NEOPHARM INC, S-1/A, 1999-03-31

NEOPHARM INC
S-1/A, 1999-03-31
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

Previous: INTRAV INC, 10-K405, 1999-03-31

Next: NEOPHARM INC, 10-K, 1999-03-31

As filed with the Securities and Exchange Commission on March 31, 1999
Registration No. 333-68133

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

PRE-EFFECTIVE AMENDMENT TO
FORM S-3
ON FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NEOPHARM, INC.
(Exact name of registrant as specified in its charter)

Delaware 8731 51-0327886
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification
Code Number) Number)

100 Corporate North
Suite 215
Bannockburn, Illinois 60015
(847) 295-8678
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)

JAMES M. HUSSEY
President and Chief Executive Officer
NEOPHARM, INC.
100 Corporate North
Suite 215
Bannockburn, Illinois 60015
(847) 295-8678

(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copy to:

LAWRENCE B. FISHER, ESQ.
ORRICK, HERRINGTON & SUTCLIFFE LLP
30 Rockefeller Plaza
New York, New York 10112
(212) 506-5000

Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.

If any of these securities being registered on this Form are being offered
pursuant to a dividend or reinvestment plans, please check the following box.
|_|

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|

<PAGE>

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
PROSPECTUS SUMMARY...............................................................................................2

RISK FACTORS.....................................................................................................6

We have a limited operating history upon which to judge us.......................................................6

We lack significant revenues and anticipate continuing losses....................................................6

Our products are in the early stage of development and we don't know if they will be
successfully developed .....................................................................................6

We are dependent upon developing working relationships with others in order to develop our products..............7

We require substantial funds and we may need to raise additional capital in the future...........................7

We do not have manufacturing, marketing, or sales resources......................................................8

We do not have clinical testing or regulatory capability.........................................................8

We may not be able to protect our patents and proprietary information............................................8

Certain of our executive officers have relationships with other entities and have
conflicts of interest .....................................................................................9

Members of our scientific advisory board commit only a portion of their time to our business and
research activities and we may not have rights to their inventions or discoveries...........................9

Our business is dependent upon compliance with governmental regulations and
obtaining approvals by governmental agencies ...............................................................9

The demand for our products may be adversely affected by health care reform and potential
limitations on third-party reimbursement..................................................................10

We are subject to regulations regarding hazardous materials and environmental matters...........................10

We don't have product liability insurance at this time..........................................................10

We may be effected by litigation involving our chairman.........................................................10

Shares eligible for future sale after this offering could adversely affect our stock price......................11

We are controlled by our officers and directors.................................................................11

We may redeem the redeemable warrants...........................................................................11

Holders of redeemable warrants may be restricted from selling the shares of our
common stock underlying the redeemable warrants...........................................................12

The year 2000 risk may adversely affect us......................................................................12

This prospectus contains forward-looking information that may prove to be inaccurate............................13

SELECTED FINANCIAL DATA.........................................................................................14

USE OF PROCEEDS.................................................................................................15

DIVIDEND POLICY.................................................................................................16
</TABLE>

-I-

<PAGE>

TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
CAPITALIZATION..................................................................................................16

MARKET FOR OUR COMMON STOCK AND REDEEMABLE WARRANTS.............................................................16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .....................................................................................18

BUSINESS .......................................................................................................21

MANAGEMENT......................................................................................................32

PRINCIPAL STOCKHOLDERS..........................................................................................40

CERTAIN TRANSACTIONS............................................................................................43

DESCRIPTION OF SECURITIES.......................................................................................44

SELLING SECURITYHOLDERS.........................................................................................47

PLAN OF DISTRIBUTION............................................................................................49

SHARES ELIGIBLE FOR FUTURE SALE.................................................................................50

LEGAL MATTERS...................................................................................................50

EXPERTS ........................................................................................................50

WHERE YOU CAN FIND MORE INFORMATION ABOUT US ...................................................................51

INDEX TO THE FINANCIAL STATEMENTS...............................................................................F-1
</TABLE>

-II-

<PAGE>

SUBJECT TO COMPLETION, DATED MARCH 31, 1999

NEOPHARM, INC.

This prospectus covers the offer and sale of shares of our common stock
upon:

(1) the exercise of 693,565 redeemable common stock purchase warrants
issued in connection with our initial public offering and each
exercisable to purchase two shares of our common stock, which are
currently traded on the American Stock Exchange;

(2) the exercise of 135,000 warrants issued to the representative of the
several underwriters of our initial public offering;

(3) the exercise of 67,500 warrants, each exercisable into two shares of
our common stock, underlying the representative's warrants; and

(4) 287,004 shares of our common stock issuable upon exercise of 143,502
warrants held by one of our affiliates.

Our common stock is traded on the American Stock Exchange under the symbol
"NEO." The closing sale price of our common stock as reported by American Stock
Exchange on March 29, 1999 was $18.00 per share.

