##### Table of Contents

---

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

---

FORM 10-Q

(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|- | ----------------------------------------------------------------------------------------
|  |                                                                                         
|  | For the quarterly period ended September 30, 2002                                       
|  |                                                                                         
|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 0-31781

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

|Delaware(State of Incorporation)                                                                       |  | 68-0389419(I.R.S. Employer Identification No.)
|------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------
|                                                                                                       |  |                                               
|11777 San Vicente Boulevard, Suite 550 Los Angeles, California(Address of principal executive offices) |  | 90049(Zip Code)                               
|                                                                                                       |  |                                               
|(310) 826-8505                                                                                        
|(Registrants telephone number, including area code)                                                  

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 | o
|--- | - | -- | -

As of November 8, 2002, the registrant had 46,850,750 shares of $0.001 par value Common Stock outstanding.

---



---

##### Table of Contents

American Pharmaceutical Partners, Inc.

INDEX

|                                |                                                                                                                                             | Page
|------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ----
|                                |                                                                                                                                             |     
|PART I.  
Financial Information |                                                                                                                                            
|                                |                                                                                                                                            
|Item 1.                         | Financial Statements (Unaudited)                                                                                                            |     
|                                |                                                                                                                                             |     
|                                | Condensed consolidated balance sheets  September 30, 2002 and December 31, 2001                                                            | 3   
|                                |                                                                                                                                             |     
|                                | Condensed consolidated statements of income  Three months ended September 30, 2002 and 2001; Nine months ended September 30, 2002 and 2001 | 4   
|                                |                                                                                                                                             |     
|                                | Condensed consolidated statements of cash flows  Nine months ended September 30, 2002 and 2001                                             | 5   
|                                |                                                                                                                                             |     
|                                | Notes to condensed consolidated financial statements  September 30, 2002                                                                   | 6   
|                                |                                                                                                                                             |     
|Item 2.                         | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                       | 13  
|                                |                                                                                                                                             |     
|Item 3.                         | Quantitative and Qualitative Disclosures About Market Risk                                                                                  | 20  
|                                |                                                                                                                                             |     
|Item 4.                         | Controls and Procedures                                                                                                                     | 21  
|                                |                                                                                                                                             |     
|PART II.  
Other Information    |                                                                                                                                            
|                                |                                                                                                                                             |     
|Item 2.                         | Changes in Securities and Use of Proceeds                                                                                                   | 21  
|                                |                                                                                                                                             |     
|Item 6.                         | Exhibits and Reports on Form 8-K                                                                                                            | 22  
|                                |                                                                                                                                             |     
|Signatures                      |                                                                                                                                             | 22  
|                                |                                                                                                                                             |     
|Certification                   | Patrick Soon-Shiong, M.D., Chief Executive Officer                                                                                          | 23  
|                                |                                                                                                                                             |     
|Certification                   | Nicole S. Williams, Chief Financial Officer                                                                                                 | 24  

2



---

##### Table of Contents



PART I.  
FINANCIAL INFORMATION

ITEM 1.  
FINANCIAL STATEMENTS

American Pharmaceutical Partners, Inc.Condensed Consolidated Balance Sheets

|                                                                                                                                      |                                                   | September 30, 2002 |             | December 31, 2001 | 
|------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------ | ----------- | ----------------- | 
|                                                                                                                                      |                                                   |                    |             |                   | 
|                                                                                                                                      |                                                   | (Unaudited)        |             | (Note 1)          | 
|Assets                                                                                                                                |                                                   |                    |             |                   | 
|Current assets:                                                                                                                       |                                                   |                    |             |                   | 
|                                                                                                                                      | Cash and cash equivalents                         |                    | $           | 36,935,000        | 
|                                                                                                                                      | Accounts receivable, net                          |                    |             | 14,509,000        | 
|                                                                                                                                      | Inventories                                       |                    |             | 72,521,000        | 
|                                                                                                                                      | Prepaid expenses and other current assets         |                    |             | 4,567,000         | 
|                                                                                                                                      | Deferred income taxes                             |                    |             | 9,137,000         | 
|                                                                                                                                      |                                                   |                    |             |                   | 
|                                                                                                                                      | Total current assets                              |                    |             | 137,669,000       | 
|Deferred income taxes                                                                                                                 |                                                   |                    | 525,000     |                   | 
|Property, plant and equipment, net                                                                                                    |                                                   |                    | 60,725,000  |                   | 
|Investment in Drug Source Co., LLC                                                                                                    |                                                   |                    | 2,818,000   |                   | 
|Product license rights, net                                                                                                           |                                                   |                    | 225,000     |                   | 
|Deferred financing costs, net                                                                                                         |                                                   |                    | 3,617,000   |                   | 
|                                                                                                                                      |                                                   |                    |             |                   | 
|                                                                                                                                      | Total assets                                      |                    | $           | 205,579,000       | 
|                                                                                                                                      |                                                   |                    |             |                   | 
|Liabilities and stockholders equity                                                                                                  |                                                   |                    |             |                   | 
|Current liabilities:                                                                                                                  |                                                   |                    |             |                   | 
|                                                                                                                                      | Accounts payable                                  |                    | $           | 15,858,000        | 
|                                                                                                                                      | Accrued expenses                                  |                    |             | 26,965,000        | 
|                                                                                                                                      | Distribution payable to American BioScience, Inc. |                    |             |                  | 
|                                                                                                                                      | Current portion of liability to VivoRx, Inc.      |                    |             | 11,592,000        | 
|                                                                                                                                      |                                                   |                    |             |                   | 
|                                                                                                                                      | Total current liabilities                         |                    |             | 54,415,000        | 
|Liability to VivoRx, Inc., less current portion                                                                                       |                                                   |                    |            |                   | 
|Commitments and contingencies                                                                                                         |                                                   |                    |            |                   | 
|Stockholders equity                                                                                                                  |                                                   |                    |             |                   | 
|Common stock - $.001 par value; 100,000,000 shares authorized, 50,060,668 and 48,272,628 shares issued in 2002 and 2001, respectively |                                                   |                    | 50,000      |                   | 
|Additional paid-in capital                                                                                                            |                                                   |                    | 179,156,000 |                   | 
|Retained earnings                                                                                                                     |                                                   |                    | 33,406,000  |                   | 
|Amounts due from American BioScience, Inc.                                                                                            |                                                   |                    | (22,724,000 | )                 | 
|Deferred stock-based compensation                                                                                                     |                                                   |                    | (2,441,000  | )                 | 
|Other comprehensive loss                                                                                                              |                                                   |                    | (8,000      | )                 | 
|Less treasury stock, at cost and inclusive of fees, 3,366,877 common shares in 2002 and none in 2001                                  |                                                   |                    | (36,275,000 | )                 | 
|                                                                                                                                      |                                                   |                    |             |                   | 
|                                                                                                                                      | Total stockholders equity                        |                    |             | 151,164,000       | 
|                                                                                                                                      |                                                   |                    |             |                   | 
|                                                                                                                                      | Total liabilities and stockholders equity        |                    | $           | 205,579,000       | 
|                                                                                                                                      |                                                   |                    |             |                   | 
|                                                                                                                                      |                                                   |                    |             |                   | 

See notes to condensed consolidated financial statements.

