The directors and executive officers of NeoPharm are as follows:

|Name                              |  | Age |  | Position                                                                 |  | Position
Held
Since
|--------------------------------- |  | --- |  | ------------------------------------------------------------------------ |  | -------------------
|John N. Kapoor, Ph.D              |  | 58  |  | Director, Chairman of the Board                                          |  | 1990               
|James M. Hussey                   |  | 42  |  | President, Chief Executive Officer, and Director                         |  | 1998               
|Erick E. Hanson(1)(2)             |  | 55  |  | Director                                                                 |  | 1997               
|Sander A. Flaum(1)(2)             |  | 64  |  | Director                                                                 |  | 1998               
|Matthew P. Rogan, M.D.(1)(2)      |  | 56  |  | Director                                                                 |  | 2000               
|Kaveh T. Safavi, M.D., J.D.(1)(2) |  | 41  |  | Director                                                                 |  | 2000               
|Jeffrey W. Sherman, M.D., F.A.C.P |  | 47  |  | Executive Vice President, Chief Medical Officer                          |  | 2000               
|Lawrence A. Kenyon, C.P.A         |  | 36  |  | Chief Financial Officer, Secretary                                       |  | 2000               
|Imran Ahmad, Ph.D                 |  | 37  |  | Senior Vice PresidentResearch and Development, Chief Scientific Officer |  | 2000               
|Lewis C. Strauss, M.D             |  | 50  |  | Vice President, Clinical Development                                     |  | 1998               
|Kirk Rosemark                     |  | 37  |  | Vice President, Regulatory Affairs                                       |  | 2001               
|Amy Y. Grahn                      |  | 43  |  | Vice President, Clinical Research Management                             |  | 2001               

---

All
directors hold office until the next annual meeting of the stockholders and until their successors are duly elected. Officers are appointed to serve, subject to the discretion of the
Board of Directors, until their successors are appointed.

John N. Kapoor, Ph.D., Chairman of the Board of Directors, joined us in July 1990 as a member of our Board of Directors. Prior to
forming our company, Dr. Kapoor formed EJ Financial Enterprises, Inc., a health care consulting and investment company, in March 1990, of which Dr. Kapoor is currently
President. Dr. Kapoor is presently Chairman of Option Care, Inc., a provider of home health care
services, Chairman and interim CEO of Akorn, Inc., a manufacturer, distributor and marketer of generic ophthalmic products, a director of Introgen Therapeutics, Inc., a gene therapy
company, and a director of First Horizon Pharmaceuticals, Inc., a distributor of pharmaceuticals. Dr. Kapoor received his Ph.D. in medicinal chemistry from the State University of New
York in 1970 and a B.S. in pharmacy from Bombay University in India.

James M. Husseyjoined us in March 1998 as President, Chief Executive Officer, and a member of the Board of Directors.
Mr. Hussey was previously the Chief Executive Officer and founder of Physicians Quality Care, a managed care organization from 1994 until its sale in January 1998. Previous to that,
Mr. Hussey held several positions with Bristol-Myers Squibb Company from 1984 to 1994, most recently as the General Manager Midwest Integrated Regional Business Unit. Mr. Hussey is
currently a director of Option Care, Inc., a provider of home health care services. Mr. Hussey, a licensed pharmacist, received a B.S. from the College of Pharmacy at Butler University
and an M.B.A. from the University of Illinois.

Erick E. Hansonjoined us as a Director in April 1997. Mr. Hanson is currently President of Hanson and Associates, a
consulting firm working with venture capital companies. Previously,

33

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Mr. Hanson served as President and Chief Executive Officer of Option Care, Inc., a provider of home health care services. Prior to joining Option Care, Inc. Mr. Hanson
held a variety of positions with Caremark, Inc., including from 1991-1995, Vice President Sales and Marketing. Mr. Hanson served as President and Chief Operating Officer of
Clinical Partners, Inc. in Boston, MA, from 1989-1991 and prior to 1989 was associated with Blue Cross and Blue Shield of Indiana for over twenty years. Mr. Hanson presently
serves on the Board of Directors for Integrity Healthcare, Inc., a home healthcare provider.

Sander A. Flaumjoined us as a director in July 1998. Mr. Flaum is Chairman and Chief Executive Officer of Robert A. Becker
EURO RSCG, a marketing and advertising company. Prior to joining Robert A. Becker, Mr. Flaum was Executive Vice President of Kleinter Advertising and prior to that served as Marketing Director
of Lederle Laboratories, a division of American Cyanamid where he was employed from 1965-1984. Mr. Flaum is Adjunct Professor of Management at the Fordham University Graduate School
of Business and also serves on the Board of Directors of Hollins Communications Research Institute, Atrix Laboratories and Integrity Pharmaceuticals.

Dr. Matthew P. Roganis President and CEO of Unicorn Pharma Consulting, Inc., a provider of customized pharmaceutical and
biotechnology medical services. From 1997 to 1999, Dr. Rogan was Vice President, Medical Affairs for Sanofi Pharmaceuticals in the United States. Prior to joining Sanofi, Dr. Rogan
served as Senior Medical Director, Medical Affairs for Zeneca Pharmaceuticals from 1996-1997 and was director of Clinical Support at Burroughs Wellcome from 1993-1995. Prior to
1993, Dr. Rogan held senior positions with Bristol-Myers Squibb. Dr. Rogan is a Diplomate of the American Board of Pediatrics, a Fellow of the American Academy of Pediatrics and a member
of the American Academy of Pharmaceutical Physicians.

Dr. Kaveh T. Safaviis Vice President of Business and Strategic Development for Alexian Brothers of Illinois, Inc., a
multi-hospital health system in metropolitan Chicago, Illinois. Prior to assuming his current position in January 2000, Dr. Safavi served as Vice President, Medical Affairs for United
Healthcare of Illinois, Inc., a large managed care organization from 1996-1999 and served as President of Health Springs Medical Group of Illinois, a primary care group practice and
physician practice management company from 1993 to 1995. Dr. Safavi is board certified in Internal Medicine and Pediatrics and is licensed to practice law in the State of Illinois.

Dr. Jeffrey W. Sherman, M.D., F.A.C.P.,joined us in September 2000 as Executive Vice President and Chief Medical Officer.
Dr. Sherman joined us from Searle/Pharmacia where, since joining that firm in 1992, he has held a variety of positions, serving as Executive Director, Clinical Research, with his focus being on
Oncology Clinical Research and Head of Oncology Global Medical Operations in Medical Marketing. Dr. Sherman received his medical degree from the Finch University of Health Sciences/The Chicago
Medical School and is a member of numerous professional societies and a Diplomate of the National Board of Medical Examiners and the American Board of Internal Medicine.

Lawrence A. Kenyonjoined us in September 2000 as our Chief Financial Officer. From October 1999 until September 2000
Mr. Kenyon was Senior Vice President of the Gabelli Mathers Fund, a regulated investment company. Prior to that, Mr. Kenyon held a variety of positions with Mathers and
Company, Inc., an investment management firm, most recently serving as the Chief Financial Officer for both Mathers and Company, Inc. and Mathers Fund, Inc. Mr. Kenyon is a
Certified Public Accountant and received his B.B.A. in Accounting from the University of WisconsinWhitewater in 1987.

Imran Ahmad, Ph.D., Vice President, Research and Development, joined NeoPharm in July 2000. Prior to joining NeoPharm,
Dr. Ahmad held a variety of positions at the Liposome Company from 1993 until 2000, most recently serving as Assistant Director of Research and Development where his responsibilities included
directing the pre-clinical research program. Dr. Ahmad conducted his post-doctoral work at the University of Alberta, Canada.

34

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Dr. Lewis C. Strauss, M.D., joined us as Chief Medical Officer, in April 1998. After completing his medical training at
Cornell Medical College and his pediatric residency at The Johns Hopkins School of Medicine in Baltimore, Dr. Strauss served as Assistant Professor, Oncology and Pediatrics at Johns Hopkins
Oncology Center (1980-1991) and Associate Professor, Pediatrics (HematologyOncology) at Northwestern University (1991-1997). Upon Dr. Jeffrey Sherman
joining us in September 2000 as Chief Medical Officer, Dr. Strauss became Vice President, Clinical Development.

Kirk Rosemark, RAC, joined us as Vice President of Regulatory Affairs in April 2001. Mr. Rosemark joined us from Solvay
Pharmaceuticals where, since joining that firm in March 1998, he has held a variety of positions, most recently serving as Director of Regulatory Affairs for Unimed
Pharmaceuticals, a Solvay Pharmaceuticals company. Prior to that, Mr. Rosemark held various Regulatory Affairs positions with Novartis Ophthalmics and Bausch & Lomb Pharmaceuticals.

