<PAGE>


                                  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 QUARTER ENDED JUNE 30, 1999
                                       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)

                               100 Corporate North
                                    Suite 215
                           Bannockburn, Illinois 60015
               (Address of principal executive offices) (Zip Code)

                                 (847) 295-8678
              (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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report:


<TABLE>
<CAPTION>

        TITLE OF EACH CLASS                      NUMBER OF SHARES OUTSTANDING
        -------------------                      ----------------------------
   <S>                                           <C>
   Common Stock ($.0002145 par value)                         8,485,000

   Warrants to purchase shares of
   Common Stock ($.0002145 par value)                           837,067
</TABLE>


<PAGE>

                                 NEOPHARM, INC.
                            (A DELAWARE CORPORATION)


                                                                   PAGE NUMBER
                                                                   -----------

PART I         Financial Information

      ITEM 1.  Financial Statements

               Balance Sheets                                            3

               Statement of Operations                                   4

               Statement of Cash Flows                                   5

               Notes to Financial Statements                             6


      ITEM 2.  Management's Discussion and Analysis of Financial
               Condition and Results of Operations                       7


PART II.       Other Information                                        13

SIGNATURE PAGE                                                          14


                                                                              2
<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS
NEOPHARM, INC.
(A DELAWARE CORPORATION)
BALANCE SHEET
(Unaudited)

<TABLE>
<CAPTION>
                                                                               JUNE 30,                  DECEMBER 31,
                                                                                 1999                       1998
                                                                                 ----                       ----
ASSETS
<S>                                                                          <C>                       <C>
Current assets:
  Cash and cash equivalents                                                  $ 6,219,512                $    40,681
  Other receivables                                                              154,229                         --
  Deferred taxes                                                                      --                  1,640,000
  Prepaid expenses                                                                40,908                         --
                                                                             -----------                -----------
         Total current assets                                                  6,414,649                  1,680,681

Equipment and furniture
  Equipment                                                                       85,447                     82,690
  Furniture                                                                       78,877                     78,877
Less accumulated depreciation                                                    (78,700)                   (60,700)
                                                                             -----------                -----------
         Total equipment, furniture, net                                          85,624                    100,867
                                                                             -----------                -----------
         Total assets                                                        $ 6,500,273                $ 1,781,548
                                                                             -----------                -----------
                                                                             -----------                -----------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Accounts payable and accrued liabilities:
    Obligations under research agreements                                    $   155,371                $   260,000
    Accounts payable and accrued liabilities                                     547,446                    275,926
    Accrued compensation                                                              --                     67,500
    Deferred Taxes                                                               677,000                         --
                                                                             -----------                -----------
         Total current liabilities                                             1,379,817                    603,426
                                                                             -----------                -----------



Stockholders' equity
  Common stock, $.0002145 par value;
    15,000,000 shares authorized:
    8,485,000 and 8,454,621 shares issued and
    outstanding, respectively                                                      1,820                      1,789
  Additional paid-in capital                                                   6,992,886                  6,637,378
  Accumulated deficit                                                         (1,874,250)                (5,461,045)
                                                                             -----------                -----------
         Total stockholders' equity                                            5,120,456                  1,178,122
                                                                             -----------                -----------
         Total liabilities and stockholders'
           equity                                                            $ 6,500,273                $ 1,781,548
                                                                             -----------                -----------
                                                                             -----------                -----------
</TABLE>

      The accompanying notes are an integral part of these balance sheets.


                                                                             3
<PAGE>


NEOPHARM, INC.
(A DELAWARE CORPORATION)
STATEMENT OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)

<TABLE>
<CAPTION>

                                           THREE MONTHS                        SIX MONTHS
                                              JUNE 30,                          JUNE 30,
                                      1999              1998             1999              1998
                                      ----              ----             ----              ----
<S>                               <C>              <C>               <C>             <C>
Revenues:
  Licensing Revenues              $       --       $        --       $ 9,000,000     $        --
Expenses:
  Research and
   development                       516,892           375,446         2,017,326          548,300
  General and
   administrative                    502,355           319,761         1,100,349          611,400
                                  -----------      ------------      -----------     ------------
    Total Expenses                 1,019,247           695,207         3,117,675        1,159,700

