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

                                    FORM 10-Q

|X|      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                    For Quarterly Period Ended March 31, 2008

                                       Or

|_|      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

                    For the transition period from             to

                         Commission file number 33-90516

                                 NEOPHARM, INC.
             (Exact name of Registrant as specified in its charter)

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

                           101 Waukegan Road Suite 970
                           Lake Bluff, Illinois 60044
               (Address of principal executive offices) (Zip Code)

                                 (847) 887-0800
              (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 |_|

Indicate by check mark whether Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of "accelerated filer," "large accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
   Large accelerated filer |_|  Accelerated filer |_|  Non-accelerated filer |_|
   Smaller reporting company |X|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of, April 28, 2008 the number of shares outstanding of each of the issuer's
classes of common stock was as follows:

         Title of each class                    Number of shares outstanding
------------------------------------------- ------------------------------------
     Common Stock ($.0002145 par value)               28,491,155

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

<PAGE>

                                 NEOPHARM, INC.

                                    FORM 10-Q
                                      INDEX

<TABLE>
<CAPTION>

<S>      <C>                                                                               <C>
                                                                                           Page
   PART I. FINANCIAL INFORMATION

         Item 1.  Financial Statements                                                        3

                  Condensed Consolidated Balance Sheets as of March 31, 2008
                  (unaudited) and December 31, 2007                                           3

                  Condensed Consolidated Statements of Operations for the three
                  months ended March 31, 2008 and 2007 (unaudited)                            4

                  Condensed Consolidated Statements of Cash Flows for the three
                  months ended March 31, 2008 and March 31, 2007 (unaudited)                  5

                  Notes to Condensed Consolidated Financial Statements (unaudited)            6

         Item 2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                                  14

         Item 3.  Quantitative and Qualitative Disclosures About Market Risk                 22

         Item 4   Controls and Procedures                                                    22

   PART II. OTHER INFORMATION                                                                23

         Item 1.  Legal Proceedings                                                          23

         Item 1A. Risk Factors                                                               23

         Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                24

         Item 3.  Defaults Upon Senior Securities                                            24

         Item 4.  Submission of Matters to a Vote of Security Holders                        24

         Item 5.  Other Information                                                          24

         Item 6.  Exhibits                                                                   24

   SIGNATURE PAGE                                                                            25

</TABLE>

                                       2
<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1.                           FINANCIAL STATEMENTS

                                 NEOPHARM, INC.
                      Condensed Consolidated Balance Sheets

<TABLE>
<CAPTION>
<S>                                                                                       <C>             <C>
                                                                                             March 31,     December 31,
                                                                                               2008            2007
                                                                                          --------------- --------------
                                                                                           (unaudited)
ASSETS
 Current assets:
  Cash and cash equivalents                                                               $   4,113,000   $   1,022,000
  Available for sale securities                                                              14,045,000      19,759,000
  Prepaid expenses and other                                                                    292,000         417,000
                                                                                          --------------  --------------
  Total current assets                                                                       18,450,000      21,198,000
 Fixed assets, net of accumulated depreciation                                                  405,000         395,000
 Other assets                                                                                   664,000         659,000
                                                                                          --------------  --------------
  Total assets                                                                            $  19,519,000   $  22,252,000
                                                                                          ==============  ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
  Accounts payable                                                                        $   1,125,000   $   1,340,000
  Accrued clinical trial expenses                                                               348,000         278,000
  Accrued compensation                                                                          582,000       1,042,000
  Accrued manufacturing expenses                                                                739,000         739,000
  Obligations under capital lease                                                                32,000          32,000
  Other accrued expenses                                                                        416,000         494,000
                                                                                          --------------  --------------
  Total current liabilities                                                                   3,242,000       3,925,000
                                                                                          --------------  --------------

 Obligations under capital lease                                                                 65,000          74,000
                                                                                          --------------  --------------
  Total liabilities                                                                           3,307,000       3,999,000
                                                                                          --------------  --------------

 Stockholders' equity:
  Preferred stock, $0.01 par value; 15,000,000 shares authorized:
      none issued and outstanding                                                                     -               -
  Common stock, $0.0002145 par value; 50,000,000
      shares authorized: 28,491,155 and 28,488,550
      shares issued and outstanding, respectively                                                 6,000           6,000
  Additional paid-in capital                                                                290,630,000     290,481,000
  Other comprehensive income (loss)                                                            (677,000)              -
  Accumulated deficit                                                                      (273,747,000)   (272,234,000)
                                                                                          --------------  --------------
  Total stockholders' equity                                                                 16,212,000      18,253,000
                                                                                          --------------  --------------

  Total liabilities and stockholders' equity                                              $  19,519,000   $  22,252,000
                                                                                          ==============  ==============
</TABLE>


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


                                       3
<PAGE>


                                 NEOPHARM, INC.

                 Condensed Consolidated Statements of Operations
                   Three Months Ended March 31, 2008 and 2007
                                   (Unaudited)

<TABLE>
<CAPTION>
<S>                                                                                      <C>             <C>
                                                                                               Three Months Ended
                                                                                         -------------------------------
                                                                                         March 31, 2008  March 31, 2007
                                                                                         --------------- ---------------

Total revenue                                                                            $            -  $            -

Expenses:
 Research and development                                                                       823,000       3,007,000
 Selling, general, and administrative                                                         1,269,000       2,861,000
 Facility consolidation costs                                                                   (75,000)              -
 Gain on sale of equipment                                                                     (208,000)              -
                                                                                         --------------- ---------------
  Total expenses                                                                              1,809,000       5,868,000
                                                                                         --------------- ---------------
Loss from operations                                                                         (1,809,000)     (5,868,000)

Interest income                                                                                 296,000         415,000
                                                                                         --------------- ---------------
Net loss                                                                                 $   (1,513,000) $   (5,453,000)
                                                                                         =============== ===============
Net loss per share --
 Basic and diluted                                                                       $        (0.05) $        (0.19)
                                                                                         =============== ===============
Weighted average shares outstanding --
 Basic and diluted                                                                           28,488,579      28,080,478
                                                                                         =============== ===============
</TABLE>

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


                                       4
<PAGE>


                                 NEOPHARM, INC.

                 Condensed Consolidated Statements of Cash Flows
                   Three Months Ended March 31, 2008 and 2007
                                   (Unaudited)
<TABLE>
<CAPTION>
<S>                                                                                   <C>                <C>
                                                                                              Three Months Ended
                                                                                      ----------------------------------
                                                                                        March 31, 2008   March 31, 2007
                                                                                      ------------------ ---------------

Cash flows from operating activities:
 Net loss                                                                             $      (1,513,000) $   (5,453,000)
 Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization                                                                  73,000         233,000
  Stock-based compensation expense                                                              148,000         131,000
  Gain on retirement of equipment and furniture                                                       -          (2,000)
 Changes in assets and liabilities:
  Interest receivable on short-term investments                                                  22,000          (3,000)
  Prepaid expenses and other assets                                                             120,000         (31,000)
  Accounts payable                                                                             (215,000)     (4,258,000)
  Other current liabilities                                                                    (468,000)       (351,000)
                                                                                      ------------------ ---------------
Net cash and cash equivalents used in operating activities                                   (1,833,000)     (9,734,000)
                                                                                      ------------------ ---------------

Cash flows from investing activities:
 Proceeds from sales of marketable securities                                                 5,015,000       9,800,000
 Proceeds from sale (purchase) of equipment and furniture, net                                  (83,000)          2,000
                                                                                      ------------------ ---------------
Net cash and cash equivalents provided by investing activities                                4,932,000       9,802,000
                                                                                      ------------------ ---------------

Cash flows from financing activities:
 Proceeds from employee stock purchase plan                                                       1,000           9,000
 Repayment of capital lease obligation                                                           (9,000)         (7,000)
                                                                                      ------------------ ---------------
Net cash and cash equivalents (used in) provided by financing activities                         (8,000)          2,000
                                                                                      ------------------ ---------------

Net increase in cash and cash equivalents                                                     3,091,000          70,000
Cash and cash equivalents, beginning of period                                                1,022,000       1,852,000
                                                                                      ------------------ ---------------
Cash and cash equivalents, end of period                                              $       4,113,000  $    1,922,000
                                                                                      ================== ===============
</TABLE>

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


                                       5
<PAGE>

                                 NEOPHARM, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

1.   BASIS OF PRESENTATION

     The financial information herein is unaudited. The balance sheet as of
December 31, 2007 is derived from audited financial statements.

     The accompanying unaudited condensed consolidated financial statements of
NeoPharm, Inc. and subsidiary ("we", "us", "our", or the "Company") have been
prepared in accordance with U.S. generally accepted accounting principles, or
U.S. GAAP, for interim financial information and with the instructions to Form
10-Q and Article 8-03 of Regulation S-X. Accordingly, these financial statements
do not contain all of the information and notes required by U.S. GAAP for
complete financial statements. In the opinion of management, the accompanying
unaudited condensed consolidated interim financial statements contain all
adjustments (consisting of normal recurring adjustments) necessary to a fair
presentation. The results of operations for the three month period ended and as
of March 31, 2008 are not necessarily indicative of our operating results for
fiscal 2008 or future interim periods.

