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

                                  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 June 30, 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 Identification Number)
   incorporation or organization)

                           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, July 31, 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)                    28,492,909

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



<PAGE>


                                 NEOPHARM, INC.

                                    FORM 10-Q
                                      INDEX

PART I. FINANCIAL INFORMATION
    Item 1. Financial Statements
            Condensed Consolidated Balance Sheets as of June 30, 2008
            (unaudited) and December 31, 2007 Condensed Consolidated Statements
            of Operations for the three and six months ended June 30, 2008 and
            June 30, 2007 (unaudited) Condensed Consolidated Statements of Cash
            Flows for the six months ended June 30, 2008 and June 30, 2007
            (unaudited) Notes to Condensed Consolidated Financial Statements
            (unaudited)
    Item 2. Management's Discussion and Analysis of Financial Condition and
            Results of Operations
    Item 3. Quantitative and Qualitative Disclosures About Market Risk
    Item 4T Controls and Procedures
PART II. OTHER INFORMATION
    Item 1. Legal Proceedings
    Item    Risk Factors
    1A.
    Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    Item 3. Defaults Upon Senior Securities
    Item 4. Submission of Matters to a Vote of Security Holders
    Item 5. Other Information
    Item 6. Exhibits
SIGNATURE PAGE


                                       2
<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1.                       FINANCIAL STATEMENTS

                                 NEOPHARM, INC.
                      Condensed Consolidated Balance Sheets

<TABLE>
<CAPTION>
<S>                                                         <C>              <C>
                                                               June 30,       December 31,
                                                                 2008             2007
                                                           ---------------- -----------------
                                                             (unaudited)
ASSETS
   Current assets:
      Cash and cash equivalents                             $    7,584,000   $     1,022,000
      Available for sale securities                             13,835,000        19,759,000
      Prepaid expenses and other                                    68,000           417,000
                                                           ---------------- -----------------
      Total current assets                                      21,487,000        21,198,000
   Fixed assets, net of accumulated depreciation                   395,000           395,000
   Other assets                                                    647,000           659,000
                                                           ---------------- -----------------
      Total assets                                          $   22,529,000   $    22,252,000
                                                           ================ =================

LIABILITIES AND STOCKHOLDERS' EQUITY
   Current liabilities:
      Accounts payable                                      $    1,095,000   $     1,340,000
      Accrued clinical trial expenses                              364,000           278,000
      Accrued compensation                                         757,000         1,042,000
      Accrued manufacturing expenses                               783,000           739,000
      Short-term debt                                            5,012,000                 -
      Obligations under capital lease                               33,000            32,000
      Other accrued expenses                                       337,000           494,000
                                                           ---------------- -----------------
      Total current liabilities                                  8,381,000         3,925,000
                                                           ---------------- -----------------

   Deferred rent                                                     6,000                 -
   Obligations under capital lease                                  57,000            74,000
                                                           ---------------- -----------------
      Total liabilities                                          8,444,000         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: 28,492,909 and 28,488,550
          shares issued and outstanding, respectively                6,000             6,000
      Additional paid-in capital                               290,766,000       290,481,000
      Other comprehensive loss                                    (868,000)                -
      Accumulated deficit                                     (275,819,000)     (272,234,000)
                                                           ---------------- -----------------
      Total stockholders' equity                                14,085,000        18,253,000
                                                           ---------------- -----------------

      Total liabilities and stockholders' equity            $   22,529,000   $    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 and Six Months Ended June 30, 2008 and June 30, 2007
                                   (Unaudited)

<TABLE>
<CAPTION>
<S>                                      <C>           <C>           <C>           <C>
                                          Three Months Ended           Six Months Ended
                                      --------------------------- ---------------------------
                                      June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
                                      -------------------------------------------------------

Total revenue                          $         -   $         -   $         -   $         -

Expenses:
 Research and development                1,014,000     1,500,000     1,837,000     4,507,000
 Selling, general, and
  administrative                         1,247,000     1,918,000     2,516,000     4,779,000
 Employee termination costs                      -       555,000             -       555,000
 Facility consolidation costs               11,000             -       (64,000)            -
 Gain on sale of equipment and
  furniture                               (101,000)            -      (309,000)            -
                                      ------------- ------------- ------------- -------------
  Total expenses                         2,171,000     3,973,000     3,980,000     9,841,000
                                      ------------- ------------- ------------- -------------
Loss from operations                    (2,171,000)   (3,973,000)   (3,980,000)   (9,841,000)