Income (loss)
 from operations                  (1,019,247)         (695,207)        5,882,325       (1,159,700)

Interest income                       63,588            28,068            98,595           65,450
Interest expense                         266                --             2,126               --
                                  -----------      ------------      -----------     ------------
Interest income
    (expense) - net                   63,322            28,068            96,469           65,450

Net income (loss)
    before income taxes           $ (955,925)      $  (667,139)      $ 5,978,794     $ (1,094,250)
                                  -----------      ------------      -----------     ------------


Income taxes                        (382,000)               --        2,392,000                --
                                  -----------      ------------      -----------     ------------

Net Income (loss)                 $ (573,925)        $(667,139)     $ 3,586,794      $ (1,094,250)
                                  ===========      ============      ===========     ============

Net Income (loss) per share
         Basic                    $     (.07)      $      (.08)     $       .43      $      (.13)
                                  ===========      ============     ============     ============

         Diluted                  $     (.07)      $      (.08)     $       .31      $      (.13)
                                  ===========      ============     ============     ============

Weighted average
shares outstanding
         Basic                     8,459,288         8,195,810         8,438,570        8,195,810
                                  ===========      ============     ============     ============

         Diluted                  11,620,726         8,600,098        11,552,102        8,601,873
                                  ===========      ============     ============     ============
</TABLE>


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


                                                                              4
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION)
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)

<TABLE>
<CAPTION>

                                                                                  JUNE 30,          JUNE 30,
                                                                                   1999               1998
                                                                                   ----               ----
<S>                                                                            <C>                 <C>
Cash flows used in operating activities:
Net income (loss)                                                               $3,586,794         $(1,094,250)
Adjustments to reconcile net loss
  to net cash used by operating
  activities:
Depreciation and amortization                                                       18,000               9,915
Deferred income taxes                                                            2,317,000                  --

Changes in assets and liabilities:
(Increase) decrease in other assets                                               (195,137)             (7,415)
Increase (decrease) in accounts
  payable and accrued liabilities                                                   99,391            (201,727)
                                                                              ------------          -----------
Net cash provided by (used in)
  operating activities                                                           5,826,048          (1,293,477)
                                                                              ------------          -----------

Cash flows used in investing activities:
Purchase of equipment and furniture                                                 (2,757)            (92,109)
                                                                              ------------          -----------

Net cash used in investing activities                                               (2,757)            (92,109)
                                                                              ------------          -----------

Cash flows from financing activities:

Proceeds from issuance of common stock                                             183,750                  --
Proceeds from exercise of warrants, net                                            171,790                  --
Cashless exercise of warrants, charge                                           (1,074,208)                 --
Cashless exercise of warrants, proceeds                                          1,074,208                  --
                                                                              ------------          -----------
Net cash provided by financing activities                                          355,540                  --
                                                                              ------------          -----------

Net increase (decrease) in cash                                                  6,178,831          (1,385,586)

Cash, beginning of period                                                           40,681           2,776,697
                                                                              ------------          -----------
Cash, end of period                                                              6,219,512         $ 1,391,111
                                                                              ============         ============



Supplemental disclosure of cash paid for:
Interest                                                                           $ 2,126               $  --
Income taxes                                                                        75,000                  --

</TABLE>


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


                                                                             5
<PAGE>


                                 NEOPHARM, INC.
                            (A DELAWARE CORPORATION)
                          NOTES TO FINANCIAL STATEMENTS
                                  JUNE 30, 1999

NOTE 1   BASIS OF PRESENTATION

The financial information herein is unaudited, other than the Balance Sheet at
December 31, 1998, which is derived from the audited financial statements.

The accompanying unaudited statements of NeoPharm, Inc. (the "Company") have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not contain all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company, the accompanying unaudited
interim financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the Company's financial
position as of June 30, 1999, the results of operations for the three and six
months ended June 30, 1999 and 1998 and the changes in cash flows for the six
month periods ended June 30, 1999 and 1998.

While the Company believes that the disclosures presented 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 1998 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.