     The unaudited condensed consolidated financial statements include the
accounts of NeoPharm, Inc. and its wholly owned subsidiary, NeoPharm EU Limited.
As of and through March 31, 2008, the subsidiary had nominal assets and had not
conducted any business. All significant intercompany accounts and transactions
are eliminated in consolidation.

     While we believe that the disclosures presented herein are adequate to make
the information not misleading, it is suggested that these financial statements
be read in conjunction with the financial statements and notes included in the
Company's 2007 Annual Report on Form 10-K filed with the United States
Securities and Exchange Commission, or SEC.

     The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expense during the reporting periods. Actual
results could differ from those estimates.

     Amounts presented have been rounded to the nearest thousand.


Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. In February of 2008, the FASB issued FASB Staff position
157-2 which delays the effective date of SFAS 157 for non-financial assets and
liabilities which are not measured at fair value on a recurring basis (at least
annually) until fiscal years beginning after November 15, 2008. The Company
adopted SFAS No. 157 on January 1, 2008, but the adoption did not have a
material impact on its consolidated financial statements.

     In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 allows entities the
option to measure eligible financial instruments at fair value as of specified
dates. Such election, which may be applied on an instrument by instrument basis,
is typically irrevocable once elected. SFAS No. 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. The
Company adopted SFAS No. 159 on January 1, 2008, but the adoption did not have a
material impact on its consolidated financial statements.


                                       6
<PAGE>

2.    NET LOSS PER SHARE

      The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
<S>                                           <C>                  <C>

                                                         Three Months Ended
                                              -----------------------------------------
                                                 March 31, 2008       March 31, 2007
                                              -------------------- --------------------
      Numerator:
       Net loss                               $        (1,513,000) $        (5,453,000)
                                              ==================== ====================
      Denominator:
       Weighted average shares outstanding             28,488,579           28,080,478
                                              ==================== ====================

      Loss per share - basic and diluted      $             (0.05) $             (0.19)
                                              ==================== ====================

      Potential common share equivalents:
       Stock options                                    1,244,826            2,252,277
                                              ==================== ====================
</TABLE>

      As we have incurred net losses in each of the periods presented, basic and
diluted loss per share amounts are the same, as the effect of common share
equivalents is anti-dilutive.


3.    SHARE-BASED COMPENSATION

      We currently sponsor the following share-based payment plans:

      2006 Plan

      In June 2006, our stockholders approved the NeoPharm, Inc. 2006 Equity
Incentive Plan, or the 2006 Plan. The 2006 Plan originally provided for the
issuance of stock options, non-vested stock, restricted stock, performance units
or performance share awards to employees, directors and consultants convertible
to up to 1,000,000 shares of our common stock. During the second quarter of
2007, the Board of Directors approved a resolution to increase the total shares
available for issuance under the 2006 Plan to 3,400,000 shares. In addition, the
Board approved an increase in the number of shares of Common Stock that may be
granted to any Grantee during any calendar year, or earned by any Grantee under
any performance based award during any calendar year, from 500,000 to 750,000
shares. Each of these Board resolutions were approved by the shareholders at the
Annual Meeting of Stockholders held on August 16, 2007. Awards under the 2006
Plan generally consist of stock options having an exercise price equal to the
average of the lowest and highest reported sale prices of our common stock on
the date of grant; vest ratably over four years; have a 10 year term; and are
subject to continuous employment. Stock awards granted to our non-employee
directors under the 2006 Plan typically vest one year from the date of grant.
Awards under the 2006 Plan vest immediately upon a change in control, as defined
in the 2006 Plan. Although the 2006 Plan provides for the issuance of
performance units and performance shares, we have not made grants of these types
of awards. The 2006 Plan limits to 500,000 the shares of common stock which may
be issued pursuant to restricted stock or bonus stock awards. As of March 31,
2008 and December 31, 2007, 2,260,139 shares were available for issuance under
the 2006 Plan.

      2006 Employee Stock Purchase Plan

      In June 2006, our shareholders also approved the 2006 Employee Stock
Purchase Plan, or the Purchase Plan, under which eligible employees may purchase
shares of common stock quarterly through payroll deductions. An aggregate of
100,000 shares of common stock may be issued under the Purchase Plan. The price
per share under the Purchase Plan is 85% of the lower of the closing price of
the common stock on (i) the first business day of the plan period or (ii) the
purchase date. The Purchase Plan imposes a limitation upon a participant's right
to acquire common stock if immediately after or prior to purchase, the employee
owns 5% or more of the total combined voting power or value of our common stock.
During the period ending March 31, 2008, 2,605 shares were issued under the
Purchase plan resulting in compensation expense of $1,240. As of March 31, 2008
and December 31, 2007, 43,790 and 46,395 shares remained available for issuance,
respectively.


                                       7
<PAGE>

      The 1998 Plan

      Our 1998 Equity Incentive Plan, or the 1998 Plan, provided for the grant
of awards, primarily stock options, to employees, directors, and consultants to
acquire up to 4,600,000 shares of our common stock. Following the June 2006
shareholder approval of the 2006 Plan, no further awards have been or will be
made under the 1998 Plan. Option awards under the 1998 Plan were generally
granted with an exercise price equal to the closing price of our common stock on
the date of grant, but may have been granted with an exercise price of not less
than 85% of the fair market value of our common stock. Option awards under the
1998 Plan typically had a 10-year life and vested ratably on the first four
anniversaries of the grant, subject to continuous employment. Stock awards
granted to our non-employee directors under the 1998 Plan typically vest one
year from the date of grant. Outstanding awards issued under the 1998 Plan
vested immediately upon a change in control, as defined in the 1998 Plan.


      Amounts recognized in the consolidated statements of operations with
respect to our share-based compensation plans were as follows:

<TABLE>
<CAPTION>
<S>                                                          <C>               <C>
                                                                      Three Months Ended
                                                             -------------------------------------
                                                              March 31, 2008     March 31, 2007
                                                             ----------------- -------------------

      Research and development                               $         40,000  $            16,000
      Selling, general and administrative                             108,000              115,000

                                                             ----------------  -------------------
      Total cost of share-based payment plans during period  $        148,000  $           131,000
                                                             ================  ===================
</TABLE>


      We have never capitalized, or recognized an income tax benefit from,
share-based compensation.

      The following is a summary of activity relating to option awards to
employees and non-employee directors during the three months ended March 31,
2008:
<TABLE>
<CAPTION>
<S>                        <C> <C>                           <C>       <C>        <C>               <C>    <C>
                                                                       Weighted Average  Weighted Average
                                                                        Exercise Price/      Remaining      Aggregate
                                                         Number of     Grant Date Fair    Contractual Life  Instrinsic
                                                           Options           Value            in years         Value
                                                       --------------- ----------------- ----------------- -------------
      Outstanding at December 31, 2007                     1,252,326   $     5.79/$4.20
       Granted                                                     -
       Exercised                                                   -
       Forfeited/expired/cancelled                            (7,500)  $      6.51/3.46
                                                       --------------
      Outstanding at March 31, 2008                        1,244,826         11.00/8.02             7.7    $           -
                                                       ==============

      Exercisable at March 31, 2008                          569,201   $    14.91/11.54             5.4    $           -
                                                       ==============

      Weighted-average fair value of options granted
       during the period                                           -   $              -

      Nonvested at December 31, 2007                         755,051   $       2.26/1.6
       Granted
       Vested                                                (79,426)          2.49/1.7
       Forfeited                                                   -
                                                      ---------------
      Nonvested at March 31, 2008                            675,625   $      2.22/1.57
                                                      ===============
</TABLE>

      As of March 31, 2008 we expect to recognize $669,000 of unrecognized
share-based compensation for our outstanding options over a weighted average
period of 1.9 years.


                                       8
<PAGE>


      Restricted Stock Awards

      In June 2007, we granted 180,665 restricted shares of common stock to our
chief executive officer with a weighted average fair value of $1.36 per share
and a four year vesting period. In August 2007, we granted 213,196 restricted
shares of common stock to non-employee directors with a weighted average fair
value of $0.99 and a one year vesting period. As of March 31, 2008, there were a
total of 451,944 restricted shares of common stock outstanding with unearned
compensation of $234,000 which is expected to be earned within 4.5 months for
the non-employee directors and 36 months for the chief executive officer. No
stock options were granted to non-employee directors during the three months
ended March 31, 2008.

      Stock Option Valuation Information

      We have estimated the fair value of our share-based compensation using the
Black-Scholes option-pricing model. This model requires the use of subjective
assumptions that have a significant impact on the fair value estimate. We have
based our assumptions regarding expected volatility on the historic volatility
of our common stock, the risk-free interest rate on the U.S. Treasury yield
curve in effect at the time of grant, and the expected term of options using the
"Simplified Method" in accordance with SAB No. 107, Share-Based Payment. There
were no employee stock options granted during the three months ended March 31,
2008.


4.    CASH AND CASH EQUIVALENTS AND AVAILABLE FOR SALE SECURITIES

      We consider all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Included with cash are
cash equivalents of $3.8 million and $0.3 million as of March 31, 2008 and
December 31, 2007, respectively. The carrying value of these investments
approximates their fair market value due to their short maturity and liquidity.