Net interest income                         99,000       358,000       395,000       773,000
                                      ------------- ------------- ------------- -------------
Net loss                               $(2,072,000)  $(3,615,000)  $(3,585,000)  $(9,068,000)
                                      ============= ============= ============= =============
Net loss per share --
 Basic and diluted                     $     (0.07)  $     (0.13)  $     (0.13)  $     (0.32)
                                      ============= ============= ============= =============
Weighted average shares outstanding
 --
 Basic and diluted                      28,491,174    28,086,748    28,489,876    28,083,630
                                      ============= ============= ============= =============
</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
                Six Months Ended June 30, 2008 and June 30, 2007
                                   (Unaudited)

<TABLE>
<CAPTION>
<S>                                                               <C>            <C>
                                                                        Six Months Ended
                                                                 -------------------------------
                                                                 June 30, 2008   June 30, 2007
                                                                 -------------- ----------------

Cash flows from operating activities:
   Net loss                                                       $ (3,585,000)  $   (9,068,000)
   Adjustments to reconcile net loss to net cash used in
    operating activities:
      Depreciation and amortization                                    107,000          456,000
      Stock-based compensation expense                                 282,000          115,000
      Gain on sale of equipment and furniture                          (18,000)          (1,000)
   Changes in assets and liabilities:
      Interest receivable on short-term investments                      3,000           14,000
      Prepaid expenses and other assets                                361,000          (66,000)
      Accounts payable                                                (245,000)      (4,484,000)
      Other current liabilities                                       (293,000)         175,000
                                                                 -------------- ----------------
Net cash and cash equivalents used in operating activities          (3,388,000)     (12,859,000)
                                                                 -------------- ----------------

Cash flows from investing activities:
   Proceeds from sales of marketable securities                      5,053,000       11,651,000
   Purchase of equipment and furniture                                (108,000)          (1,000)
   Proceeds from sale of equipment and furniture                        19,000                -
                                                                 -------------- ----------------
Net cash and cash equivalents provided by investing activities       4,964,000       11,650,000
                                                                 -------------- ----------------

Cash flows from financing activities:
   Proceeds from employee stock purchase plan                            2,000           13,000
   Proceeds from short-term debt                                     5,000,000                -
   Repayment of capital lease obligation                               (16,000)         (14,000)
                                                                 -------------- ----------------
Net cash and cash equivalents provided by (used in) financing
 activities                                                          4,986,000           (1,000)
                                                                 -------------- ----------------

Net increase in cash and cash equivalents                            6,562,000       (1,210,000)
Cash and cash equivalents, beginning of period                       1,022,000        1,852,000
                                                                 -------------- ----------------
Cash and cash equivalents, end of period                          $  7,584,000   $      642,000
                                                                 ============== ================
</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 and six month period ended
and as of June 30, 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 June 30, 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. See note 5 below.

    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.

Reclassifications

      Certain reclassifications have been made to conform prior period
consolidated financial statements and notes to current period presentation.


                                       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>              <C>             <C>
                                            Three Months Ended               Six Months Ended
                                      ------------------------------- -------------------------------
                                       June 30, 2008   June 30, 2007   June 30, 2008   June 30, 2007
                                      --------------- --------------- --------------- ---------------
Numerator:
  Net loss                             $  (2,072,000)  $  (3,615,000)   $ (3,585,000)   $ (9,068,000)
                                      =============== =============== =============== ===============
Denominator:
  Weighted average shares outstanding     28,486,770      28,086,748      28,489,876      28,083,630
                                      =============== =============== =============== ===============

Loss per share - basic and diluted     $       (0.07)  $       (0.13)   $      (0.13)   $      (0.32)
                                      =============== =============== =============== ===============
</TABLE>

    As we have incurred net losses in each of the periods presented, basic and
diluted loss per share amounts are the same. Common share equivalents of
1,566,021 and 1,520,428 at June 30, 2008 and 2007, respectively, have been
excluded from the computation since the effect of their assumed conversion would
be 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 June 30,
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 three and six month periods ending June 30, 2008, 1,754 and 4,359
shares, respectively, were issued under the Purchase plan resulting in
compensation expense of $1,240 and $775, respectively. During the three and six
month periods ending June 30, 2007, 5,476 and 11,756 shares, respectively, were
issued under the Purchase plan resulting in compensation expense of $2,000 and
$10,000, respectively. As of June 30, 2008 and December 31, 2007, 42,036 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>              <C>            <C>
                                                      Three Months Ended              Six Months Ended
                                                ------------------------------ ------------------------------
                                                June 30, 2008   June 30, 2007  June 30, 2008   June 30, 2007
                                                -------------- --------------- -------------- ---------------

