<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                 Form 10-K/A2

(Mark One)
  X  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 for the Year Ended December 31, 1996, 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 0-24320

                          NaPRO BIOTHERAPEUTICS, INC.

Incorporated in Delaware                                IRS ID No.  84-1187753
                            6304 Spine Road, Unit A
                            Boulder, Colorado 80301
                                 (303) 530-3891

Securities registered pursuant to Section 12(b) of the Act:  none
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0075
par value; Preferred Stock Purchase Rights

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

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant was $93,507,156 as of March 21, 1997.

The number of shares outstanding of each of the registrant's classes of common
stock, as of March 21, 1997:

Common Stock                     11,767,251
Nonvoting  Common Stock             595,000

Incorporated by reference in Part III of this report is the information
contained in the NaPro Proxy Statement for the 1997 annual meeting of
stockholders, which will be filed with the SEC within 120 days after December
31, 1996.
<PAGE>
 
                                     Part I

                               Item 1.   Business


General

NaPro BioTherapeutics, Inc. ("NaPro" or "the Company") is a natural product
pharmaceutical company which is focusing  primarily on the development,
manufacture and commercialization of paclitaxel, a naturally-occurring anti-
cancer agent found in certain species of yew (Taxus) trees.  The Company's
paclitaxel is referred to herein as "NBT Paclitaxel."

The market for paclitaxel is dominated by Bristol-Myers Squibb Company ("BMS").
BMS has publicly announced that worldwide sales of their formulation of
paclitaxel were approximately $580 million in 1995 and $813 million in 1996.
BMS's paclitaxel is the only United States Food and Drug Administration ("FDA")
approved formulation of paclitaxel, which approval is for the treatment of
refractory (non-responsive) breast and ovarian cancers.  NaPro believes that by
combining its proprietary extraction, isolation and purification ("EIP/TM")
manufacturing technology,  the renewable sources of Taxus biomass being
developed by NaPro, and its long-term, exclusive agreements with two major
international pharmaceutical companies, NaPro will be positioned to participate
significantly in the worldwide paclitaxel market.  There can be no assurance,
however, that NBT Paclitaxel will prove safe and effective, meet applicable
standards necessary for regulatory approvals, or be successfully marketed.

To advance the development and commercialization of NBT Paclitaxel, NaPro has
entered into 20-year, exclusive agreements with each of F.H. Faulding & Co.,
Ltd. ("Faulding") and Baker Norton Pharmaceuticals, a subsidiary of IVAX
Corporation ("IVAX" and together with Faulding, the "Strategic Partners") for
the clinical development, sales, marketing and distribution of NBT Paclitaxel.
Under the agreements, Faulding's territory includes Australia, New Zealand and
much of southeast Asia, and IVAX's territory includes much of the rest of the
world including North America, Europe and Japan. Faulding, Australia's largest
domestic pharmaceutical company, had 1996 sales of approximately $1.2 billion,
and IVAX, a diversified international healthcare company, also had 1996 sales of
approximately $1.2 billion.

The Strategic Partners have agreed to fund and undertake the clinical trials
required in order to obtain regulatory approvals for the commercialization of
NBT Paclitaxel in their respective territories.  NaPro is responsible for
supplying the Strategic Partners with NBT Paclitaxel for all of their clinical
and commercial requirements.  Under the terms of each agreement, IVAX and
Faulding pay a fixed price for NBT Paclitaxel for non-commercial sales.  For NBT
Paclitaxel sold commercially, Faulding pays NaPro a substantial share of gross
revenue.  For IVAX's commercial sales, IVAX  has agreed to pay NaPro on a cost
plus basis for NaPro's manufacture of NBT Paclitaxel and in addition to pay
NaPro a substantial share of IVAX's NBT Paclitaxel profit.

Faulding obtained regulatory approval and began marketing NBT Paclitaxel as a
generic pharmaceutical in Australia in January 1995 for the treatment of
refractory breast and ovarian cancers and is seeking approval to sell NBT
Paclitaxel in other countries in its defined territory. IVAX filed an
investigational new drug exemption ("IND") application for NBT Paclitaxel with
the FDA in June 1994. IVAX has completed the treatment phase of the Phase II/III
clinical trials with NBT Paclitaxel for three therapeutic indications including
refractory breast and ovarian cancers and Kaposi's Sarcoma and submitted a new
drug application ("NDA") to the FDA for Kaposi's Sarcoma on March 31, 1997.
There can be no assurance, however, as to whether IVAX will be successful in
obtaining any necessary regulatory approvals or successfully market NBT
Paclitaxel even if approval is obtained.

NaPro's EIP/TM technology is designed to allow the extraction, isolation and
purification of paclitaxel and other taxanes (compounds structurally similar to
paclitaxel that can be synthesized into paclitaxel) from renewable sources of
biomass such as needles and limbstock harvested from ornamental yew bushes.  In
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order to have access to a more stable and reliable source of Taxus biomass for
use in the production of NBT Paclitaxel, NaPro has entered into agreements with
Pacific Biotechnologies, Inc.  ("PBI"), a subsidiary of Pacific Regeneration
Technologies, Inc., one of Canada's largest reforestation companies (the "PBI
Agreement"), and Zelenka Nursery, Inc.  ("Zelenka"), one of the largest
horticulture companies in the United States (the "Zelenka Agreement"), each to
grow cloned ornamental yew bushes on a large scale. NaPro intends to supplement
its supply of biomass obtained from PBI and Zelenka by entering into additional
agreements with commercial growers of ornamental yew bushes. NaPro is currently
constructing a large scale commercial EIP/TM manufacturing facility with planned
capacity to meet the forecasted commercial needs of the Strategic Partners
through 1999. In addition, in order to increase production yields of NBT
Paclitaxel and lower its cost of manufacture, NaPro is developing a semi-
synthetic process for manufacturing NBT Paclitaxel from certain other taxanes
contained in renewable biomass sources.

Paclitaxel Overview

Cancer is the second leading cause of death in the United States with over one
million new cases diagnosed each year.  Cancer is generally treated by surgery,
radiation or chemotherapy or a combination of these therapies.  Paclitaxel,
approved less than four years ago, has become the largest selling of  the class
of cancer chemotherapy drugs known as cytotoxic agents.

Paclitaxel is a natural product that was recognized by the National Cancer
Institute (the "NCI") in 1963 as showing cytotoxic activity against leukemia
cells and inhibitory activity against a variety of tumors.  Over the next two
decades, researchers working under grants from the NCI conducted studies to
determine paclitaxel's structure and its mechanism of action.  The NCI studies
indicated that paclitaxel inhibits the normal action of microtubules in cancer
cell division.  Microtubules, located in the cytoplasm of cells, play a vital
role in cellular division.  Paclitaxel promotes microtubule assembly and blocks
normal microtubule disassembly in cells, thereby inhibiting cell division and
inducing death of cancer cells.  This cytoplasmic mechanism of action contrasts
with the nuclear mechanism of action of the majority of cytotoxic drugs which
kill the cell by attacking nuclear components such as DNA or RNA.

In June 1991, the NCI formalized a Collaborative Research and Development
Agreement for development of paclitaxel with BMS, the world's largest oncology
company.  BMS assumed development of paclitaxel which included completion of the
necessary clinical trials and manufacturing scale-up.  In June 1992, BMS
submitted an NDA to the FDA.  BMS received approval for the sale of paclitaxel
as a treatment for refractory ovarian cancer in December 1992 and approval for
the sale of paclitaxel as a treatment for refractory breast cancer in April
1994. BMS has publicly announced that their formulation of paclitaxel has
achieved world-wide commercial sales of approximately $813 million in 1996.

Paclitaxel is one of a family of compounds, commonly referred to as taxanes,
which share a hydrocarbon ring (diterpene) structure.  Taxanes are found
naturally in many parts of various species of yew trees and bushes.  The
concentration of taxanes in yew trees and bushes is very small, generally much
less than 500 parts per million, and accordingly, the process of extracting
taxanes from yew biomass is complicated and challenging. To arrive at a final
stage paclitaxel product for use in clinical trials and for commercialization,
several production approaches can be utilized. NaPro believes the two most
prevalent processes used today are conventional extraction and semi-synthesis.