3



---

##### Table of Contents

American Pharmaceutical Partners, Inc.Condensed Consolidated Statements of Income (Unaudited)

|                                                                                    |                                              | Three Months Ended September 30, |            | Nine Months Ended September 30, |  
|----------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------- | ---------- | ------------------------------- | -
|                                                                                    |                                              |                                  |            |                                 |  
|                                                                                    |                                              | 2002                             |            | 2001                            |  
|                                                                                    |                                              |                                  |            |                                 |  
|Net sales                                                                           |                                              | $                                | 70,599,000 |                                 | $
|Cost of sales                                                                       |                                              |                                  | 37,317,000 |                                 |  
|                                                                                    |                                              |                                  |            |                                 |  
|Gross margin                                                                        |                                              |                                  | 33,282,000 |                                 |  
|Operating expenses:                                                                 |                                              |                                  |            |                                 |  
|                                                                                    | Research and development costs               |                                  |            | 2,722,000                       |  
|                                                                                    | Selling, general and administrative expenses |                                  |            | 11,840,000                      |  
|                                                                                    | Stock-based compensation                     |                                  |            | 577,000                         |  
|                                                                                    | Gain on litigation settlements, net          |                                  |            |                                |  
|                                                                                    | Equity in net income of Drug Source Co., LLC |                                  |            | (526,000                        | )
|                                                                                    |                                              |                                  |            |                                 |  
|                                                                                    | Total operating expenses                     |                                  |            | 14,613,000                      |  
|                                                                                    |                                              |                                  |            |                                 |  
|Income from operations                                                              |                                              |                                  | 18,669,000 |                                 |  
|Interest income                                                                     |                                              |                                  | 547,000    |                                 |  
|Interest expense                                                                    |                                              |                                  | (197,000   | )                               |  
|                                                                                    |                                              |                                  |            |                                 |  
|Income before income taxes                                                          |                                              |                                  | 19,019,000 |                                 |  
|Provision for income taxes                                                          |                                              |                                  | 8,433,000  |                                 |  
|                                                                                    |                                              |                                  |            |                                 |  
|Net income                                                                          |                                              |                                  | 10,586,000 |                                 |  
|Imputed preferred stock dividends                                                   |                                              |                                  |           |                                 |  
|                                                                                    |                                              |                                  |            |                                 |  
|Income applicable to common stock                                                   |                                              | $                                | 10,586,000 |                                 | $
|                                                                                    |                                              |                                  |            |                                 |  
|Income per common share:                                                            |                                              |                                  |            |                                 |  
|                                                                                    | Basic                                        |                                  | $          | 0.22                            |  
|                                                                                    |                                              |                                  |            |                                 |  
|                                                                                    | Diluted                                      |                                  | $          | 0.21                            |  
|                                                                                    |                                              |                                  |            |                                 |  
|Interest income includes interest earned from American BioScience, Inc. as follows: |                                              | $                                | 332,000    |                                 | $
|                                                                                    |                                              |                                  |            |                                 |  
|                                                                                    |                                              |                                  |            |                                 |  

See notes to condensed consolidated financial statements.

4



---

##### Table of Contents

American Pharmaceutical Partners, Inc.Condensed Consolidated Statements of Cash Flows (Unaudited)

|                                                    |                                                                                             | Nine Months Ended September 30, |            
|--------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------------- | -----------
|                                                    |                                                                                             |                                 |            
|                                                    |                                                                                             | 2002                            |            
|                                                    |                                                                                             |                                 |            
|Cash flows from operating activities:               |                                                                                             |                                 |            
|                                                    | Net income                                                                                  |                                 | $          
|                                                    | Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                 |            
|                                                    | Depreciation                                                                                |                                 |            
|                                                    | Amortization                                                                                |                                 |            
|                                                    | Imputed interest on liability to VivoRx, Inc.                                               |                                 |            
|                                                    | Income tax benefit on stock option exercises                                                |                                 |            
|                                                    | Stock-based compensation                                                                    |                                 |            
|                                                    | (Gain) loss on disposal of property, plant and equipment                                    |                                 |            
|                                                    | Deferred income taxes                                                                       |                                 |            
|                                                    | Equity in net income of Drug Source Co., LLC                                                |                                 |            
|                                                    | Common stock earned by Premier                                                              |                                 |            
|                                                    | Changes in operating assets and liabilities:                                                |                                 |            
|                                                    | Accounts receivable, net                                                                    |                                 |            
|                                                    | Inventories                                                                                 |                                 |            
|                                                    | Prepaid expenses and other current assets                                                   |                                 |            
|                                                    | Accounts payable and accrued expenses                                                       |                                 |            
|                                                    | Distribution payable to American BioScience, Inc.                                           |                                 |            
|                                                    | Liability to VivoRx, Inc.                                                                   |                                 |            
|                                                    |                                                                                             |                                 |            
|Net cash provided by (used in) operating activities |                                                                                             |                                 | (29,722,000
|Cash flows from investing activities:               |                                                                                             |                                 |            
|                                                    | Purchases of property, plant and equipment                                                  |                                 |            
|                                                    | Proceeds from the sale of property, plant and equipment                                     |                                 |            
|                                                    | Purchase of product license rights                                                          |                                 |            
|                                                    |                                                                                             |                                 |            
|Net cash used in investing activities               |                                                                                             |                                 | (13,715,000
|Cash flows from financing activities:               |                                                                                             |                                 |            
|                                                    | Net borrowings on revolving line of credit                                                  |                                 |            
|                                                    | Payments on long-term debt                                                                  |                                 |            
|                                                    | Proceeds from the exercise of stock options                                                 |                                 |            
|                                                    | Proceeds from the sale of stock under employee stock purchase plan                          |                                 |            
|                                                    | Increase in amounts due from American BioScience, Inc.                                      |                                 |            
|                                                    | Purchase of treasury stock                                                                  |                                 |            
|                                                    | Payment of financing costs                                                                  |                                 |            
|                                                    | Proceeds from the issuance of common stock, net                                             |                                 |            
|                                                    |                                                                                             |                                 |            
|Net cash provided by (used in) financing activities |                                                                                             |                                 | (16,317,000
|                                                    |                                                                                             |                                 |            
|Decrease in cash and cash equivalents               |                                                                                             |                                 | (59,754,000
|Foreign currency translation loss                   |                                                                                             |                                 | 1,000      
|Cash and cash equivalents at beginning of period    |                                                                                             |                                 | 96,688,000 
|                                                    |                                                                                             |                                 |            
|Cash and cash equivalents at end of period          |                                                                                             | $                               | 36,935,000 
|                                                    |                                                                                             |                                 |            
|                                                    |                                                                                             |                                 |            

See notes to condensed consolidated financial statements.

5



---

##### Table of Contents

AMERICAN PHARMACEUTICAL PARTNERS, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 (Unaudited)

(1)   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2002 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2002.

The balance sheet information at December 31, 2001 has been derived from the audited financial statements at that date but does
not include all of the information and notes required by generally accepted accounting principles for complete financial statements.