Research and
 development                                     $      40,000  $     (57,000)   $     80,000   $    (41,000)
Selling, general and administrative                     94,000         41,000         202,000        156,000

                                                -------------- --------------- -------------- ---------------
Total cost of share-based payment plans during
 period                                          $     134,000  $     (16,000)   $    282,000   $    115,000
                                                ============== =============== ============== ===============
</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 six months ended June 30, 2008:

<TABLE>
<CAPTION>
<S>                                  <C>                <C>                     <C>   <C>
                                   Number of     Weighted Average  Weighted Average   Aggregate
                                     Options      Exercise Price/      Remaining      Instrinsic
                                                 Grant Date Fair    Contractual Life     Value
                                                       Value            in years
                                 --------------- ----------------- ----------------- ------------
Outstanding at December 31, 2007     1,252,326    $     2.73/1.89
Granted                                      -
Exercised                                    -
Forfeited/expired/cancelled            (35,000)   $     3.48/2.17
                                 --------------
Outstanding at June 30, 2008         1,217,326          2.69/1.88               8.6   $         -
                                 ==============

Exercisable at June 30, 2008           575,901    $     5.78/3.91              7.52   $         -
                                 ==============

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

Nonvested at December 31, 2007         755,051    $     1.92/1.37
Granted                                      -
Vested                                 (86,126)         2.92/2.06
Forfeited                              (27,500)         2.66/1.81
                                ---------------
Nonvested at June 30, 2008             641,425    $     1.76/1.26
                                ===============
</TABLE>

    As of June 30, 2008 we expect to recognize $718,000 of unrecognized
share-based compensation for our outstanding options over a weighted average
period of 1.7 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 June 30, 2008, there were a
total of 393,861 restricted shares of common stock outstanding with unearned
compensation of $209,000 which is expected to be earned within 1.5 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 six months ended
June 30, 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 six months ended June 30,
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 $7.6 million and $0.7 million as of June 30, 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 June 30, 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 June 30,
2008, including those held in the Company's account. The fair value of
NeoPharm's auction rate certificates was estimated to be $13.8 million, which is
$0.9 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 and
fully drawn on a $5.0 million credit facility collateralized by all of the
Company's investments, including its auction rate certificates. This borrowing
on 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 6 below).


                                       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 June 30, 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, of $0.7
million and $0.2 million for the three and six month periods ending June 30,
2008, respectively, as Other Comprehensive Income (Loss), 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 $3,000 and $59,000 as of
June 30, 2008 and December 31, 2007, respectively.

    Short-term investments, stated at fair market value, are as follows (in
thousands):
<TABLE>
<CAPTION>
<S>                                                     <C>               <C>
                                                           June 30,       December 31,
                                                              2008             2007
                                                       ----------------------------------

State government agencies, at par value                 $        14,700   $        19,700
Less: temporary decline in estimated fair value (Other
 Comprehensive Loss)                                               (868)                -

                                                       ----------------- ----------------
    Total estimated fair value of short-term
     investments                                        $        13,832   $        19,700
                                                       ================= ================
</TABLE>

5.      FAIR VALUE MEASUREMENT

        As discussed in Note 1, SFAS 157 became effective for measuring and
reporting financial assets and liabilities in our financial statements as of
January 1, 2008. SFAS 157 defines fair value as the price that would be received
to sell an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date.

       SFAS 157 establishes a three-level hierarchy for disclosure to show the
extent and level of judgment used to estimate fair value measurements:

Level 1 - Uses unadjusted quoted prices that are available in active markets for
identical assets or liabilities as of the reporting date.


Level 2 - Uses inputs other than Level 1 that are either directly or indirectly
observable as of the reporting date through correlation with market data,
including quoted prices for similar assets and liabilities in active markets and
quoted prices in markets that are not active. Level 2 also includes assets and
liabilities that are valued using models or other pricing methodologies that do
not require significant judgment since the input assumptions used in the models,
such as interest rates and volatility factors, are corroborated by readily
observable data.