In extraction, the manufacturing process must be designed to extract, isolate
and purify paclitaxel from yew biomass leaving behind other components,
including non-paclitaxel taxanes.  The extraction, isolation and purification
processes, however, are complicated since there are over 100 different taxanes
present in yew biomass.  In a semi-synthesis process, the initial extraction,
isolation and purification is similar to that of the conventional extraction
process, except that the process not only isolates paclitaxel, but also isolates
and subsequently converts through chemical synthesis certain other taxanes
(which are otherwise considered waste byproducts) into paclitaxel, thereby
increasing the yield of 
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paclitaxel from the same biomass source. The final product of either method must
have levels of impurity at or below acceptable regulatory standards.

Historically, the wild Pacific yew tree has been the primary source of yew
biomass.  Most species of Taxus, including the wild Pacific yew, grow slowly,
requiring a number of years to reach harvestable size. As a result of its slow
growing pattern, wild Taxus is generally found in old growth forests, frequently
the habitat of endangered species, including the spotted owl.  Biomass from the
wild Pacific yew tree has historically been obtained from the bark, which
generally requires destroying the tree.  As a result, there has been a
considerable amount of public debate and controversy in the United States and
other countries by environmental groups and others regarding the harvesting of
bark from the wild tree.  NaPro halted harvesting bark from wild Pacific yew
trees in 1994.  See "Corporate Strategy" and "Biomass; Manufacturing."

Other companies have developed taxane analogues which are similar, but not
chemically identical, to paclitaxel.  For example, Rhone-Poulenc Rorer, Inc.,
("RPR"), a large international pharmaceutical company, has developed docetaxel,
one such taxane analog, which is being marketed in various parts of the world
under the trademark Taxotere/R.  Taxotere/R has a different toxicity profile
from paclitaxel and has side effects not observed with paclitaxel.  In May 1996,
the FDA approved Taxotere/R for treatment of anthracycline-resistant breast
cancer in patients without impaired liver function.

Clinical Status of NBT Paclitaxel

Pursuant to the agreements between NaPro and the Strategic Partners, the
Strategic Partners have primary responsibility for designing and conducting
clinical trials and for pursuing regulatory approval of NBT Paclitaxel
throughout the world. NaPro has primary responsibility for carrying out the
procedures for regulatory approval relating to NaPro's manufacturing processes.
NaPro has filed confidential Drug Master Files ("DMF") and other information
containing certain of NaPro's proprietary manufacturing processes relating to
the manufacture of NBT Paclitaxel with regulatory agencies in the United States,
Australia, Canada and Europe.  In addition, NaPro performed the toxicological
and preclinical characterization necessary for an IND for extracted paclitaxel.

Existing regulatory approvals and statutes have a direct impact on the clinical
and marketing strategy being pursued by NaPro and its Strategic Partners.  In
December 1992, BMS obtained NDA approval in the United States for its paclitaxel
compound.  Under the Waxman-Hatch Act, a non-patented drug such as paclitaxel
which first gains approval through an NDA process is granted a five year period
of marketing exclusivity which prevents submission by another party of an
Abbreviated New Drug Application ("ANDA") for generic substitutes until such
period of exclusivity expires.  The exclusivity period in the United States
expires in December 1997.  The FDA will accept and review, however, an NDA
submitted by another party during this period of exclusivity.  A comparable
statute to the Waxman-Hatch Act exists in Europe, although the related period of
exclusivity is generally ten years.  For these reasons, IVAX has submitted an
NDA for NBT Paclitaxel. See "Government Regulation and Product Approvals."

IVAX.  IVAX is currently pursuing a strategy to obtain NDA approval of NBT
Paclitaxel in the United States for the treatment of refractory breast and
ovarian cancers and Kaposi's Sarkoma. IVAX filed an IND with the FDA in June
1994.  In October 1994, IVAX initiated its Phase I clinical trials of NBT
Paclitaxel in the United States and in May 1995 initiated Phase II/III clinical
trials.  IVAX has substantially completed Phase II/III studies using NBT
Paclitaxel in three indications, including refractory breast and ovarian
cancers. IVAX submitted an NDA for NBT Paclitaxel for Kaposi's Sarkoma on March
31, 1997. There can be no assurance that NBT Paclitaxel will prove safe and
effective, meet applicable regulatory standards or be successfully marketed.

Faulding.  In January 1995, Faulding received regulatory approval from the
Australian Therapeutic Goods Administration  ("TGA") to market ANZATAX/TM
(Faulding's brand name for NBT Paclitaxel) in Australia for the treatment of
refractory breast and ovarian cancers.  Under Australian law there is no
exclusivity period comparable to that provided by the Waxman-Hatch Act, and,
<PAGE>
 
therefore, approval of a generic substitute was possible without the need for
additional clinical trials.  Faulding did, however, conduct clinical
investigations with ANZATAX/TM (Faulding's brand name for NBT paclitaxel) in
order to support marketing in Australia and to support applications for
regulatory approval in other countries.  NaPro and Faulding have obtained
regulatory approval from the TGA for NaPro to supply NBT Paclitaxel to Faulding
from either its Canadian or United States manufacturing facilities.  Faulding is
also engaged in ongoing clinical research with NBT Paclitaxel with the goal of
improving the effectiveness of combination therapies utilizing NBT Paclitaxel
and expanding the number of disease indications treatable with NBT Paclitaxel.
Faulding has filed dossiers with certificates of free sale and requested
marketing approval in various territories including Hong Kong, Cyprus, Egypt,
Oman, Turkey, Kuwait, Saudi Arabia, Malaysia, Thailand, Indonesia and the
Philippines.  There can be no assurance, however, that Faulding will receive
approval in any of these territories or will successfully market NBT Paclitaxel,
even if such approvals are received.

NaPro plans to submit a DMF in support of a Supplemental NDA "SNDA" for NBT
Paclitaxel manufactured through a semi-synthesis process.  An SNDA cannot be
filed until such time, if ever, as an NDA is approved for NBT Paclitaxel.  Based
on the SNDA approval process for BMS, NaPro believes additional toxicological
and stability data may be required prior to submission of an SNDA for
manufacturing NBT Paclitaxel through a semi-synthesis process.  It is not
anticipated that an SNDA could be filed before 1999, since an approved NDA will
need to exist before an SNDA can be submitted.  The requirements for an SNDA
have not been discussed with the FDA and, therefore, are uncertain.  As such,
there can be no assurance that the semi-synthetic process being developed by
NaPro will receive regulatory approval.  See "Government Regulation and Product
Approvals."

Biomass; Manufacturing

Biomass.  Paclitaxel and other taxanes necessary for the production of NBT
Paclitaxel are present in many parts of various species of yew trees and bushes.
NaPro's EIP/TM technology is designed to allow extraction and purification of
paclitaxel and other taxanes, which can be synthesized into paclitaxel, from
renewable sources of biomass such as needles and limbstock harvested from
ornamental yew trees and bushes.

In order to have access to a stable long-term supply of biomass for use in the
production of NBT Paclitaxel, NaPro entered into the PBI Agreement in 1993 and
the Zelenka Agreement in 1996 and may enter into additional agreements to
purchase biomass and mature yew bushes from commercial growers. NaPro believes
that the plantations being developed under these agreements will produce
adequate biomass to support the commercial requirements of the Strategic
Partners for the foreseeable future. By planting and propagating a reliable and
renewable homogeneous biomass source, NaPro believes that it may be able to
reduce its raw material cost, while at the same time allowing it to increase the
yield of NBT Paclitaxel. NaPro made its first small scale harvest pursuant to
the PBI Agreement in the first quarter of 1996 and pursuant to the Zelenka
Agreement in the second quarter of 1996. There can be no assurance that the use
of the ornamental yew bushes and the use of needles and limbstock of such bushes
will be approved by the FDA for use in manufacturing NBT Paclitaxel or that
current sources of biomass will be sufficient to meet NaPro's needs.

Manufacturing. Crude paclitaxel is extracted from cultivated yew bushes by third
party extractors and delivered to NaPro's manufacturing facilities in Boulder,
Colorado and British Columbia, Canada. At these two facilities, the impure
paclitaxel is isolated and purified and the resulting active drug substance is
delivered to Faulding's final fill and finish facility in Australia where NBT
Paclitaxel is formulated by Faulding for final packaging for the Strategic
Partners. On a combined basis, NaPro believes these facilities would have
adequate capacity to meet clinical and commercial demand through the launch of
commercial sales of NBT Paclitaxel in the United States. Each of NaPro's small
scale manufacturing facilities has been inspected by the TGA and approved for
the commercial production of NBT Paclitaxel for sale in Australia. NaPro plans
to seek FDA approval of its manufacturing processes, which utilize non-bark
sources of biomass obtained from the needles and limbstock of ornamental yew
trees and 
<PAGE>
 
bushes. NaPro has manufactured a number of lots of paclitaxel using its new
process including the use of needles and limbstock from its plantations, and has
submitted data from these lots in the initial NDA filing. There can be no
assurance that such regulatory approval will be obtained.