NOTE 2  EARNINGS PER SHARE

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

<TABLE>
<CAPTION>

                                                               FOR THE THREE MONTHS ENDED:        FOR THE SIX MONTHS ENDED:
                                                                June 30,          June 30          June 30,          June 30
                                                                  1999              1998             1999              1998
                                                             -----------       -----------       -----------       -----------
<S>                                                            <C>               <C>              <C>               <C>
Numerator:
  Net income (loss) from continuing operations                 $(573,925)        $(667,139)       $3,586,794       $(1,094,250)
                                                              ===========       ===========      ===========       ===========

Denominator:
  Denominator for basic loss per share-weighted
  Average shares                                               8,459,288         8,195,810         8,438,570         8,195,810

Effect of Dilutive securities:
  Stock options                                                1,783,888           404,288         1,777,595           406,063
  Warrant exercise                                             1,377,550              -            1,335,937              -
                                                             -----------       -----------       -----------       -----------

Dilutive potential common shares                              11,620,726         8,600,098        11,552,102        8,601,873
                                                              ===========       ===========      ===========       ===========
Denominator for diluted loss per share-weighted
  Average shares and assumed conversions

Basic income (loss) per share                                $      (.07)      $      (.08)      $       .43       $     (.13)
                                                              ===========       ===========      ===========       ===========

Diluted income (loss) per share                              $      (.07)      $      (.08)      $       .31       $     (.13)
                                                              ===========       ===========      ===========       ===========
</TABLE>



                                                                             6
<PAGE>

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

Any statements made by NeoPharm Inc. (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. The Company cautions readers
that important factors may affect the Company's actual results and could cause
such results to differ materially from forward-looking statements made by or on
behalf of the Company. Such factors include, but are not limited to, changing
market conditions, the impact of competitive products and pricing, the timely
development, approval by the Food and Drug Administration ("FDA") and foreign
health authorities, and market acceptance of the Company's products in
development, the Company's ability to further raise capital, the Company's
dependence on key personnel, and other factors referenced under "Risk Factors"
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998

OVERVIEW

         NeoPharm is a pharmaceutical Company engaged in the research and
development of drugs for the diagnosis and treatment of various forms of cancer.
Presently the Company has several drugs which are in varying stages of
development; BudR (Broxuridine), liposome encapsulated doxorubicin ("LED"),
liposome encapsulated paclitaxel ("LEP"), liposome encapsulated antisense
oligodeoxynucleotide ("LE-AON" and with LED and LEP the "Liposome Products"),
IL-13 PE38QQR ("IL-13") and Mesothelin ss-(dsFv)-PE38 ("Mesothelin Mab"). IL-13
and Mesothelin Mab are both Ligand Target Cytotoxins that specifically target
cancer cells and leave normal cells unaffected.

         The Company has obtained rights to its various products as a result of
agreements and relationships entered into with various third parties including
the National Cancer Institute ("NCI"), the United States Food and Drug
Administration ("FDA"), the National Institute of Health ("NIH") and Georgetown
University.

         To date, the Company has been engaged primarily in research and
development of its developmental stage products. The Company has developed
expertise in identification, development and preparation for regulatory approval
of cancer drugs for both therapeutic and diagnostic purposes, although the
Company has no products that are currently approved for sale. The Company
currently has no marketing or sales staff and has conducted its activities
primarily through consultants and at university research facilities. To date,
the Company's sole source of revenue has come from the licensing of technology
it has developed. The Company has moved from its development stage upon the
licensing of its LEP and LED products as discussed below.

         NeoPharm, Inc., was incorporated in Delaware under the name OncoMed,
Inc. in June 1990, and changed its name to NeoPharm, Inc. in March, 1995.

NEOPHARM PRODUCTS

         The Company's Liposome Products consist of spheres of subcellular size
composed primarily of phospholipids, certain of which are the primary components
of living cell membranes, and can be made to contain and deliver drugs. This
membrane encapsulation feature of liposomes enables the entrapped drug to be
circulated in the bloodstream in higher concentrations for longer periods of
time than the free drug. When certain drugs, including chemotherapeutic agents,
are administered in conjunction with liposomes, they have been shown to produce
fewer and less severe local and systematic side effects. Although liposomes have
been investigated and used for many years as drug delivery systems, the
difficulty in producing liposomes on a large scale, as well as the limited shelf
life of many liposomes, have limited their use in clinical settings.