Level 3 - Uses inputs that are unobservable and are supported by little or no
market activity and reflect the use of significant management judgment. These
values are generally determined using pricing models for which the assumptions
utilize management's estimates of market participant assumptions.

We have applied the provisions of SFAS 157 to financial assets and liabilities
measured at fair value on our consolidated financial statements.


                                       10
<PAGE>


Investments in student loan backed auction-rate securities are our only Level 3
assets and these investments are classified as available-for-sale and recorded
at fair value. Because of the recent deterioration in the credit markets,
auctions for these securities have failed since the first quarter of 2008.
Consequently, fair value measurements have been estimated by the investment bank
which holds NeoPharm's auction rate certificates using an income-approach model
(discounted cash-flow analysis). The model considers factors that reflect
assumptions that market participants would use in pricing similar securities,
including, the collateral underlying the investments, the creditworthiness of
the counterparty, expected future cash-flows, including the next time the
security is expected to have a successful auction, and risks associated with the
uncertainties of the current market, the formula applicable to each security
which defines the interest rate paid to investors in the event of a failed
auction, forward projections of the interest rate benchmarks specified in such
formulas, the likely timing of principal repayments; the probability of full
repayment considering the guarantees by the U.S. Department of Education of the
underlying student loans, guarantees by other third parties, and additional
credit enhancements provided through other means, and publicly available pricing
data for recently issued student loan asset-backed securities which are not
subject to auctions.


    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 June 30, 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, of $0.7
million and $0.2 million for the three and six month periods ending June 30,
2008, respectively, as Other Comprehensive Income (Loss), 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.

       Any future fluctuations in fair value, including recoveries of previously
unrealized losses relating to these investments, would be recorded as Other
Comprehensive Income (Loss). Any adjustments in fair value that we determine to
be other-than-temporary would require us to recognize associated adjustments to
earnings. We evaluate financial assets and liabilities subject to fair value
measurements on a recurring basis to determine the appropriate level at which to
classify them for each reporting period.


6.     SHORT-TERM DEBT

    During the second quarter of 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. As of June 30, 2008, this rate was 2.71%. In June 2008, we
borrowed $5.0 million under this credit agreement and invested the proceeds in a
short-term money market fund. This $5.0 million loan, along with accrued
interest expense, is shown as of June 30, 2008 on our Consolidated Balance Sheet
as short-term debt. The $5.0 million proceeds invested in a short-term money
market fund are included in cash and cash equivalents as of June 30, 2008 on our
Consolidated Balance Sheet. Interest expense of approximately $12,000 for the
three months ended June 30, 2008, is included in net interest income in our
Condensed Consolidated Statement of Operations.


7.     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 six
months ended June 30, 2008 and June 30, 2007, was $107,000 and $456,000,
respectively. During the six months ended June 30, 2008, the Company capitalized
the cost of leasehold improvements totaling $108,000 in connection with its move
to a smaller corporate headquarters facility.


                                       11
<PAGE>


    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.


8.     FACILITY CONSOLIDATION COSTS

    The lease on our former 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.

    During the second quarter of 2008, other immaterial facility consolidation
expenses of $11,000 were incurred.



9.     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.     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 June 30, 2008, management does not believe that there is a
    current obligation to pay this amount. Refer to Note 11 for further
    discussion.
       License and Research Agreements--From time to time we enter into license
    and research agreements with third parties. As of June 30, 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.


                                       12
<PAGE>



       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 license 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
    noncredit able, 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 $20,00 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
    received 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.
      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 June 30, 2008, we had clinical trial
agreements with various 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 and we recorded $70,000 in accrued clinical trial expenses at
March 31, 2008 for the patient enrollment milestone payment obligation. This
patient enrollment milestone obligation was paid in April 2008. Included in
accrued clinical trial expenses at June 30, 2008 is $35,000 for patient
enrollment expense accrued toward the next milestone payment obligation, for the
6 patients enrolled to-date in this study as of June 30, 2008. The total
remaining obligation is potentially $174,000 for the completion of this phase II
clinical trial.


                                       13
<PAGE>


      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. Included in accrued clinical trial
expenses at June 30, 2008 is $14,000 for patient enrollment expense accrued
toward the next milestone payment obligation, for the 1 patient enrolled to-date
in this study as of June 30, 2008. 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 $211,000 for the completion of the phase I clinical trial
at this site.