A subsidiary of ours owns a 50% share of Drug Source Company, LLC.
Drug Source Company is a joint venture with three other partners established in June 2000 to purchase raw materials for resale to pharmaceutical companies, including us. Our equity in the net income of Drug Source Company, net of intercompany profit
on purchases of inventory, is classified in operating expenses in the accompanying consolidated statements of income. Research and development costs include purchases from Drug Source Company for $676,000 and $16,000 for the three months ended
September 30, 2002 and 2001, respectively and $1,723,000 and $615,000 for the nine months ended September 30, 2002 and 2001, respectively. Inventory includes purchases from Drug Source Company of $221,000 for the three and nine months ended
September 30, 2002. There were no inventory purchases from Drug Source Company for the three- and nine-month periods ended September 30, 2001.

For further information, refer to the
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K/A for the year ended December 31, 2001.

(2)   Quarterly Periods

We use a 52-week, 53-week fiscal year that ends on the Saturday nearest to December 31. For quarterly reporting purposes, the quarterly periods end on the Saturday nearest to the end of the quarter. For clarity
of presentation, comparative periods are presented as if the quarter ended on September 30. Both of the three-month periods ended September 30, 2002 and 2001 contained 13 weeks, and both of the nine-month periods ended September 30, 2002 and 2001
contained 39 weeks.

6



---

##### Table of Contents

(3)   Earnings Per Share Information

The following tables
set forth the computation of basic and diluted earnings per share for the periods indicated:

|                                                            |                                                                      | Three Months Ended September 30, |     
|----------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------- | ----
|                                                            |                                                                      |                                  |     
|                                                            |                                                                      | 2002                             |     
|                                                            |                                                                      |                                  |     
|Basic and dilutive numerator:                               |                                                                      |                                  |     
|                                                            | Net income                                                           |                                  | $   
|                                                            | Less dividends on Series A convertible preferred stock               |                                  |     
|                                                            |                                                                      |                                  |     
|                                                            | Net income applicable to common stock                                |                                  | $   
|                                                            |                                                                      |                                  |     
|Denominator:                                                |                                                                      |                                  |     
|                                                            | Weighted-average common shares outstanding                           |                                  |     
|                                                            | Weighted-average common shares earned by, but not issued to, Premier |                                  |     
|                                                            |                                                                      |                                  |     
|                                                            | Weighted common shares - basic                                       |                                  |     
|Net effect of dilutive securities:                          |                                                                      |                                  |     
|                                                            | Stock options                                                        |                                  |     
|                                                            | Warrant                                                              |                                  |     
|Weighted-average conversion of convertible preferred stock: |                                                                      |                                  |     
|                                                            | Series B                                                             |                                  |     
|                                                            | Series C                                                             |                                  |     
|                                                            | Series D                                                             |                                  |     
|                                                            |                                                                      |                                  |     
|                                                            | Weighted common shares - diluted                                     |                                  |     
|                                                            |                                                                      |                                  |     
|Income per common share - basic                             |                                                                      | $                                | 0.22
|                                                            |                                                                      |                                  |     
|Income per common share - diluted                           |                                                                      | $                                | 0.21
|                                                            |                                                                      |                                  |     
|                                                            |                                                                      |                                  |     
|                                                            |                                                                      | Nine Months Ended September 30,  |     
|                                                            |                                                                      |                                  |     
|                                                            |                                                                      | 2002                             |     
|                                                            |                                                                      |                                  |     
|Basic and dilutive numerator:                               |                                                                      |                                  |     
|                                                            | Net income                                                           |                                  | $   
|                                                            | Less dividends on Series A convertible preferred stock               |                                  |     
|                                                            |                                                                      |                                  |     
|                                                            | Net income applicable to common stock                                |                                  | $   
|                                                            |                                                                      |                                  |     
|Denominator:                                                |                                                                      |                                  |     
|                                                            | Weighted-average common shares outstanding                           |                                  |     
|                                                            | Weighted-average common shares earned by, but not issued to, Premier |                                  |     
|                                                            |                                                                      |                                  |     
|                                                            | Weighted common shares - basic                                       |                                  |     
|Net effect of dilutive securities:                          |                                                                      |                                  |     
|                                                            | Stock options                                                        |                                  |     
|                                                            | Warrant                                                              |                                  |     
|Weighted-average conversion of convertible preferred stock: |                                                                      |                                  |     
|                                                            | Series B                                                             |                                  |     
|                                                            | Series C                                                             |                                  |     
|                                                            | Series D                                                             |                                  |     
|                                                            |                                                                      |                                  |     
|                                                            | Weighted common shares - diluted                                     |                                  |     
|                                                            |                                                                      |                                  |     
|Income per common share - basic                             |                                                                      | $                                | 0.55
|                                                            |                                                                      |                                  |     
|Income per common share - diluted                           |                                                                      | $                                | 0.53
|                                                            |                                                                      |                                  |     

The assumed conversion of the Series A convertible preferred stock, which was outstanding during the
three and nine month periods ended September 30, 2001, was anti-dilutive.

7



---

##### Table of Contents

(4)   Recent Accounting Pronouncements

In June 2001, the
Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets (SFAS No. 141 and SFAS No. 142).  Under the new rules,
effective January 1, 2002, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with the Statements.  Other intangible assets continue to be amortized
over their useful lives. The effect of adopting SFAS No. 141 and SFAS No. 142 had no impact on our statements of income or financial position. We do not have any goodwill recorded in our consolidated balance sheets.

(5)   Transactions with American BioScience, Inc.

Loans to American BioScience, Inc.

A summary of activity in the note receivable from American BioScience, Inc. account for the nine months ended September 30, 2002, which is classified as a deduction from stockholders equity in the accompanying condensed
consolidated balance sheet, is as follows:

|Note receivable from American BioScience, Inc.          |                                                          |   |            |           |   |            | 
|------------------------------------------------------- | -------------------------------------------------------- | - | ---------- | --------- | - | ---------- | 
|Balance January 1, 2002                                 |                                                          |   |            |           | $ | 20,957,000 | 
|Payments on behalf of American BioScience, Inc in 2002: |                                                          |   |            |           |   |            | 
|                                                        | New product development (principally related to ABI-007) |   | $          | 5,313,000 |   |            | 
|                                                        | Income tax refund                                        |   |            | (397,000  | ) |            | 
|                                                        | Interest charged to American BioScience, Inc.            |   |            | 927,000   |   |            | 
|                                                        | Other                                                    |   |            | 94,000    |   |            | 
|                                                        |                                                          |   |            |           |   |            | 
|                                                        |                                                          | $ | 5,937,000  |           |   |            | 
|Repayments                                              |                                                          |   | (4,170,000 | )         |   |            | 
|                                                        |                                                          |   |            |           |   |            | 
|Net increase in note receivable                         |                                                          |   |            |           | $ | 1,767,000  | 
|                                                        |                                                          |   |            |           |   |            | 
|Balance at September 30, 2002                           |                                                          |   |            |           | $ | 22,724,000 | 
|                                                        |                                                          |   |            |           |   |            | 

Payments on behalf of American BioSciences new product development activities include our
administrative salary and benefit allocations, charges for our employees services and supplies related to American BioSciences products in development. Subsequent to September 30, 2002, $1,132,000 has been repaid by American BioScience.