      Available for sale securities consist of auction rate certificates with
scheduled maturities greater than 90 days at the time of purchase. Auction rate
certificates are used by many student-loan providers, municipalities and other
governmental authorities to raise cash to fund projects or operations, and money
market funds. These auction rate certificates all have AAA/aaa credit ratings,
consistent with our investment policy guidelines, and have long-term nominal
maturities with provisions calling for the interest rates to be reset through
periodic auctions every 7 to 28 days. We believe the structural features of the
auction rate certificates, including an interest rate reset feature, provide us
with liquidity characteristics similar to cash equivalents. As provided by
Statement of Financial Accounting Standards, or SFAS, No. 115, Accounting for
Certain Investments in Debt and Equity Securities, we have elected to treat all
of our investments in marketable securities as "available-for-sale," which
requires that these investments be recorded at fair market value.


      All of the auction rate certificates held by the Company as of March 31,
2008 have experienced failed auctions. An auction failure is not a default. An
auction failure means that the parties wishing to sell securities could not
because the number of sellers was greater than the number of buyers at the reset
dates. Because the investments typically have provisions such that the interest
rates reset at higher percentages upon failure in the auction market, the
issuers have a strong incentive to restructure and repurchase the underlying
bonds.


      The investment bank which holds NeoPharm's auction rate certificates has
estimated the fair value of all of its auction rate certificates as of March 31,
2008, including those held in the Company's account. The fair value of
NeoPharm's auction rate certificates was estimated to be $14 million, which is
$0.7 million less than their $14.7 million cost. We believe that improving
market conditions will ultimately lead to the repurchase of NeoPharm's auction
rate certificates at their par value. Since the timing of the repurchase of the
Company's auction rate certificates at par is uncertain and dependent on the
rate with which market conditions continue to improve, we have arranged for a
$5.0 million credit facility collateralized by all of the Company's investments,
including its auction rate certificates. The credit facility will provide us the
liquidity to fund our operations for at least the next 12 months, based on our
forecasted cash consumption during that period of time (see note 10).


                                       9
<PAGE>

      The Company considers this decline in the estimated fair value of its
investments in auction rate certificates to be temporary, based on the
relatively short length of time and the extent to which the estimated fair value
has been less than cost, and the Company's intent and ability to hold its
investments in auction rate certificates for a period of time that is deemed to
be sufficient to allow for the anticipated recovery in their market value. As
the Company believes that the failed auctions are the result of temporary market
conditions, management currently expects to be able to liquidate these
securities within the short term. Accordingly, we are reporting our investments
in auction rate certificates as of March 31, 2008 on our Consolidated Balance
Sheet as a Current Asset at their estimated fair value, and reporting the
decline in estimated fair value, which is considered to be temporary, as Other
Comprehensive Income, a separate component of Shareholders' Equity, as provided
by Statement of Financial Accounting Standards, or SFAS, No. 115, Accounting for
Certain Investments in Debt and Equity Securities. However, management intends
to monitor these investments and will make adjustments to their treatment,
including potential reclassification to long term in the future, if that is
considered necessary.

      Included with the carrying value of the investments in available for sale
securities was accrued interest income receivable of $22,000 and $59,000 as of
March 31, 2008 and December 31, 2007, respectively.

      Short-term investments, stated at fair market value, are as follows:

<TABLE>
<CAPTION>
<S>                                                                             <C>                  <C>
                                                                                     March 31,          December 31,
                                                                                        2008                2007
                                                                                -------------------- -------------------

      State government agencies, at par value                                   $       14,700,000   $        19,700,000
      Less: temporary decline in estimated fair value                                     (700,000)                    -

                                                                                -------------------  -------------------
          Total estimated fair value of short-term investments                  $       14,000,000   $        19,700,000
                                                                                ===================  ===================
</TABLE>

5.    FIXED ASSETS

      We record fixed assets at cost and record depreciation using the
straight-line method over the related asset's estimated useful life.
Expenditures that do not extend the life or improve the productivity of assets
are charged to expense when incurred. When fixed assets are disposed of, the
related costs and accumulated depreciation are removed from the accounts and any
gain or loss is recorded. Depreciation and amortization expense for the three
months ended March 31, 2008 and 2007, was $73,000 and $233,000, respectively.
During the three months ended March 31, 2008, the Company capitalized the cost
of leasehold improvements totaling $82,000 in connection with its move to a
smaller corporate headquarters facility.

      Long-lived assets are reviewed for impairment when changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the assets to estimated undiscounted cash flows expected to
be generated by the assets. If the carrying amount of an asset were to exceed
its estimated future cash flows, an impairment charge would be recognized by the
amount by which the carrying amount of the asset exceeds the fair value of the
asset.



6.    FACILITY CONSOLIDATION COSTS

      The lease on our old Waukegan facility, from which we moved to our new
facility in Lake Bluff, expired on March 31, 2008. In this lease there was an
obligation when we vacated the premises for us to restore the facility to its
original condition when we moved into the facility. As a result, for the year
ended December 31, 2007, we accrued an estimated cost of our restoration
obligation of $200,000. In April 2008 we entered into an agreement to pay
$125,000 to the owner of our former Waukegan facility in lieu of incurring the
actual costs for the restoration of that facility. As a result, we recorded a
reduction in facility consolidation costs of $75,000 in the first quarter of
2008 to adjust the accrual to the amount that was actually paid in April 2008.



7.    STOCKHOLDERS' EQUITY

      We maintain a Stockholder Rights Plan whereby rights to purchase shares of
Series A Participating Preferred Stock become exercisable by our stockholders in
the event a non-excluded party acquires, or attempts to acquire, 15% or more of
our outstanding common stock.


                                       10
<PAGE>

8.    COMMITMENTS

          Manufacturing Commitment--To secure access to manufacturing capacity
      for the potential manufacture, scale-up of manufacturing and regulatory
      advancement of Cintredekin Besudotox, we entered into agreements with a
      contract manufacturing organization. Under the terms of the agreements, we
      may be obligated to pay half of the committed processing costs, or
      approximately $2.1 million, should we elect not to utilize such capacity.
      However, at March 31, 2008, management does not believe that there is a
      current obligation to pay this amount. Refer to Note 9 for further
      discussion.

          License and Research Agreements--From time to time we enter into
      license and research agreements with third parties. As of March 31, 2008,
      we had significant agreements with three parties, as described below.

          Georgetown University--We have entered into two license agreements
      with Georgetown whereby we obtained an exclusive worldwide license to use
      certain technologies. In exchange for the grant of one of these exclusive
      licenses that is related to taxane derivatives, we agreed to pay
      Georgetown a royalty, ranging from 1.25% to 2.50% of any net sales from
      our products incorporating such technologies as covered by the licensed
      patents. The royalty will be payable for the life of the related patents.
      Additionally, we may be obligated to pay $400,000 upon entering into any
      sublicense agreement and $250,000 upon approval of a New Drug Application,
      or NDA.

          In July 2007, we entered into an exclusive license to use certain
      antisense technologies covered by certain US patents. In exchange for the
      grant of this license, we paid Georgetown a non-refundable license issue
      fee of $10,000 and are liable for yearly maintenance fees of $20,000. In
      addition, we agreed to pay Georgetown a royalty of 2.75% of net sales from
      our products incorporating these technologies and 50% of any royalties
      received from sublicensees. We may also be obligated to make milestone
      payments totaling $900,000 upon achievement of certain objectives.

          National Institutes of Health--We entered into an exclusive worldwide
      licensing agreement with the NIH in 1997 to develop and commercialize
      IL13-PE38QQR (Cintredekin Besudotox). The agreement required us to pay NIH
      a $75,000 non-refundable license issue payment and minimum annual royalty
      payments of $10,000, which increase to $25,000 after the first commercial
      sale. The agreement further provides for us to make milestone payments to
      NIH of up to $585,000 and royalties of up to 3.50% based on any future
      product sales. We made the first milestone payment of $25,000 to NIH in
      November 1999 after the filing of the U.S. Investigational New Drug IND
      application for IL13-PE38QQR. We are required to pay the costs of filing
      and maintaining product patents on the licensed patents. The agreement
      extends to the expiration of the last to expire of the patents on the
      licensed patents, if not terminated earlier. The agreement may be
      terminated by mutual consent of NIH and us. Either party may terminate if
      the other party breaches a material term or condition and such breach is
      not cured within a certain period of time. Also, either party may
      unilaterally terminate by giving advanced notice.

          On May 30, 2006 we entered into a non-exclusive Patent License
      Agreement with the NIH providing us with a non-exclusive licnese to
      utilize a patented process owned by the U.S. government relating to
      convection enhanced delivery or CED, for us to use with drugs, including
      Cintredekin Besudotox in the treatment of gliomas, in the U.S., its
      territories and possessions. Under the terms of this Patent License
      Agreement, we have paid NIH a noncreditable, nonrefundable license issue
      royalty of $5,000 and have agreed to pay a nonrefundable, minimum annual
      royalty of $2,000, which will be credited against earned royalties, which
      are fixed at one-half of one percent (0.5%) on aggregate future product
      sales over $100 million. An additional benchmark royalty of $20,000 is
      payable within thirty (30) days of receiving approval from the U.S. FDA of
      approval to use the licensed CED process in administrating a drug for the
      treatment of gliomas. Pursuant to an amendment to this Patent License
      Agreement entered into in August 2006, we expanded the field of use to
      cover the treatment of cancer, were given the right to sublicense our
      rights and extended the time for us to reach certain benchmarks. In return
      for these additional rights, we agreed to pay additional sublicensing
      royalties one and one-half percent (1.5%), to a maximum of $200,000, on
      the fair market value of any upfront consideration for granting a
      sublicense.