NaPro is currently constructing a large scale commercial manufacturing facility,
which is being built in Boulder, Colorado. NaPro expects to substantially
complete construction and validation of this facility in 1997. The NDA
submission established NaPro's pilot scale facility as the initial manufacturing
site. The large scale commercial facility has been submitted in the NDA as an
alternate facility, requiring NaPro to prepare two manufacturing facilities for
inspection and inclusion in the NDA. NaPro anticipates the large scale
commercial facility and processes intended to be used for commercial launch of
NBT Paclitaxel in the United States will be inspected by the FDA upon completion
of validation, but prior to approval of the NDA for NBT Paclitaxel .

There can be no assurance that NaPro will succeed in adapting its EIP/TM
technology for large scale commercial manufacturing, that the facility will be
completed or validated within the time periods indicated, that such facility and
manufacturing processes will receive necessary regulatory approvals or, even if
approved, will be capable of producing NBT Paclitaxel in the quantities
necessary to satisfy the requirements of the Strategic Partners.

NaPro currently contracts with a third party for small-to-mid-scale extraction
of paclitaxel.  In order for NaPro to meet the expected increase in demand for
NBT Paclitaxel once commercialized, NaPro must either contract out part of its
extraction requirements or build a large scale commercial extraction facility.
There can be no assurance that a third party contract for such large scale
extraction can be obtained on commercially reasonable terms or that a large
scale extraction facility can be constructed in a timely fashion and receive the
necessary regulatory approvals.  The failure of NaPro to secure a large scale
commercial extraction contract or to construct a regulatory-approved large scale
commercial extraction facility on a timely basis may have a material adverse
effect on NaPro.

In order to increase its manufacturing capacity, NaPro is also developing, and
has applied for patent protection for, a semi-synthesis process for
manufacturing NBT Paclitaxel from certain other taxanes contained in renewable
biomass sources. Semi-synthesis manufacturing initially involves extraction of
paclitaxel and other taxanes from yew sources.  Unlike extraction, however,
which attempts to isolate and purify only paclitaxel, semi-synthesis isolates
and purifies certain additional taxanes.  Through a chemical synthesis process,
these other taxanes are converted into paclitaxel.  Accordingly, since both
paclitaxel and other taxanes are used in semi-synthesis, NaPro expects to be
able to increase the paclitaxel yield from its biomass sources using a semi-
synthesis process.  The use of semi-synthesis will require receipt of additional
regulatory approvals, of which there can be no assurance.

Strategic Alliances

NaPro has formed strategic alliances through long-term exclusive agreements with
each of Faulding and IVAX.  Pursuant to such arrangements, each Strategic
Partner has agreed to fund and, with NaPro's input, undertake the clinical
trials required to obtain regulatory approvals for commercializing NBT
Paclitaxel in their respective territories.  NaPro is responsible for supplying
the Strategic Partners with NBT Paclitaxel for clinical trials and commercial
purposes and each Strategic Partner is required to purchase all of its
paclitaxel requirements from NaPro.  Under the terms of each agreement, IVAX and
Faulding pay a fixed price for NBT Paclitaxel for non-commercial sales.  For NBT
Paclitaxel sold commercially, Faulding pays NaPro a substantial share of gross
revenue.  For IVAX's commercial sales, IVAX will pay NaPro on a cost plus basis
for NaPro's manufacture of NBT Paclitaxel and in addition will pay NaPro a
substantial share of IVAX's NBT Paclitaxel profit (as determined in accordance
with the IVAX Agreement (as defined herein)). NaPro believes that through its
agreements with Faulding and IVAX, it will be able to take advantage of their
resources, including expertise in clinical testing and sales, marketing and
distribution. As a result of these strategic alliances, NaPro believes it may be
able to compete 
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more effectively with BMS, RPR, generic drug manufacturers and other companies,
research organizations and academic institutions that are developing paclitaxel
and are attempting to develop new and advanced forms of anti-cancer drugs. There
can be no assurance, however, that the Strategic Partners will succeed in
obtaining the necessary regulatory approvals to market NBT Paclitaxel in the
United States or elsewhere or that they will market NBT Paclitaxel successfully.

Faulding.  Faulding, Australia's largest domestic pharmaceutical company with
1996 sales of approximately $1.2 billion, actively markets anti-cancer
pharmaceuticals and other health care products in Australia, Southeast Asia and
other countries throughout the world.  In 1992, NaPro originally entered into a
development and marketing agreement (the "Faulding Agreement") with Faulding.
The Faulding Agreement, as amended and restated, has an initial term of 20 years
and will continue thereafter from year to year unless terminated in writing by
either party.

The Faulding Agreement grants Faulding the exclusive right to develop and market
NBT Paclitaxel in ten countries, including Australia, New Zealand and much of
Southeast Asia (the "Faulding Territory"). The Faulding Agreement also grants
Faulding the non-exclusive right to sell NBT Paclitaxel in certain countries in
the Middle East. Pursuant to the Faulding Agreement, Faulding is required to
purchase all of its requirements of paclitaxel from NaPro, except in certain
circumstances where NaPro is unable to supply Faulding's requirements.

In a March 1995 amendment to the Faulding Agreement, Faulding agreed to convert
certain prepaid product sales and deferred revenue aggregating $1.1 million,
which would have become due in 1995 and 1996, into a note in the aggregate
principal amount of $1.2 million, which matures in 1997.  The terms of the note
provide that NaPro will pay interest quarterly on amounts which would have been
payable to Faulding had the conversion not occurred, at an annual rate of 9%.

Faulding may terminate the Faulding Agreement: (i) upon the reorganization or
insolvency of NaPro; (ii) if Faulding becomes controlled by a pharmaceutical
company that sells paclitaxel in the Faulding territory; (iii) if NaPro becomes
controlled by IVAX or BMS; (iv) if NaPro is purchased by a pharmaceutical
company which sells paclitaxel in the Faulding territory and that company
refuses to be bound by the terms of the Faulding Agreement; or (v) if NaPro is
unable to meet the paclitaxel supply requirements of Faulding.  NaPro may
terminate the Faulding Agreement: (i) upon the reorganization or insolvency of
Faulding; or (ii) in certain circumstances, upon a change in control of
Faulding.

NaPro is required to indemnify Faulding pursuant to the Faulding Agreement for
any defect in the NBT Paclitaxel that is shipped to Faulding and for uncured
breaches of NaPro's warranties or obligations under the Faulding Agreement.
Faulding is required to indemnify NaPro against all losses (i) resulting from a
defect in a product containing NBT Paclitaxel manufactured by Faulding except
where such defect is the fault of NaPro, (ii) resulting from a product
containing NBT Paclitaxel formulated, stored, handled, promoted, distributed,
registered or sold by Faulding and (iii) for uncured breaches of Faulding's
representations and warranties under the Faulding Agreement.

In connection with  NaPro's initial public offering, completed August 1, 1994,
Faulding purchased 400,000 shares of NaPro's Nonvoting Common Stock and 400,000
warrants to purchase Nonvoting Common Stock.  In 1996 Faulding exercised 200,000
of the warrants.

IVAX.  IVAX, a diversified international health care company with 1996 sales of
approximately $1.2 billion, is engaged in the research, development, manufacture
and sale of branded and generic pharmaceuticals and other related health care
and personal products and specialty chemicals.  In 1993, NaPro entered into a
development and marketing agreement (the "IVAX Agreement") with IVAX, through
IVAX's subsidiary, Baker Norton Pharmaceuticals ("BNP").  The IVAX Agreement has
an initial term of 20 years and will continue thereafter from year to year
unless terminated in writing by either party.

The IVAX Agreement grants IVAX the exclusive right to develop and market NBT
Paclitaxel in the United States and in every country outside the Faulding
<PAGE>
 
Territory except for the Vatican City, China, the former Soviet Union and the
Middle East where such right is non-exclusive.  Pursuant to the IVAX Agreement,
IVAX is required to purchase all of its requirements of paclitaxel from NaPro
except in certain circumstances where NaPro is unable to supply IVAX's
requirements.