On December 14, 2001, we received a demand promissory note for the balance outstanding from American BioScience (Demand Note). The Demand Note bears interest at a rate equal to the rate of interest
on our credit facility (6.0% at September 30, 2002).

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

8



---

##### Table of Contents

VivoRx, Inc. Settlement

As of September
30, 2002, we are jointly and severally liable for the remaining $12,000,000 settlement payment to VivoRx, Inc. due February 2003, which American Bioscience has agreed to make, as more fully described in Note 14. We expect that American BioScience
will have sufficient liquid assets to make this remaining payment to VivoRx. In 2001, American BioScience agreed that if it fails to timely make any of the settlement payments due to VivoRx, American BioScience will surrender to us that number of
shares of our common stock having a fair market value equal to 120% of the unpaid amount. As American BioScience makes the payment to VivoRx, the liability to VivoRx reflected in our consolidated balance sheet will be eliminated and a corresponding
capital contribution will be recorded net of related deferred income taxes. In February 2002, American BioScience made the scheduled $12,000,000 payment due in February 2002 with the resulting capital contribution to us of $7,320,000, net of related
deferred income taxes.

Product License Agreement

In November 2001, we entered into a license agreement with
American BioScience under which we acquired the exclusive rights to market and sell ABI-007 in North America, and which provided for initial license payments of $60,000,000 in January 2002. This license is perpetual. American BioScience also entered
into a manufacturing agreement with us that grants us exclusive manufacturing rights for a three-year period. American BioScience is responsible for substantially all costs associated with the development of ABI-007, except that we agreed to provide
up to $2,000,000 of ABI-007 for use in clinical trials. The cost of the clinical product was charged to research and development expense in the year ended December 31, 2001. We are also required to make milestone payments of up to (a) $60,000,000
for indications related to breast, ovarian and lung cancers and (b) $32,500,000 for indications relating to prostate cancer and other indications as agreed upon between American BioScience and us. We also may be required to make additional milestone
payments of up to an aggregate of $110,000,000 based upon the achievement of particular annual sales levels. Profits from any sales of ABI-007 will be shared equally with American BioScience after deducting costs of goods sold, selling expenses and
other appropriate deductions. All costs and expenses related to product recalls and product liability claims generally will be split equally between American BioScience and us.

The initial license
payment has been accounted for as a distribution of our stockholders equity to American BioScience. As of December 31, 2001, the entire $60,000,000 had been accrued as a distribution payable to American BioScience. The $60,000,000 was paid to
American BioScience in January 2002. The income tax benefits related to this payment will be credited to the stockholders equity as realized.

(6)   Inventories

Inventories consist of the following:

|                |  | September 30, 2002 |            | December 31, 2001 |  
|--------------- |  | ------------------ | ---------- | ----------------- | -
|                |  |                    |            |                   |  
|Finished goods  |  | $                  | 25,945,000 |                   | $
|Work in process |  |                    | 12,347,000 |                   |  
|Raw materials   |  |                    | 34,229,000 |                   |  
|                |  |                    |            |                   |  
|                |  | $                  | 72,521,000 |                   | $
|                |  |                    |            |                   |  

Inventory increases were attributable to new product introductions, product mix, increased sales, as
well as an overall general increase in months of supply.

9



---

##### Table of Contents

(7)   Accrued Liabilities

Accrued liabilities consist of
the following:

|                              |  | September 30, 2002 |            | December 31, 2001 |  
|----------------------------- |  | ------------------ | ---------- | ----------------- | -
|                              |  |                    |            |                   |  
|Payroll and employee benefits |  | $                  | 5,541,000  |                   | $
|Legal                         |  |                    | 2,337,000  |                   |  
|Insurance                     |  |                    | 3,641,000  |                   |  
|Sales and marketing           |  |                    | 12,726,000 |                   |  
|Accrued income taxes          |  |                    | 1,691,000  |                   |  
|Other                         |  |                    | 1,029,000  |                   |  
|                              |  |                    |            |                   |  
|                              |  | $                  | 26,965,000 |                   | $
|                              |  |                    |            |                   |  

(8)   Credit Facility

In
December 2001, we entered into a credit facility providing for a $25,000,000 term loan and a $50,000,000 revolving line of credit. This credit facility replaced a former facility with another lender. Proceeds of our initial public offering were used
to pay off all outstanding amounts under the revolving line of credit and retire the term loan. The revolving line of credit can be increased to $75,000,000 at our request.  In connection with our repurchase of shares of our common stock from
one of our stockholders on July 29, 2002, we amended our revolving credit facility to temporarily reduce our available credit to $30,000,000 until the six-month anniversary of that repurchase, or January 29, 2003. This credit facility expires
December 14, 2006.

The credit facilitys interest rate for the revolving line is equal to the sum of an adjustable margin rate (1.25% for the nine months ended September 30, 2002) plus the
greater of the prime rate or the federal funds rate plus 0.5%. We also have the option of converting revolving line loans to the eurocurrency rate, as defined.

There were no outstanding balances
under the revolving lines of credit at September 30, 2002. Loans under the credit facility are collateralized by substantially all of our assets. Under the credit facility, we are prohibited from paying dividends and are subject to various covenants
and restrictions. At September 30, 2002, we were in compliance with all covenants.

The credit facility limits the aggregate undrawn amount of all letters of credit and assesses
fees on the face amount of commercial and standby letters of credit. A fee is assessed at 3.75% of the face amount of commercial and standby letters of credit. The letters of credit are payable on demand. There were no amounts outstanding under
letters of credit at September 30, 2002.

(9)   Exercise of Over-allotment Option

On January 10, 2002, the underwriters for our
initial public offering in December 2001 exercised in full their option to purchase an additional 1,350,000 shares of our common stock at the initial public offering price of $16.00 per share in order to cover over-allotments. As a result of this
exercise, we received net proceeds of $20,088,000, after underwriting discounts and commissions of $1,512,000.

10



---

##### Table of Contents

(10)  Shares Earned by Premier Purchasing Partners, L.P.

Pursuant to an agreement that expired March 31, 2001, Premier Purchasing Partners, L.P. (Premier) earned, at no cost, shares of our common stock based upon the level of our sales to Premiers partners. During the nine
months ended September 30, 2001, the shares earned by Premier had a fair value of $1,754,000 and were classified as a reduction of net sales in the accompanying condensed consolidated statements of income.

(11)  Stock Options

During the nine months ended September 30, 2002, 217,300 options were granted at an average exercise price of $12.69 and 411,067 options
were exercised at an average exercise price of $3.26. Stock based compensation charges were $2,005,000 and $1,748,000 for the nine months ended September 30, 2002 and 2001, respectively.