Our redeemable warrants are traded on the American Stock Exchange under the
symbol "Neo_T". The closing sale price of the redeemable warrants as reported by
American Stock Exchange on March 29, 1999 was $26.125.

Selling securityholders, including our affiliates, are offering all of the
shares covered by this prospectus. We will not receive any proceeds from the
sale of the shares of common stock but we will receive proceeds upon exercise of
the redeemable warrants, and the warrants underlying the warrants issued to the
representative of the several underwriters of our initial public offering and we
may receive proceeds upon exercise of the representative's warrants.

Our shares are very risky. See "Risk Factors" on page 5.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The date of this prospectus is _________, 1999.

<PAGE>

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information and our financial statements and the notes to those financial
statements appearing elsewhere in this prospectus.

Certain information contained in, this prospectus, include "forward-looking
statements," as indicated by the use of such terms as "may," "will," "expect,"
"believe," "estimate," "anticipate," "intend" or other similar terms or the
negative of such terms. These forward-looking statements include, without
limitation, our expectations with respect to our future financial results,
capital requirements, market growth, new product introductions, potential
acquisitions and the like. These statements are based upon information currently
available to us and are subject to a number of risks and uncertainties that
could cause our actual results to differ materially from those anticipated. The
principal risks and uncertainties are set forth under the heading "Risk Factors"
beginning on page 6 of this prospectus and are also described in other parts of
this prospectus.

Neopharm, Inc.

We are a pharmaceutical company that researches and develops drugs used in
the fields of oncology therapeutics and diagnostics. We have developed expertise
in the identification, development, preparation and filing for the regulatory
approval of cancer drugs for both therapeutic and diagnostic purposes, although
we don't currently have any products that are approved for sale. Our goal is to
be a leading worldwide oncology drug company, and over the past eight years, we
have established a portfolio of compounds in various stages of clinical and
pre-clinical development.

We are currently developing six compounds which all target various forms of
cancer. Cancer is the second largest cause of death in the U.S. and there are a
large number of new cases of cancer each year. However, for some types of
cancer, there are no acceptable treatments, while for others, the currently
available treatments are limited due to severe side effects. Our products under
development offer either improvements to currently available technology or new
technology that improves the efficacy and reduces the side effects. Before new
drugs can be approved by the U.S. Food and Drug Administration, they must go
through several test phases, from pre-clinical trials to Phase I to Phase II and
Phase III trials. The products which we currently have under development are
detailed in the following table:

<TABLE>
<CAPTION>
Compounds Use or Advantage Development Status Cancer Indication U.S. Patent
Position
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LED We believe LED allows cancer Phase I completed, initiated Breast, Prostate, 2 Patents
patients to tolerate higher Phase II in June 1998 Hematological
dosages of chemotherapy
providing greater therapeutic
value in a number of types of
cancer tumors.
- ------------------------------------------------------------------------------------------------------------------------------------
LEP We believe LEP allows cancer Phase I completed in Ovarian, Breast, Lung 1 Patent
patients to tolerate higher September 1998
dosages of chemotherapy,
providing greater therapeutic
value in a number of types of
cancer tumors.
- ------------------------------------------------------------------------------------------------------------------------------------
LE-AON LE-AON is an antisense drug Pre-clinical trials ongoing, Head & Neck, Lung, Brain 1 Patent
useful in enhancing the initiate Phase I in the 2nd
lethality and effectiveness of Quarter, 1999
radiation.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

2
<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
IL-13 Chimeric IL-13 Chimeric Protein Pre-clinical trials ongoing, Renal Cell, Brain, 2 Patents
Protein Exotoxin Exotoxin is a genetically initiate Phase I in the 2nd Kaposi's Sarcoma, Breast
engineered compound Quarter, 1999
incorporating a highly toxic
material that destroys cells
once linked to the target
receptor on its surface.
- ------------------------------------------------------------------------------------------------------------------------------------
Mesothelin Mab Mesothelin Mab specifically Phase I to be initiated in Ovarian, Head, Neck, 5 Patents
(Pending) targets those tumors that 4th Quarter 1999 Mesotheliomas
express the mesothelin antigen
on the surface of cancer cells
- ------------------------------------------------------------------------------------------------------------------------------------
Broxine(R) We believe Broxine will prove New drug application pending Breast, Colon, Prostate, 0 Patents
useful in characterizing tumor before the FDA Hematologic
cell growth in nearly all
solid tumors.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Our short term goal is to use our proprietary technology to significantly
enhance the efficiency and reduce the side effects of currently available
chemotherapy compounds.

Our long term goal is to be a leading worldwide oncology drug development
company. To reach our goal we have developed the following strategies:

o focus our resources exclusively on the expanding cancer market;

o develop a balanced portfolio of anti-cancer drugs based on enhancing
proven compounds;

o develop novel therapeutic agents and leverage our expertise to
identify compounds we can license; and

o form strategic alliances with larger pharmaceutical and biotechnology
companies to obtain financial and marketing support for certain of our
product development activities.