Amy Y. Grahnjoined us as Vice President of Clinical Research Management in August 2001. Prior to that, from September 2000
until August 2001, Ms. Grahn was Senior Project Manager at Takeda Pharmaceuticals, North America. From 1998 until 2000, Ms. Grahn served as Associate Director of Oncology Clinical
Research and G.D. Searle & Co. Prior to 1998, Ms. Grahn held a variety of positions in clinical research at Abbott Laboratories. Ms. Grahn received her M.S. from the Illinois
Institute of Technology in 1988.

John
N. Kapoor, PhD., one of our directors and a principal stockholder, was previously the Chairman and President of Lyphomed, Inc. Fujisawa Pharmaceutical Co., Ltd. was a
major stockholder of Lyphomed from the mid-1980's until 1990, at which time Fujisawa completed a tender offer for the remaining shares of Lyphomed, including the shares held by
Dr. Kapoor. In 1992, Fujisawa filed suit in federal District Court in Illinois against Dr. Kapoor alleging that between 1980 and 1986, Lyphomed filed a large number of allegedly
fraudulent new drug applications with the FDA, and that Dr. Kapoor's failure to make certain disclosures to Fujisawa constituted a violation of federal securities laws and the Racketeer
Influenced and Corrupt Organizations Act. Fujisawa also alleged state law claims. Dr. Kapoor countersued, and in 1999, the litigation was settled on terms mutually acceptable to the parties.
The terms of the settlement are subject to a confidentiality agreement.

Officers
serve at the discretion of the Board of Directors. There are no family relationships between any of our directors or executive officers.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely on a review of the copies of reports furnished to the Company or written representations that no reports were required, the Company believes that,
during the 2001 fiscal year, all filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item as to executive compensation is hereby incorporated by reference from the information appearing under the captions
"Executive Compensation", "Compensation of Directors," "Election of Directors-Compensation Committee Interlocks and Insider Participation", and "Compensation Committee Report" in the Company's
definitive Proxy Statement which is filed with the Securities and Exchange Commission (the "commission") within 120 days of the Company's fiscal year ended December 31, 2001.

35

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  AND MANAGEMENT

The information required by this item as to the ownership of management and others of securities of the Company is hereby incorporated by reference from the
information appearing under the caption "Security Ownership" in the Company's definitive Proxy Statement which is to be filed with the Commission within 120 days of the Company's fiscal year
ended December 31, 2001.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item as to certain business relationships and transactions with management and other related parties of the Company is hereby
incorporated by reference from the information appearing under the caption "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement which is to be filed with the
Commission within 120 days of the Company's fiscal year ended December 31, 2001.

36

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PART IV

ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

|(a) |  | Exhibits                                                                                                                                                                                                                                
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | 3.1                                                                                                                                                                                                                                     
|    |  | 3.2                                                                                                                                                                                                                                     
|    |  | 10.01                                                                                                                                                                                                                                   
|    |  | 10.02                                                                                                                                                                                                                                   
|    |  | 10.03                                                                                                                                                                                                                                   
|    |  | 10.04                                                                                                                                                                                                                                   
|    |  | 10.05                                                                                                                                                                                                                                   
|    |  | 99.01                                                                                                                                                                                                                                   
|(b) |  | Financial Statements                                                                                                                                                                                                                    
|    |  | (1)                                                                                                                                                                                                                                     
|    |  | The financial statements filed as part of this Registration Statement are listed in the Index to Financial Statements of the Company on Page 38.                                                                                        
|(c) |  | Reports on Form 8-K                                                                                                                                                                                                                     
|    |  | On December 31, 2001, the Company filed a report on Form 8-K reporting the execution of a promissory note and processing agreement between the Company and Akorn, Inc., a related party, describing the general terms of the agreements.

37

---



SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

| |  | NEOPHARM, INC.
| |  | --------------
| |  | By:           

PURSUANT
TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS ANNUAL REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.

|Signature                               |  | Title                                                                                  |  | Date          
|--------------------------------------- |  | -------------------------------------------------------------------------------------- |  | --------------
|                                        |  |                                                                                        |  |               
|/s/JOHN N. KAPOORJohn N. Kapoor         |  | Director, Chairman of the Board                                                        |  | April 10, 2002
|/s/JAMES M. HUSSEYJames M. Hussey       |  | Director, President, and Chief Executive Officer (Principal Executive Officer)         |  | April 10, 2002
|/s/ERICK E. HANSONErick E. Hanson       |  | Director                                                                               |  | April 10, 2002
|/s/SANDER FLAUMSander Flaum             |  | Director                                                                               |  | April 10, 2002
|/s/MATTHEW P. ROGANMatthew P. Rogan     |  | Director                                                                               |  | April 10, 2002
|/s/KAVEH T. SAFAVIKaveh T. Safavi       |  | Director                                                                               |  | April 10, 2002
|/s/LAWRENCE A. KENYONLawrence A. Kenyon |  | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |  | April 10, 2002

38

---



INDEX TO FINANCIAL STATEMENTS

NEOPHARM, INC.  (A DELAWARE CORPORATION)

|                                                              |  | Page
|------------------------------------------------------------- |  | ----
|Report of Arthur Andersen LLP, Independent Public Accountants |  | 40  
|Balance Sheets                                                |  | 41  
|Statements of Operations                                      |  | 42  
|Statements of Stockholders' Equity                            |  | 43  
|Statements of Cash Flows                                      |  | 44  
|Notes to Financial Statements                                 |  | 46  

39

---



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To
the Stockholders of NeoPharm, Inc.:

We
have audited the accompanying balance sheets of NeoPharm, Inc. (a Delaware corporation) as of December 31, 2000 and 2001, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NeoPharm, Inc. as of December 31, 2000 and
2001, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the
United States.

As
explained in Note 5 to the financial statements, effective July 2000, the Company changed its method of accounting for non-employee director stock
compensation.

|                                |  |                    
|------------------------------- |  | -------------------
|                                |  | ARTHUR ANDERSEN LLP
|Chicago, Illinois
April 9, 2002 |  |                    

40

---



NEOPHARM, INC.  (A DELAWARE CORPORATION)        BALANCE SHEETS

|                                     |                                                                                                                                                                         | December 31,                               |  
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -
|
|ASSETS                               |                                                                                                                                                                         |                                            |  
|Current assets:                      |                                                                                                                                                                         |                                            |  
|                                     | Cash and cash equivalents                                                                                                                                               |                                            | $
|                                     | Short-term investment in marketable securities                                                                                                                          |                                            |  
|                                     | Other receivables                                                                                                                                                       |                                            |  
|                                     | Prepaid expenses                                                                                                                                                        |                                            |  
|                                     |                                                                                                                                                                         |                                            |  
|                                     |                                                                                                                                                                         | Total current assets                       |  
|Equipment and furniture:             |                                                                                                                                                                         |                                            |  
|                                     | Equipment                                                                                                                                                               |                                            |  
|                                     | Furniture                                                                                                                                                               |                                            |  
|                                     | Leasehold improvements                                                                                                                                                  |                                            |  
|                                     | Less accumulated depreciation                                                                                                                                           |                                            |  
|                                     |                                                                                                                                                                         |                                            |  
|                                     |                                                                                                                                                                         | Total equipment and furniture, net         |  
|                                     |                                                                                                                                                                         |                                            |  
|                                     | Long-term investment in marketable securities                                                                                                                           |                                            |  
|                                     | Related party note receivable, net (Note 9)                                                                                                                             |                                            |  
|                                     |                                                                                                                                                                         |                                            |  
|                                     |                                                                                                                                                                         | Total assets                               |  
|                                     |                                                                                                                                                                         |                                            |  
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                                         |                                            |  
|Current liabilities:                 |                                                                                                                                                                         |                                            |  
|                                     | Accrued clinical trial expenses                                                                                                                                         |                                            | $
|                                     | Accounts payable                                                                                                                                                        |                                            |  
|                                     | Accrued compensation                                                                                                                                                    |                                            |  
|                                     | Other accrued expenses                                                                                                                                                  |                                            |  
|                                     |                                                                                                                                                                         |                                            |  
|                                     |                                                                                                                                                                         | Total current liabilities                  |  
|                                     |                                                                                                                                                                         |                                            |  
|Stockholders' equity:                |                                                                                                                                                                         |                                            |  
|                                     | Common stock, $.0002145 par value; 25,000,000 shares authorized, 14,656,588 and 16,237,779 shares issued and outstanding as of December 31, 2000 and 2001, respectively |                                            |  
|                                     | Additional paid-in capital                                                                                                                                              |                                            |  
|                                     | Accumulated deficit                                                                                                                                                     |                                            |  
|                                     |                                                                                                                                                                         |                                            |  
|                                     |                                                                                                                                                                         | Total stockholders' equity                 |  
|                                     |                                                                                                                                                                         |                                            |  
|                                     |                                                                                                                                                                         | Total liabilities and stockholders' equity |  
|                                     |                                                                                                                                                                         |                                            |  