(12)  Treasury Stock

On July 29, 2002, we repurchased all shares of our common stock held by Premier Purchasing Partners, totaling 2,914,593 shares for
$29,758,000 in cash. In addition, on August 28, 2002, we repurchased 452,284 shares of our common stock owned by Biotechnology Development Fund, L.P. for $6,000,000 in cash pursuant to a stock repurchase program adopted by our Board of Directors on
July 26, 2002. These repurchases were funded through our internal cash resources and the shares are being retained as treasury stock.

(13)  Employee Stock Purchase Plan

On July 31, 2002, 421 participants in our employee stock purchase plan elected to purchase 37,598 shares of our common stock at $10.20 per share. The purchase price of the stock was established at the inception
of the plan to be 85% of the lower of the fair market value per share of our common stock on the date the offer period begins or the exercise date. In our initial purchase period, the offer period began on December 14, 2001 and ended on July 31,
2002, the exercise date.

(14)  Litigation

VivoRx, Inc. and VivoRx Diabetes, Inc.

During 1999, VivoRx brought an action against us, our chairman and chief executive officer and American BioScience relating to the development of the businesses of American BioScience and us while our chairman and chief
executive officer was also serving as the chief executive officer and chairman of VivoRx.  This action was settled in February 2001 with American BioScience obtaining clear title and ownership to its intellectual property, including the
intellectual property underlying American BioSciences ABI-007 product candidate. Under the settlement, we are jointly and severally liable with American BioScience to pay VivoRx the remaining obligation under the settlement agreement of
$12,000,000 in February 2003, of which American BioScience has agreed to pay. The respective boards of directors for American BioScience and us, in consultation with litigation counsel, passed resolutions allocating $3,400,000 of the total
settlement obligation of $34,000,000 to us and the remaining $30,600,000 to American BioScience. We paid our allocated portion of the settlement obligation in February 2001. The allocation of the settlement was primarily based upon American
BioScience obtaining clear title and ownership to its intellectual property, including the intellectual property underlying American BioSciences ABI-007 product candidate, and, accordingly, being the primary beneficiary of the settlement.

Notwithstanding the agreed upon allocation of the settlement obligation between American BioScience and us, we recorded the entire present value of $30,354,000 of the litigation settlement with
VivoRx as an expense for the year ended December 31, 2000.

11



---

##### Table of Contents

Other

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

(15)  Net Sales by Product Line

Net sales by product line is as follows:

|                                                                                                         |  | Three Months Ended September 30, |            
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------- | -----------
|                                                                                                         |  |                                  |            
|                                                                                                         |  | 2002                             |            
|                                                                                                         |  |                                  |            
|Oncology                                                                                                 |  | $                                | 15,215,000 
|Anti-infective                                                                                           |  |                                  | 20,429,000 
|Critical care                                                                                            |  |                                  | 33,094,000 
|Contract manufacturing                                                                                   |  |                                  | 1,596,000  
|Other                                                                                                    |  |                                  | 265,000    
|                                                                                                         |  |                                  |            
|                                                                                                         |  |                                  | 70,599,000 
|Less fair value of common shares earned by Premier                                                       |  |                                  |           
|                                                                                                         |  |                                  |            
|                                                                                                         |  | $                                | 70,599,000 
|                                                                                                         |  |                                  |            
|Estimated net sales to our wholesalers of products resold to Premiers members included in above amounts |  | $                                | 15,624,000 
|                                                                                                         |  |                                  |            
|                                                                                                         |  |                                  |            
|                                                                                                         |  | Nine Months Ended September 30,  |            
|                                                                                                         |  |                                  |            
|                                                                                                         |  | 2002                             |            
|                                                                                                         |  |                                  |            
|Oncology                                                                                                 |  | $                                | 42,338,000 
|Anti-infective                                                                                           |  |                                  | 50,639,000 
|Critical care                                                                                            |  |                                  | 94,425,000 
|Contract manufacturing                                                                                   |  |                                  | 5,297,000  
|Other                                                                                                    |  |                                  | 791,000    
|                                                                                                         |  |                                  |            
|                                                                                                         |  |                                  | 193,490,000
|Less fair value of common shares earned by Premier                                                       |  |                                  |           
|                                                                                                         |  |                                  |            
|                                                                                                         |  | $                                | 193,490,000
|                                                                                                         |  |                                  |            
|Estimated net sales to our wholesalers of products resold to Premiers members included in above amounts |  | $                                | 44,519,000 
|                                                                                                         |  |                                  |            

(16)  Enterprise Resource Planning System

In March 2002, we entered into various licensing and support agreements for the implementation of a new enterprise resource planning (ERP) business system application. During the nine months ended September 30, 2002, we have
capitalized $4,998,000 for license fees, hardware and other costs for this project.

12



---

##### Table of Contents

ITEM 2.  
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Note Regarding Forward-Looking Statements

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

| |  | the impact of competitive products and pricing;                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                           
| |  | the availability and pricing of raw materials and components used in the manufacture of our pharmaceutical products;                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                           
| |  | the ability to successfully manufacture products in an efficient, time-sensitive and cost effective manner;                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                           
| |  | the acceptance of and demand for our existing and new pharmaceutical products;                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                           
| |  | our ability, and that of our suppliers, to comply with laws, regulations, and standards, and the application and interpretation of those laws, regulations, and standards, that govern
or affect the pharmaceutical industry, the non-compliance with which may delay or prevent the sale of our products;
| |   |                                                                                                                                                                                                                                                                                                           
| |  | the impact on our products and revenues of patents and other proprietary rights licensed or owned by us, our competitors and other third parties;                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                           
| |  | the difficulty in predicting the timing or outcome of product development efforts and regulatory approvals;                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                           
| |  | the actual results achieved in the ongoing and future clinical trials for ABI-007;                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                           
| |  | the timing of the completion of the ongoing and future clinical trials for ABI-007;                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                           
| |  | licenses or acquisitions; and                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                           
| |  | relationships and agreements with other parties.                                                                                                                                                                                                                                                          

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

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect managements opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results
of any revision to these forward-looking statements.

13



---

##### Table of Contents

Results of Operations

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

|                           |                                              | Three Months Ended September 30, |       | Nine Months Ended September 30, |   
|-------------------------- | -------------------------------------------- | -------------------------------- | ----- | ------------------------------- | --
|                           |                                              |                                  |       |                                 |   
|                           |                                              | 2002                             |       | 2001                            |   
|                           |                                              |                                  |       |                                 |   
|Net sales                  |                                              |                                  | 100.0 | %                               |   
|Cost of sales              |                                              |                                  | 52.9  | %                               |   
|                           |                                              |                                  |       |                                 |   
|Gross margin               |                                              |                                  | 47.1  | %                               |   
|Operating expenses:        |                                              |                                  |       |                                 |   
|                           | Research and development costs               |                                  |       | 3.8                             | % 
|                           | Selling, general and administrative expenses |                                  |       | 16.8                            | % 
|                           | Stock-based compensation                     |                                  |       | 0.8                             | % 
|                           | Gain on litigation settlements, net          |                                  |       |                                | % 
|                           | Equity in net income of Drug Source Co., LLC |                                  |       | (0.7                            | )%
|                           |                                              |                                  |       |                                 |   
|                           | Total operating expenses                     |                                  |       | 20.7                            | % 
|                           |                                              |                                  |       |                                 |   
|Income from operations     |                                              |                                  | 26.4  | %                               |   
|Interest income            |                                              |                                  | 0.8   | %                               |   
|Interest expense           |                                              |                                  | (0.3  | )%                              |   
|                           |                                              |                                  |       |                                 |   
|Income before income taxes |                                              |                                  | 26.9  | %                               |   
|Provision for income taxes |                                              |                                  | 11.9  | %                               |   
|                           |                                              |                                  |       |                                 |   
|Net income                 |                                              |                                  | 15.0  | %                               |   
|                           |                                              |                                  |       |                                 |   
|                           |                                              |                                  |       |                                 |   