Scientists specializing in cancer therapy founded us in 1990. We have
relationships with the FDA, National Cancer Institute, Georgetown University, as
well as with established pharmaceutical manufacturers. The FDA has not approved
any of our products for sale, and, as a result, we have no marketing or sales
staff and have conducted our activities through consultants and at university
research facilities.

Our principal executive offices are located at 100 Corporate North, Suite
215, Bannockburn, Illinois 60015, and our telephone number is (847) 295-8678.

The Offering

Common stock outstanding..................... 8,454,621

3
<PAGE>

American Stock Exchange trading symbols:

Common Stock............................."NEO"

Redeemable warrants......................"NEO_t"

Use of proceeds..............................Working capital and general
corporate proceeds

Risk factors.................................The securities offered hereby
involve a high degree of risk and
should be considered only by
persons who can afford the loss of
their entire investment.

Summary Financial Data

<TABLE>
<CAPTION>
June 15, 1990
(Inception)
Year Ended December 31, December 31,
----------------------- ------------
1994 1995 1996 1997 1998 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues $ -- $ -- $ -- $ 550, 000 $ -- $ 550,000
Operating expenses:
Research and
development 813,761 1,068,683 1,099,631 1,411,692 1,611,343 7,085,874
General and
administrative 107,286 244,901 956,924 1,370,486 1,691,132 4,837,984
----------- ----------- ----------- ----------- ----------- ------------
Loss from operations (921,047) (1,313,584) (2,056,555) (2,232,178) (3,302,475) (11,373,858)
Interest income $ -- $ -- $ 238,275 $ 210,501 $ 88,752 $ 537,528
Interest expense (162,620) (356,043) (47,365) -- -- (735,606)
----------- ----------- ----------- ----------- ----------- ------------
Interest income
(expense) - net (162,620) (356,043) 190,910 210,501 88,752 (198,078)
----------- ----------- ----------- ----------- ----------- ------------
Loss before income taxes $(1,083,667) $(1,669,627) $(1,865,645) $(2,021,677) $(3,213,723) $(11,571,936)
----------- ----------- ----------- ----------- ----------- ------------
Income taxes $ -- $ -- $ -- $ -- $(1,640,000) $ (1,640,000)
----------- ----------- ----------- ----------- ----------- ------------
Net loss $(1,083,667) $(1,669,627) $(1,865,645) $(2,021,677) $(1,573,723) $ (9,931,936)
=========== =========== =========== =========== =========== ============
Basic and diluted net loss per
share $ (.32) $ (.36) $ (.24) $ (.25) $ (.19)
=========== =========== =========== =========== ===========
</TABLE>

4
<PAGE>

<TABLE>
<CAPTION>
December 31,
------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>

Balance Sheet Data:
Cash $ 9,205 $ 671 $ 4,479,041 $ 2,776,697 $ 40,681
Working capital
(deficit) (2,137,037) (4,553,057) 4,013,010 2,348,904 1,077,255
Total assets 112,988 495,891 4,492,208 2,854,499 1,781,548
Line of credit with
bank 656,452 2,007,652 -- -- --
Loan payable to
principal
stockholder 1,500,000 1,500,000 -- -- --
Deficit accumulated
during the
development stage (2,801,264) -- (1,865,645) (3,887,322) (5,461,045)
Total stockholders'
equity (deficit) (2,691,773) (4,361,392) 4,026,177 2,374,072 1,178,122
</TABLE>

5
<PAGE>

RISK FACTORS

An investment in our securities offered by this prospectus involves a high
degree of risk. In addition to the other information contained in this
prospectus, you should carefully consider the following risk factors in
evaluating us and our business.

We have a limited operating history upon which to judge us

We are a development stage company and our history of operations consists
primarily of the development of our products and the sponsorship of research and
clinical trials. Therefore, we have only a limited history upon which you may
judge our performance and prospects.

We lack significant revenues and anticipate continuing losses

We have incurred significant losses since inception. At December 31, 1998
and December 31, 1997, we had accumulated losses since inception of
approximately $9,932,000 and $8,358,000, respectively. We probably will continue
to incur substantial additional operating losses for at least the next several
years and expect cumulative losses to increase as our research and development
efforts expand. Until we executed our agreement with Pharmacia & UpJohn Company,
we generated only limited amounts of revenue from our license fees and we cannot
predict when or if we will be able to develop other sources of revenue or when
or if our operations will become profitable, even if we are able to
commercialize some of our products.