Either IVAX or NaPro may terminate the IVAX Agreement if the other party
materially breaches the agreement under certain circumstances.  In addition,
IVAX may terminate the IVAX Agreement if NaPro fails to meet the paclitaxel
supply requirements of IVAX for a continuing three year period.  Under certain
circumstances, IVAX may obtain certain manufacturing information from NaPro and
have NBT Paclitaxel manufactured by third parties.

NaPro is required to indemnify IVAX pursuant to the IVAX Agreement for any
defect in the NBT Paclitaxel that is shipped to IVAX, for certain claims of
patent or trade secret infringement relating to the manufacture, composition, or
sale of NBT Paclitaxel supplied to IVAX and for uncured breaches of certain of
NaPro's representations and warranties under the IVAX Agreement.  IVAX is
required to indemnify NaPro against all losses (i) resulting from a defect in a
product containing NBT Paclitaxel manufactured by IVAX, (ii) resulting from a
product containing NBT Paclitaxel formulated, stored, handled, promoted,
distributed, registered or sold by IVAX, to the extent the defect is caused by
IVAX, and (iii) for uncured breaches of IVAX's representations and warranties
under the IVAX agreement.

IVAX, through its subsidiary D&N Holding Company ("D&N"), currently owns
1,126,398 shares of NaPro's common stock (the "Common Stock").  See "Security
Ownership of Certain Beneficial Owners and Management."

Marketing and Sales

Marketing and sales of NBT Paclitaxel will be conducted by the Strategic
Partners.  NaPro has no sales force and has only limited marketing capabilities
and has no present intention to establish a sales or marketing force.  NaPro
expects that sales to the Strategic Partners will account for substantially all
of NaPro's revenue for the foreseeable future.  As a result, the loss of either
Strategic Partner as a customer, in the absence of a comparable alternative
strategic alliance arrangement, may have a material adverse effect on NaPro. See
"Strategic Alliances."

Competition

The biopharmaceutical industry is an expanding and rapidly changing industry
characterized by intense competition for financing, executive talent,
intellectual property and product sales.  NaPro competes with all entities
developing and producing therapeutic agents for cancer treatment.  The basis
upon which NaPro competes is through its ownership and utilization of technology
that it believes to be superior to others and through its relationships with the
Strategic Partners to obtain regulatory approvals and to market its products.
The success of competitors in entering the market for paclitaxel may reduce
NaPro's potential market share and reduce the price of NBT Paclitaxel, each of
which could have a material adverse effect on NaPro.  In addition, regulatory
approval and marketing are being handled exclusively by the Strategic Partners.
Although NaPro believes the Strategic Partners have capable clinical and
marketing abilities, there can be no assurance that the Strategic Partners will
be capable or effective in gaining regulatory approval on a timely basis, if at
all, or competing on a global basis with existing or new competitors.

BMS, the world's largest oncology company, is already marketing paclitaxel
commercially in the United States, Australia, Canada, Europe and certain other
territories.  In addition, RPR has developed a proprietary analog of paclitaxel,
docetaxel, which is marketed under the trademark Taxotere/R. Taxotere/R has a
microtubule binding mechanism of action similar to that of paclitaxel.
Taxotere/R is approved in the United States, European Community, Australia,
Canada and a number of other countries. Taxotere/R is approved in the United
States for treatment of anthracycline-resistant breast cancer in patients
without impaired liver function.  Treatment with Taxotere/R, however,  may cause
certain side 
<PAGE>
 
effects not observed with paclitaxel. It is anticipated, however, that
Taxotere/R may compete with paclitaxel, and thereby reduce overall paclitaxel
sales.

Furthermore, upon expiration in December 1997 of the five-year marketing
protection from generic competition currently provided to BMS's formulation of
paclitaxel by the Waxman-Hatch Act, NaPro may be subject to competition from
generic paclitaxel manufacturers.  In Europe, a similar exclusivity period will
end in most cases 10 years after BMS' initial approval.  NaPro is aware of
several pharmaceutical companies which have stated that they are in the process
of developing generic paclitaxel in the United States, Canada,  Mexico and
Europe.  Finally, academic and research organizations and pharmaceutical and
biotechnology companies are pursuing, among other things, genetically engineered
drugs, chemical synthesis and cell-tissue culture which may compete with NaPro's
products or technology.  In addition, certain companies are pursuing the
production of paclitaxel and other taxanes from natural product extraction
techniques.

Many of NaPro's competitors, most notably BMS and RPR, have substantially
greater capital resources, research and development capabilities, manufacturing
and marketing resources, and experience than NaPro.  NaPro expects BMS to
compete intensely to maintain its dominance of the paclitaxel market, including
through pursuit of an aggressive patent strategy.  NaPro's competitors may
succeed in developing products that are more effective or less costly than any
that may be developed by NaPro, or that gain regulatory approval prior to
NaPro's products. Many companies and research institutions are also seeking
means to obtain paclitaxel and taxanes from non-bark renewable biomass
components of yew trees and other sources in order to increase paclitaxel
yields, avoid environmental concerns and reduce the cost of biomass.  In
addition, NaPro is aware of several potential competitors that have developed
and patented or are developing various processes for producing paclitaxel and
paclitaxel-related substances semi-synthetically, which may result in a low-
cost, pure paclitaxel.  The discovery by a third party of a cost-effective means
to fully synthesize paclitaxel in commercial quantities or the manufacture of
taxane derivatives or analogs that are more efficacious than paclitaxel in
treating cancer could have a material adverse effect on NaPro.

Patents and Proprietary Technology

NaPro's success depends, in part, on its ability to obtain patents, maintain
trade secret protection and operate without infringing on the proprietary rights
of third parties.  Where appropriate, NaPro seeks protection of its proprietary
technology by applying for patents in the United States and abroad.  NaPro owns
three issued United States patents and has several United States patent
applications pending.  NaPro has filed patent applications in certain other
areas of the world and expects to make additional filings as it believes
appropriate. In addition, NaPro has obtained licenses from third parties to use
their proprietary technology, for which patent applications have been filed in
the United States and in certain other areas of the world.  There can be no
assurance that either NaPro's or its licensors' existing patent applications
will become issued patents or that, if issued, the coverage claimed in the
applications will not be significantly reduced prior to issuance or, that NaPro
will be able to obtain any necessary or desired additional licenses to patents
or technologies of others or that NaPro will be able to develop its own
additional patentable technologies.  In addition, there can be no assurance that
any future patents issued to NaPro, if any, will provide it with competitive
advantages or that products or processes covered by such patents will not be
challenged as infringing upon the patents or proprietary rights of others or
that any such patents will not be invalidated, or that the patents or
proprietary rights of others will not have a material adverse effect on the
ability of NaPro to do business.  Patent applications in the United States are
maintained in secrecy until patents are issued and patent applications in
certain other countries generally are not published until more than 18 months
after they are filed.  In addition, publication of scientific or patent
literature often lags behind actual discoveries.  As a result, NaPro cannot be
certain it or any of its licensors was the first creator of inventions covered
by NaPro's or its licensors' pending patent applications or that NaPro or its
licensors were the first to file such 
<PAGE>
 
applications. Furthermore, there can be no assurance that others will not
independently develop similar technology or, if patents are issued to NaPro,
that others will not design technology to circumvent NaPro's patents or
proprietary rights.

Much of NaPro's proprietary technology, including much of its EIP/TM technology,
is not protected by patents and is held by NaPro as trade secrets.  NaPro's
success will depend in part on its ability to protect the trade secrets relating
to extracting, isolating and purifying paclitaxel as well as to other
technology. NaPro relies on proprietary know-how and confidential information
and employs various methods, such as entering into confidentiality and non-
compete agreements with its current employees and with third parties to whom it
divulges proprietary information, to protect the processes, concepts, ideas and
documentation associated with its technologies, including its paclitaxel
production process. Such methods may afford incomplete protection and there can
be no assurance that NaPro will be able to adequately protect its trade secrets
or that other companies will not acquire information which NaPro considers to be
proprietary. In addition, if NaPro is unable to fulfill its contractual
obligations to IVAX relating to its supply of NBT Paclitaxel, NaPro may, under
certain circumstances, be contractually obligated to disclose proprietary
manufacturing information to IVAX.  The inability to maintain its trade secrets
for its exclusive use could have a material adverse effect on NaPro.