                                                                              7
<PAGE>

         The Company's LED is currently under development in three Phase II
trials. The Company started a Phase II trial in hormone refractory prostate
cancer patients in June 1998. The Company is also starting an additional
trial in osteosarcoma (bone cancer) at higher doses of LED. These Phase II
trials will be conducted in several cancer centers in the United States. The
Company has also initiated a multi-center Phase II trial of LED in breast
cancer patients who have failed most of the chemotherapy protocols to
appreciate the capacity of LED in overcoming MDR in those patients. The
Company also has a clinical trial with LED in myeloma, a blood cancer. The
Company has also initiated a Phase I clinical study on LEP in September of
1998 for patients with lung cancer. These trials are on-going at this time.

         In February 1999, the Company signed a License Agreement with Pharmacia
and Upjohn ("P&U") to develop and commercialize LEP and LED worldwide. The
Company received a $9,000,000 nonrefundable up-front payment upon execution of
the License Agreement and will receive milestone payments as clinical progress
occurs under the License Agreement. The Company will also receive royalties on
overseas sales and a co-promotion profit split on sales in the United States.
Pursuant to the License Agreement, P&U will assume all further responsibility
for, and the costs associated with, the further development and testing of LED
and LEP and the obtaining of all regulatory approvals. In addition, the Company
has agreed to sell $8,000,000 of its common stock to P&U when certain
Investigatory New Drug ("IND") applications are transferred to P&U in accordance
with a separate Stock Purchase Agreement at a price per share equal to 110% of
the then market price of the common stock during the sixty (60) day period
preceeding the transfer of the INDs. The final IND was transferred on July 14,
1999. Pursuant to the license agreement, P&U purchased 452,861 shares of the
Company's common stock at a per share price of $17.6655 on July 23, 1999.
Additionally, the Company received its first milestone payment from P&U in the
amount of $2,000,000 on July 12, 1999.

         The Company has two license and research agreements with Georgetown
University that cover the use of certain technologies used in the Company's LED
and LEP products. In January 1999, the Company and Georgetown University agreed
to amend the agreements to reduce the level of future sublicense royalties on
LEP and LED sales payable to Georgetown in return for a one time sublicense fee
of $800,000. The Company made the $800,000 payment to Georgetown in March 1999,
after the execution of the P&U agreement.

         In October 1997, the Company entered into an exclusive worldwide
licensing agreement with the FDA and the NIH to develop and commercialize a
chimeric human protein known as "IL13-PE38QQR." The National Institute of Health
license requires a $75,000 non-refundable license issue payment and minimum
annual royalty payments of $10,000, which increase to $25,000 after our first
commercial sale. The National Institute of Health license also provides for
milestone payments which, if all milestones were to be attained, would require
payments aggregating to $785,000 and royalties of 4% based on future
product sales, if any. We are also required to pay the costs of filing and
maintaining product patents on the licensed products as they are incurred.

         Extensive research by the scientists at FDA and NCI have
demonstrated that some solid human tumors such as kidney cancer (renal cell
carcinoma), brain cancer (glioblastoma), Kaposi's sarcoma and breast
carcinoma express high numbers of IL-13 receptors on their cell surfaces.
These receptor sites become a specific target for the IL-13 chimeric protein
for inducing cytotoxicity at nanogram concentration. On the other hand,
normal organs of the body are shown to exhibit minimal receptors sites
thereby sparing these organs from any toxic effect. The Company successfully
scaled up the production of this chimeric protein to complete preclinical
studies. The Company plans to initiate a Phase I clinical program in humans
with renal cell carcinoma and glioblastoma during the third quarter.

                                                                              8
<PAGE>

         The Company also recently entered into a Licensing Agreement with the
NIH for Mesothelin Mab for head and neck cancer and mesothelioma. Like IL-13,
Mesothelin Mab targets mesothelin receptors on cancer cells and delivers a
cytotoxin to destroy the cancer cell while leaving normal cells alone.
Mesothelin Mab is expected to enter Phase I Clinical Studies in the later part
of 1999. The terms and conditions of the Mesothelin Mab License Agreements with
the National Institute of Health are substantially the same as those described
above for our agreement with the National Institute of Health for IL-13 chimeric
protein-therapy, with the exception that milestone payments by the Company (if
all milestones were to be attained) would aggregate to $500,000. The royalty
payable on future product sales if any, would be 5% and the Company has agreed
to reimburse the National Institute of Health, within 60 days of a request for
up to $175,000 of previously incurred patent prosecution costs. Additionally,
the Company finalized a Cooperative Research and Development Agreement (CRADA)
with the NCI on May 19, 1999 for the development of Mesothelin Mab. Under the
terms of the agreement, the company paid a $50,000 up front payment and is
required to pay $50,000 every six months during the four year term of the
agreement.