Our products are in the early stage of development and we don't know if they
will be successfully developed

Our research and development programs are at various states of development,
ranging from the pre-clinical stage, to Phase I and Phase II clinical trials to
a pending new drug application. We will need to conduct substantial additional
research and development in order to develop our products, and we don't know
whether our research and development will lead to the development of
commercially viable products that are shown to be safe and effective in clinical
trials. Our proposed products will also require clinical testing, regulatory
approval and substantial additional investment prior to commercialization. Our
proposed products are subject to the risks of failure inherent in the
development of pharmaceutical products. These risks include the following:

o some of our products may be found to be unsafe or ineffective, or may
fail to receive the necessary regulatory clearances in a timely
fashion, if at all;

o our products, if safe and effective, may be difficult to manufacture
on a large scale or may be uneconomical to market;

o the proprietary rights of competitors may prevent us from marketing
some of our products; and

o competitors and other researchers may market more effective or less
costly products for treatment of the same diseases.

As a result, we do not know whether we will successfully develop any of our
products, receive the required governmental regulatory approvals on a timely
basis, become commercially viable or achieve market acceptance. Also, we have
only limited experience in conducting clinical trials and other aspects of the
regulatory process.

6
<PAGE>

We have experienced delays in our testing and development schedules and our
expected testing and development schedules may not be met. Delays in our testing
and development schedules could have a material adverse effect on our business,
financial condition and results of operations.

We are dependent upon developing working relationships with others in order to
develop our products

In order to successfully develop our products, we must develop and maintain
strategic and collaborative relationships with government agencies, research
institutions, public and private universities and hospitals.

Our failure to develop and maintain any of the following strategic and
collaborative relationships could have a material adverse effect on our
business, financial condition and results of operations:

o Our Broxine(R) product was the subject of a cooperative research and
development agreement with the National Cancer Institute which gave us
exclusive rights to data generated by the National Cancer Institute
for certain cancer indications. That agreement expired on September
13, 1998 and is to be replaced by a clinical trials agreement which
became effective October 29, 1998. Because our Broxine(R) product is
not covered by patents or patent applications, our exclusive access to
the data collected by the National Cancer Institute is of significant
importance to us for the conduct of clinical trials and is a principal
advantage over others.

o Our IL-13 product is the subject of a cooperative research and
development agreement with the FDA that extends through October 2001
and provides us with rights to the development of IL-13 with the FDA
and to the data generated during the term of this agreement. This
agreement may be terminated by either party upon sixty days advance
notice without cause. Termination of this agreement would materially
adversely affect our development program and could require curtailment
or termination of that program.

o We have also entered into two license and sponsored research
agreements with Georgetown University relating to our liposomal
products. These licenses are generally not terminable by Georgetown
University except in the event of a default by us. Any such default
and resulting termination of the licenses would be materially adverse
to our liposome program and could require curtailment or termination
of that program, and could adversely effect the sublicense agreements
that we have entered into with Pharmacia & UpJohn Company for two of
our liposome compounds.

We require substantial funds and we may need to raise additional capital in the
future

We require substantial funds to conduct research and development,
pre-clinical and clinical testing and to manufacture and market our proposed
products. Our fixed commitments, including consulting fees, rent, payments under
license agreements and other contractual commitments are substantial and are
likely to increase. Our cash requirements may vary materially from those now
planned. We may seek to satisfy our future funding requirements through
additional public or private offerings of securities, with collaborative
arrangements with corporate partners or from other sources.

Additional financing may not be available when we need it or be on terms
acceptable to us. If adequate financing is not available, we may be required to
delay, scale back or eliminate certain of our research and development programs,
to relinquish rights to some of our technologies, therapeutic and diagnostic
agents, product candidates or products, or to license third parties to
commercialize products or technologies that we would otherwise seek to develop
ourself. If additional capital is

7
<PAGE>

raised through the sale of equity or debt securities, the percentage ownership
of our existing stockholders will be reduced and such securities may have
rights, preferences or privileges superior to those of our current stockholders.

We do not have manufacturing, marketing, or sales resources

We currently do not have internal manufacturing, marketing or sales
resources. Since we focus on research and development and have limited
resources, we do not anticipate spending a significant amount of cash to acquire
resources and develop capabilities in these areas. Our manufacturing strategy
will be to develop manufacturing relationships with established pharmaceutical
manufacturers for the production of products. We can give no assurance that we
will be able to enter into manufacturing agreements on commercially reasonable
terms, if at all.

We do not have clinical testing or regulatory capability

We currently do not have internal clinical testing or regulatory
capability. If we develop compounds with commercial potential, we will have to
hire additional personnel skilled in the clinical testing and the regulatory
compliance processes. We may not successfully complete clinical testing of,
obtain regulatory approval for, or manufacture or market any product we may
develop, either independently or pursuant to manufacturing or marketing
arrangements. Should we seek to enter into third-party arrangements, we cannot
give any assurance that such arrangements can be successfully negotiated on
commercially reasonable terms, if at all.