Three Months Ended September 30, 2002 and 2001The generic pharmaceutical marketplace is characterized by additional competitors
entering the market, for specific products, forcing existing sellers like ourselves to lower prices on these products to maintain market share. Generally, we select products for development that will give us higher returns, try to be innovative in
the products we develop and strive to be the first to market to launch new products in order to capture market share and optimize growth. Our strategy has been to successfully launch a number of new abbreviated new drug applications (ANDAs)
each year to increase revenue and gross margin. As a result of this strategy, we received 13 product approvals in 2001 and 8 product approvals in the first nine months of 2002. The benefits of the strategy are reflected in our robust sales growth
and increased gross margin.

Net sales. Net sales were $70.6 million and $49.3 million for the three months ended September 30, 2002 and 2001, respectively, representing an increase of $21.3
million, or 43.2%. Products launched since January 2002 provided over half of the additional sales. Several products launched in 2001 continued to strengthen in the three-month period ended September 30, 2002.

Cost of sales. Cost of sales were $37.3 million and $33.1 million for the three months ended September 30, 2002 and 2001, respectively, representing an increase of $4.2 million. This increase was primarily due to the
increase in net sales in 2002. Cost of sales as a percentage of net sales decreased to 52.9% for the three months ended September 30, 2002 from 67.1% for the same period in 2001. The decrease in percentage was driven primarily by higher margin
products that we introduced in 2002 and 2001.

Gross margin.  Gross margin as a percent of net sales was 47.1% and 32.9% for the three months ended September 30, 2002 and 2001
respectively. The increase in gross margin percent was primarily due to our launch of new higher priced, higher gross margin products.

Research and development. Research and development costs
were $2.7 million both for the three months ended September 30, 2002 and 2001. Decreased spending for raw materials was offset by increased spending for personnel expenses and outside testing.

14



---

##### Table of Contents

We anticipate research and development expenses to exceed 2001 expenses as a result of higher cost raw materials associated with
the specific products being developed.

Selling, general and administrative. Selling, general and administrative expenses were $11.8 million and $7.6 million for the three months ended
September 30, 2002 and 2001, respectively, representing an increase of $4.2 million. As a percent of net sales, selling general and administrative expenses increased just slightly to 16.8% from 15.4% for the three months ended September 30, 2002 and
2001. This increase was primarily due to increased salaries and related expenses due to headcount additions, increased legal expenses and other costs related to our status as a public company such as insurance, professional services and franchise
tax expenses.

Stock-based compensation. Stock-based compensation was $0.6 million and $0.7 million for the three months ended September 30, 2002 and 2001, respectively, representing a decrease
of $0.1 million. The reduction resulted from a 2001 stock option tranche being amortized at the lower second-year amortization rate (per FASB Interpretation #28), offset by the amortization of stock options granted in the fourth quarter of
2001.

Litigation settlements. There were no litigation settlements for the three months ended September 30, 2002, as compared with a gain on litigation settlements of $0.3 million for the
three months ended September 30, 2001. Under the terms of a 2000 legal settlement, we were entitled to receive a series of payments, which began in March 2000 and concluded in 2001. All payments due to us under this settlement agreement were
received during 2001 and 2000.

Equity in Drug Source Co., LLC.In June 2000, a limited liability company, Drug Source Co., LLC, was formed to engage in the business of selling raw materials to
the pharmaceutical industry. We own 50% of Drug Source Co., LLC, and account for this interest on the equity method from which income of $0.5 million for the three months ended September 30, 2002 was recognized compared to income of $0.3 for the
three months ended September 30, 2001.

Interest income. Interest income was $0.5 million for the three months ended September 30, 2002 and 2001, representing no change. An increase in interest
earned on the cash proceeds from our initial public offering was offset by a decrease in the interest earned from our intercompany balance with American BioScience. The decrease in interest earned from American BioScience was a consequence of lower
interest rates.

Interest expense. Interest expense was $0.2 million and $1.0 million for the three months ended September 30, 2002 and 2001, respectively, representing a decrease of $0.8
million. This decrease was primarily due to the absence of bank debt, for which there was $0.5 million of interest expense for the three months ended September 30, 2001. Our bank debt was retired in December 2001 with proceeds from our initial
public offering. The imputed interest expense related to the amounts due to VivoRx also declined by $0.3 million as a result of scheduled payments made by American BioScience in accordance with the related settlement agreement.

Provision for income taxes. Provision for income taxes was $8.4 million and $2.6 million for the three months ended September 30, 2002 and 2001, respectively, representing an increase of $5.8 million due to
higher pretax income. Our effective income tax rates were 44.3% and 49.1% for the three months ended September 30, 2002 and 2001, respectively. The notably higher 2001 effective tax rate was primarily due to the higher ratio of non-deductible
stock-based compensation expense to pre-tax income.

15



---

##### Table of Contents

Nine Months Ended September 30, 2002 and 2001The generic pharmaceutical marketplace,
like other generic markets, is characterized by additional competitors entering the market, forcing existing sellers like ourselves to lower prices to maintain market share. Generally, we select products for development that will give us higher
returns, try to be innovative in the products we develop and strive to be the first to market to launch new products in order to capture market share and optimize growth. Our strategy has been to successfully launch a number of new ANDAs each
year to increase revenue and gross margin. As a result of our strategy, we received 13 product approvals in 2001 and 8 product approvals in the first nine months of 2002. The benefits of the strategy are reflected in our robust sales growth and
increased gross margin.

Net sales. Net sales were $193.5 million and $136.4 million for the nine months ended September 30, 2002 and 2001, respectively, representing an increase of $57.1
million, or 41.9%. Products launched in 2002 and 2001 represented 70% of the increased sales; 25% from 2001 product introductions and 45% came from 2002 product introductions. The balance of the increased sales came from a variety of sources,
including a certain critical care product showing increased demand due to a competitors inability to supply. These increases were offset by price erosion, typical at this point in the product cycle of certain of our oncology products.  In
addition, net sales for the nine months ended September 30, 2001 were reduced by $1.8 million for common stock earned by Premier Purchasing Partners. No common stock was earned by Premier for the nine months ended September 30, 2002.

Cost of sales. Cost of sales were $103.5 million and $90.0 million for the nine months ended September 30, 2002 and 2001, respectively, representing an increase of $13.5 million. This increase was
primarily due to the increase in net sales in 2002. Cost of sales as a percentage of net sales decreased to 53.5% for the nine months ended September 30, 2002 from 66.0% for the same period in 2001. The decrease in percentage was driven primarily by
the higher margin products introduced in 2002 and 2001.