          In June 2007, we entered into an exclusive worldwide license agreement
     with the NIH to develop and commercialize IL13-PE38QQR (Cintredekin
     Besudotox) for use in the treatment of asthma and pulmonary fibrosis. Upon
     entering the contract, we paid NIH a non-refundable license issue royalty
     of $125,000 and have agreed to pay an annual royalty of $20,000, which will
     be credited against earned royalties, which are fixed at four percent (4%)
     of net sales, including those of sublicensees. In addition, we may be
     obligated to make milestone payments totaling $1,410,000 upon achievement
     of certain objectives. We are required to pay the costs of filing and
     maintaining product patents on the licensed patents. The agreement extends
     to the expiration of the last to expire of the patents on the licensed
     patents, if not terminated earlier. The agreement may be terminated by
     mutual consent of NIH and us. Either party may terminate if the other party
     breaches a material term or condition and such breach is not cured within a
     certain period of time. Also, either party may unilaterally terminate by
     giving advanced notice.


                                       11
<PAGE>

      U.S. Food and Drug Administration--In 1997 the Company entered into a
Cooperative Research and Development Agreement, or CRADA, with the FDA. Pursuant
to the CRADA, we committed to work to commercialize the IL13-PE38QQR chimeric
protein which we licensed from NIH. The FDA agreed to collaborate on the
clinical development and commercialization of IL13-PE38QQR. In September 2005,
we and the FDA agreed to extend the term and funding of the CRADA through July
2009 for $165,000 per year.

      Clinical Trial Commitments--As of March 31, 2008, we had clinical trial
agreements with two parties, as described below.

      Excel Life Science-- In August 2007, the Company entered into an agreement
with Excel Life Science for the completion of Phase II clinical trials with the
use of LEP-ETU for the treatment of metastatic breast cancer. The agreement
contains milestone payments which are based upon stages of completion of the
phase II clinical trials. Upon entering the contract, we paid Excel Life
Sciences $70,000. In March 2008, we began enrolling patients in this phase II
clinical trial. We have included $70,000 in accrued clinical trial expenses at
March 31, 2008 for the patient enrollment milestone payment obligation. The
total remaining obligation is potentially $209,000 for the completion of this
phase II clinical trial.

      TGen Clinical Research Services-- In March 2008, we entered into an
agreement with TGen Clinical Research Services for the completion of Phase I
clinical trials with the use of LE-DT for the treatment of advanced solid
tumors. The agreement contains milestone payments which are based upon stages of
completion of the phase II clinical trials. Upon entering the contract, we paid
$13,000 to TGen Clinical Research Services. The total remaining obligation is
dependent on the number of patients that are enrolled in the phase I study at
TGen, but could potentially be $450,000 for the completion of the phase I
clinical trial at this site.

      Termination and Employment Agreements-- On March 23, 2007, the Company
terminated the employment of Mr. Guillermo Herrera, its President and Chief
Executive Officer. In accordance with his employment agreement, Mr. Herrera was
scheduled to receive a salary continuation of approximately $35,400 per month
for twelve months. However, subsequent to his termination, the Company
determined that, based on the terms of the employment agreement, no salary
continuance was due Mr. Herrera and further payments were stopped. Refer to Note
9 for further discussion.

      On March 23, 2007, the Company entered into an employment agreement with
Mr. Laurence P. Birch (the "Agreement") to serve as its President and Chief
Executive Officer. Mr. Birch was subsequently elected to the Company's Board of
Directors on March 30, 2007. Under terms of the Agreement, Mr. Birch is provided
an annual base salary of $275,000 and a target bonus of 50% of his base salary
based on performance criteria to be established by the Board in consultation
with Mr. Birch, with the potential to earn up to 100% of his base salary for
over achievement of performance criteria. In the event the Company terminates
Mr. Birch's employment without cause he would be entitled to receive a
continuation of his then current base salary for a period of twelve months. In
the event of a termination after a change of control of the Company, Mr. Birch
would receive, in addition to twelve months salary continuation, a lump sum
payment equal to the prior year's bonus, if any, plus accelerated vesting of all
options or restricted stock.


9.    CONTINGENCIES

      NeoPharm, Inc. and certain of our former officers have been named in a
consolidated amended complaint, which alleges various violations of the federal
securities laws in connection with our public statements regarding our LEP drug
product candidate during the period from October 31, 2001 through April 19,
2002. On November 4, 2002, we moved to have the complaint dismissed. Our motion
to dismiss was granted in part and denied in part in February 2003. In November
2004, the plaintiffs filed a motion to amend and a motion for summary
adjudication. The motion to amend sought to include certain pre-class period
statements in the complaint. The motion for summary adjudication asked the Court
to rule that certain statements made in an arbitration award regarding the LEP
drug product candidate be deemed facts established in this proceeding. On
February 23, 2007, the Court entered an order denying both the plaintiffs'
motion to amend and the plaintiffs' motion for summary adjudication. Fact and
expert discovery is closed. On March 21, 2008, the dispositive motion filing
deadline, NeoPharm filed a motion for summary judgment to which the plaintiffs
filed an opposition on May 6, 2008. We plan on filing a reply by June 6, 2008,
after which the Court may require an oral hearing before it either grants or
denies our motion.. No trial date has yet been set. We intend to vigorously
defend each and every claim in the complaint. Management is unable to estimate
the potential outcome or range of possibilities, if any. In addition, we
maintain insurance coverage to mitigate the financial impact of any potential
loss.


                                       12
<PAGE>


      The employment of Mr. Guillermo Herrera, the former CEO of the Company,
was terminated effective March 23, 2007. Since that date, he has retained
counsel and on May 7, 2007, Mr. Herrera's attorney filed a suit entitled
Guillermo Herrera vs. NeoPharm, Inc., Case No. 2007 L 004711 in the Circuit
Court of Cook County, Illinois, seeking payment of $212,500 for his 2006 bonus
and $25,000 for a salary increase for 2007. Subsequent to this filing, the
Company determined that under the terms of his employment agreement the Company
should not be responsible for the payment of severance and terminated further
payments. Mr. Herrera filed an Amended Complaint on February 21, 2008 alleging
breach of his employment agreement with the Company, defamation, and tortious
presentation of the plaintiff in a false light. Mr. Herrera seeks an additional
$363,612 representing the remaining severance payments, plus attorneys' fees and
costs. Mr. Herrera also seeks unspecified compensatory and punitive damages. The
Company is vigorously defending this matter. We are unable at this time to make
any prediction as to the outcome of this litigation.

      We entered into various contractual arrangements, primarily during the
fourth quarter of 2006, under take or pay agreements, with Diosynth
Biotechnology, Inc. ("Diosynth"), to secure access to manufacturing capacity for
the potential manufacture and regulatory advancement of Cintredekin Besudotox
through early 2008. As a result of the FDA's decision to require additional
Phase III clinical testing of Cintredekin Besudotox, the Company advised
Diosynth that the timing of further work to support a potential BLA submission
must be delayed. Diosynth has indicated that such a delay constitutes a default
under our contract. In response, the Company invoked the dispute resolution
provisions of the contract in an attempt to resolve these and other differences
between the two companies. A dialogue between the senior executives of our
Company and Diosynth was initiated, but no resolution has been forthcoming. In
the event these discussions fail to resolve the parties' differences, the
contract provides for mediation and eventually binding arbitration. Under the
terms of the various contractual arrangements, if the Company can not settle its
outstanding differences with Diosynth, and Diosynth should refuse to delay the
related disputed manufacturing activity, and such dispute were to culminate in
an arbitration judgment against the Company, we may be obligated to pay half of
the disputed processing costs. The Company estimates the potential exposure to
be approximately $2.1 million at March 31, 2008.

      We are from time to time subject to claims and litigation arising in the
ordinary course of business. 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 those proceedings of which management is
aware, even if adverse to us, will not have a material adverse effect on our
consolidated financial position or results of operations. While we maintain
insurance to cover the use of our drug product candidates in clinical trials, we
do not presently maintain insurance covering the potential commercial use of our
drug product candidates and there is no assurance that we will be able to obtain
or maintain such insurance on acceptable terms.


10.   SUBSEQUENT EVENTS

      Subsequent to March 31, 2008, we entered into a credit agreement with the
investment bank that holds our auction rate securities that will enable the
Company to borrow up to a maximum of $5.0 million in the form of a demand margin
loan. Under the terms of the agreement, borrowings are collateralized by the
Company's auction rate securities and other investments and interest is based on
an annual rate equal to the sum of the prevailing daily 30-day LIBOR rate plus
25 basis points.