      Georgetown University-- In April 2008, we entered into an agreement with
Georgetown University Medical Center 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 accrued a start
up fee of $9,000 payable to Georgetown University Medical Center. Included in
accrued clinical trial expenses at June 30, 2008 is $28,000 for patient
enrollment expense accrued toward the next milestone payment obligation, for the
2 patients enrolled to-date in this study as of June 30, 2008. The total
remaining obligation, is dependent on the number of patients that are enrolled
in the phase I study at Georgetown, but could potentially be $197,000 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
11 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.


11.    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, on which we are awaiting
the court's decision. 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 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.


                                       14
<PAGE>


    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 while initiated, has not been pursued by the parties. In
the event the parties fail to resolve their 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 June 30, 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.


12.     SUBSEQUENT EVENTS

    Subsequent to June 30, 2008, we entered into an agreement to pay $1.1
million for the performance of a preclinical inhalation toxicology study in
non-human primates for our Cintredekin Besudotox IL13-PE38 therapeutic agent for
the treatment of pulmonary fibrosis. Under the terms of this agreement, we paid
$200,000 in August 2008 upon execution of the agreement, and will pay an
additional $500,000 in the fourth quarter of 2008 and the remaining balance upon
completion of the final study report in the first quarter of 2009.



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 and the uncertainty of maintenance of our
trade secrets; 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.


                                       15
<PAGE>


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 located
in Lake Bluff, Illinois and we had 16 active employees as of June 30, 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:


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

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

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

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

LE-DT                      Breast cancer, ovarian      Phase I (4)            World wide
(Liposomal Docetaxel)       cancer, prostate cancer and
                            other solid tumors

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

Cintredekin Besudotox      Interstitial pulmonary      Pre-IND (5)            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 has signed a
      letter of intent with a clinical research organization to oversee an
      initial Phase III confirmatory trial 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 began in the
      second quarter of 2008.

(5)   The Company entered into an agreement with Lovelace Respiratory Research
      Institute for the completion of a two week inhalation toxicology study
      designed to provide a detailed preclinical evaluation of this product
      through nebulization to fully characterize the physio-chemical behavior of
      the nebulized product.


                                       16
<PAGE>


    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.

    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 results from the Company's Phase III PRECISE
trial 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.


                                       17
<PAGE>


    The Company has executed a letter of intent with a clinical research
organization to oversee 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. All of
the regulatory submissions have been completed and, once a definitive agreement
has been finalized, the Company is expecting to start enrolling patients in the
fourth quarter of 2008. 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 the potential of Cintredekin Besudotox for
the treatment of recurrent GBM. 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.

    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 is moving forward
with its plan to undertake additional detailed preclinical evaluation of this.
In July 2008, the Company entered into an agreement for the performance of a two
week inhalation toxicology study with a two week recovery period in non-human
primates. This study is designed to provide a detailed preclinical evaluation of
this product through nebulization to fully characterize the physio-chemical and
biological behavior of the nebulized product. The Company plans to submit an IND
to the FDA in the first quarter of 2009 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, 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.


                                       18
<PAGE>


    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 the patients.
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.

     Based on the results obtained in its Phase I trial, 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. Six patients have been enrolled as of end of the second quarter
of 2008. This study is expected to be completed in the fourth quarter of 2008,
with a total of 35 patients to be enrolled in five centers. Depending on the
outcome of this clinical trial, 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. Following the activation of its IND, the Company started
enrolling patients in two cancer centers, Georgetown University, Lombardi Cancer
Center and at TGen, Scottsdale Health Care system. These two Centers have thus
far enrolled three patients in this trial which is designed to define 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 the second half of 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.


                                       19
<PAGE>


    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.

    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>
<S>                                    <C>                <C>                 <C>
                                                    Total Direct Costs Incurred
                                      -------------------------------------------------------
Research Project                      Three Months Ended  Six Months Ended   Since Beginning
                                         June 30, 2008      June 30, 2008       of Project
                                      ------------------ ------------------- ----------------

Cintredekin
 Besudotox                             $        106,000   $         144,000   $    67,652,000
LEP-ETU                                          90,000             171,000         7,961,000
LE-SN38                                           2,000               9,000         5,324,000
LE-DT                                            81,000             116,000           661,000
LE-rafAON                                       132,000             208,000           279,000
Non-project specific and
 other                                          603,000           1,189,000               N/A
                                      -----------------  ------------------  ----------------