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

41

---

NEOPHARM, INC.  (A DELAWARE CORPORATION)        STATEMENTS OF OPERATIONS

|                                                                                                                      |                                                                 | For the Years Ended December 31, |           
|--------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | -------------------------------- | ----------
|
|Revenues                                                                                                              |                                                                 | $                                | 11,000,000
|                                                                                                                      |                                                                 |                                  |           
|Expenses:                                                                                                             |                                                                 |                                  |           
|Research and development                                                                                              |                                                                 |                                  | 2,375,458 
|General and administrative                                                                                            |                                                                 |                                  | 2,413,901 
|Related party expenses (Note 9)                                                                                       |                                                                 |                                  | 1,416,547 
|                                                                                                                      |                                                                 |                                  |           
|                                                                                                                      |                                                                 | Total expenses                   |           
|                                                                                                                      |                                                                 |                                  |           
|Income/(loss) from operations                                                                                         |                                                                 |                                  | 4,794,094 
|Other income                                                                                                          |                                                                 |                                  |          
|Other expense                                                                                                         |                                                                 |                                  |          
|                                                                                                                      |                                                                 |                                  |           
|Other income - net                                                                                                    |                                                                 |                                  |          
|Interest income                                                                                                       |                                                                 |                                  | 626,508   
|Interest expense                                                                                                      |                                                                 |                                  | 2,126     
|                                                                                                                      |                                                                 |                                  |           
|Interest income - net                                                                                                 |                                                                 |                                  | 624,382   
|                                                                                                                      |                                                                 |                                  |           
|Income/(loss) before income taxes                                                                                     |                                                                 | $                                | 5,418,476 
|Income taxes (benefit)/expense                                                                                        |                                                                 |                                  | 1,664,000 
|                                                                                                                      |                                                                 |                                  |           
|Income/(loss) before cumulative effect of accounting change                                                           |                                                                 | $                                | 3,754,476 
|                                                                                                                      |                                                                 |                                  |           
|Cumulative effect on prior years (to December 15, 1998) of changing to a different stock compensation method (Note 5) |                                                                 |                                  |          
|                                                                                                                      |                                                                 |                                  |           
|Net income/(loss)                                                                                                     |                                                                 | $                                | 3,754,476 
|                                                                                                                      |                                                                 |                                  |           
|Net income/(loss) per share                                                                                           |                                                                 |                                  |           
|Basic                                                                                                                 |                                                                 |                                  |           
|                                                                                                                      | Net income/(loss) before cumulative effect of accounting change |                                  | $         
|                                                                                                                      | Cumulative effect of accounting change on prior years (Note 5)  |                                  |           
|                                                                                                                      |                                                                 |                                  |           
|                                                                                                                      | Net income/(loss) per share - basic                             |                                  | $         
|                                                                                                                      |                                                                 |                                  |           
|Diluted                                                                                                               |                                                                 |                                  |           
|                                                                                                                      | Net income/(loss) before cumulative effect of accounting change |                                  | $         
|                                                                                                                      | Cumulative effect of accounting change on prior years (Note 5)  |                                  |           
|                                                                                                                      |                                                                 |                                  |           
|                                                                                                                      | Net income/(loss) per share - diluted                           |                                  | $         
|                                                                                                                      |                                                                 |                                  |           
|Pro forma amounts assuming new stock compensation method applied retroactively                                        |                                                                 |                                  |           
|                                                                                                                      | Net income/(loss) before cumulative effect of accounting change |                                  | $         
|                                                                                                                      | Net income/(loss) per share - basic                             |                                  | $         
|                                                                                                                      | Net income/(loss) per share - diluted                           |                                  | $         
|Weighted average shares outstanding                                                                                   |                                                                 |                                  |           
|                                                                                                                      | Basic                                                           |                                  |           
|                                                                                                                      | Diluted                                                         |                                  |           

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

42

---



NEOPHARM, INC.  (A DELAWARE CORPORATION)        STATEMENT OF STOCKHOLDERS' EQUITY

|                                                        |  | Common Stock
Shares |  | Par
Value |       | Additional
Paid-in
Capital |   | Accumulated Deficit |   | Total
Stockholders'
Equity |            
|------------------------------------------------------- |  | ------------------- |  | --------- | ----- | -------------------------- | - | ------------------- | - | -------------------------- | -----------
|Balance at December 31, 1998                            |  | 8,341,779           |  | $         | 1,789 |                            | $ | 6,637,378           |   | $                          | (5,461,045 
|Issuance of stock pursuant to exercise of stock options |  | 356,000             |  |           | 76    |                            |   | 1,495,424           |   |                            |           
|Issuance of stock pursuant to restricted stock grants   |  | 5,372               |  |           | 1     |                            |   | 79,826              |   |                            |           
|Issuance of stock to Pharmacia & Upjohn                 |  | 452,861             |  |           | 97    |                            |   | 7,999,903           |   |                            |           
|Exercise of warrants                                    |  | 1,872,605           |  |           | 403   |                            |   | 9,073,983           |   |                            |           
|Net income                                              |  |                    |  |           |      |                            |   |                    |   |                            | 3,754,476  
|Issuance of options to non-employees                    |  |                    |  |           |      |                            |   | 422,747             |   |                            |           
|                                                        |  |                     |  |           |       |                            |   |                     |   |                            |            
|Balance at December 31, 1999                            |  | 11,028,617          |  | $         | 2,366 |                            | $ | 25,709,261          |   | $                          | (1,706,569 
|Issuance of stock pursuant to exercise of stock options |  | 77,324              |  |           | 17    |                            |   | 370,252             |   |                            |           
|Issuance of stock pursuant to restricted stock grants   |  | 3,229               |  |           | 1     |                            |   | 66,898              |   |                            |           
|Issuance of stock pursuant to follow-on offering        |  | 3,480,000           |  |           | 747   |                            |   | 115,673,334         |   |                            |           
|Exercise of warrants                                    |  | 67,418              |  |           | 14    |                            |   | (14                 | ) |                            |           
|Net loss                                                |  |                    |  |           |      |                            |   |                    |   |                            | (386,230   
|Issuance of options to non-employees                    |  |                    |  |           |      |                            |   | 501,599             |   |                            |           
|Cumulative effect of accounting change (Note 5)         |  |                    |  |           |      |                            |   | (139,598            | ) |                            |           
|                                                        |  |                     |  |           |       |                            |   |                     |   |                            |            
|Balance at December 31, 2000                            |  | 14,656,588          |  | $         | 3,145 |                            | $ | 142,181,732         |   | $                          | (2,092,799 
|Issuance of stock pursuant to exercise of stock options |  | 105,250             |  |           | 23    |                            |   | 503,820             |   |                            |           
|Issuance of stock pursuant to 10% stock dividend        |  | 1,475,941           |  |           | 316   |                            |   | 26,891,329          |   |                            | (26,891,645
|Net loss                                                |  |                    |  |           |      |                            |   |                    |   |                            | (13,424,037
|Issuance of options to non-employees                    |  |                    |  |           |      |                            |   | 171,666             |   |                            |           
|                                                        |  |                     |  |           |       |                            |   |                     |   |                            |            
|Balance at December 31, 2001                            |  | 16,237,779          |  | $         | 3,484 |                            | $ | 169,748,547         |   | $                          | (42,408,481
|                                                        |  |                     |  |           |       |                            |   |                     |   |                            |            