The patent position of pharmaceutical companies generally is highly uncertain
and involves complex legal and factual questions.  Paclitaxel is an
unpatentable, naturally-occurring compound.  Various compositions containing
paclitaxel, and also various processes and other technologies, however,
including those relating to extracting paclitaxel and preparing the drug for
finished formulation, are or may be patented.  In addition, certain methods of
administering paclitaxel are or may be patented.  Certain of these patents are
owned or controlled by BMS and RPR, two of NaPro's primary competitors.  NaPro
is aware of competitors and potential competitors who are pursuing patent
protection for various aspects of the extraction, preparation, administration
and production of natural and semi-synthetic paclitaxel.  In the event that
NaPro's technology, products or activities are deemed to infringe upon the
rights of others, NaPro could be subject to damages or enjoined from using such
technology, or NaPro could be required to obtain licenses to utilize such
technology.  No assurance can be given that any such licenses would be made
available on terms acceptable to NaPro, or at all.  If NaPro were unable to
obtain such licenses or was enjoined from using its technology, it could
encounter significant delays in product market introductions while it attempted
to design around the patents or rights infringed upon, or could find the
development, manufacture or sale of products to be foreclosed, any of which may
have a material adverse effect on NaPro.  In addition, NaPro could experience a
loss of revenue and may incur substantial cost in defending itself and
indemnifying the Strategic Partners in patent infringement or proprietary rights
violation actions brought against it or either of the Strategic Partners.  NaPro
could also incur substantial cost in the event it finds it necessary to assert
claims against third parties to prevent the infringement of its patents and
proprietary rights by others.  Participation in such infringement proceedings
could have a material adverse effect on NaPro, even if the eventual outcome were
favorable.  See "Strategic Alliances," and "Australian Petty Patents."

Australian Petty Patents

In September 1993 and August 1994, BMS received two Australian petty patents
claiming certain methods of administering paclitaxel.  Australian petty patents
have a maximum term of six years, are allowed to contain only three claims (one
independent and two dependent) and are granted on the basis of a prior art
search which is significantly more limited in scope than the searches done prior
to issuance of standard patents.  Following publication of these patents,
Faulding instituted legal action to revoke these patents on the grounds that the
patent claims are invalid and that the subject matter claimed in the patents was
already known prior to the claimed date of invention.  In February 1995, BMS
brought legal action against Faulding, based upon these patent claims, seeking
an injunction against Faulding to prevent Faulding from marketing NBT Paclitaxel
pursuant to Faulding's generic approval.  In March 1995, the Australian court
<PAGE>
 
denied BMS's request to enjoin Faulding from marketing NBT Paclitaxel.  NaPro
believes, based on communications with Faulding, that BMS's claims will likely
be resolved in conjunction with Faulding's revocation action in  1997.  No
assurance can be given, however, that BMS will not obtain an injunction against
Faulding which could prevent Faulding from marketing NBT Paclitaxel in
Australia.  If Faulding were prevented from marketing NBT Paclitaxel in
Australia pursuant to its generic approval, Faulding would be unable to market
NBT Paclitaxel for commercial sale in Australia until such time as Faulding
obtains its own non-generic approval which will require substantial clinical
trials and regulatory approval. There can be no assurances, however, that
Faulding would be able to obtain its own non-generic approval in such
circumstances.  If BMS is successful in enforcing its patent claims against
Faulding such that Faulding is unable to sell NBT Paclitaxel in Australia,
NaPro's business, financial condition and results of operations could be
materially and adversely affected.  See "Patents and Proprietary Technology,"
and "Strategic Alliances."

Government Regulation and Product Approvals

The production and marketing of NBT Paclitaxel and NaPro's research and
development activities are subject to extensive regulation by numerous
governmental authorities in the United States and other countries.  In the
United States, drugs are subject to FDA regulation.  The Federal Food, Drug and
Cosmetic Act ("FDC Act"), and the regulations promulgated thereunder, and other
federal and state statutes and regulations govern, among other things, the
testing, manufacture, quality, safety, efficacy, labeling, storage, advertising
and promotion of pharmaceutical products.  Product development within this
regulatory framework takes a number of years and involves the expenditure of
substantial resources.  The marketing of drugs in the United States may not
begin without FDA approval.

The steps required before a pharmaceutical product may be marketed in the United
States include: (i) preclinical laboratory tests, animal pharmacology,
toxicology studies and formulation studies; (ii) the submission to the FDA of an
IND for human clinical testing, which must become effective before human
clinical trials commence; (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the drug; (iv) the submission of
an NDA to the FDA; and (v) FDA approval of the NDA prior to any commercial sale
or shipment of the drug.  In addition to safety and efficacy requirements, the
FDA requires the applicant to demonstrate to the FDA's satisfaction that it can
manufacture the drug in compliance with the FDA's current Good Manufacturing
Practices ("cGMP") regulations.  In addition to obtaining FDA approval for each
product, each domestic drug manufacturing establishment must be registered with
the FDA. Domestic drug manufacturing establishments are subject to regular
inspections by the FDA and must comply with cGMP regulations.  To supply
products for use in the United States, foreign manufacturing establishments must
comply with cGMP regulations and are subject to periodic inspection by the FDA
or by corresponding regulatory agencies in their home countries under reciprocal
agreements with the FDA.

Preclinical studies include the laboratory evaluation of in vitro and in vivo
cytotoxicity, pharmacology, product chemistry and formulation, as well as animal
studies to assess the potential safety and activity of the product.  Compounds
must be formulated according to cGMP, and preclinical safety tests must be
conducted by laboratories that comply with FDA regulations regarding good
laboratory practices.  The results of the preclinical tests are submitted to the
FDA as part of an IND and are reviewed by the FDA prior to the commencement of
human clinical trials.  The data in an IND consists of animal data on safety,
possibly human data from a related use, and chemistry, formulation and
manufacturing data.  If the FDA objects, the study may not commence.  There can
be no assurance that submission of an IND will result in FDA authorization to
commence clinical trials.

Clinical trials involve the administration of the investigational new drug to
patients under the supervision of a qualified principal investigator.  Clinical
trials must be conducted in accordance with good clinical practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated.  Each protocol must be
<PAGE>
 
submitted to the FDA as part of the IND. Each clinical study must be conducted
under the auspices of an Institutional Review Board ("IRB") at the institution
at which the study will be conducted.  The IRB will consider, among other
things, the safety of human subjects and the possible liability of the
institution.   The company sponsoring the trials is required to select qualified
investigators to supervise the administration of the drug and to ensure that the
trials are adequately monitored in accordance with FDA regulations.

Clinical trials typically are conducted in three sequential phases, which may
overlap.  In Phase I, the initial introduction of the drug into healthy
subjects, the drug is tested for safety (adverse effects), dosage tolerance,
metabolism, distribution, excretion and pharmacodynamics (clinical
pharmacology).  Phase II involves studies in a limited patient population to:
(i) determine the efficacy of the drug for specific, targeted indications; (ii)
determine dosage tolerance and optimal dosage; and (iii) identify possible
adverse effects and safety risks. When a compound is found likely to be
effective and to have an acceptable safety profile in Phase II evaluations,
Phase III trials are undertaken to evaluate further clinical efficacy and to
test further for safety within an expanded patient population at geographically
dispersed clinical study sites. Clinical trials require substantial time and
effort.  There can be no assurance that Phase I, Phase II or Phase III testing
will be completed successfully within any specific time period, if at all.
Furthermore, although certain clinical trials have been completed to date,
NaPro, the Strategic Partners or the FDA may modify, suspend or terminate
clinical trials at any time if they feel that the subjects or patients are being
exposed to an unacceptable health risk.

The results of the pharmaceutical development, preclinical studies and clinical
studies are submitted to the FDA in the form of an NDA for approval of the
marketing and commercial shipment of the drug.  An NDA is a systematic
compilation of data, analysis and conclusions on a new drug product based on
studies conducted under an IND.  The NDA testing and approval process requires
substantial time and effort, and there can be no assurance that approval will be
granted on a timely basis, if at all.  The FDA may refuse to approve an NDA if
the FDA does not view the NDA as containing adequate evidence of the safety and
efficacy of the drug, or if other applicable regulatory criteria are not
satisfied.  In addition, the FDA may require additional testing or information,
or require post-marketing testing and surveillance. Notwithstanding the
submission of complete data, the FDA may ultimately decide that the application
does not satisfy its criteria for approval.  Moreover, if regulatory approval of
a drug is granted, such approval may entail limitations on the indicated uses
for which the drug may be marketed.  Finally, product approvals may be withdrawn
if compliance with regulatory standards is not maintained or if problems occur
following initial marketing or if previously unknown information demonstrates a
lack of safety or effectiveness.  Following an approved NDA, an SNDA may be
submitted to the FDA which requests a change in the existing approval.  An SNDA
can be for changes in manufacturing, quality control or clinical data or for
changes in product labeling such as indications or warnings.