                                       13
<PAGE>


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

      Any statements made by NeoPharm, Inc. ("we", "us", "our", or the
"Company") in this quarterly report that are forward-looking are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. We caution readers that important factors may affect our actual results
and could cause such results to differ materially from forward-looking
statements made by or on our behalf. Such factors include, but are not limited
to, those risks and uncertainties relating to difficulties or delays in
development, testing, manufacturing, regulatory approval, recruitment of
patients, production and marketing of the Company's drug candidates, including,
but not limited to: our drug product candidate IL13-PE38QQR, or Cintredekin
Besudotox, and our NeoLipid(R) product candidates LE-SN38, LEP-ETU, LE-DT and
LE-rafAON; our ability to make, or the timing of, a filing of any Biologics
License Application, or BLA, for approval of Cintredekin Besudotox with the
United States Food and Drug Administration, or FDA; our ability to conserve our
cash resources, to implement reductions in general and administrative
expenditures and to obtain additional sources of financing in the future; the
performance of third-party contractors; uncertainty regarding the outcome of
certain pending class action and other outstanding litigation; unexpected
adverse side effects or inadequate therapeutic efficacy of our drug product
candidates, including, but not limited to, Cintredekin Besudotox, that could
slow or prevent our drug product candidates coming to market; the uncertainty of
patent protection for our intellectual property and trade secrets, including
freedom to operate with any of our drug product candidates; our ability to raise
additional funds at all or on terms acceptable to us; and other factors
referenced under Item 1A, "Risk Factors" in Part II of this Quarterly Report on
Form 10-Q.

      The following should be read in conjunction with our condensed
consolidated financial statements and related notes and with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Risk Factors section included as Item 1A herein and in the Company's 2007 Annual
Report on Form 10-K. The results discussed below are not necessarily indicative
of the results to be expected in any future periods. The following discussion
contains forward-looking statements that are subject to risks and uncertainties,
which could cause actual results to differ from statements made.

Overview

We are a biopharmaceutical company engaged in the research, development, and
commercialization of drugs for the treatment of various cancers and other
diseases. Our corporate office and research and development facility is
currently located in Lake Bluff, Illinois and we had 17 active employees as of
March 31, 2008. We have built our drug development program around our two
proprietary technology platforms: a tumor-targeting toxin platform and
NeoLipid(R) liposomal drug delivery system. We have advanced five drug product
candidates in various stages of clinical and pre-clinical development for the
treatment of cancer and one drug product candidate in pre-clinical development
for treatment of interstitial pulmonary fibrosis, or IPF, and asthma. The
following table summarizes key information about our current drug product
candidate pipeline:


                                       14
<PAGE>

<TABLE>
<CAPTION>
                                                              2008 Clinical             Commercialization
Drug product candidate     Clinical indication(s)          development status                 rights
-------------------------  --------------------------- ---------------------------  --------------------------

<S>                        <C>                         <C>                          <C>
Cintredekin Besudotox      Glioblastoma multiforme     Completed Phase III (1)      World wide
(IL13-PE38QQR)             (brain cancer)

LEP-ETU                    Breast cancer, ovarian      Phase II (2)                 World wide
(Liposomal Paclitaxel)     cancer and other solid
                           tumors

LE-SN38                    Colorectal cancer and       Phase II (3)                 World wide
(Liposomal SN-38)          other solid tumors

LE-DT                      Breast cancer, ovarian      IND activated, Starting      World wide
(Liposomal Docetaxel)      cancer, prostate cancer     Phase I in two Centers (4)
                           and other solid tumors

LE-rafAON                  Pancreatic and prostate     Re-activate IND, Planning    United States
(Liposomal-raf-Antisense   cancer                      Phase I/Phase II in
 Oligonucleotide)                                      Pancreatic Cancer

Cintredekin Besudotox      Interstitial pulmonary      Pre-IND                      World wide
 (IL13-PE38QQR)            fibrosis and asthma
</TABLE>

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

      (1)   Representatives of the United States Food and Drug Administration's,
            or FDA, Office of Oncology indicated during a review of the clinical
            data with the Company in March 2007, that an additional Phase III
            confirmatory clinical trial for Cintredekin Besudotox in the
            treatment of glioblastoma multiforme, or GBM, would be required
            before the FDA could accept the Company's Biologics License
            Application, or BLA. The Company continues to evaluate its options
            regarding Cintredekin Besudotox, which is further discussed below in
            the Drug Product Candidate Summary.

      (2)   The Company announced on March 31, 2008 that it had enrolled its
            first patients in its multi-center open-label, Phase II clinical
            trial of Liposomal Paclitaxel (LEP-ETU) for efficacy and safety in
            patients with Metastatic Breast Cancer.

      (3)   The Company announced in March 2007 that the interim analysis of
            data following the completion of treatment of the first 21 patients
            demonstrated disease stabilization, but the study for LE-SN38 did
            not achieve the primary tumor response endpoint. The Company is
            reassessing project next steps including additional data analyses
            and the possibility of other studies related to lung and breast
            cancer.

      (4)   The Company entered into agreements with TGen Clinical Research
            Services and Georgetown University in March 2008 and April 2008,
            respectively, for the completion of Phase I clinical trials with the
            use of LE-DT for the treatment of advanced solid tumors. Patient
            enrollment in this Phase I clinical trial with LE-DT to define the
            toxicities, pharmacokinetics and maximum tolerated dose with this
            new modality of treatment is currently expected to begin in the
            second quarter of 2008.

      To date, we have not received FDA approval for any of our drug product
candidates. We expect to continue to incur losses for the foreseeable future as
we continue our research and development activities, which include the
sponsorship of human clinical trials for our drug product candidates. Until we
are able to successfully commercialize one or more of our drug product
candidates, we anticipate that we will be required to fund our research and
development activities primarily by other means, including, but not limited to,
issuing equity or other securities, licensing drug product candidates to third
parties and collaborating with third parties to develop formulations of their
compounds using our technology.


Drug Product Candidate Summary

      Cintredekin Besudotox
      Cintredekin Besudotox (GBM)
      ---------------------------

      The drug product candidate which we have advanced the farthest is
Cintredekin Besudotox, a tumor-targeting toxin being developed as a treatment
for glioblastoma multiforme, or GBM, a deadly form of brain cancer.


                                       15
<PAGE>
***START HERE***




     We have exclusively licensed Cintredekin Besudotox from the NIH and the
FDA, and have been developing this drug product candidate under a Cooperative
Research and Development Agreement, or CRADA, with the FDA Center for Biologics
Evaluation and Research, or CBER. Cintredekin Besudotox has received orphan drug
designation in the US and Europe and FDA has designated it for the fast track
drug development program. In addition, Cintredekin Besudotox has been selected
to participate in the FDA's Continuous Marketing Application, CMA, Pilot 2
program. We also hold a non-exclusive license to utilize a patented process
owned by the U.S. government relating to convection enhanced delivery, or CED,
for use with drugs, including Cintredekin Besudotox in the treatment of gliomas.

     Conventional, non-specific chemotherapeutic drugs attack cancer cells by
stopping them from dividing and reproducing, but can also damage normal healthy
cells because they do not discriminate between cancerous and healthy cells.
Furthermore, standard chemotherapy drugs are usually administered systemically,
which leads to their distribution throughout the body rather than to one area,
such as a tumor in the brain. Common side effects of chemotherapy that are
caused by damage to bone marrow include the body's inability to produce enough
red blood cells, causing weakness and fatigue; white blood cells, lowering the
body's resistance to infections; or platelets, preventing blood from clotting
properly, which can lead to excessive bleeding.

     Cintredekin Besudotox is being developed as a highly specific
tumor-targeting agent. Cintredekin Besudotox is a recombinant protein consisting
of a single molecule composed of two parts: a tumor-targeting molecule and a
cytotoxic agent. The targeting component consists of interleukin-13(IL-13), an
immune regulatory cytokine. Malignant glioma cells, as compared to normal brain
cells, express IL-13 receptors at a higher density. The cytotoxic agent is a
potent bacterially derived toxin called PE38. Cintredekin Besudotox is designed
to detect and bind IL-13 receptors on the surface of malignant glioma cells and
selectively deliver PE38 to destroy tumor cells. Cintredekin Besudotox is
administered by a technique known as convection-enhanced delivery, or CED, in
which the drug is delivered through catheters inserted in brain tissue
surrounding the tumor (peritumoral administration) or into the tumor
(intratumoral administration) following surgical resection of the tumor. CED is
designed to infuse Cintredekin Besudotox directly to the tumor site and adjacent
brain tissue with the goal of killing resident tumor cells and preventing
recurrence of tumor cell growth. We hope to show that this method of delivery
minimizes both damage to the surrounding cells and toxicity from systemic drug
exposure.

     During 2006 and the first quarter of 2007, the Company primarily focused on
completing its Phase III trial and commercialization strategy for Cintredekin
Besudotox, including the preparation of the corresponding BLA submission to the
FDA. However, upon review of the PRECISE trial results with the Company in March
2007, the FDA concluded that an additional Phase III confirmatory trial would be
required prior to acceptance of a potential BLA filing by the Company. This will
substantially delay, and may even prevent, the potential commercialization of
the product.