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

43

---

NEOPHARM, INC.  (A DELAWARE CORPORATION)        STATEMENTS OF CASH FLOWS

|                                                                                                   |                                                                          | For the Years Ended December 31, |           
|-------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | -------------------------------- | ----------
|
|Cash flows provided by/(used in) operating activities:                                             |                                                                          |                                  |           
|Net income/(loss)                                                                                  |                                                                          | $                                | 3,754,476 
|Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: |                                                                          |                                  |           
|Depreciation and amortization                                                                      |                                                                          |                                  | 38,583    
|Deferred income taxes                                                                              |                                                                          |                                  | 1,640,000 
|Expense from non-employee stock options                                                            |                                                                          |                                  | 422,747   
|Cumulative effect of accounting change (Note 5)                                                    |                                                                          |                                  |          
|Restricted stock grants in lieu of cash compensation                                               |                                                                          |                                  | 79,827    
|Income tax refunds received                                                                        |                                                                          |                                  |          
|(Increase)/decrease in other assets                                                                |                                                                          |                                  | (320,807  
|Increase/(decrease) in accrued liabilities                                                         |                                                                          |                                  | 151,833   
|Increase/(decrease) in accounts payable                                                            |                                                                          |                                  | 291,431   
|                                                                                                   |                                                                          |                                  |           
|                                                                                                   | Net cash and cash equivalents provided by/(used in) operating activities |                                  |           
|                                                                                                   |                                                                          |                                  |           
|Cash flows used in investing activities:                                                           |                                                                          |                                  |           
|Purchase of marketable securities                                                                  |                                                                          |                                  |          
|Purchase of equipment and furniture                                                                |                                                                          |                                  | (4,090    
|Issuance of related party note receivable, net (Note 9)                                            |                                                                          |                                  |          
|                                                                                                   |                                                                          |                                  |           
|                                                                                                   | Net cash and cash equivalents used in investing activities               |                                  |           
|                                                                                                   |                                                                          |                                  |           
|Cash flows provided by financing activities:                                                       |                                                                          |                                  |           
|Proceeds from issuance of common stock                                                             |                                                                          |                                  | 9,495,500 
|Proceeds from exercise of warrants                                                                 |                                                                          |                                  | 9,074,386 
|Cashless exercise of warrants, charge                                                              |                                                                          |                                  | (1,074,208
|Cashless exercise of warrants, proceeds                                                            |                                                                          |                                  | 1,074,208 
|                                                                                                   |                                                                          |                                  |           
|                                                                                                   | Net cash and cash equivalents provided by financing activities           |                                  |           
|                                                                                                   |                                                                          |                                  |           
|Net increase/(decrease) in cash                                                                    |                                                                          |                                  | 24,623,886
|Cash and cash equivalents, beginning of period                                                     |                                                                          |                                  | 40,681    
|                                                                                                   |                                                                          |                                  |           
|Cash and cash equivalents, end of period                                                           |                                                                          | $                                | 24,664,567
|                                                                                                   |                                                                          |                                  |           
|Supplemental disclosure of cash paid for:                                                          |                                                                          |                                  |           
|Interest                                                                                           |                                                                          | $                                | 2,126     
|Income taxes                                                                                       |                                                                          | $                                | 150,000   

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

44

---

Supplemental disclosure of cash flow information:

In
1999, the company granted 5,372 shares of restricted common stock to employees as compensation and recorded compensation expense of $79,827 based on the fair market value of the
shares on the date of grant. Additionally, holders of the Company's Representative warrants that were issued as part of the initial public offering exercised on a cashless basis 44,935 of 86,000
outstanding warrants. Each warrant entitles the holder to two shares of common stock for an exercise price of $9.80. The Company called its 837,067 redeemable common stock purchase warrants and the
67,500 warrants underlying its representative's warrants on June 24, 1999. The period for exercising the outstanding warrants closed at the close of business on July 27, 1999. Warrant
holders exercised 836,942 of the redeemable warrants and 67,500 of the underlying warrants for total net proceeds to the Company of $9,074,386. Pursuant to its license agreement, Pharmacia purchased
452,861 shares of the Company's common stock at a price of $17.6655 per share on July 23, 1999.

In
2000, the company granted 3,229 shares of restricted common stock to employees as compensation and recorded compensation expense of $66,899 based on the fair market value of the
shares on the date of grant. Additionally, holders of the Company's Representative warrants that were issued as part of the initial public offering exercised on a cashless basis the remaining 41,065
outstanding warrants. Each warrant entitles the holder to two shares of common stock for an exercise price of $9.80. As of December 31, 2000 there were no warrants outstanding.

The
Company sold 3,000,000 shares of common stock to the public at a price of $35.50 per share on September 25, 2000. In addition, the underwriters exercised their option to
purchase an additional 480,000 shares at $35.50 per share on October 4, 2000. These sales of common stock resulted in net proceeds to the Company of $115,674,081 after expenses.

During
2001, the Company loaned $3,250,000 to Akorn, Inc. to assist Akorn in the completion of its manufacturing facility in Decatur, Illinois. The note receivable issued to Akorn
is due in December 2006, and accrues interest at a rate equal to that received on the Company's investments in marketable securities. In exchange, the Company has been granted access to at
least 15% of the annual lyophilization capacity at Akorn at a discounted price, upon completion of the facility (See Note 9). A valuation allowance of $1,266,619 was established, and fully
expensed in 2001, based on the difference between the actual loan amount and the present value of the loan using an estimated market interest rate of 10%.

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

45

---



NEOPHARM, INC.  (A DELAWARE CORPORATION)        NOTES TO FINANCIAL STATEMENTS        DECEMBER 31, 2000 and 2001

1. ORGANIZATION AND BUSINESS:

NeoPharm, Inc. (the "Company"), a Delaware corporation, was incorporated on June 15, 1990, under the name of OncoMed, Inc. In
March 1995, the Company changed its name to NeoPharm, Inc. The Company is engaged in the research, development and commercialization of drugs for the treatment of various forms of
cancer. At December 31, 2001, the Company has a portfolio of eight anticancer drugs, six of which are in human clinical trials.

The
Company has one product which is the subject of a Cooperative Research and Development Agreement ("CRADA") with the National Cancer Institute ("NCI"), a unit of the National
Institute of Health ("NIH") and two products, licensed from the NIH, one of which is the subject of a CRADA with the United States Food and Drug Administration ("FDA"). The Company also has rights to
products developed under license and sponsored research agreements with Georgetown University ("Georgetown").

The
Company is continuing to develop its products, which requires substantial capital for research, product development and market development activities. The Company has not yet
initiated marketing of a commercial product. Future product development will require clinical testing, regulatory approval and substantial additional investment prior to commercialization. The future
success of the Company is dependent on its ability to make progress in the development of its products and, ultimately, upon its ability to attain future profitable operations through the successful
manufacturing and marketing of those products. There can be no assurance that the Company will be able to obtain necessary financing or regulatory approvals to be able to successfully develop,
manufacture and market its products, or
attain successful future operations. Insufficient funds could require the Company to delay, scale back or eliminate one or more of its research and development programs or to license third parties to
commercialize products or technologies that the Company would otherwise seek to develop without relinquishing its rights thereto. Accordingly, the predictability of the Company's future success is
uncertain.

The
Company's rights to its products are subject to the terms of its agreements with NCI, NIH, FDA and Georgetown. Termination of any, or all, of these agreements could have a material
adverse effect on the Company's business, financial condition and results of operations. In addition, uncertainty exists as to the Company's ability to protect its rights to patents and its
proprietary information. There can also be no assurance that research and discoveries by others will not render some or all of the Company's programs or products noncompetitive or obsolete. Nor can
there be any assurance that unforeseen problems will not develop with the Company's technologies or applications, or that the Company will be able to address successfully technological challenges it
encounters in its research and development programs. Although the Company plans to obtain product liability insurance, it currently does not have any nor is there any assurance that it will be able to
attain or maintain such insurance on acceptable terms or with adequate coverage against potential liabilities. A description of the risks related to the Company's business can be found in the Risk
Factors section of the Company's most recent annual report on Form 10-K, which is on file with the Securities and Exchange Commission.

From
its inception on June 15, 1990, through December 31, 1998, the Company was classified as a development stage entity. The Company completed its development stage upon
the out-licensing of its first major compound to Pharmacia & Upjohn ("Pharmacia") in February of 1999. Accordingly, the inception to date information is not presented in these
financial statements.

46

---

2. SIGNIFICANT ACCOUNTING POLICIES:

Research and Development

Research and development costs are expensed when incurred. These costs include, among other things, consulting fees and costs reimbursed to Georgetown pursuant to
the agreements as described in Note 7. Payments related to the acquisition of technology rights, for which development work is in process, are expensed and considered a component of research
and development costs. The Company also allocates indirect costs, consisting primarily of operational costs for administering research and development activities, to research and development expenses.

Investments

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying value of
these investments approximate the fair market value. Short -term investment in marketable securities includes liquid investments purchased with an original maturity of between three months
and one year while long-term investment in marketable securities includes liquid investments purchased with an original maturity of greater than one year but less than two years. As
provided by SFAS No. 115, the Company has elected to treat all of its investments in marketable securities as "available-for-sale", which requires these investments to
be recorded at fair market value. At December 31, 2001, the Company recorded its investments in marketable securities using cost plus accrued interest as this approximated the fair market value
of the securities held. No investments were sold during the period.