Gross margin. Gross margin as a percent of net sales was 46.5% and 34.0% for the nine months ended September 30, 2002. The increase in
gross margin percent was primarily due to our launch of new higher priced, higher gross margin products.

Research and development. Research and development costs were $10.4 million and $8.6
million for the nine months ended September 30, 2002 and 2001, respectively, representing an increase of $1.8 million. This increase was primarily the result of the timing of the use of raw materials in research and development activities, the cost
of validation and stability procedures and lab supplies required in research and development activities.

We anticipate research and development expenses to continue to increase from 2001 amounts as a
result of higher raw material costs associated with the specific products being developed.

Selling, general and administrative. Selling, general and administrative expenses were $31.7 million
and $21.7 million for the nine months ended September 30, 2002 and 2001, respectively, representing an increase of $10.0 million. However, as a percent of sales, the expenses only increased to 16.4% from 15.9% for the nine months ended September 30,
2002 and 2001. This increase was primarily due to increased salaries and related expenses due to headcount additions and increased legal expenses and other costs related to our status as a public company such as insurance, professional services and
franchise tax expenses.

Stock-based compensation. Stock-based compensation was $2.0 million and $1.7 million for the nine months ended September 30, 2002 and 2001, respectively, representing
an increase of $0.3 million. This increase was the result of stock options granted throughout 2001, being amortized in 2002, for which the exercise price was less than the estimated fair value of our common stock on the grant date.

16



---

##### Table of Contents

Litigation settlements. There were no litigation settlements for the nine months ended September 30,
2002, as compared with a gain on litigation settlements of $0.8 million for the nine months ended September 30, 2001. Under the terms of a 2000 legal settlement, we were entitled to receive a series of payments, which began in March 2000 and
concluded in 2001. All payments due to us under this settlement agreement were received during 2001 and 2000.

Equity in Drug Source Co., LLC.In June 2000, a limited liability company, Drug
Source Co., LLC, was formed to engage in the business of selling raw materials to the pharmaceutical industry. We own 50% of Drug Source Co., LLC, and account for this interest on the equity method from which income of $1.3 million for the nine
months ended September 30, 2002 was recognized compared to income of $1.1 for the nine months ended September 30, 2001.

Interest income. Interest income was $1.6 million and $0.8 million for
the nine months ended September 30, 2002 and 2001, respectively, representing an increase of $0.8 million. This increase was primarily the result of interest earned on the cash proceeds from our initial public offering.

Interest expense. Interest expense was $0.9 million and $3.5 million for the nine months ended September 30, 2002 and 2001, respectively, representing a decrease of $2.6 million. This decrease was primarily due to the
absence of bank debt, for which there was $1.6 million of interest expense for the nine months ended September 30, 2001. Our bank debt was retired in December 2001 with proceeds from our initial public offering. The imputed interest expense related
to the amounts due to VivoRx also declined as a result of scheduled payments made by American BioScience in accordance with the related settlement agreement.

Provision for income taxes.
Provision for income taxes was $21.2 million and $6.1 million for the nine months ended September 30, 2002 and 2001, respectively, representing an increase of $15.1 million due to higher pretax income. Our effective income tax rates were 44.2% and
45.4% for the nine months ended September 30, 2002 and 2001, respectively.

Significant Accounting Policies and Estimates

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

Revenue recognition

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

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

17



---

##### Table of Contents

Expense recognition

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

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

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

Stock-based
compensation

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

We have recorded
deferred stock-based compensation related to unvested options granted to employees and outside directors. Based upon the number of unvested options outstanding as of September 30, 2002, we expect to amortize approximately $2.5 million of deferred
stock-based compensation in future periods as follows: $0.5 million for the remainder of 2002; $1.3 million in 2003; $0.6 million in 2004; and $0.1 million in 2005. We anticipate that the exercise price of substantially all stock options granted on
an ongoing basis will be at the reported market price of our common stock and, therefore, no significant deferred stock-based compensation will result from these option grants.

Liquidity and
Capital Resources

Net cash used in operating activities was $29.7 million for the nine months ended September 30, 2002 as compared to $4.3 million of cash provided for the comparable period of
2001. The primary use of cash for the nine months ended September 30, 2002 was the $60.0 million payment to American BioScience in accordance with the terms of the ABI-007 license agreement, as further discussed below. For the nine months ended
September 30, 2002 and 2001, operating cash flows were impacted by the increase in net income and changes in working capital, mainly in inventory, accounts payable and accrued expenses.

Net cash used
in investing activities was $13.7 million for the nine months ended September 30, 2002 as compared to $6.1 million for the comparable period of 2001. Our investing activities have primarily consisted of capital expenditures for new manufacturing
equipment and, in 2002, licensing fees and costs related to the ongoing implementation of a new enterprise resource planning business system application.

18



---

##### Table of Contents

Net cash used in financing activities was $16.3 million for the nine months ended September 30, 2002 as compared to $1.3 million
of cash provided for the comparable period of 2001. Our financing activities in 2002 primarily included net proceeds received from the sale of common stock of $20.1 million, which was a result of the underwriters of our December 14, 2001 initial
public offering exercising an over-allotment option on January 10, 2002. This increase was offset by the repurchase of our common stock for $36.3 million in July and August 2002, including fees. Our financing activities in 2001 included net
borrowings on our revolving line of credit of $17.9 million. This was offset by an increase in amounts due from American BioScience of $13.8 million and payments of long-term debt of $2.9 million.

In
December 2001, we entered into a credit agreement with a syndicate of banks headed by the Canadian Imperial Bank of Commerce (CIBC). The CIBC agreement includes a $50.0 million revolving line of credit and a $25.0 million term loan. The credit
facility is secured by substantially all of our assets, is guaranteed by each of our subsidiaries and contains various operating and financial covenants. The revolving credit facility has a term of five years and can be increased to $75.0 million at
our request. The initial CIBC term loan balance of $25.0 million, the proceeds of which were used to repay our indebtedness under a former credit facility, was repaid and permanently reduced with proceeds from our initial public offering. The
revolving credit facility balance of $12.7 million was also paid in full with proceeds from our initial public offering. In connection with our repurchase of shares of our common stock we agreed with CIBC to amend our revolving credit facility to
temporarily reduce our available credit to $30.0 million until January 29, 2003.  The CIBC credit facility expires in 2006. There were no outstanding balances due under the CIBC credit facility at September 30, 2002.

As of September 30, 2002, we were jointly and severally liable with American BioScience for payments due to VivoRx pursuant to a litigation settlement requiring $12.0 million to be paid prior to February 26, 2003. Under the
terms of an agreement between American BioScience and us, American BioScience has agreed to pay this obligation in full. If American BioScience fails or is unable to pay the remaining obligation of $12.0 million due on February 26, 2003, we will be
liable for any amounts that remain unpaid, which could adversely affect our financial condition. American BioScience agreed in July 2001 that if it fails to timely make any of the settlement payments due to VivoRx, American BioScience will surrender
shares of our common stock to us having a fair market value of 120% of the unpaid amount.