     The Company is currently exploring the possibility of undertaking an
initial Phase III confirmatory trial with the primary objective of overall
survival, with a secondary objective of progression free survival for patients
with recurrent GBM against the standard of care. If the results of such an
initial confirmatory trial were to be encouraging, the Company could elect to
expand the trial into a larger Phase III trial in order to support a possible
BLA filing for Cintredekin Besudotox with the FDA. While the Company has
sufficient resources to fund the initial Phase III confirmatory trial, and
evaluate possible drug activity, additional funding from sources outside the
Company would be necessary to expand and then complete the necessary Phase III
trial, make the BLA filing and advance this drug product candidate. The Company
does not currently have the financial reserves to fully fund the testing and
obtain approval for any of its drug product candidates, including, but not
limited to, Cintredekin Besudotox. Even if third party financing were to become
available, and at this time no assurance can be given that it would be, there
can be no assurance given that the terms of any proposed third party financing
arrangement would be acceptable to the Company. The Company continues to explore
drug delivery improvements as well as the possibility of genetic testing to
identify patients that might be more responsive to treatment. There can be no
assurance that these modifications will result in a positive outcome in a second
Phase III trial. Further, there can be no assurances the data from a second
Phase III trial, whether or not these modifications were made, would be deemed
acceptable by the FDA or that the FDA would approve a BLA for Cintredekin
Besudotox based on such data.

     The Company continues to evaluate its options related to Cintredekin
Besudotox. There can be no assurance that, if a second Phase III trial were
completed, data evidencing statistical superiority would be generated and, even
if such data were generated and produced to the FDA, there can be no assurance
that the FDA would accept or approve a BLA submission by the Company.


                                       16
<PAGE>

     Cintredekin Besudotox( IPF and Asthma)
     --------------------------------------

     The Company has licensed IL13-PE38 from NIH, FDA, and University of
Michigan as a potential therapeutic agent for the treatment of pulmonary
fibrosis and asthma. The Company's collaborators have completed extensive
preclinical studies in animal models for the control and reversal of pulmonary
fibrosis with this agent. Preclinical studies relating to asthma have also been
performed. Other preclinical toxicology studies are also underway. The Company
plans to undertake additional detailed preclinical evaluation of this product
through nebulization in these studies and to fully characterize the
physio-chemical behavior of the nebulized product. The Company plans to submit
an IND to the FDA in the last half of 2008 if those studies show that it is
reasonably safe to conduct clinical investigations in humans. The preclinical
testing plan has been discussed with the FDA, and the agency has made it clear
that significant studies must be performed in animals to explore potential side
effects in humans, before the agency will permit testing in humans.

     NeoLipid(R) Platform

     LE-SN38
     -------

     LE-SN38 is our NeoLipid(R) liposomal formulation of SN-38, the active
metabolite of Camptosar(R) (Pfizer Inc.), a chemotherapeutic pro-drug, which is
used as a first-line and second-line colorectal cancer treatment. At the present
time, without the NeoLipid(R) system, SN-38 is insoluble and can only be used to
treat cancer by administering the pro-drug Camptosar(R). A pro-drug is a
compound that is converted into the active drug in the body. However,
Camptosar(R) is converted into SN-38 in the liver at different rates by
different patients, and this variability in conversion rates can result in
suboptimal dosing and adverse side effects, such as severe diarrhea. We hope to
show that our proprietary NeoLipid(R) technology permits delivery of SN-38 to
the tumor cells without the need for conversion, therefore minimizing
variability and optimizing dose with minimal side effects.

     Results from our 2004 Phase I clinical trial provided evidence of the
safety and tolerability of LE-SN38 and established a maximum tolerated dose
(MTD) of 35 mg/m(2) for all but a small subset of patients who metabolize SN-38
slowly. Pharmacokinetic analysis of blood samples from patients treated with
LE-SN38 showed that blood levels and systemic drug exposure to SN-38 were
comparable to or greater than that expected from the marketed Camptosar(R) dose
based on previously published studies.

     During the second quarter of 2006, in conjunction with the Cancer and
Leukemia Group B, or CALGB, we initiated enrollment in a Phase II clinical trial
with LE-SN38 in metastatic colorectal cancer patients, and completed enrollment
of the 21st patient in December, 2006.

     In March 2007, the Company announced that the interim analysis of data
following the completion of treatment of the first 21 patients demonstrated
disease stabilization, but the study did not achieve the primary tumor response
endpoint. The Company is reviewing the data and, in particular, examining the
patients' demography, prior chemotherapy exposure, advanced stage of the
disease, and other related factors. It is possible that patients who were
enrolled in this trial were exposed to other chemotherapy regimens prior to
enrolling and that this prior exposure may be the reason the study did not
achieve its primary endpoint. The Company is also assessing the potential next
steps for this project which may include additional data analyses and the
possibility of other studies related to lung cancer and breast cancer with
LE-SN38.

     LEP-ETU
     -------

     LEP-ETU is our NeoLipid(R) liposomal formulation of the widely used cancer
drug, paclitaxel. Paclitaxel, also known as Taxol(R) (Bristol-Myers Squibb
Company), has been approved in the US for the treatment of ovarian, breast and
lung cancers. Despite paclitaxel's wide use and its tumor cytotoxic
characteristics, its effectiveness can be limited by its adverse side effects,
which can include nausea, vomiting, hair loss and nerve and muscle pain. Because
of the chemical characteristics of paclitaxel, it cannot be introduced into the
body unless it is first formulated in a mixture of castor oil (Cremophor(R)) and
ethanol, which can lead to significant side effects such as hypersensitivity
reactions and cardiac toxicities. We hope to show that our proprietary
NeoLipid(R) technology, which eliminates the need for Cremophor and ethanol,
permits delivery of paclitaxel treatment with fewer side effects.

     During 2004, we completed a Phase I clinical trial for LEP-ETU. In this
study, LEP-ETU appeared to be well tolerated in the majority of patients, in
terms of typical paclitaxel side effects, including those patients receiving the
higher doses of drug, as well as those who were not premedicated with
antihistamines and steroids. Antitumor activity was observed, with 16% of
patients experiencing partial responses (shrinkage of tumor by 50% or more).
Additionally, 44% of patients evidenced stable disease and were able to complete
4 or more, 3-week cycles of LEP-ETU treatment. Patients previously treated with
taxanes were among those who partially responded to LEP-ETU.


                                       17
<PAGE>

     The Company began patient enrollment in the first quarter of 2008 in five
centers in a Phase II trial designed to assess the efficacy and safety of
LEP-ETU in recurrent breast cancer patients. Depending on the outcome of those
clinical trials, we may decide to undertake multicenter and multinational Phase
III trials in this indication after thorough discussions with FDA.

     LE-DT
     -----

     Pre-clinical work has also advanced on our earlier stage liposomal
formulation of the anti-cancer agent docetaxel, LE-DT, which is the active
ingredient in Sanofi Aventis' Taxotere(R) which is approved for use in certain
breast cancer, non-small cell lung cancer, gastric adenocarcinoma, head and neck
cancer indications and prostate cancer. We filed the Investigational New Drug
Application, IND, to the FDA on December 28, 2007 and the IND became effective
on January 30, 2008. We currently expect to start a Phase I trial with LE-DT to
determine the maximum tolerated dose (MTD) of LE-DT in patients with metastatic
solid cancer who have failed conventional therapy in the second quarter of 2008.

     LE-rafAON
     ---------

     Preclinical work with the new formulation of LE-rafAON, which is expected
to have minimal infusion related toxicities, is ongoing and we expect to submit
a revised IND to FDA in mid-2008. The antisense oligonucleotide agent c-raf has
shown significant down regulation of the gene in Preclinical studies. Also,
LE-rafAON has exhibited significant radiation sensitization and chemo
sensitization with other anticancer agents such as Gemcitabine and Paclitaxel in
human xenograft models in mice in Pancreatic and Prostate tumors. We plan to
perform the bridging Phase I trial with this newly formulated LE-rafAON and
thereafter start Phase II trials in pancreatic and prostate cancer models where
this gene seems to be potentially over expressed.

     We intend to further develop the NeoLipid(R) drug product candidates by
using our internal resources and by continuing to collaborate with other
companies and leading governmental and educational institutions.

     In addition, we intend to explore the use of our proprietary NeoLipid(R)
liposomal drug delivery technology to create new products in two ways: life
cycle management, therefore extending the patent life and/or modifying the
pharmacokinetic profile of existing cancer drugs, and by utilizing our platform
to develop new drugs. We are aware of several widely used cancer drugs that are
nearing patent expiration, as well as other widely used cancer drugs with
patents that have expired. When a drug is combined with another agent or
delivery system in a novel way, its patent life may be extended. Additionally,
while many chemotherapeutic drugs have been effective for the treatment of
cancer, these drugs have been limited in their use because of adverse side
effects and difficulties in administration. Our NeoLipid(R) drug delivery
technology may increase the usefulness of these compounds as improved
anti-cancer treatments. Finally, we believe that our liposomal drug delivery
technology may provide us with a platform for the development of novel
therapeutic agents for cancer drug development.

     It is difficult to predict with any certainty the timing of and total
estimated costs to complete development of drug product candidates in early
stage, or Phase I, clinical development, as well as the estimated date such drug
product candidates would be available for sale, if approved by the FDA. A number
of factors contribute to this uncertainty, including: side effects encountered
in early stage clinical trials, ability to scale up manufacturing for commercial
supply, and the fact that the size and scope of pivotal Phase III clinical
trials are unknown until sufficient data is available to present a Phase III
plan to the FDA for approval. In addition, our drug product candidates require
approval by the FDA after completing Phase III clinical trials before we can
sell the drugs to generate revenue and, potentially, realize net cash inflows.
Substantial additional clinical trial expenses are expected to be incurred for
Cintredekin Besudotox before approval can be sought again.