Equipment and Furniture

Equipment and furniture are recorded at cost and are depreciated using an accelerated method over the estimated useful economic lives of the assets involved. The
estimated useful lives employed in computing depreciation are five years for computers and scientific equipment, seven years for furniture, and leasehold improvements are amortized over the lesser of
the life of the improvements or the life of the lease. Maintenance and repairs that do not extend the life of assets are charged to expense when incurred.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during
the reporting period. Actual results could differ from those estimates.

Stock-Based Compensation

As provided by SFAS No. 123, the Company has elected to continue to account for its stock-based compensation programs according to the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, compensation expense has been recognized to the extent of employee or director services
rendered based on the intrinsic value of compensatory

47

---

options or shares granted under the plans. The Company has adopted the disclosure provisions required by SFAS No. 123 (see Note 4).

Revenue Recognition-License Fees

The Company has licensed certain of its technologies to third parties in return for up-front license fees and subsequent milestone-based payments. The
Company's policy is to recognize revenue upon receipt of the license fees or milestone payments provided the payments are non-refundable and are not subject to future performance
obligations. All payments received to-date have been non-refundable. Further, the Company has no material obligations to provide future services or financial support under the
terms of the license agreements. The Company was required to implement Staff Accounting Bulletin ("SAB") 101 in the fourth quarter of 2000. Adoption of SAB 101 had no material effect on the Company's
financial statements since the Company had been in compliance with SAB 101 prior to adoption.

Reclassification

Certain amounts in previously issued financial statements have been reclassified to conform to 2001 classifications.

Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years beginning
after June 15, 1999, which requires an entry to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. In
June 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging ActivitiesDeferral of the Effective Date of FASB
Statement No. 133," effective for all fiscal quarters beginning after June 15, 2000. SFAS No. 137 allows companies that have not applied early adoption of SFAS No. 133 to
delay implementation until quarters beginning after June 15, 2000. Implementation of SFAS No. 133/SFAS No. 137 had no material impact on the Company's 2001 financial statements
since it has already been adopted.

On
July 20, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141") and
Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). These pronouncements change the accounting for business combinations,
goodwill, and intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and further clarifies the criteria to
recognize intangible assets separately from goodwill. The requirements of SFAS No. 141 are effective for any business combination accounted for by the purchase method that is completed after
June 30, 2001. SFAS No. 142 states goodwill and indefinite lived intangible assets are no longer amortized but are reviewed for impairment annually (or more frequently if impairment
indicators
arise). Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives and assessed for impairment under the provisions of
SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of." The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after

48

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June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt the pronouncement in their fiscal year beginning after
December 15, 2001. The Company believes that the provisions of SFAS No. 142, described above, will have no impact on its financial position and results of operations.

3. INCOME PER SHARE

The following table sets forth the computation of the basic and diluted loss per share from continuing operations:

|                                 |                                                  | 1999 |           | 2000       |  | 2001    |           
|-------------------------------- | ------------------------------------------------ | ---- | --------- | ---------- |  | ------- | ----------
|Numerator:                       |                                                  |      |           |            |  |         |           
|                                 | Net income/(loss)                                |      | $         | 3,754,476  |  | $       | (386,230  
|                                 |                                                  |      |           |            |  |         |           
|Denominator:                     |                                                  |      |           |            |  |         |           
|                                 | Denominator for basic income/(loss) per share    |      |           |            |  |         |           
|                                 | Weighted average shares                          |      |           | 10,524,427 |  |         | 13,199,927
|Effect of dilutive securities:   |                                                  |      |           |            |  |         |           
|                                 | Stock options                                    |      |           | 917,063    |  |         | 966,467   
|                                 | Warrant exercise                                 |      |           | 829,111    |  |         | 13,515    
|                                 |                                                  |      |           |            |  |         |           
|Dilutive potential common shares |                                                  |      | 1,746,174 |            |  | 979,982 |           
|                                 | Denominator for diluted income/(loss) per share- |      |           |            |  |         |           
|                                 | Weighted average shares and assumed
Conversions  |      |           | 12,270,601 |  |         | 14,179,909
|                                 |                                                  |      |           |            |  |         |           
|                                 | Basic income/(loss) per share                    |      | $         | .36        |  | $       | (.03      
|                                 |                                                  |      |           |            |  |         |           
|                                 | Diluted income/(loss) per share                  |      | $         | .31        |  | $       | (.03      
|                                 |                                                  |      |           |            |  |         |           

Options
to purchase 11,000, 67,650 and 1,061,525 shares of common stock were outstanding as of December 31, 1999, 2000 and 2001, respectively but were not included in the
computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares and, therefore, would be antidilutive. For additional
disclosure regarding the Company's stock options and warrants, see Notes 4, 5 and 10.

4. STOCK OPTIONS

Option Agreements

On July 23, 1998, the board of directors approved the NeoPharm, Inc. 1998 Equity Incentive Plan (the "1998 Plan"), which replaced all prior equity
incentive plans, and provides for the grant of options to acquire up to 2,200,000 shares of the Company's common stock. Additionally, 275,000 of the 2,200,000 shares can be used for restricted stock
grants to employees and consultants. The option prices shall be not less than 85% of the fair market value of the stock as determined by the Administrator pursuant to the 1998 Plan. The consideration
paid for shares of restricted stock shall not be less than

49

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the par value of the Company's common stock. At December 31, 2001 approximately 390,000 shares were available under the 1998 Plan.

The
following table summarizes the transactions in the Company's stock option plans for the three year period ended December 31, 2001.

|                                                                             |  | Number of
Shares |   | Weighted Average
Exercise
Price Per Share
|---------------------------------------------------------------------------- |  | ---------------- | - | -----------------------------------------
|Unexercised stock options outstanding, December 31, 1998                     |  | 1,293,406        |   | $                                        
|Options granted                                                              |  | 381,700          |   | $                                        
|Options exercised                                                            |  | (391,600         | ) | $                                        
|Unexercised stock options outstanding, December 31, 1999                     |  | 1,283,506        |   | $                                        
|Options granted                                                              |  | 518,650          |   | $                                        
|Options exercised                                                            |  | (85,056          | ) | $                                        
|Options cancelled                                                            |  | (15,400          | ) | $                                        
|Unexercised stock options outstanding, December 31, 2000                     |  | 1,701,700        |   | $                                        
|Options granted                                                              |  | 526,850          |   | $                                        
|Options exercised                                                            |  | (115,775         | ) | $                                        
|Unexercised stock options outstanding, December 31, 2001                     |  | 2,112,775        |   | $                                        
|                                                                             |  |                  |   |                                          
|Detail of unexercised stock options outstanding, December 31, 2001          |  |                  |   |                                          
|Price range $2.05 - $16.82 (weighted average contractual life of 5.9 years)  |  | 1,072,775        |   | $                                        
|Price range $11.49 - $32.95 (weighted average contractual life of 8.9 years) |  | 1,040,000        |   | $                                        
|                                                                             |  |                  |   |                                          
|Exercisable options, December 31, 2001                                       |  | 813,633          |   | $                                        
|                                                                             |  |                  |   |                                          

The
Company accounts for the plans under APB Opinion No. 25, under which no compensation cost has been recognized for stock option awards to employees since the exercise price of
options granted is equal to market value on the date of grant. Had compensation cost for such stock option awards under the plans been determined consistent with SFAS No. 123, the Company's
earnings per share would have been reduced to the following pro forma amounts using the Black Scholes option pricing model:

|                   |  |             |  | 1999 |           | 2000 |   | 2001       |  
|------------------ |  | ----------- |  | ---- | --------- | ---- | - | ---------- | -
|Net Income/(Loss): |  | As Reported |  | $    | 3,754,476 |      | $ | (386,230   | )
|                   |  | Pro Forma   |  |      | 2,981,413 |      |   | (2,296,850 | )
|Basic EPS:         |  | As Reported |  |      | ..36      |      |   | (.03       | )
|                   |  | Pro Forma   |  |      | .28       |      |   | (.17       | )
|Diluted EPS:       |  | As Reported |  |      | ..31      |      |   | (.03       | )
|                   |  | Pro Forma   |  |      | .24       |      |   | (.17       | )

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The
Company has granted options to purchase 770,866 shares to certain non-employees of which 328,075 such options remain outstanding and unexercised at December 31,
2001. These consultants served as scientific and/or business advisors to the Company. The Company accounts for these options using a fair value method with the fair value of these options determined
at the date of grant. From inception through December 31, 1995 the Company deemed the fair value of these options on the date of grant to be nominal, and no expense was recorded. For all
subsequent years, the fair value of option grants was calculated using the Black-Scholes pricing model. For the year ended December 31, 1999, 2000 and 2001, an expense of $422,747, $501,599 and
$171,666 was recorded respectively. The Black Scholes option pricing model weighted average fair value of options granted in the three most recent fiscal years is included in the following table,
along with key assumptions used to determine fair value.