We may not be able to protect our patents and proprietary information

Because of the substantial length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, patent and trade secret protection for new technologies, products
and processes is very important to us. We have obtained licenses to ten United
States patent applications and have sixteen other issued or allowed patent
applications outside the United States. With respect to these patents, however,
no assurance can be given that:

o any patents under any pending applications or on future patent
applications will be issued;

o the scope of any patent protection will exclude competitors or provide
competitive advantages to us;

o any of our patents that may be issued will be held valid if
subsequently challenged;

o others will not claim rights in or ownership to the patents and other
proprietary rights held by us;

o others will not independently develop substantially equivalent
proprietary information or otherwise obtain access to our know-how; or

o others may be issued patents that require licensing and the payment of
significant fees or royalties by us.

Further, we may incur substantial costs in defending ourselves in suits
that may be brought against us claiming infringement of the patent rights of
others, in asserting our patent rights in a suit against another party, or in
participating in interference proceedings declared by the United States Patent
and Trademark Office for the purpose of determining the priority of invention in
connection with our patent applications or those of others. If we lose, we may
be forced to seek licenses, which

8
<PAGE>

may not be available on commercially reasonable terms, if at all, or subject us
to significant liabilities to a third party and could, therefore, have a
material adverse effect on us.

Our Broxine(R) product is not currently the subject of patents or patent
applications and we do not expect to obtain patent protection for this product.
The lack of patent protection could have a material adverse effect on our
business, financial condition and results of operations.

Finally, we also rely on trade secrets, know-how and technological
advantage to protect the technology we develop. Although we use confidentiality
agreements and employee proprietary information and invention assignment
agreements to protect our trade secrets and other unpatented know-how, these
agreements may be breached by the other party thereto or may otherwise be of
limited effectiveness or enforceability.

Certain of our executive officers have relationships with other entities and
have conflicts of interest

Messrs. John N. Kapoor, Mahendra Shah and Kevin M. Harris, who each hold
executive positions with us, are also associated with EJ Financial Enterprises,
Inc., a healthcare investment firm which is wholly owned by John N. Kapoor. On
July 1, 1994, we entered into a consulting agreement with EJ Financial. The
consulting agreement provides that we will pay EJ Financial $125,000 per year
(paid quarterly) for certain business and financial services, including having
certain officers of EJ Financial serve as officers of ours without pay. EJ
Financial is involved in the management of healthcare companies in various
fields, and Messrs. Kapoor, Shah and Harris are involved in various capacities
with the management and operation of these companies. The John N. Kapoor Trust,
dated September 20, 1989, the beneficiary of which is Dr. John Kapoor, is a
principal shareholder of each of these companies as well as us. The John N.
Kapoor Trust and other entities controlled by John N. Kapoor beneficially own
shares of our common stock, representing approximately 24% of our outstanding
shares of common stock.

Mr. Harris, our Chief Financial Officer, is also the Director of Taxes and
Planning of EJ Financial. Accordingly, Mr. Harris will not devote all of his
working hours to our affairs. In addition, EJ Financial is involved with other
companies in the oncology field. Although these companies are pursuing different
therapeutic approaches for the treatment of cancer, discoveries made by one or
more of these companies could render our products less competitive or obsolete.

Members of our scientific advisory board commit only a portion of their time to
our business and research activities and we may not have rights to their
inventions or discoveries

Members of our scientific advisory board are employed on a full-time basis
by academic or research institutions. These individuals will devote only a
portion of their time to our business and research activities. Except for work
performed specifically for and at our direction, the inventions or processes
discovered by our consultants and scientific advisors will not become our
property but will be the intellectual property of other institutions with which
they may have an affiliation. If this happens, we would have to obtain licenses
to such technology from such institutions. In addition, invention assignment
agreements executed by scientific advisory board members and consultants in
connection with their relationships with us may be subject to the rights of
their primary employers or other third parties with whom such individuals have
consulting relationships.

Our business is dependent upon compliance with governmental regulations and
obtaining approvals by governmental agencies

Governmental authorities in the United States and other countries regulate
our research, testing, manufacturing, labeling, distribution, marketing and
advertising activities. The FDA and comparable agencies in foreign countries
impose substantial requirements on our ability to introduce

9
<PAGE>

pharmaceutical products through lengthy and detailed laboratory and clinical
testing procedures, sampling procedures, sampling activities and other costly
and time consuming procedures. Our proprietary products may require substantial
clinical trials and FDA review as new drugs.

We cannot predict with certainty if or when we might submit for regulatory
review our products currently under development. Once we submit our potential
products for review, we don't know whether the FDA or other regulatory agencies
will grant approvals for any of our pharmaceutical products on a timely basis or
at all. A delay in obtaining or failure to obtain these approvals may adversely
affect our business. If we fail to comply with regulatory requirements, we could
be subjected to regulatory or judicial enforcement actions, including product
recalls or seizures, injunctions, civil penalties, criminal prosecution,
refusals to approve new products, withdrawal of approvals, and product liability
exposure. Sales of our products outside the United States will be subject to
regulatory requirements governing clinical trials and marketing approval. These
requirements vary widely from country to country and could delay the
introduction of our products in those countries.