         Clinical trials involving prognostic use of BUdR have indicated that
the information regarding tumor cell behavior provided by BUdR can assist the
oncologist in selecting appropriate therapeutic regimens for the patients and
enable better monitoring of the effectiveness of the chosen therapy.

         In December 1996, the Company filed an NDA with the FDA for BUdR as a
prognostic agent in the treatment of breast cancer. The Company's NDA as it
relates to BUdR as a prognostic indication in the treatment of breast cancer was
accepted for review by the FDA and was reviewed by the FDA's Oncology Advisory
Committee ("ODAC") on December 19, 1997, at which time ODAC voted not to
recommend this indication to the FDA for approval. Since the ODAC action, the
Company has met with the FDA to respond to concerns raised by ODAC for the
purpose of continuing to pursue FDA approval. Based on these discussions the
Company is gathering additional data and reanalyzing the existing data in order
to obtain the FDA's approval of the Company's NDA. The original NDA was filed in
December 1996. The application has already been extended once and the Company
was informed on March 31, 1998 that the time for processing the original
application has expired. The Company is continuing to work with FDA to explore
the requirements for a prognostic application. Additionally, the Company is
exploring opportunities to license and/or sell its Budr product.

RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1999 VS. THREE MONTHS ENDED
MARCH 31, 1998

         Research and development expenses for the three month period ended
June 30, were $516,892 compared to $375,446 for the same period in 1998.
Research and development payroll and related travel expenses increased
approximately $51,000 due to staff additions being present for the full 1999
period. The Company's research and development expenses related to LED and
LEP have been substantially reduced due to the licensing agreement with P&U.
However, the Company has redirected its research and development activities
toward its other compounds and as a result has seen its research cost
increase by approximately $90,000 over the 1998 period.

General and administrative expenses for the three month period ended June 30,
1999 were $502,355 compared to $319,761 for the same period is 1998. General
and administrative expense increased primarily due to increased investor
relations activity, increased professional fees related to licensing activities
and other corporate matters, and relocation costs for one of the Company's
executives.

The Company generated interest income on excess cash balances of $63,588 and
$28,068 for the three month periods ended June 30, 1999 and June 30, 1998
respectively. The Company incurred $266 of


                                                                             9
<PAGE>

interest expense during the three month period ended June 30, 1999. The Company
recorded no interest expense for the same period in 1998.

The Company recorded an income tax benefit of $382,000 for the three month
period ended June 30, 1999. No income tax expense or benefit was recorded for
the comparable period in the prior year.

The net loss for the three months ended June 30, 1999 was $573,925 compared to a
net loss of $667,139 for the three month period ended June 30, 1998.

Net loss per share for the three month period ended June 30, 1999 was $0.07
basic and diluted compared to a net loss per share of $0.08 basic and diluted
for the three month period ended June 30, 1998.

RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1999 VS. SIX MONTHS ENDED JUNE
30, 1998.

Research and development expenses increased by approximately $1,469,026 for the
six month period ended June 30, 1999 compared to the six month period ended June
30, 1998. The increase was due primarily to the sublicensing fee paid to
Georgetown of $800,000, increased payroll due to additional staff being present
for the full 1999 period and employee bonuses of $300,000 and other expenditures
of approximately $369,000 related to other licensing and direct research
activities.

General and administrative expenses increased by $488,949 for the six month
period ended June 30, 1999 compared to the six month period ended June 30,
1998 due to additional payroll costs and bonuses of approximately $100,000,
increased insurance costs of $54,000 increased investor relations activities
and professional fees of approximately $274,000 and relocation expenses for a
corporate executive of $50,000.

The Company generated interest income on excess cash balances of $98,595 and
$65,450 for the six month periods ended June 30, 1999 and June 30, 1998
respectively.