|                                             |  | 1999 |          | 2000 |   | 2001     |  
|-------------------------------------------- |  | ---- | -------- | ---- | - | -------- | -
|Weighted average fair value of option grants |  | $    | 10.66    |      | $ | 20.27    |  
|                                             |  |      |          |      |   |          |  
|Weighted average risk-free interest rate     |  |      | 5.31     | %    |   | 5.77     | %
|Dividend yield                               |  |      | 0.00     | %    |   | 0.00     | %
|Volatility factor                            |  |      | 91.05    | %    |   | 91.24    | %
|Weighted average expected life               |  |      | 10 years |      |   | 10 years |  

5. CHANGE IN STOCK COMPENSATION METHOD

In 2000, FASB issued its Interpretation 44, which required all non-employee directors of the Company to be treated as employees for computing stock
compensation expense. Stock compensation in prior years, beginning in 1999, was computed assuming that the Company's non-employee members of the Board of Directors were not employees. The
new method of stock compensation was adopted retroactively and has been applied to stock compensation expense in prior years. The effect of the change in 2000 was to increase income by $139,598 ($.01
per share). The pro forma amounts shown on the income statement have been adjusted for the effect of retroactive application on stock compensation had the new method been in effect.

6. FEDERAL INCOME TAXES:

From inception through October 11, 1995, the Company operated as an S Corporation for income tax purposes. Losses incurred during this period are reported
on the stockholders' tax return, and are not available to the Company as a net operating loss carry forward.

On
October 11, 1995, the Company voluntarily terminated its S Corporation election. Since that time, losses incurred represent net operating loss carry forwards which can be used
to offset future taxable income. Total net operating loss carry forwards were approximately $8,200,000 and

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approximately $22,394,000 as of December 31, 2000 and 2001, respectively. The net operating loss carry forwards will expire as follows:

Year of Expiration

Amount2011

$
1,773,0002012


1,969,0002013


3,122,0002015


1,336,0002016


14,194,000


The
Company has general business credit carry forwards of approximately $851,000 which expire in the years 2011-2016.

The
Company made payments of $150,000 towards federal alternative minimum tax during 1999 of which $110,347 was refunded during 2000. Of the remaining payments, of $24,000 generated
alternative minimum tax credit carry forwards of a like amount that are available to reduce future federal regular income taxes, if any, over an indefinite period, and $15,653 was charged against the
year 2000 income tax provision.

The
components of income tax expense/(benefit) consist of the following:

|                                           |         | 1999 |            | 2000      |   | 2001     |         
|------------------------------------------ | ------- | ---- | ---------- | --------- | - | -------- | --------
|Current:                                   |         |      |            |           |   |          |         
|                                           | Federal |      | $          |          |   | $        | 15,653  
|                                           | State   |      |            |          |   |          |        
|                                           |         |      |            |           |   |          |         
|Total Current Expenses                     |         | $    |           |           | $ | 15,653   |         
|                                           |         |      |            |           |   |          |         
|Deferred:                                  |         |      |            |           |   |          |         
|                                           | Federal |      | $          | 1,456,000 |   | $        | (528,500
|                                           | State   |      |            | 208,000   |   |          | (75,500 
|                                           |         |      |            |           |   |          |         
|Total Deferred Expense                     |         | $    | 1,664,000  |           | $ | (604,000 | )       
|(Increase)/Decrease in Valuation Allowance |         |      | (1,664,000 | )         |   | (604,000 | )       
|                                           |         |      |            |           |   |          |         
|Total Income Tax Expense/(Benefit)         |         | $    |           |           | $ |         |         
|                                           |         |      |            |           |   |          |         

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Significant
components of the Company's deferred tax assets as of December 31 are as follows:

|                                                   |  | 1999 |            | 2000 |   | 2001       |  
|-------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|Net Operating Loss Carry Forwards                  |  | $    | 2,746,000  |      | $ | 3,442,000  |  
|General Business Credit Carry Forwards             |  |      | 276,000    |      |   | 276,000    |  
|Alternative Minimum Tax Carry Forwards             |  |      | 24,000     |      |   | 24,000     |  
|Expenses Not Currently Deductible for tax purposes |  |      | 181,000    |      |   | 88,000     |  
|                                                   |  |      |            |      |   |            |  
|Total Deferred Tax Assets                          |  |      | 3,227,000  |      |   | 3,830,000  |  
|Valuation Allowance                                |  |      | (3,227,000 | )    |   | (3,830,000 | )
|                                                   |  |      |            |      |   |            |  
|Net Deferred Tax Assets                            |  | $    |           |      | $ |           |  
|                                                   |  |      |            |      |   |            |  

At
December 31, 1999, December 31, 2000 and December 31, 2001, in accordance with the provisions of SFAS No. 109, a valuation allowance has been established
on the deferred tax asset due to the uncertainty of its realization.

7. COMMITMENTS:

License and Research Agreements

From time to time the Company enters into license and research agreements with third parties. At December 31, 2001, the Company had significant agreements
with five parties in effect, as described below.

National Cancer Institute

In May 1999, the Company entered into a CRADA with the NCI. Pursuant to the CRADA, the Company committed to work to commercialize the SS1 (dsFv)-PE38
monoclonal antibody product which it licensed from the NIH and the FDA. The NCI agreed to collaborate on the clinical development and commercialization of the licensed product.

The
Company was originally committed to pay $100,000 per year over four years for the reasonable and necessary expenses incurred by the NCI in carrying out their responsibilities under
the CRADA. During each of 1999 and 2000, NeoPharm spent $100,000 under this agreement. In 2000, the parties agreed to expand the scope of the CRADA and increase the Company's annual funding
requirement to $150,000 for the final two years of the agreement. In 2001, the Company spent $150,000 under the agreement.

U.S. Food and Drug Administration

In 1997 the Company entered into a CRADA with the FDA. Pursuant to the CRADA, the Company committed to work to commercialize the IL13-PE38 chimeric
protein product which it licensed from the NIH and FDA. The FDA agreed to collaborate on the clinical development and commercialization of the licensed product.

53

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The
Company is committed to pay $100,000 per year for the reasonable and necessary expenses incurred by the FDA in carrying out the FDA's responsibilities under the CRADA. During 1999,
the parties agreed to expand the scope of the CRADA and increase the Company's funding requirement to $150,000 for the final two years of the agreement. During 1998, 1999 and 2000, the Company spent
$100,000, $150,000 and $150,000 respectively under these agreements. In January 2001 the parties agreed to further expand the scope of the CRADA and increase the Company's funding requirement
to $400,000 per year and extend the term of the agreement through December 31, 2003.

National Institute of Health

The Company entered into an exclusive worldwide licensing agreement with the NIH and the FDA to develop and commercialize an IL13-PE38 chimeric
protein therapy. The agreement required a $75,000 non-refundable license issue payment and minimum annual royalty payments of $10,000 which increases to $25,000 after the first commercial
sale. The agreement further provided for milestone payments and royalties based on future product sales. The Company made its first milestone payment of $25,000 to NIH in November 1999 after
the filing of the U.S. Investigational New Drug ("IND") application for IL13-PE38. The Company is required to pay the costs of filing and maintaining product patents on the licensed
products. The agreement shall extend to the expiration of the last to expire of the patents on the licensed products, if not terminated earlier. The agreement may be terminated by mutual consent of
NIH and the Company. Either party may terminate if the other party breaches a material term or condition and such breach is not cured within a certain period of time. Also, either Party may
unilaterally terminate by giving advanced notice. During 1999, 2000 and 2001, the Company expensed approximately $35,000, $10,000 and $10,000, respectively under this agreement.

In
March 1999 the Company entered into a license agreement with the NIH for SS1 (dsFv)-PE38. The agreement required a $75,000 non-refundable payment and requires
minimum annual royalty payments of $20,000 to the NIH beginning January 1, 2001, which increase to $150,000 per year if certain benchmarks are not achieved. The other terms and conditions of
the SS1 (dsFv)-PE38 license are substantially the same as those of the NIH IL13-PE38 license described above. During 1999, 2000 and 2001, the Company expensed approximately $75,000, $0 and
$20,000, respectively under this agreement.