Manufacturers of drugs sold in the United States are required to satisfy the FDA
that their manufacturing facilities and processes adhere to applicable standards
for cGMP and to engage in extensive record keeping and reporting.  Thus, even if
regulatory approval for NBT Paclitaxel is granted, NaPro's current and any
future facilities will be subject to periodic review and inspections by the FDA
or the analogous regulatory authorities of other countries for compliance with
cGMP or similar foreign regulatory standards. Compliance with cGMP regulations
requires substantial time, attention and financial resources.  Following
inspections of NaPro's United States and Canadian manufacturing facilities by a
cGMP Auditor of the Australian TGA, the TGA issued approvals to NaPro as an
Australian cGMP compliant paclitaxel manufacturer.  NaPro's facilities, however,
have not been inspected by the FDA for regulatory compliance purposes.  There
can be no assurance that the FDA or foreign regulatory authorities other than
the TGA will find NaPro's current facilities or facilities being constructed to
be in compliance with United States cGMP regulations or analogous foreign
standards. Subsequent discovery of previously unknown problems with a product or
NaPro's manufacturing facilities may result in restrictions, including
withdrawal of the product from the market.  Failure to comply with the
applicable regulatory requirements by either NaPro or its Strategic Partners
could, among other things, 
<PAGE>
 
result in criminal prosecution and fines, product recalls, product seizures and
operating restrictions.

NaPro has met with the FDA to discuss technical issues associated with the its
DMF in support of the approval of its bulk drug product as part of IVAX's NDA.
In these meetings,  NaPro learned that the pilot scale facility, which
manufactured the drug used in the IVAX clinical trials, needed to be inspected
for approval in the initial NDA.  The scaled-up commercial facility will be
submitted in the NDA as an alternate facility.  This has resulted in requiring
NaPro to prepare two "commercial" facilities for FDA approval, which was not
anticipated and requires the expenditure of more resources than originally
planned.  The biomass strategy employing plantation-grown ornamental yews was
also discussed with the FDA.  NaPro believes that the necessary technical and
environmental requirements for approval will be met in the DMF in support of the
NDA.

NaPro is also subject to United States laws and regulations applicable to
exporting drugs.  On April 26, 1996, the export provisions in the FDC Act were
amended in Chapter 1A of Title II, Supplemental Appropriations For The Fiscal
Year Ending September 30, 1996, in the "FDA Export Reform and Enhancement Act of
1996" to authorize the export of a drug before marketing approval is obtained in
the United States, to any country, if the drug (a) complies with the laws of the
importing country, and (b) has valid marketing authorization by the appropriate
authority in a country listed by the statute, one of which is Australia.  NaPro
has received valid marketing authorization from Australia.  Thus, if the other
statutory conditions are met, NaPro believes that future exports from the United
States of NBT Paclitaxel labeled in accordance with the laws of Australia and,
for countries other than Australia, of the importing country, should be
permissible without an FDA permit or other FDA approval although no assurance
can be given.

NaPro is also subject to, among others, the regulations of Canada, the Province
of British Columbia, the United States Environmental Protection Agency, the
Department of Interior (United States Fish and Wildlife Services and the Bureau
of Land Management), the Department of Agriculture (United States Forest
Service) and other countries and regulatory agencies.  Pursuant to the National
Environmental Policy Act, certain United States agencies have prepared an
Environmental Impact Statement that addresses the impact of harvesting wild
Pacific yew trees, including cutting down wild Pacific yew trees on federally-
managed land.  NaPro is also subject to federal, state and local laws and
regulations governing the use and disposal of hazardous materials as well as
regulations imposed by the Occupational Safety and Health Administration
governing worker safety.  There can be no assurance that NaPro is at all times
in complete compliance with all such requirements.  NaPro has made and will
continue to make expenditures to comply with environmental requirements.
Compliance with these regulations is time-consuming and expensive.  The failure
to comply with these regulations, however, could have a material adverse effect
on NaPro's business, financial condition and results of operations.

The adoption by federal, state or local governments of significant new laws or
regulations or a change in the interpretation or implementation of existing laws
or regulations relating to environmental or other regulatory matters could
increase the cost of producing products, delay regulatory approval or otherwise
adversely affect NaPro's ability to produce or sell NBT Paclitaxel or other
products.  Adverse governmental regulations which might arise from future
legislative or administrative regulations or other actions cannot be predicted.
In addition, NaPro's activities have been opposed by the Oregon Natural
Resources Council ("ONRC") because of their concern over wild Pacific yew in old
growth forests.  The ONRC and the FDA have reached an agreement on the National
Environmental Policy Act ("NEPA") requirements for NDAs, ANDAs and INDs
involving more than 200 patients involving paclitaxel from Pacific yew trees.
The agreement provides that an applicant shall include an Environmental
Assessment ("EA") which will identify all sources of Pacific yew which are
expected to be harvested in connection with the manufacture of paclitaxel
relating to the application.  The FDA  is to subject such EAs to the NEPA
process and shall complete and issue a Finding of No Significant Impact
("FONSI"), or an Environmental Impact Statement ("EIS") and Record of Decision
(ROD) as required 
<PAGE>
 
by NEPA before approving any NDA or ANDA involving paclitaxel derived from or
otherwise involving the Pacific yew tree. Because NaPro relies on plantation-
grown ornamental yews, and it will not harvest any Pacific yew trees to
manufacture paclitaxel for a marketed product, it believes that the ONRC-FDA
Agreement requirements will be met in the NDA and DMF and that these
requirements will not jeopardize the NDA approval. Even though NaPro no longer
harvests biomass from the bark of the wild Pacific yew, there can be no
assurance that the ONRC and other environmental activist groups will not oppose
other activities of NaPro, which may have the effect of delaying or halting
production of NBT Paclitaxel, each of which could have a material adverse effect
on NaPro's business, financial condition and results of operations.

Outside the United States, NaPro's ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authority. This foreign regulatory approval process includes all of the risks
associated with FDA approval set forth above.

NaPro has filed confidential DMFs and other documents containing certain of
NaPro's proprietary manufacturing processes with regulatory agencies in the
United States, Australia, Canada and Europe, relating to NaPro's manufacture of
NBT Paclitaxel.  Faulding, referring to NaPro's Australian DMF, has received
marketing approval in Australia for NBT Paclitaxel for treating refractory
ovarian and breast cancers.  Additionally, Faulding has completed clinical
trials with NBT Paclitaxel in Australia, which may form the basis for
applications for further marketing approvals in Australia and other countries
where Faulding has the right to market NBT Paclitaxel.  Faulding is also engaged
in ongoing clinical research with NBT Paclitaxel with the goal of improving the
effectiveness of paclitaxel treatment in combination therapies and expanding the
number of disease indications treatable with paclitaxel.  There can be no
assurance that Faulding's efforts to expand the use of NBT Paclitaxel will be
successful.

IVAX, using NaPro's United States DMF, filed an IND with the FDA in June 1994
relating to NBT Paclitaxel and began its Phase I clinical trials relating to NBT
Paclitaxel in the United States in October 1994.  IVAX began Phase II/III
clinical trials in May 1995.  Based upon communications from IVAX, it is
estimated that  IVAX  will file a NDA seeking commercial approval to sell NBT
Paclitaxel in the United States in 1997.  No assurance can be given, however,
that NBT Paclitaxel will prove to be safe and effective in clinical trials, that
IVAX will file the NDA within the time period indicated, or that IVAX will
complete any clinical trials or obtain regulatory approvals for NBT Paclitaxel
in a timely manner, or at all, to market NBT Paclitaxel in the United States or
other countries.

Research and Development

During the years ended December 31, 1994, 1995 and 1996, NaPro spent
approximately $3.9 million, $4.6 million and $6.8 million, respectively, on
Company sponsored research and development activities and to produce NBT
Paclitaxel sold to its Strategic Partners.  Research and development is expected
to remain a significant cost component of NaPro's business.  In the short term,
research and development is expected to concentrate primarily on: (i) improving
paclitaxel yield and reducing production cost; (ii) developing NaPro's semi-
synthesis process for paclitaxel production; and (iii) improving the yields of
NaPro's production methodology for processing needles and limbstock.  NaPro will
focus its internal efforts on process development and plans to contract out
research considered essential but for which it lacks facilities or staff.  NaPro
also intends to engage in early stage research and development to identify other
potential natural product pharmaceuticals.