                                       18
<PAGE>

     The table below includes a summary of identified direct project costs
incurred to date for our clinical research and development projects. Generally,
identified project costs include expenses incurred specifically for clinical
trials and pre-clinical studies we conduct, and exclude expenses incurred for
salaries paid to our professional staff, our Lake Bluff facility and the related
depreciation of equipment as well as general laboratory supplies used in our
research, which are included with non-project specific costs.

<TABLE>
<CAPTION>

                                                          Total Direct Costs Incurred
                                                    ---------------------------------------
                                                    Three months ended   Since Beginning of
     Research Project                                 March 31, 2008          Project
                                                    ------------------   ------------------

<S>                                                 <C>                  <C>
     Cintredekin Besudotox                          $           38,000   $       67,546,000
     LEP-ETU                                                    81,000            7,871,000
     LE-SN38                                                     7,000            5,322,000
     LE-DT                                                      35,000              580,000
     LE-rafAON                                                  76,000              147,000
     Non-project specific and other                            586,000                  N/A
                                                    ------------------   ------------------

          Total research and development expenses   $          823,000                  N/A
                                                    ==================   ==================

</TABLE>

Results of Operations

     Three Months Ended March 31, 2008 as compared to Three Months Ended
March 31, 2007.

     Research and development, or R&D, expense for the three months ended March
31, 2008 decreased by $2.2 million, to $0.8 million, compared to $3.0 million
for the same period in 2007. The decrease is attributed to a $.5 million
reduction in payroll and benefits expenses, primarily attributed to the
Company's various cost reduction initiatives implemented during 2007 and a $1.7
million decrease in overall project costs. The decrease in overall project costs
is primarily attributed to decreases in the PRECISE trial and Initial Diagnosis
GBM Phase I trial expenditures and product manufacturing costs in connection
with decision to bring the phase III trial to an early conclusion, and the
advancement of our NeoLipid(R) products from a pre-clinical status. Product
manufacturing costs decreased $0.7 million and sites costs, data management and
third party contract services decreased by a combined $1.0 million a result of
these changes in our drug development activities.

     Selling, general, and administrative, or SG&A, expenses decreased $1.6
million, to $1.3 million for the three months ended March 31, 2008, compared to
$2.9 million for the same period in 2007. The decrease is attributed to a $0.9
million decrease in personnel costs, primarily attributed to the Company's
various cost reduction initiatives implemented during 2007, and includes $0.4
million in costs associated with the termination of the Company's former Chief
Executive Officer in March, 2007. With the reduction in people and cost
containment measures put into effect, the Company has been able to realize
reductions in spending in accounting, legal, consulting, travel expenses,
equipment lease costs, board of director compensation, and office supplies
totaling $0.7 million.

     The lease on our Waukegan facility, from which we are moved to our new
facility in Lake Bluff, expired on March 31, 2008. The Waukegan lease imposed an
obligation on us to restore the facility to its original condition when we
vacated the facility. As a result, for the year ended December 31, 2007, we
accrued an estimated cost of our restoration obligation of $200,000. In April
2008 we entered into an agreement to pay $125,000 to the owner of our former
Waukegan facility in lieu of the actual restoration of that facility. As a
result, we recorded a reduction in facility consolidation costs of $75,000 in
the first quarter of 2008 to adjust the accrual to the amount that was actually
paid in April 2008.

     The Company sold clinical equipment returned from the PRECISE trial that
has been expensed in a prior year, and realized a $0.2 million gain for the
three months ended March 31, 2008.

     The Company generated interest income on cash equivalents and short-term
investments of approximately $0.3 million and $0.4 million for the three months
ended March 31, 2008 and 2007, respectively. The decrease in interest income
during the period was primarily due to a decrease in average short-term
investment balances, which were used to fund operations.


                                       19
<PAGE>

     Liquidity and Capital Resources

     Net cash used in operating activities decreased $7.9 million from $9.7
million to $1.8 million for the three months ended March 31, 2007 and 2006,
respectively. The decrease in cash used by operations was primarily a result of
the lower net loss for the quarter ended March 31, 2008 compared to 2007, and a
significant reduction in accounts payable balances due to a reduction in overall
operations.

     Our primary source of cash has been proceeds from sales of marketable
securities. As of March 31, 2008, we had available for sale securities with an
estimated value of $14.0 million, consisting solely of state government auction
rate certificates. All of the auction rate certificates held by the Company as
of March 31, 2008 have experienced failed auctions. An auction failure is not a
default. An auction failure means that the parties wishing to sell securities
could not because the number of sellers was greater than the number of buyers at
the reset dates. Because the investments typically have provisions such that the
interest rates reset at higher percentages upon failure in the auction market,
the issuers have a strong incentive to restructure and repurchase the underlying
bonds.

     We believe that improving market conditions will ultimately lead to the
sale of NeoPharm's auction rate certificates at their par value. Since the
timing of the repurchase of the Company's auction rate certificates at par is
uncertain and dependent on the rate in which market conditions continue to
improve, we have arranged for a $5.0 million credit facility in the form of a
demand margin loan which we believe will provide us the liquidity to fund our
operations for at least the next 12 months, based on our forecasted cash
consumption during that period of time.

     We expect that our primary use of cash over the next 12 to 18 months will
be to fund, in addition to general and administrative expenses, advancement of
our NeoLipid(R) clinical and pre-clinical research and development efforts and
our remaining CINTREDEKIN BESUDOTOX Phase III clinical trial patient
obligations.

     As a result of the April 2007 cost reduction initiative coupled with other
ongoing cost-saving initiatives, the Company was able to reduce budgeted
selling, general and administrative expenditures for 2007 by $6.7 million
compared to 2006, and by $1.6 million for the quarter ended March 31, 2008
compared to 2007. The total cost savings implemented, before consideration of
project costs and final payments related to previous drug product candidates'
trial obligations are expected to result in annualized cash consumption rate of
approximately $5.0 million. The Company currently projects it has sufficient
cash available to fund operations for 2008 and well into 2009 before requiring
additional financing. The date as to which sufficient funds continue to be
available for operations, without additional financing, may vary depending upon
the timing and implementation of various strategies under consideration by the
Company.

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

     We have no exposure to off-balance sheet arrangements, no special purpose
entities, or activities that include non-exchange-traded contracts accounted for
at fair value.


Critical Accounting Policies

     In preparing the Company's financial statements in conformity with U.S.
generally accepted accounting principles, management must make a variety of
decisions which impact the reported amounts and related disclosures. Such
decisions include the selection of the appropriate accounting principles to be
applied, the assumptions on which to base accounting estimates and the
consistent application of those principles. Due to the type of industry in which
we operate and the nature of our business, the following policies are those that
management believes are the most important to the portrayal of our financial
condition and results and that require management's most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain.


                                       20
<PAGE>

     Income Taxes

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Significant judgments are
required to estimate the generation of future taxable income and the timing of
the reversal of deferred tax liabilities.

     Contingencies

     To properly account for and provide disclosure of loss contingencies,
management must apply judgment in determining whether a loss contingency is:
probable, reasonably possible, or remote. In instances where management has
determined that a loss contingency is probable, it must make use of estimates to
determine the amount of probable loss. Management must apply judgment in
determining whether or not it can make a reasonable estimate. Management must
also apply judgment in determining whether or not disclosure of loss
contingencies that have been accrued should be made for the consolidated
financial statements not to be misleading.

     Share-based Compensation

     We account for share-based compensation in accordance with SFAS No. 123
(revised 2004), Share-Based Payment, or SFAS 123(R). Under the provisions of
SFAS 123(R), share-based compensation cost is estimated at the grant date based
on the award's fair value as calculated by the Black-Scholes option-pricing
model and is recognized as expense over the requisite service period. We also
use the Black-Scholes model to estimate the fair value of non-employee options
grants that are revalued each quarter. The Black-Scholes model requires various
highly judgmental assumptions including volatility and expected option life. If
any of the assumptions used in the Black-Scholes model change significantly,
share-based compensation expense may differ materially in the future from that
recorded in the current period.

     Available for Sale Securities

     Available for sale securities consist of auction rate certificates with
scheduled maturities greater than 90 days at the time of purchase. Auction rate
certificates are used by many student-loan providers, municipalities and other
governmental authorities to raise cash to fund projects or operations, and money
market funds. These auction rate certificates all have AAA/aaa credit ratings,
consistent with our investment policy guidelines, and have long-term nominal
maturities with provisions calling for the interest rates to be reset through
periodic auctions every 7 to 28 days. We believe the structural features of the
auction rate certificates, including an interest rate reset feature, provide us
with liquidity characteristics similar to cash equivalents. As provided by
Statement of Financial Accounting Standards, or SFAS, No. 115, Accounting for
Certain Investments in Debt and Equity Securities, we have elected to treat all
of our investments in marketable securities as "available-for-sale," which
requires that these investments be recorded at fair market value.

     All of the auction rate certificates held by the Company as of March 31,
2008 have experienced failed auctions. An auction failure is not a default. An
auction failure means that the parties wishing to sell securities could not
because the number of sellers was greater than the number of buyers of the reset
dates. Because the investments typically have provisions such that the interest
rates reset at higher percentages upon failure in the auction market, the
issuers have a strong incentive to restructure and repurchase the underlying
bonds.