The demand for our products may be adversely affected by health care reform and
potential limitations on third-party reimbursement

The continuing effort of governmental and third-party payors to contain or
reduce the costs of health care may reduce our revenues and profitability. We
cannot predict the effect that health care reforms may have on our business, and
it is possible that any reforms will hurt our business. In addition, in both the
United States and elsewhere, sales of prescription pharmaceuticals are dependent
in part on the availability of reimbursement to the consumer from third-party
payors, such as government and private insurance plans. Third-party payors are
increasingly challenging the prices charged for medical products and services.
We cannot be certain that our current and proposed products will be considered
cost-effective and that reimbursement to the consumer will be available or will
be sufficient to allow us to sell products on a competitive basis.

We are subject to regulations regarding hazardous materials and environmental
matters

We are subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of hazardous materials and
certain waste products. We currently maintain a supply of several hazardous
materials at our facilities. While we currently outsource our research and
development programs involving the controlled use of biohazardous materials, if
we conduct such programs, we might be required to incur significant cost to
comply with environmental laws and regulations. In the event of an accident, we
could be held liable for any damages that result, and such liability could
exceed our resources.

We don't have product liability insurance at this time

We currently do not have any product liability insurance and our business
exposes us to potential product liability risks which are inherent in the
testing, manufacturing and marketing of human therapeutic products. Although we
plan to obtain product liability insurance when and if our products become
commercially available, there can be no assurance that we will be able to obtain
or maintain this insurance on acceptable terms or that any insurance we obtain
will provide us with adequate coverage against potential liabilities. Claims or
losses in excess of any liability insurance coverage we obtain could have a
material adverse effect on our business and prospects.

We may be effected by litigation involving our chairman

John N. Kapoor, our chairman and principal stockholder, was previously the
chairman and president of Lyphomed Inc. Fujisawa Pharmaceutical Co. Ltd. was a
major stockholder of Lyphomed from the mid-1980s until 1990, at which time
Fujisawa completed a tender offer for the

10
<PAGE>

remaining shares of Lyphomed, including the shares held by Dr. Kapoor. Fujisawa
filed suit in federal district court in Illinois against Dr. Kapoor alleging
that between 1980 and 1986, Lyphomed filed a large number of allegedly
fraudulent new drug applications with the FDA, and that Dr. Kapoor's failure to
disclose these violations to Fujisawa constituted a violation of federal
securities laws and the Racketeer Influenced and Corrupt Organizations Act.
Fujisawa also alleged state common-law claims of constructive trust, fraud,
breach of fiduciary duties and breach of warranty against Dr. Kapoor. In
addition to substantial monetary relief in excess of $100,000,000 (which amount
could be trebled under RICO), Fujisawa also seeks a constructive trust on the
assets of Dr. Kapoor, which may include Dr. Kapoor's shares of our common stock
or rights to acquire shares of our common stock.

Dr. Kapoor has vigorously defended himself against all these allegations.
In the federal lawsuit, Dr. Kapoor's motion for summary judgement was granted by
the trial court. However, the Seventh Circuit Court of Appeals subsequently
reversed, in part, the trial court's decision, reinstating the RICO claims
against Dr. Kapoor. Dr. Kapoor's subsequent motion for summary judgment was
denied and the matter has been referred to a special master for mediation
discussions. It is anticipated that in the absence of resolution of the matter,
a trial would be held in late 1999 or early in 2000. Fujisawa's claims under
state law against Dr. Kapoor are also pending. A related suit filed by Dr.
Kapoor in Delaware Chancery Court seeking to require Lyphomed to advance to Dr.
Kapoor the cost of his defense to all of Fujisawa's lawsuits was decided in Dr.
Kapoor's favor and that decision was subsequently affirmed by the Delaware
Supreme Court. Finally, a countersuit filed by Dr. Kapoor against Fujisawa in
the Circuit Court of Cook County for breach of contract was dismissed without
prejudice with the court determining that the proper forum for such an action
was as part of the pending federal lawsuit. The decision of the lower court was
affirmed on appeal and Dr. Kapoor has filed a counterclaim for breach of
contract as part of the federal court action.

If a decision is made in favor of Fujisawa, Fujisawa may acquire the right
to control Dr. Kapoor's shares of our common stock, which comprise approximately
24% of our common stock. This decision could have a material effect on us.

Shares eligible for future sale after this offering could adversely affect our
stock price

If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market following this offering, the market price of our common stock
could fall. These sales might also make it more difficult to sell our equity or
equity related securities in the future at a time and price that we deem
appropriate. Of the 8,454,621 shares of common stock outstanding as of March 19,
1999, 3,792,746 shares are freely transferable without restriction or further
registration under the Securities Act. The remaining 4,661,875 shares are
"restricted securities," and may only be sold pursuant to a registration
statement under the Securities Act or an applicable exemption from registration
thereunder.