Georgetown University

The Company entered into two license and research agreements with Georgetown whereby the Company obtained an exclusive worldwide license to use certain
technologies. In exchange for the grant of these exclusive licenses, the Company will pay Georgetown, beginning with the first commercial sale of a product incorporating the licensed technologies, a
royalty on net sales by the Company of products incorporating any of such technologies. The royalty will be payable for the life of the related patents. In January 1999, the Company and
Georgetown University agreed to amend the agreements in addition to other modifications to reduce the level of future sublicense royalties on LEP and LED sales payable to Georgetown in return for a
one time sublicense fee of $800,000. The Company made the $800,000 payment to Georgetown in March 1999, after the execution of the Pharmacia agreement. During 2001, the Company expanded its
relationship with Georgetown by entering three new research agreements to

54

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develop new compounds for the treatment of cancer. If successful, the Company will have the opportunity to purchase or license any new drugs developed under these agreements.

During
the years ended December 31, 1999, 2000 and 2001, the Company paid and expensed approximately $1,019,000, $456,000 and $2,458,000 respectively, pursuant to the license and
research agreements. The $800,000 payment referred to above is included in the 1999 total.

Amounts
paid to our major research and development collaborators under our various agreements during the last three years, as well as our commitments under these agreements for 2002, are
included in the following table:

|Research and Development Collaboration Expenses
|-----------------------------------------------
|
|
|Georgetown                                     
|FDA                                            
|NCI                                            
|NIH                                            
|Total Collaboration Expenses                   

---

Pharmacia Corporation

On February 19, 1999 the Company entered into an exclusive worldwide license agreement with Pharmacia and Upjohn Company ("Pharmacia"). Pursuant to the
agreement, the Company granted Pharmacia an exclusive worldwide license to develop, use, manufacture, distribute, market, and sell the Company's Electrostatic Liposome Encapsulated Doxorubicin ("LED")
and Electrostatic Liposome
Encapsulated Paclitaxel ("LEP") products for all approved indications. All of the development costs, clinical and pre-clinical, regulatory and manufacturing scale up expenses for LED and
LEP incurred after the date of the agreement shall be borne by Pharmacia. The Company shall use reasonable efforts to assist Pharmacia in obtaining and confirming the rights granted to Pharmacia under
the agreement. However, any reasonable costs or expenses incurred by the Company to provide such assistance shall be reimbursed by Pharmacia.

The
Company received a $9,000,000 non-refundable license fee upon signing the agreement. Upon the transfer of the IND's for LED and LEP to Pharmacia, Pharmacia was to
purchase $8,000,000 of the Company's newly issued common stock. The share price was equal to 110% of the average closing price of the Company's Common Stock for the 60-day period preceding
the Pharmacia purchase date. On July 23, 1999, Pharmacia purchased 452,861 shares of the Company's common stock at a per share price of $17.6655. The Company recorded the newly issued shares at
$.0002145 par value with the remaining proceeds reflected as additional paid in capital.

The
Company shall receive milestone payments upon the completion of each phase of clinical development and upon regulatory approval for both LED and LEP. If all milestone goals set forth
in

55

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the agreement are met, the Company would be eligible to receive $52,000,000 in milestone payments. During 1999, the Company received a $2,000,000 milestone payment in addition to the $9,000,000
license fee. During 2000, a $3,000,000 milestone payment was received under the agreement. No milestone payments were received in 2001.

If
the LED product were to be approved for commercial sale and thereafter marketed, the Company would receive a royalty payment for sales outside of the U.S. for the first seven years
after commercial sale at a rate of 8% declining to 5% for the eighth through tenth years of such commercial sales. With respect to the LEP product, the Company is entitled to receive a royalty of
12.5% for LEP products sold outside of the United States for the valid life of an enforceable NeoPharm patent, determined on a country-by-country basis. With respect to sales
of both LEP and LED products in the United States, the Company is permitted to elect, in lieu of royalty payments for U.S. sales, to co-promote the products within the United States. Under
the terms of the co-promotion, the Company's participations in net profits is to be in proportion to its monetary contribution to the promotion of each product in the United States, but in
no event shall the Company's share of profits exceed 37.5% of total net profits. In addition, the Company's right to co-promote is contingent upon the Company reimbursing Pharmacia for an
amount equal to the amount of the Company's net profit percentage multiplied by the amount expended by Pharmacia in development costs for the products in the United States (which may not exceed
60 percent of Pharmacia's total development costs throughout the world). If the Company does not elect to co-promote the product within the U.S., then the Company would receive a
flat royalty with respect to LED equal to 10% of net sales for the first ten years of sales in the United States, and with respect to LEP, a royalty equal to 12.5% of net sales for the period in which
Pharmacia has exclusivity to LEP product. Because of the uncertainty surrounding the ability of the Company to attain the milestones and obtain FDA approval for the product, and the uncertainty that
the product would be accepted by the medical community, it is not possible to project with any degree of certainty what the potential revenues (other than the milestone payments) under the contract
would be.

In
January 2002, Pharmacia informed the Company that the LEP and LED development programs were experiencing delays. At the time of that meeting, Pharmacia was unable to determine
when Phase II/III studies were expected to begin. The Company continues to work with Pharmacia to determine the development status of both LEP and LED, but as of the date of this filing, Pharmacia has
not provided the Company with new target dates for starting Phase II/III clinical trials in these products.

Properties

The Company currently leases 6,440 square feet of office space in Lake Forest, Illinois, for a term of five years with a minimum annual rent of approximately
$118,000. As of January 2002, the Company has subleased an additional 6,597 square feet of office space in the same Lake Forest location for a term of 18 months at a minimum annual rent
of approximately $160,000. Additionally, in January 2001, the Company entered into a sublease for a 35,500 square foot research and development facility in Waukegan, Illinois. The term of the
sublease is three years at a minimum annual rent of approximately $195,000.

56

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Biochem Pharma

In 1997, the Company entered into a collaboration agreement with BioChem Therapeutics, Inc., the wholly owned subsidiary of BioChem Pharma, under which
BioChem will have an exclusive license to develop, market and distribute broxuridine in Canada. The agreement required BioChem to make an initial non-refundable up-front
payment of $550,000 and subsequent milestone-based payments. The Company and BioChem were to share product revenue from any future sales of broxuridine in Canada. The Company terminated this agreement
in October, 1999 by making a $50,000 termination payment to BioChem Pharma. The Company retained the Canadian rights to BUdR under the termination agreements.

Other

The Company entered into consulting arrangements with its Scientific Advisors who are also employed on a full-time basis by academic or research
institutions. Since inception through December 31, 2001, these advisors were issued options (see Note 4) to purchase an aggregate 168,324 shares of Company stock at the fair market value
at the dates of grant. At December 31, 2001, 115,500 options remained unexercised.

8. CONTINGENCIES

The pharmaceutical industry has traditionally experienced difficulty in maintaining product liability insurance coverage at desired levels. To date, no
significant product liability suit has ever been filed against the Company. However, if a suit were filed and a judgment entered against the Company, it could have a material adverse effect upon the
Company's operations and financial condition.

Currently,
the Company is not a party to any litigation or other legal proceedings.

9. TRANSACTIONS WITH RELATED PARTIES

The Company receives management consulting services from EJ Financial Enterprises, Inc. ("EJ Financial"), a healthcare consulting and investment firm in
which Dr. Kapoor is the principal stockholder. Under its management consulting agreement, EJ Financial charges the Company $125,000 per year for services provided plus actual expenses incurred.
The agreement provides for technical management support in the areas of research and development and operations. Charges to the Company are based on estimated time spent by EJ Financial personnel on
the Company's affairs. For the years ended December 31, 1999, 2000 and 2001, the Company expensed $131,251, $136,750 and $126,877 respectively under this agreement.

Prior
to moving into new corporate offices in Lake Forest, Illinois in December 2000, the Company subleased office space from Option Care Inc., a home infusion company in
which Dr. Kapoor, the Company's Chairman, is a major stockholder. For the years ended December 31, 1999 and 2000, the Company expensed $33,025 and $33,125 respectively under the
subleases.

From
October, 1998 through February, 1999 the Company had a $3,000,000 line of credit in place with the John N. Kapoor Trust dtd 9/20/89, an entity affiliated with the Company's
Chairman. The

57

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Company borrowed $250,000 on the line of credit on January 8, 1999. The $250,000 plus all accrued interest was repaid on January 29, 1999. The line of credit terminated upon the signing
of the Pharmacia licensing agreement on February 19, 1999 (See Note 7).