Foreign and Domestic Operations; Export Sales

The following table sets forth, for the past three fiscal years revenue,
profitability (operating loss),and identifiable assets attributable to NaPro's
U.S.  and foreign operations (amounts in thousand dollars):
<PAGE>
 
<TABLE>
<CAPTION>
 
                                      YEAR ENDED DECEMBER 31
                                   ----------------------------
                                     1994      1995      1996
                                   --------  --------  --------
<S>                                <C>       <C>       <C>
Sales to Unaffiliated Customers
 United States                     $   854   $ 2,054   $ 1,692
 Canada                                148       569     1,781
                                   -------    ------    ------
  Total Sales (1)                    1,002     2,623     3,473
 
Operating Loss
 United States                      (5,914)   (3,851)   (6,719)
 Canada                                (68)     (433)     (384)
 
Identifiable Assets
 United States                       4,304     5,133    20,198
 Canada                                672     6,820     4,823
</TABLE>

- --------------------
(1) Includes export sales to Australia of $1,392 in 1995 and $2,509 in 1996.
There were no export sales in 1994.


Sales from Canada include sales of product manufactured and shipped from NaPro
Canada, NaPro's Canadian subsidiary.  Such products sold by NaPro Canada to
NaPro are then re-sold to Faulding for use outside the United States.  Such
"exported" products never physically enter the United States.

Sales of NBT Paclitaxel into foreign markets accounted for approximately 75% of
NaPro's revenue for the year ended December 31, 1995 and 72% of NaPro's revenue
for the year ended December 31, 1996.  NaPro anticipates that a significant
portion of its revenue will continue to be derived from sales of its products in
foreign markets until such time, if ever, as IVAX receives approval for
commercial sale of NBT Paclitaxel in the United States.

A substantial portion of NaPro's revenues and operations will thus continue to
be subject to the risks associated with foreign business, including economic or
political instability, shipping delays, fluctuations in foreign currency
exchange rates and various trade restrictions, all of which could have a
significant impact on NaPro's ability to deliver products on a competitive and
timely basis. Future imposition of, or significant increases in, the level of
customs duties, export quotas, drug regulatory restrictions or other regulatory
or trade restrictions could have an adverse effect on NaPro.

Employees

As of March 21, 1997, NaPro had 114 full-time and three part-time employees, of
whom nine hold Ph.D. or M.D. degrees.  Three employees were engaged in
biological and clinical research, 18 in chemical research, 21 in quality
control/quality assurance, 51 in manufacturing and 21 in general administration
and finance. NaPro believes that its relations with its employees are good.

Special Note Regarding Forward-looking Statements

Certain statements under the captions "Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in
this report constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act").  Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
NaPro, or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.  Such factors include, among other things, the following: general
economic and business conditions; competition; technological advances; ability
to obtain rights to technology; ability to obtain and enforce patents; ability
to commercialize and manufacture products; ability to obtain raw materials;
results of clinical studies; results of research and development activities;
business 
<PAGE>
 
abilities and judgment of personnel; availability of qualified personnel;
changes in, or failure to comply with, governmental regulations; ability to
obtain adequate financing in the future; the ability of NaPro's strategic
partners to perform their obligations under existing agreements with NaPro; and
other factors referenced in this Report and in NaPro's August 1, 1996
Prospectus.


                               Item 2. Properties

NaPro leases approximately 54,000 square feet of space in Boulder, Colorado,
which is used for research and development and will be used for commercial-scale
manufacturing upon completion of improvements and installation and validation of
equipment. This facility is also used for NaPro's executive offices and
warehousing of raw materials and equipment. NaPro leases an additional 5,900
square feet of space in Boulder which is used for research and development and
small scale manufacturing. NaPro leases a facility of approximately 3,400 square
feet in British Columbia, Canada which is used for manufacturing. NaPro leases
an additional 10,090 square foot facility in British Columbia, Canada which the
Company intends to sublease to a third party. NaPro has an option to purchase
7.3 acres of land in Longmont, Colorado as a potential site on which to build a
manufacturing facility and has until May 6, 1997, to exercise this option.

NaPro believes its facilities, other than the one it is intending to sublease,
to be suitable and adequate for its current purposes and needs for manufacturing
capacity in the immediate future.  As NBT Paclitaxel has not been approved for
marketing in a major pharmaceutical market, NaPro currently is using only a
portion of the productive capacity of its facilities that would be available
after completion of improvements and installation and validation of equipment
referred to above.
<PAGE>
 
                                    Part II


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

The following discussion and analysis provides information which NaPro's
management believes is relevant to an assessment and understanding of NaPro's
results of operations.  This discussion should be read in conjunction with the
Financial Statements and Notes included elsewhere in this Report.  Special Note:
Certain statements set forth below constitute "forward-looking statements"
within the meaning of the Reform Act.  See "Business--Special Note Regarding
Forward-Looking Statements" for additional factors relating to such statements.

General

NaPro has devoted its efforts primarily to the development and implementation of
its EIP/TM/ technology for producing NBT paclitaxel. NaPro is currently
dependent exclusively on sales of NBT paclitaxel for revenue. Through December
31, 1996, NaPro's production of NBT paclitaxel was limited primarily to research
and pilot-scale production, and much of NaPro's product sales were for use in
clinical trials and for research and development purposes. Accordingly, NaPro
has generated only limited revenue from such activities and has incurred
significant operating losses, including operating losses of approximately $6
million, $4.3 million and $7.1 million for the years ended December 31, 1994,
1995 and 1996, respectively, resulting in an accumulated deficit of $25.5
million as of December 31, 1996. NaPro expects that it will continue to have a
high level of operating expense and will be required to make significant up-
front expenditures in connection with its biomass procurement, product
development and research-and-development activities. NaPro anticipates that
operating losses will continue until such time, if ever, as NaPro is able to
generate sufficient revenue to support its operations. NaPro believes that its
ability to generate such revenue depends primarily on the ability of its
Strategic Partners to obtain regulatory approval in the U.S. for the commercial
sale of NBT paclitaxel, on NaPro's ability to obtain regulatory approval for its
manufacturing facilities and on NaPro's ability to construct manufacturing
facilities that produce quantities of NBT Paclitaxel sufficient to supply the
Strategic Partners' requirements for commercial sales. Moreover, NaPro's future
growth and profitability will depend on the success of the Strategic Partners in
fostering acceptance in the oncological market for NBT paclitaxel as a preferred
form of chemotherapy to be used alone or in combination with other
chemotherapeutic agents.

In January 1995, Faulding received approval to market NBT paclitaxel
commercially in Australia under their trade name ANZATAX/TM.  Although NaPro's
revenue has increased as a result of this approval, NaPro does not currently
expect to reach profitability for the year ending December 31, 1997.  The
ability of Faulding to continue to market NBT paclitaxel in Australia pursuant
to Faulding's marketing approval and the success of these marketing efforts will
continue to have a significant effect on NaPro's revenue and profitability.

In June 1996 NaPro completed the call of 2,070,000 redeemable warrants, issuing
630,620 shares of Common Stock with the receipt of cash in the amount of $3.1
million pursuant to cash exercise elections of 630,620 redeemable warrants, and
issuing 1,007,102 shares of Common Stock pursuant to Cash-less exercise
elections of 1,438,720 redeemable warrants.

In August 1996, NaPro closed a public offering of 1.79 million shares of its
Common Stock, which resulted in net proceeds of $13.8 million to the Company.
The proceeds of this offering are being used to establish and upgrade
manufacturing facilities and to fund NaPro's operations, capital expenditures,
additional plantation development and general corporate purposes.
<PAGE>
 
Results of Operations

NaPro was in the development stage through December 31, 1994.  Comparison of
operations between years and historical trends does not necessarily indicate
future trends and operating results of NaPro.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995  Revenue.
---------------------------------------------------------------------          
Sales to affiliate increased $100,000 to $700,000 for 1996 from $600,000 for
1995.  Other sales increased $800,000 to $2.8 million for 1996 from $2 million
for 1995.  Through December 31, 1995, the majority of product sales had been for
use in clinical trials and for research and development purposes. Such sales are
unpredictable by nature.  Other sales include commercial sales.  Commercial
sales commenced in January 1995.  NaPro expects commercial sales to be
unpredictable until such time as the markets of the Strategic Partners have been
established and proven.