     Total research and development
      expenses                         $      1,014,000   $       1,837,000               N/A
                                      =================  ==================  ================
</TABLE>

Results of Operations

     Three Months Ended June 30, 2008 as compared to Three Months Ended June 30,
2007

    Research and development, or R&D, expense for the three months ended June
30, 2008 decreased by $0.5 million, to $1.0 million, compared to $1.5 million
for the same period in 2007. The decrease is attributed to a $0.1 million
reduction in payroll and benefits expenses, primarily attributed to the
Company's various cost reduction initiatives implemented during 2007 and a $0.4
million decrease in overall project costs. The decrease in overall project costs
is primarily attributed to a decrease in the PRECISE trial expenditures in
connection with decision to bring that phase III trial to an early conclusion,
which was partially offset by the advancement of our NeoLipid(R) products into
clinical trials from a pre-clinical status. Product manufacturing costs,
research supplies and lab facility expenses decreased by a combined $0.3 million
as a result of these changes in our drug development activities and the
Company's move into a smaller, more cost-effective lab facility.

    Selling, general, and administrative, or SG&A, expenses decreased $0.7
million, to $1.2 million for the three months ended June 30, 2008, compared to
$1.9 million for the same period in 2007. Included in this $1.2 million of total
SG&A for the three months ended June 30, 2008 are one-time, non-recurring
expenses of $0.1 million related to the Company's move into smaller, more
cost-effective facility. The overall decrease in SG&A is attributed to a $0.2
million decrease in personnel costs, primarily attributed to the Company's
various cost reduction initiatives implemented during 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 $0.5 million

    The Company sold clinical equipment returned from the PRECISE trial that has
been expensed in a prior year, and realized a $0.1 million gain in the three
months ended June 30, 2008.

    The Company generated interest income on cash equivalents and short-term
investments of approximately $0.1 million and $0.4 million for the three months
ended June 30, 2008 and June 30, 2007, respectively. The decrease in interest
income during the period was primarily due to a temporary decrease in the yields
on the Company's short-term investment balances, in connection with the failed
auctions of the Company's auction rate certificates (see note 4).


                                       20
<PAGE>


    Six Months Ended June 30, 2008 as compared to Six Months Ended June 30, 2007

    Research and development, or R&D, expense for the six months ended June 30,
2008 decreased by $2.7 million, to $1.8 million, compared to $4.5 million for
the same period in 2007. The decrease is attributed to a $.6 million reduction
in payroll and benefits expenses, primarily attributed to the Company's various
cost reduction initiatives implemented during 2007 and a $2.1million 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 PRECISE trial to an early conclusion, which was partially offset by
the advancement of our NeoLipid(R) products into clinical trials from a
pre-clinical status. Product manufacturing costs, research supplies and lab
facility expenses decreased by a combined $1.3 million as a result of these
changes in our drug development activities and the Company's move into a
smaller, more cost-effective lab facility.

     Selling, general, and administrative, or SG&A, expenses decreased $2.3
million, to $2.5 million for the six months ended June 30, 2008, compared to
$4.8 million for the same period in 2007. Included in this $2.3 million of total
SG&A for the three months ended June 30, 2008 are one-time, non-recurring
expenses of $0.2 million related to the Company's move into smaller, more
cost-effective facility. The overall decrease in SG&A is attributed to a $1.1
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, patent, consulting, travel
expenses, equipment lease costs, board of director compensation, and office
supplies totaling $1.2 million.

    Following the Company's announcement in March 2007 that additional Phase III
clinical trials have been recommended for its drug product candidate,
Cintredekin Besudotox, the Company initiated an organizational realignment in
April 2007 which reduced the workforce by 25 employees resulting in a charge to
earnings totaling approximately $555,000.

    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, which was then partially offset by other immaterial facility
consolidation costs incurred in the second quarter of 2008.

    The Company sold clinical equipment returned from the PRECISE trial that has
been expensed in a prior year, and realized a $0.3 million gain for the six
months ended June 30, 2008.

    The Company generated interest income on cash equivalents and short-term
investments of approximately $0.4 million and $0.8 million for the six months
ended June 30, 2008 and June 30, 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, and a temporary decrease
in the yields on the Company's short-term investment balances, in connection
with the failed auctions of the Company's auction rate certificates (see note
4).