The
Company's former Chief Scientific Officer, Dr. Aquilur Rahman, was employed on a full-time basis by Georgetown until joining the Company in March 1996.
Dr. Rahman retired from NeoPharm in January 2001. Additionally, Anatoly Dritschilo, M.D., the Chairman of the Department of Radiation Medicine and Medical Director of the Georgetown
University Medical Center was a Director of the Company from June, 1990 through June, 1999. As was previously mentioned, Georgetown and the
Company are parties to license and sponsored research agreements for product research and development (see Note 6). During 1999 and 2000, the Company paid approximately $1,019,000 and $456,000
related to work performed and expenses incurred by Georgetown. As of the retirement of Dr. Rahman in January 2001, the Company no longer considers Georgetown a related party.

In
June 2000 the Company entered into a consulting agreement with Unicorn Pharma Consulting, Inc. ("Unicorn") to assist the Company in the clinical development of Company
products. Dr. Matthew P. Rogan, a Director of the Company, is also President and CEO of Unicorn. The Company paid Unicorn approximately $91,000 in 2000 for work performed under the consulting
agreement. The agreement was terminated by mutual consent in October 2000 and renewed in November 2001. The Company paid Unicorn approximately $35,283 under the agreement in 2001.

Prior
to February 1996, the Company's former President and Chief Executive Officer ("CEO"), William C. Govier, was a consultant to the Company on clinical trials and NDA filing
matters, both as an individual and as a consultant with Aegis Technology, Inc. ("Aegis"), an entity co-founded by Govier and Gail Salzberg. Dr. Govier retired from the
Company on January 16, 1998. Salzberg also provided consulting services to the Company both as an individual and as a consultant with Aegis. During 1999, 2000 and 2001, the Company paid to
Salzberg and expensed approximately $196,800, $3,100 and $0 respectively, related to these arrangements.

During
1999, the Company paid $36,825 to Taylor Pharmaceuticals for the consulting services of Dr. Abu Alam regarding the manufacturing scale-up of the Company's
electrostatic liposome products. Taylor Pharmaceuticals is a subsidiary of Akorn, Inc., a company in which Dr. Kapoor is a major shareholder and Chairman.

In
December 2001, following approval by the Company's Board of Directors, the Company loaned $3,250,000 to Akorn, Inc., an independent publicly traded company, to assist
Akorn in the completion of its manufacturing facility in Decatur, Illinois. The note receivable issued to Akorn is due in December 2006, and accrues interest at a rate equal to that received on
the Company's investments in marketable securities, which is lower than the interest rate paid by Akorn on its other outstanding debt. In exchange, the Company has entered into a manufacturing
processing agreement that grants the Company access to at least 15% of the annual lyophilization manufacturing capacity at Akorn at a discounted price, upon completion of the facility. The Company has
recorded the note receivable net of a valuation allowance of $1,266,619 reflecting the difference between the actual loan amount and the present value of the loan using an estimated market interest
rate of 10%. The valuation allowance was fully expensed in 2001 and will be amortized over the life of the loan.

58

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In
connection with the Note, Neopharm entered into a Subordination Agreement, dated December 20, 2001, with The Northern Trust Company ("Northern"), Akorn's primary lender
pursuant to an Amended and Restated Credit Agreement, dated September 15, 1999, as amended by a Forbearance
Agreement, dated July 12, 2001 ("Akorn's Credit Facility"). This Subordination Agreement provides that Neopharm will subordinate its rights to repayment of amounts due under the Note to
Northern's rights to repayment of amounts due under Akorn's Credit Facility. In addition, Neopharm entered into a Subordination and Intercreditor Agreement, dated December 20, 2001, with
John N. Kapoor, Ph.D., as Trustee under The John N. Kapoor Trust, dated September 20, 1989 (the "Trust"). Pursuant to this Subordination and Intercreditor Agreement,
Dr. Kapoor, on behalf of the Trust, subordinated the Trust's rights to repayment of amounts due under a Convertible Bridge Loan and Warrant Agreement, dated July 13, 2001, between Akorn
and the Trust, to Neopharm's rights to repayment of amounts due under the Note. Dr. John N. Kapoor, Neopharm's Chairman, is also Chairman and Chief Executive Officer of Akorn, and holds a substantial
stock position in both companies. Because of his role in both companies, Dr. Kapoor refrained from participating in the deliberations by the Company's Board of Directors.

The
Following table summarizes the related party expenses discussed above:

|                                          |  |                   |  | For the Years Ended December 31,
|----------------------------------------- |  | ----------------- |  | --------------------------------
|
|
|Georgetown University                     |  | Research & Fees   |  | $                               
|Gail Salzberg                             |  | Consulting        |  |                                 
|Taylor Pharmaceuticals                    |  | Consulting        |  |                                 
|Unicorn Pharma Consulting, Inc.           |  | Consulting        |  |                                 
|E.J. Financial Enterprises                |  | Consulting        |  |                                 
|E.J. Financial Enterprises                |  | Direct Expense    |  |                                 
|                                          |  |                   |  |                                 
|Total Research and Development expenses   |  |                   |  | $                               
|                                          |  |                   |  |                                 
|E.J. Financial Enterprises                |  | Consulting        |  |                                 
|E.J. Financial Enterprises                |  | Direct Expense    |  |                                 
|Option Care, Inc.                         |  | Rent and Expenses |  |                                 
|Unicorn Pharma Consulting, Inc.           |  | Consulting        |  |                                 
|                                          |  |                   |  |                                 
|Total General and Administration expenses |  |                   |  | $                               
|                                          |  |                   |  |                                 
|Total Related Party expenses:             |  |                   |  | $                               
|                                          |  |                   |  |                                 

10. STOCKHOLDERS' EQUITY

During 2000, holders of the Company's Representative warrants that were issued as part of the initial public offering exercised on a cashless basis the remaining
41,065 outstanding warrants. At December 31, 2000 the Company had no warrants outstanding.

59

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In
October 2000, the Company completed a public offering of 3,480,000 shares of newly issued common stock (including the underwriters overallotment) resulting in the Company
receiving net proceeds of $115,674,081 after expenses.

On
September 28, 2001, the Company's Board of Directors authorized a stock repurchase program to purchase up to 1,000,000 shares of the Company's outstanding common stock at
market prices over a period not to exceed one year. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from
time-to-time without prior notice. Repurchased shares may be used for the Company's employee benefit plans, subsequent acquisitions or other general corporate purposes. As of
December 31, 2001, no shares had been repurchased under the plan. In
addition, on November 6, 2001, the Company declared a 10% stock dividend payable on December 4, 2001 to shareholders of record on November 27, 2001. A total of 1,457,941 shares
were distributed as part of the stock dividend. All basic and diluted (loss) earnings per share in this report have been restated to reflect the stock dividend.

11. QUARTERLY FINANCIAL DATA (unaudited)

The following table summarizes the quarterly financial data for the years ended December 31, 2001 and 2000:

|                   |  | Net Revenues |  | Research &
Development
Expense |  | General &
Administrative
Expense |  | Operating
Income/(Loss) |   | Net Income/(Loss) |   | Earnings Per
Basic |   | Share
Diluted |  
|------------------ |  | ------------ |  | ------------------------------ |  | -------------------------------- |  | ----------------------- | - | ----------------- | - | ------------------ | - | ------------- | -
|2001               |  |              |  |                                |  |                                  |  |                         |   |                   |   |                    |   |               |  
|March 31, 2001     |  |             |  | 1,583,397                      |  | 977,043                          |  | (2,560,440              | ) | (583,827          | ) | (0.04              | ) | (0.04         | )
|June 30, 2001      |  |             |  | 2,982,161                      |  | 1,061,572                        |  | (4,043,733              | ) | (2,506,542        | ) | (0.16              | ) | (0.16         | )
|September 30, 2001 |  |             |  | 4,091,492                      |  | 1,054,784                        |  | (5,146,276              | ) | (3,876,749        | ) | (0.24              | ) | (0.24         | )
|December 31, 2001  |  |             |  | 6,157,119                      |  | 1,321,070                        |  | (7,478,189              | ) | (6,456,919        | ) | (0.40              | ) | (0.40         | )
|2000               |  |              |  |                                |  |                                  |  |                         |   |                   |   |                    |   |               |  
|March 31, 2000     |  | 3,000,000    |  | 652,826                        |  | 505,674                          |  | 1,841,500               |   | 2,254,673         |   | 0.19               |   | 0.17          |  
|June 30, 2000      |  |             |  | 976,555                        |  | 714,919                          |  | (1,691,474              | ) | (1,297,588        | ) | (0.11              | ) | (0.11         | )
|September 30, 2000 |  |             |  | 879,000                        |  | 687,371                          |  | (1,566,371              | ) | (1,163,797        | ) | (0.09              | ) | (0.09         | )
|December 31, 2000  |  |             |  | 1,283,286                      |  | 1,132,707                        |  | (2,415,993              | ) | (179,518          | ) | (0.01              | ) | (0.01         | )

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