     The investment bank which holds NeoPharm's auction rate certificates has
estimated the fair value of all of its auction rate certificates as of March 31,
2008, including those held in the Company's account. The fair value of
NeoPharm's auction rate certificates was estimated to be $14 million, which is
$0.7 million less than their $14.7 million cost. We believe that improving
market conditions will ultimately lead to the repurchase of NeoPharm's auction
rate certificates at their par value. Since the timing of the repurchase of the
company's auction rate certificates at par is uncertain and dependent on the
rate with which market conditions continue to improve, we have arranged for a
credit facility which will provide us the liquidity to fund our operations for
at least the next 12 months, based on our forecasted cash consumption during
that period of time (see note 10).

     The Company considers this decline in the estimated fair value of its
investments in auction rate certificates to be temporary, based on the
relatively short length of time and the extent to which the estimated fair value
has been less than cost, and the Company's intent and ability to hold its
investments in auction rate certificates for a period of time that is deemed to
be sufficient to allow for the anticipated recovery in their market value. As
the Company believes that the failed auctions are the result of temporary market
conditions, management currently expects to be able to liquidate these
securities within the short term. Accordingly, we are reporting our investments
in auction rate certificates as of March 31, 2008 on our Consolidated Balance
Sheet as a Current Asset at their estimated fair value, and reporting the
decline in estimated fair value, which is considered to be temporary, as a
separate component of Shareholders' Equity, as provided by Statement of
Financial Accounting Standards, or SFAS, No. 115, Accounting for Certain
Investments in Debt and Equity Securities. However, management intends to
monitor these investments and will make adjustments to their treatment,
including potential reclassification to long term in the future, if that is
considered necessary.


                                       21
<PAGE>

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As of March 31, 2008, we did not own any derivative instruments, but we
were exposed to market risks, primarily the impact of changes in United States
interest rates on our short-term investments. As of March 31, 2008, we held
total cash and cash equivalents of $4,113,000 and available for sale securities
of auction rate certificates of $14,045,000. All cash equivalents have a
maturity less than 90 days. Declines in interest rates over time would reduce
our interest income from our investments. Based upon our cash and cash
equivalents as of March 31, 2008, a decrease in interest rates of 1.0% would
cause a corresponding decrease in our annual interest income on cash and cash
equivalents of approximately $40,000.

     The market values of the available for sale securities may fluctuate due to
market conditions and other conditions over which we have no control.
Fluctuations in the market price and valuations of these securities may require
us to record losses due to impairment in the value of the securities underlying
the investment. This could result in future charges to our earnings. All of the
auction rate certificates held by the Company as of March 31, 2008 have
experienced failed auctions. An auction failure is not a default. An auction
failure means that the parties wishing to sell securities could not because the
number of sellers was greater than the number of buyers of the reset dates.
Because the investments typically have provisions such that the interest rates
reset at higher percentages upon failure in the auction market, the issuers have
a strong incentive to restructure and repurchase the underlying bonds. Refer to
Note 4 of our financial statements for further discussion regarding the failed
auctions of our available for sale securities in the auction markets as of March
31, 2008.

ITEM 4.                   CONTROLS AND PROCEDURES

   Disclosure Controls and Procedures

     Our disclosure controls and procedures are designed to ensure that
information required to be disclosed in the reports that we file or submit under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, including ensuring that such information
is accumulated and communicated to management as appropriate to allow timely
decisions regarding required disclosure. We necessarily apply judgment in
assessing the costs and benefits of such controls and procedures that, by their
nature, can only provide reasonable assurance regarding management's control
objectives.

Our President and Chief Executive Officer/Acting Chief Financial Officer, has
carried out an evaluation, with the participation of our management, of the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934), as of the end of the
period covered by this report, based on the evaluation required by paragraph (b)
of Rule 13a-15 under the Securities Act of 1934. Based upon such evaluation, our
President and Chief Executive Officer/Acting Chief Financial Officer has
concluded that, as of the end of such period, the Company's disclosure controls
and procedures were effective.


   Changes in Internal Control Over Financial Reporting

     There have been no significant changes in our internal control over
financial reporting that occurred during the quarter ended March 31, 2008, that
have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.


                                       22
<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1.                        LEGAL PROCEEDINGS

     NeoPharm, Inc. and certain of our former officers have been named in a
consolidated amended complaint, which alleges various violations of the federal
securities laws in connection with our public statements regarding our LEP drug
product candidate during the period from October 31, 2001 through April 19,
2002. On November 4, 2002, we moved to have the complaint dismissed. Our motion
to dismiss was granted in part and denied in part in February 2003. In November
2004, the plaintiffs filed a motion to amend and a motion for summary
adjudication. The motion to amend sought to include certain pre-class period
statements in the complaint. The motion for summary adjudication asked the Court
to rule that certain statements made in an arbitration award regarding the LEP
drug product candidate be deemed facts established in this proceeding. On
February 23, 2007, the Court entered an order denying both the plaintiffs'
motion to amend and the plaintiffs' motion for summary adjudication. Fact and
expert discovery is closed. On March 21, 2008, the dispositive motion filing
deadline, NeoPharm filed a motion for summary judgment to which the plaintiffs
filed an opposition on May 6, 2008. We plan on filing a reply by June 6, 2008,
after which the Court may require an oral hearing before it either grants or
denies our motion. No trial date has yet been set. We intend to vigorously
defend each and every claim in the complaint. Management is unable to estimate
the potential outcome or range of possibilities, if any. In addition, we
maintain insurance coverage to mitigate the financial impact of any potential
loss.

     The employment of Mr. Guillermo Herrera, the former CEO of the Company, was
terminated effective March 23, 2007. Since that date, he has retained counsel
and on May 7, 2007, Mr. Herrera's attorney filed a suit entitled Guillermo
Herrera vs. NeoPharm, Inc., Case No. 2007 L 004711 in the Circuit Court of Cook
County, Illinois, seeking payment of $212,500 for his 2006 bonus and $25,000 for
a salary increase for 2007. Subsequent to this filing, the Company determined
that under the terms of his employment agreement the Company should not be
responsible for the payment of severance and terminated further payments. Mr.
Herrera filed an Amended Complaint on February 21, 2008 alleging breach of his
employment agreement with the Company, defamation, and tortuously presenting him
in a false light. Mr. Herrera seeks an additional $363,612 representing the
remaining severance payments, plus attorneys' fees and costs. Mr. Herrera also
seeks unspecified compensatory and punitive damages. The Company is vigorously
defending this matter. We are unable at this time to make any prediction as to
the outcome of this litigation.


ITEM 1A.                         RISK FACTORS

     Below are the risk factors that have been revised since the filing of our
annual report on March, 28, 2008 on Form 10-K for the year ended December 31,
2007 (the "2007 Form 10-K"). We face significant additional risks, which are set
forth in the Part I, Item 1A in our 2007 Form 10-K under the caption "Risk
Factors." You are urged to read these risk factors in the 2007 Form 10-K, in
addition to the following revised risk factors set forth below. Each of the risk
factors set forth here and in our 2007 Form 10-K could materially adversely
affect our business, operating results and financial condition, as well as the
value of an investment in our common stock. Additional risks and uncertainties
not presently known to us, or those we currently deem immaterial, may also
materially harm our business, operating results and financial condition.

Our investments could lose market value and consequently harm our ability to
fund continuing operations.

     Investments in both fixed-rate and floating-rate interest earning
instruments carry varying degrees of interest rate risk. Fixed-rate securities
may have their fair market value adversely impacted due to a rise in interest
rates. In general, securities with longer maturities are subject to greater
interest rate risk than those with shorter maturities. While floating-rate
securities generally are subject to less interest rate risk than fixed-rate
securities, floating-rate securities may produce less income than expected if
interest rates decrease. Due in part to these factors, our investment income may
fall short of expectations or we may suffer losses in principal if securities
are sold that have declined in market value due to changes in interest rates.


                                       23
<PAGE>

     The market values of the available for sale securities may fluctuate due to
market conditions and other conditions over which we have no control.
Fluctuations in the market price and valuations of these securities may require
us to record losses due to impairment in the value of the securities underlying
the investment. This could result in future charges to our earnings. All of the
auction rate certificates held by the Company as of March 31, 2008 have
experienced failed auctions. An auction failure is not a default. An auction
failure means that the parties wishing to sell securities could not because the
number of sellers was greater than the number of buyers of the reset dates.
Because the investments typically have provisions such that the interest rates
reset at higher percentages upon failure in the auction market, the issuers have
a strong incentive to restructure and repurchase the underlying bonds. Refer to
Note 4 of our financial statements for further discussion regarding the failed
auctions of our available for sale securities in the auction markets as of March
31, 2008.


ITEM 2.           UNREGISTERS SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

          None

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES

          None

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS

          None

ITEM 5.           OTHER INFORMATION

          None

ITEM 6.           EXIBITS

          31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002

          32.1    Certification pursuant to section 906 of the Sarbanes-Oxley
                  Act or 2002


                                       24
<PAGE>

                                 SIGNATURE PAGE
                                 --------------

Pursuant to the requirements 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.

Dated:  May 15, 2008                      /s/ Laurence P. Birch
                                          --------------------------------
                                          Laurence P. Birch
                                          President and Chief Executive Officer
                                          (Principal Executive Officer) and
                                          Acting Chief Financial Officer
                                          (Principal Financial Officer)


                                       25