In November 2001, we entered into a license agreement with American BioScience under which we acquired the
exclusive rights to market and sell ABI-007 in North America, and which provided for initial license payments of $60 million in January 2002. This license is perpetual. American BioScience also entered into a manufacturing agreement with us that
grants us exclusive manufacturing rights for a three-year period. American BioScience is responsible for substantially all costs associated with the development of ABI-007, except that we agreed to manufacture up to $2.0 million of ABI-007 for use
in clinical trials. The cost of the clinical product was charged to research and development expense in the year ended December 31, 2001. We are also required to make milestone payments of up to (a) $60.0 million for indications relating to breast,
ovarian and lung cancers and (b) $32.5 million for indications relating to prostate cancer and other indications as agreed upon between American BioScience and us. We also may be required to make additional milestone payments, up to an aggregate of
$110.0 million, based upon the achievement of particular annual sales levels. Profits from sales of ABI-007 will be shared equally between us and American BioScience after deducting costs of goods sold, selling expenses and other appropriate
deductions. All costs and expenses related to product recalls and product liability claims generally will be split equally between American BioScience and us.

The initial license payment has been
accounted for as a distribution of our stockholders equity to American BioScience. As of December 31, 2001, the entire $60.0 million had been accrued as a distribution payable to American BioScience. The $60.0 million was paid to American
BioScience in January 2002.  The income tax benefits related to this payment will be credited to our stockholders equity as realized.

19



---

##### Table of Contents

On July 29, 2002, we repurchased all shares of our common stock held by Premier Purchasing Partners, totaling 2,914,593 shares
for $29,758,000 in cash. In addition, on August 28, 2002, we repurchased 452,284 shares of our common stock owned by Biotechnology Development Fund, L.P. for $6,000,000 in cash pursuant to a stock repurchase program adopted by our Board of Directors
on July 26, 2002. These repurchases were funded through our internal cash resources and the shares are being retained as treasury stock. We may purchase additional shares of our common stock under the stock repurchase program for up to
$200,000.

On July 31, 2002, 421 participants in our employee stock purchase plan elected to purchase 37,598 shares of our common stock at $10.20 per share. The purchase price of the stock was
established at the inception of the plan to be 85% of the lower of the fair market value per share of our common stock on the date the offer period begins or the exercise date. In our initial purchase period, the offer period began on December 14,
2001 and ended on July 31, 2002, the exercise date.

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

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets (SFAS No. 141 and SFAS No. 142). Under the new rules, effective January 1, 2002, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with the Statements. Other intangible assets continue to be amortized over their useful lives. The effect of adopting
SFAS No. 141 and SFAS No. 142 had no impact on our statement of income or financial position. We do not have any goodwill recorded in our consolidated balance sheets.

ITEM 3.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our investment activities is to preserve principal while at the same time maximizing the
income we receive from our activities. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the fair value of the principal amount of the investment to fluctuate. For example,
if we hold a security that was issued with a fixed interest rate at the prevailing rate and the prevailing rate later rises, the fair value of the principal amount of our investment will probably decline. To minimize this risk in the future, we
intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, government and non-government debt securities and money market funds. The average duration of all our investments
has been less than one year. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments. Therefore, no quantitative tabular disclosure is presented.

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

20



---

##### Table of Contents

ITEM 4.  
CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings
under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Our principal executive and financial officers have
evaluated our disclosure controls and procedures within 90 days of the filing of this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective.

Subsequent to our evaluation, there were no significant changes in internal controls or other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies
and material weaknesses.

PART II.  
OTHER INFORMATION

ITEM 2.  
CHANGES IN SECURITIES AND USE OF PROCEEDS

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

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

For the nine months ended September 30, 2002, $55.0 million of the net proceeds from our initial public offering, along with $5.0 million of cash generated from operations, for a total of $60.0 million paid in January, 2002,
was used to acquire the ABI-007 license, and $9.0 million of the net proceeds was used for general corporate purposes. Under the ABI-007 license agreement, we acquired the exclusive rights to market and sell ABI-007 in North America. On July 29,
2002, $14.9 million of the net proceeds from our initial public offering (along with $14.9 million of cash generated from our operations, for a total of $29.8 million) were used to repurchase shares from Premier Purchasing Partners.

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

21



---

##### Table of Contents

ITEM 6.  
EXHIBITS AND REPORTS ON FORM 8-K

|(a)                                                                                                                                  |  | Exhibits.                                                                                                                                                                                                      
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                    
|                                                                                                                                     |  | 10.15                                                                                                                                                                                                          
|                                                                                                                                     |  |                                                                                                                                                                                                                
|                                                                                                                                     |  | 10.16                                                                                                                                                                                                          
|                                                                                                                                     |  |                                                                                                                                                                                                                
|                                                                                                                                     |  | 10.17                                                                                                                                                                                                          
|                                                                                                                                     |  |                                                                                                                                                                                                                
|                                                                                                                                     |  | 99.1                                                                                                                                                                                                           
|                                                                                                                                     |  |                                                                                                                                                                                                                
|                                                                                                                                     |  | 99.2                                                                                                                                                                                                           
|                                                                                                                                     |  |                                                                                                                                                                                                                
|                                                                                                                                     |  |                                                                                                                                                                                                                
|                                                                                                                                     |  |                                                                                                                                                                                                                
|(1)Incorporated by reference to the Companys report on Form 8-K filed with the
Securities and Exchange Commission on  July29, 2002.
|                                                                                                                                    
|(b)                                                                                                                                  |  | Reports on Form 8-K                                                                                                                                                                                            
|                                                                                                                                     |  |                                                                                                                                                                                                                
|                                                                                                                                     |  | The Company filed a Form 8-K on July 29, 2002 to report that the Company had entered into a Stock Purchase Agreement with Premier Purchasing Partners, Inc. to repurchase 2,914,593
shares of its common stock.

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.

| | AMERICAN PHARMACEUTICAL PARTNERS, INC.
| | --------------------------------------
| |                                       
| |                                       
| | By:                                   
| |                                       
| |                                       
| |                                       
| |                                       
| | By:                                   
| |                                       
| |                                       

Date: November 13, 2002

22



---

##### Table of Contents

CERTIFICATION

|I, Patrick Soon-Shiong, certify that:
|-------------------------------------
|                                     
|1.                                   
|                                     
|2.                                   
|                                     
|3.                                   
|                                     
|4.                                   
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|5.                                   
|                                     
|                                     
|                                     
|                                     
|                                     
|6.                                   
|                                     
|Date:  November 13, 2002             
|                                     
|                                     
|                                     
|                                     
|                                     

23



---

##### Table of Contents

CERTIFICATION

|I, Nicole Williams, certify that:
|---------------------------------
|                                 
|1.                               
|                                 
|2.                               
|                                 
|3.                               
|                                 
|4.                               
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|5.                               
|                                 
|                                 
|                                 
|                                 
|                                 
|6.                               
|                                 
|Date:  November 13, 2002         
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 

24