Research, Development and Cost of Products Sold.  Research, development and cost
of products sold increased $2.5 million to $6.8 million for 1996 from $4.3
million for 1995.  The increase was due primarily to an increase in the level of
process development and research, including higher production cost due to higher
production volume.  NaPro's production process is not distinct from its research
and development processes.  Accordingly, the cost of products sold is included
with NaPro's research and development expense.

General and Administrative Expense.  General and administrative expense (G&A)
increased $1.4 million to $3.7 million for 1996 from $2.3 million for 1995.
This increase was due primarily to a $500,000 increase in facility cost and a
$400,000 increase in administrative and support staff.

Plantation Fees.  Plantation fees decreased from $300,000 in 1995 to zero,
reflecting the completion of research related to plantation development as of
December 31, 1995.  In 1996, NaPro began capitalizing plantation expenditures
incurred prior to the first commercial harvest from its plantations and depletes
such cost over the remaining life of the plantation contract using the units-of-
production method.

Interest Income.  Interest income increased $300,000 to $700,000 for 1996 from
$400,000 for 1995.  This increase was the result of larger free cash balances
associated with the completion of NaPro's offering of Common Stock in August
1996 and its warrant call completed in June 1996 (see Liquidity and Capital
Resources).

Interest and Other Expense.  Interest and other expense increased $300,000 to
$400,000 for 1996 from $100,000 for 1995.  Of the increase, $100,000 was
attributable to interest on increased borrowings on equipment financing and
$200,000 was attributable to the note payable to Faulding (see Liquidity and
Capital Resources).

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994  Revenue.
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Sales to affiliate decreased $100,000 to $600,000 for 1995 from $700,000 for
1994.  Affiliate sales were for use in clinical trials and for research and
development purposes.  Such sales are unpredictable by nature.  Other sales
increased $1.7 million to $2 million for 1995 from $300,000 for 1994.  A total
of $1.5 million of the increase was attributable primarily to the timing of
product deliveries to Faulding; $200,000 was attributable to changes in pricing
associated with commercial sales of NBT paclitaxel in Australia.

Research, Development and Cost of Products Sold.  Research, development and cost
of products sold increased $1.6 million to $4.3 million for 1995 from $2.7
million for 1994.  The increase was due primarily to an increase in the level of
process development and research, including higher production cost due to higher
production volume.

General and Administrative Expense.  G&A increased $300,000 to $2.3 million for
1995 from $2 million for 1994.  The increase was due primarily to an increase in
administrative and related support staff.
<PAGE>
 
Faulding Royalty Expense and Plantation Fees.  Plantation fees decreased
$900,000 to $300,000 for 1995 from $1.2 million for 1994.  Higher fees during
1994 reflected the additional expense of establishing the plantation as opposed
to ongoing maintenance in 1995 (see Note 8 to the Financial Statements).  The $1
million 1994 Faulding royalty expense was a one-time charge.

Interest Income.  Interest income increased $200,000 to $400,000 for 1995 from
$200,000 for 1994.  This increase was the result of larger free cash balances.

Interest and Other Expense.  Interest and other expense decreased $200,000 to
$100,000 for 1995 from $300,000 for 1994.  The decrease was the result of the
absence of interest on bridge loans which were paid off in 1994.  NaPro incurred
expense in 1994 in the amount of $500,000 as a result of early repayment of the
bridge loans.  (see Note 6 to the Financial Statements).

Liquidity and Capital Resources

NaPro's capital requirements have been and will continue to be significant.  As
of  December 31, 1996, NaPro had a working capital balance of $14.2 million.
This compared to a working capital balance of $8.5 million as of December 31,
1995.  To date, the funding of NaPro's capital requirements has been dependent
primarily on net proceeds of public offerings of its common stock of
approximately $21.1 million, on private placements of its equity securities of
approximately $22.8 million, on the exercise of warrants and options of $4.3
million, and on capital leases, loans and advances from its stockholders and the
Strategic Partners.

Working Capital and Cash Flow  Cash and cash equivalents increased $2.4 million
-----------------------------                                                  
to $9.5 million for the year ended December 31, 1996 from $7.1 million at
December 31, 1995.  Net cash provided by 1996 financing activity was partially
offset by $6.5 million used in operating activities, by capital expenditures of
$4.9 million and net purchases of investments of $4.9 million.  Cash and cash
equivalents increased $6.2 million to $7.1 million at December 31, 1995 from
$900,000 at December 31, 1994.  Net cash provided by 1995 financing activity was
partially offset by cash used in operations of $3 million, by capital
expenditures of $ 1.2 million and net purchases of investments of $100,000.
Cash and cash equivalents increased $822,000 to $900,000 at December 31, 1994
from $18,000 at December 31, 1993.  Net cash provided by 1994 financing activity
of $9.2 million was partially offset by cash used in operations of $7.2 million,
by capital expenditures of $600,000 and net purchases of investments of
$500,000.

Inventory increased $1.1 million to $2.3 million in the year ended December 31,
1996 from $1.2 million at December 31, 1995.  The amount of product held as
finished goods equivalents in work-in-progress inventories as well as finished
goods inventories is dependent on a number of factors, including the shipping
requirements of the Strategic Partners and NaPro's production planning for
meeting those needs. Inventory balances may vary significantly during product
development and launch periods.  NaPro may make significant biomass investments
during 1997.

Capital Expenditures  NaPro expended $4.9 million and $1.2 million,
--------------------                                               
respectively, during 1996 and 1995 for capital projects.  These expenditures
primarily included plantation cost, initial work on a new large scale commercial
EIP/TM/ manufacturing facility in Boulder, and expansion and improvement to
NaPro's Boulder laboratories and facilities. In 1997, NaPro expects to invest
capital in property, plant and equipment, primarily to expand its plantation
operations, to complete the large scale commercial EIP/TM/ manufacturing
facility in Boulder and to upgrade and expand its extraction manufacturing
capabilities.

NaPro anticipates a significant increase in capital expenditures and operations
in 1997 in anticipation of possible NDA approval.  Therefore, NaPro plans to
obtain additional capital during the year in the form of debt, equity, corporate
partnering or a combination of these sources.  If NaPro is not successful in
attracting capital, it will need to significantly reduce the scope of capital
expenditures and operations.
<PAGE>
 
The amount and timing of future capital expenditures will depend upon numerous
factors, including approval or non-approval of the NDA, differences between
actual and projected demand for NBT paclitaxel, the progress of NaPro's research
and development programs, the magnitude and scope of these activities, the cost
of preparing, filing, prosecuting, maintaining and enforcing patent claims and
other intellectual property rights, competing technological and marketing
developments, changes in or terminations of existing strategic partnerships, the
establishment of additional strategic relationships and the cost of
manufacturing scale-up.  NaPro may seek additional long-term financing to fund
capital expenditures should such financing become available on terms acceptable
to NaPro.

Net Operating Loss Carryforwards  As of December 31, 1996, NaPro had net
--------------------------------                                        
operating loss carryforwards for income tax purposes of approximately $22
million to offset future taxable income.  Under Section 382 of the Internal
Revenue Code of 1986, as amended, the utilization of net operating loss
carryforwards is limited after an ownership change, as defined in such Section
382, to an annual amount equal to the value of the loss corporation's
outstanding stock immediately before the date of the ownership change multiplied
by the federal long-term tax-exempt rate in effect during the month the
ownership change occurred.  Such an ownership change occurred in September 1993.
As a result, NaPro will be subject to an annual limitation on the use of its net
operating losses.  This limitation only affects net operating losses incurred up
to the ownership change and does not reduce the total amount of net operating
loss which may be taken, but rather limits the amount which may be used during a
particular year. Therefore, in the event NaPro achieves profitability, such
limitation would have the effect of increasing NaPro's tax liability and
reducing the net income and available cash resources of NaPro if the taxable
income during a year exceeded the allowable loss carried forward to that year.
<PAGE>
 
                                   Signatures

Pursuant to Section 13 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.

NAPRO BIOTHERAPEUTICS, INC.



By: /s/ Gordon H. Link, Jr.
    -----------------------
     Gordon H. Link, Jr.
     Chief Financial Officer

Date: August 15, 1997