The Company incurred $2,126 of interest expense during the six months ended June
30, 1999. The Company recorded no interest expense for the same period in 1998.

The Company recorded income tax expense of $2,392,000 for the six month period
ended June 30, 1999. The Company recorded no income tax expense for the same
period in 1998.

Net income for the six month ended June 30, 1999 was $3,586,794 compared to a
net loss of $1,094,250 for the period ended June 30, 1998.

Net income per share for the six month period ended June 30, 1999 was $0.43
basic and $.31 diluted compared to a net loss per share of $0.13 basic and
diluted for the six month period ended June 30, 1998.


LIQUIDITY AND CAPITAL RESOURCES

         Cash expenditures exceeded revenues from the Company's inception until
the 1st Quarter of 1999. Operations have principally been funded through a loan
from the Company's Chairman, a bank line-of-credit and since January 1996, the
initial public offering of common stock. The Company expects to incur additional
expenses, resulting in potentially significant losses, as it continues and
expands its research and development activities and undertakes additional
clinical trials of compounds obtained under proprietary licenses. The Company
also expects to incur substantial administrative and


                                                                            10
<PAGE>

commercialization expenditures in the future as it seeks FDA approval of drugs
under development and initiates marketing activities.

         From October 1998 through February 1999 the Company had a $3,000,000
line of credit in place with the John N. Kapoor Trust dtd 9/20/89, an entity
affiliated with the Company's Chairman. The Company borrowed $250,000 on the
line of credit on January 8, 1999. The $250,000 plus accrued interest of $1,062
was repaid on January 29, 1999. The line of credit terminated upon the signing
of the licensing agreement with P&U on February 19, 1999.

         At June 30, 1999, the Company's cash and cash equivalents were
$6,219,512 compared to $40,681 at December 31, 1998. This increase in cash and
cash equivalents of $6,178,831 was the result of cash generated by operating
activities of $5,826,048, cash used to purchase equipment and furniture of
$2,757 and cash provided by financing activities of $355,540.

The Company called its 837,067 redeemable common stock purchase warrants and
the 67,500 warrants underlying its representative's warrants on June 24,
1999. The period for exercising the outstanding warrants ended at the close
of business on July 27, 1999. Warrant holders exercised 836,942 of the
redeemable warrants and 67,500 of the underlying warrants for 1,808,884
shares of the Company's common stock. The Company received total proceeds of
$9,135,692 from the exercise of the warrants. The remaining 125 redeemable
common stock purchase warrants will be redeemed for $0.01 per warrant.

The Company plans to finance its immediate needs principally from its existing
capital resources and interest thereon, and to the extent available, through
collaborative agreements with corporate partners and future public and private
financing. The Company's long term capital needs will require substantial
additional funding in order to continue its research and product development
programs. The Company's long-term capital requirements and the adequacy of its
available funds will depend upon many factors, including results of research and
development, results of product testing, relationships with potential
partnerships and collaborations, and the FDA regulatory process. No assurance
can be given that additional funding will be available when needed or on terms
acceptable to the Company. Insufficient funds may require the Company to delay,
scale-back or eliminate certain of its research and development programs or to
license third parties to commercialize products or technologies that the Company
would otherwise undertake itself.


THE YEAR 2000 ISSUE

         The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
equipment software and devices with imbedded technology that are time sensitive
may treat years as occurring between 1900 and the end of 1999 and may not
self-convert to reflect the upcoming change in the century. If not corrected,
this problem could result in system failures or miscalculations and erroneous
results by, or at, Year 2000.

         The Company conducted an assessment of its business systems that could
encounter Year 2000 problems. This assessment included both information
technology systems and non-information technology systems. Based on this
internal assessment, the Company has not identified any material year 2000
issues. The Company retained an outside consultant to review its assessment. The
consultant recommended several minor corrective measures which have been
completed. The cost of the review and corrective measures was less than $5,000.