    Liquidity and Capital Resources

    Net cash used in operating activities decreased $9.5 million from $12.9
million to $3.4 million for the six months ended June 30, 2008 and June 30,
2007, respectively. The decrease in cash used by operations was primarily a
result of the lower net loss for the quarter ended June 30, 2008 compared to
June 30, 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 and in the second quarter of 2008, borrowings under our credit
agreement . As of June 30, 2008, we had available for sale securities with an
estimated value of $13.8 million, consisting solely of state government auction
rate certificates. All of the auction rate certificates held by the Company as
of June 30, 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 upon failure in the auction market at higher average
percentages over a period of time, the issuers have a strong incentive to
restructure and repurchase the underlying bonds.


                                       21
<PAGE>


    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 and fully drawn on 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, our initial Phase
III confirmatory trial for Cintredekin Besudotox for glioblastoma multiforme,
advancement of our Cintredekin Besudotox for pulmonary fibrosis and our
NeoLipid(R) clinical and pre-clinical research and development efforts, and our
remaining PRECISE 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 by $2.3 million for the six
months ended June 30, 2008 as compared to June 30, 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.

    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.


                                       22
<PAGE>


    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 June 30, 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 June 30,
2008, including those held in the Company's account. The fair value of
NeoPharm's auction rate certificates was estimated to be $13.8 million, which is
$0.9 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 4).

    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 June 30, 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.


                                       23
<PAGE>


ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    As of June 30, 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 and on our short-term debt. As of
June 30, 2008, we held total cash and cash equivalents of $7.6 million,
available for sale securities of auction rate certificates of $13.8 million and
short-term debt of $5.0 million. All cash equivalents have a maturity less than
90 days. Declines in interest rates on our short-term investments over time
would reduce our interest income from our investments. An increase in the
interest rate on our short-term debt over time would increase our interest
expense on our short-term debt. Based upon our cash and cash equivalents as of
June 30, 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 $76,000. An increase in the interest rate of 1.0% on our
short-term debt as of June 30, 2008 would cause a corresponding increase in our
annual interest income of $50,000.

    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 June 30, 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 June
30, 2008.

ITEM 4T.                      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 June 30, 2008, that
have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.


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<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, on which we are awaiting
the court's decision. 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 the initiation of this action, 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," and in Part II, Item 1A in our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2008. You are urged to read these risk factors in the
2007 Form 10-K and First Quarter 2008 10-Q, 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.


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<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 June 30, 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 June
30, 2008.

The Nasdaq Capital Market may cease to list our common stock, which may cause
our stock price to suffer and adversely affect the market liquidity of our
common stock.

       On December 26, 2007, we received notice from the Nasdaq Stock Market
("Nasdaq") advising us that for 30 consecutive trading days, the bid price of
our common stock had closed below the minimum $1.00 per share requirement for
continued listing under Nasdaq Marketplace Rule 4450(a)(5) (the "Rule"). The
Company had until June 23, 2008 to regain compliance with the Rule. On June 24,
2008, Nasdaq notified the Company that as a result of the Company's failure to
comply with the Rule as of June 23, 2008, the Company's common stock would be
delisted unless the Company requested a hearing before a Nasdaq Listing
Qualifications Panel, which the Company did on July 1, 2008. The Listing
Qualifications Panel has discretion to grant the Company up to an additional 180
days from the date of the June 24, 2008 delist letter to regain compliance with
the Rule. However, no assurance can be given that the Listing Qualifications
Panel will grant the Company additional time to regain compliance with the Rule
or, even if additional time is granted, what actions the Company would be
required to take in order to continue to have its common stock listed for
trading on the Nasdaq Capital Market.

While the Company's filing of a request for a hearing has stayed the delisting
of our common stock, if our common stock were to be delisted, the delisting
could adversely affect the market liquidity of our common stock and the market
price of our common stock could decrease. Such a delisting could also adversely
affect our ability to obtain financing for the continuation of our operations
and could result in a loss of confidence by investors, suppliers and employees.
In addition, our stockholders ability to trade or obtain quotations on our
shares could be severely limited because of lower trading volumes and
transaction delays. These factors could contribute to lower prices and larger
spreads in the bid and ask price for our common stock.

ITEM 2.     UNREGISTERED 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.     EXHIBITS

     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


                                       26
<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:  August 14, 2008       /s/  Laurence P. Birch
                              -----------------------
                              Laurence P. Birch
                              President and Chief Executive Officer (Principal
                              Executive Officer) and Acting Chief Financial
                              Officer (Principal Financial Officer)


                                       27