We are controlled by our officers and directors

As of March 19, 1999, our directors and officers beneficially owned a total
of 60.79% of the outstanding shares of our common stock. Accordingly, our
officers and directors, if acting together, have the ability to elect a majority
of our directors and otherwise control our operations.

We may redeem the redeemable warrants

Since July 25, 1997, the redeemable warrants have been subject to
redemption by us at $0.01 per redeemable warrant on thirty (30) days' prior
written notice to the redeemable warrantholders. We can only redeem the warrants
if the average closing sale price of our common stock as reported on the
American Stock Exchange equals or exceeds $5.60 per share for twenty (20)
trading days within a period of thirty (30) consecutive trading days ending on
the fifth trading day prior to the date

11
<PAGE>

of the notice of redemption. If we redeem the redeemable warrants, holders of
the redeemable warrants will lose their rights to purchase shares of our common
stock issuable upon the exercise of the redeemable warrants. Upon receipt of a
notice of redemption, holders would be required to:

o exercise the redeemable warrants and pay the exercise price at a time
when it may be disadvantageous for them to do so;

o sell the redeemable warrants at the current market price, if any, when
they might otherwise wish to hold the redeemable warrants; or

o accept the redemption price which is likely to be substantially less
than the market value of the redeemable warrants at the time of
redemption.

Since November 4, 1998, our common stock has traded above $5.60. As a
result, we may redeem the redeemable warrants, if we wish. We are currently
evaluating the merits of calling the redeemable warrants.

Holders of redeemable warrants may be restricted from selling the shares of our
common stock underlying the redeemable warrants

The redeemable warrants are not exercisable unless, at the time of the
exercise, we have a current prospectus covering the shares of common stock
issuable upon exercise of the redeemable warrants, and such shares have been
registered, qualified or deemed to be exempt under the securities laws of the
state of residence of the exercising holder of the redeemable warrants. We do
not intend to qualify the redeemable warrants for exercise in the states in
which the holders reside. As a result, holders of the redeemable warrants may be
deprived of value. Although we have agreed to use our best efforts to keep a
registration statement covering the shares of common stock issuable upon
exercise of the redeemable warrants effective for the term of the redeemable
warrants, if we fail to do so for any reason, your ability to resell the shares
underlying the redeemable warrants will be materially adversely effected.

Purchasers may buy redeemable warrants in the aftermarket or may move to
jurisdictions in which the shares underlying the redeemable warrants are not
registered or qualified during the period that the redeemable warrants are
exercisable. If this happens, we can't issue shares to those persons desiring to
exercise their redeemable warrants, and holders of redeemable warrants would
have no choice but to attempt to sell the redeemable warrants in a jurisdiction
where such sale is permissible or allow the redeemable to expire unexercised.

The year 2000 risk may adversely affect us

Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results. We believe that our products and
internal systems are currently year 2000 compliant. We have confirmed our year
2000 compliance by obtaining representations by third party vendors of their
products' year 2000 compliance, as well as specific testing of our products. The
failure of products or systems maintained by third parties or our products and
systems to be year 2000 complaint could cause us to incur significant expenses
to remedy any problems, or seriously damage our business. We have not incurred
significant costs to date complying with year 2000 requirements, and we do not
believe that we will incur significant costs for such purposes in the
foreseeable future.

12
<PAGE>

This prospectus contains forward-looking information that may prove to be
inaccurate

This prospectus contains various forward looking statements. These
statements are based upon our management's current beliefs as well as
assumptions made by our management based upon information currently available to
us. These statements are subject to various risks and uncertainties, including
those described above, as well as potential changes in economic or regulatory
conditions generally which are beyond our control. Should one or more of those
risks materialize or changes occur, or should our management's assumptions prove
incorrect, our actual results may vary materially from those anticipated or
projected.