         Because the Company expects that its internal systems will be Year 2000
compliant, the Company belives that the most likely worst case scenario would
result from third parties failing to achieve Year 2000 compliance. The Company
relies on vendors, service providers and collaboration partners for raw
materials, contract manufacturing, research activities, product testing,
clinical trials,


                                                                             11
<PAGE>

administrative services and other services ("Service Providers"). The Company is
in the process of surveying its Service Providers to determine if they are Year
2000 complient or have effective plans in place to address the Year 2000 issue
and to determine the extent of the Company's vulnerability to the failure of its
Service Providers to remedy such issues. Based upon the responses that the
Company receives from its Service Providers, the Company will assess its risks
and develop appropriate contingency plans as needed. The Company does not
currently have a contingency plan in place; however it is the Company's
intention to complete its contingency plan by October 31, 1999.

         The Company does not expect the Year 2000 issue to have a material
adverse impact on the Company's business or results of operations. However, no
assurance can be given that unanticipated or undiscovered Year 2000 problems
will not arise that could have a material adverse effect on the Company's
business and results of operations. In addition, there can be no assurance that
Year 2000 non-compliance by any of the Company's significant Service Providers
will not have a material adverse effect on the Company's business or results of
operations.






                                                                            12
<PAGE>

PART II - OTHER INFORMATION

<TABLE>
      <S>               <C>                                           <C>
      Item 1.           Legal Proceedings                             None

      Item 2.           Changes in Securities                         None

      Item 3.           Defaults Upon Senior Securities               None

      Item 4.           Submission of Matters to a Vote
                        of Security-Holders
</TABLE>

On June 10, 1999, the Company held its annual meeting of Stockholders for the
purpose of electing 5 directors to serve until the 2000 Annual Meeting of
Stockholders and voting on the adoption of the 1998 Equity Inception Plan.

With respect to the election for directors, the votes were as follows:

<TABLE>
<CAPTION>
                                    VOTES FOR                  VOTES AGAINST               VOTES WITHHELD
                                    ---------                  -------------               --------------
<S>                                 <C>                        <C>                         <C>
James M. Hussey                     7,904,107                        0                       279,800
John N. Kapoor                      7,904,107                        0                       279,800
Aquilur Rahman                      7,904,107                        0                       279,800
Sander Flaum                        7,904,107                        0                       279,800
Erick E. Hanson                     7,904,107                        0                       279,800
</TABLE>

With respect to the adoption of the 1998 Equity Incentive Plan, the votes were
as follows:

<TABLE>
<CAPTION>
                                    VOTES FOR                  VOTES AGAINST               VOTES WITHHELD
                                    ---------                  -------------               -------------
<S>                                <C>                           <C>                         <C>
                                    5,361,628                     814,818                     2,007,461
</TABLE>
<TABLE>
     <S>                   <C>
     Item 5.               Other Information

                           On July 23, 1999, the Company sold 452,861 shares of its common stock to Pharmacia & UpJohn, Inc.
                           ("P&U") at a price of $17.67 per share, pursuant to the terms of the Licensing Agreement entered
                           into by both companies on February 19, 1999. As a result of the sale, and based on the number of
                           shares of NeoPharm common stock outstanding as of July 23, 1999, the stock acquired by P&U represented
                           approximately 4.6% of the Company's issued and outstanding shares. The stock sale provision of the
                           Licensing Agreement was triggered by the transfer of the Investigational New Drug Applications for
                           NeoPharm's two anti-cancer agents, LEP ("Liposomal Encapsulated Paxlitaxel") and LED ("Liposomal
                           Encapsulated Doxorubicin") to P&U.


     Item 6.               Exhibits and Reports on Form 8-K

                               (a)  Exhibits

                                    Exhibit 10.1 is a Cooperative Research and Development Agreement ("CRADA") entered into
                                    as of May 19, 1999 by and between the Company and the National Cancer Institute and relating
                                    to Mesothelin Mab ss-(dsFv)-PE38.

                               (b)  Reports on Form 8-K

                                    On July 7, 1999, the Company filed a report on Form 8-K, reporting the call for redemption
                                    of the Company's Redeemable Common Stock Purchase Warrants and describing the terms and
                                    conditions of such redemption.
</TABLE>

                                       13
<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.

                                       NEOPHARM, INC.

                                       By:    /s/  Kevin M. Harris
                                       --------------------------------
                                              Kevin M. Harris,
                                              CHIEF FINANCIAL OFFICER
                                              AND AUTHORIZED OFFICER

                                              Date: AUGUST 13, 1999
                                                    -------------------







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