13
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data as of December 31, 1998 and 1997 and
for each of the years in the five year period ended December 31, 1998 are
derived from our historical financial statements which have been audited by
Arthur Andersen LLP, independent public accountants. The selected financial data
as of and for the years ended December 31, 1996, 1995 and 1994 are derived from
our audited financial statements which are not included in this prospectus. The
selected financial data set forth below should be read in conjunction with our
financial statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
June 15, 1990
(Inception)
Year Ended December 31, December 31,
------------------------------------------------------ ------------
1994 1995 1996 1997 1998 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues $ -- $ -- $ -- $ 550,000 $ -- $ 550,000
Operating expenses:
Research and
development 813,761 1,068,683 1,099,631 1,411,692 1,611,343 7,085,874
General and
administrative 107,286 244,901 956,924 1,370,486 1,691,132 4,837,984
------------ ------------ ------------ ------------ ----------- ------------
Loss from operations (921,047) (1,313,584) (2,056,555) (2,232,178) (3,302,475) (11,373,858)
Interest income $ -- $ -- $ 238,275 $ 210,501 $ 88,752 $ 537,528
Interest expense (162,620) (356,043) (47,365) -- -- (735,606)
------------ ------------ ------------ ------------ ----------- ------------
Interest income
(expense) - net (162,620) (356,043) 190,910 210,501 88,752 (198,078)
------------ ------------ ------------ ------------ ----------- ------------
Loss before income taxes $ (1,083,667) $ (1,669,627) $ (1,865,645) $ (2,021,677) $(3,213,723) $(11,571,936)
------------ ------------ ------------ ------------ ----------- ------------
Income taxes $ -- $ -- $ -- $ -- $(1,640,000) $ (1,640,000)
------------ ------------ ------------ ------------ ----------- ------------
Net loss $ (1,083,667) $ (1,669,627) $ (1,865,645) $ (2,021,677) $(1,573,723) $ (9,931,936)
============ ============ ============ ============ =========== ============
Basic and diluted net loss per
share $ (.32) $ (.36) $ (.24) $ (.25) $ (.19)
============ ============ ============ ============ ===========
</TABLE>

<TABLE>
<CAPTION>
December 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash $ 9,205 $ 671 $ 4,479,041 $ 2,776,697 $ 40,681
Working capital
(deficit) (2,137,037) (4,553,057) 4,013,010 2,348,904 1,077,255
Total assets 112,988 495,891 4,492,208 2,854,499 1,781,548
Line of credit with
bank 656,452 2,007,652 -- -- --
Loan payable to
principal
stockholder 1,500,000 1,500,000 -- -- --
Deficit accumulated
during the
development stage (2,801,264) -- (1,865,645) (3,887,322) (5,461,045)
Total stockholders'
equity (deficit) (2,691,773) (4,361,392) 4,026,177 2,374,072 1,178,122
</TABLE>

14
<PAGE>

USE OF PROCEEDS

We will receive net proceeds upon the exercise of the redeemable warrants,
the representative's warrants and the warrants underlying the representative's
warrants, after deduction of certain expenses we have agreed to bear, in the
amount of approximately $10,461,807. We intend to use the net proceeds for
working capital and general corporate purposes. The net proceeds of $10,461,807
is comprised of the following amounts:

o $8,203,257 upon exercise of all of the redeemable warrants;

o $1,323,000 upon exercise of all of the representative's warrants; and

o $935,550 upon exercise of all of the warrants underlying the
representative's warrants.

The representative's warrants may be exercised on a cashless basis and if
the holders of representative's warrants choose to do so, net proceeds will be
reduced by approximately $1.32 million.

Since July 25, 1997, the redeemable warrants may be redeemed at $0.01 per
redeemable warrant on thirty (30) days prior written notice to the
warrantholders if the average closing sale price of our common stock as reported
by the American Stock Exchange equals or exceeds $5.60 for any twenty (20)
trading days within a period of thirty (30) consecutive trading days ending on
the fifth trading day prior to the date of notice of redemption. Since November
4, 1998, our common stock has traded above $5.60 with the result that we may
redeem the redeemable warrants, if we wish. We are currently evaluating the
merits of calling the redeemable warrants.

15
<PAGE>

DIVIDEND POLICY

We have never declared or paid dividends on our capital stock. We presently
intend to retain any future earnings to finance the expansion of our business
and do not expect to pay any cash dividends in the foreseeable future.

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 1998.
This table should be read in conjunction with our financial statements and the
notes to our financial statements contained elsewhere in this prospectus.

Stockholders Equity (deficit)

Common Stock, par value

$.0002145 per shares 15,000,000 shares authorized,
8,341,779 shares issued and outstanding .................. $1,789

Additional paid in capital ............................... 6,637,378

Deficit accumulated during the
developmental stage ...................................... 5,461,045

Total stockholders equity ................................ 1,178,122

MARKET FOR OUR COMMON STOCK AND REDEEMABLE WARRANTS

From January 25, 1996 until December 2, 1996 our common stock was quoted on
the Nasdaq SmallCap Market under the trading symbol "NPRM." Beginning on
December 2, 1996, and continuing through the date of this prospectus, our common
stock has been traded on the American Stock Exchange under the symbol "NEO."

From January 25, 1996 until September 4, 1998, our redeemable warrants were
quoted on the Nasdaq SmallCap Market under the trading symbol "NPRMw". Beginning
on September 5, 1998, and continuing through the date of this prospectus, our
redeemable warrants have been treated on the American Stock Exchange under the
symbol "Neo_ t."

The following are the high and low last reported sales prices for our
common stock and the redeemable warrants for the periods indicated.

Common Stock Warrants
------------ --------
High Low High Low
---- --- ---- ---
1997
First Quarter 9 5/8 6 3/8 9 1/2 7

Second Quarter 7 1/2 3 1/16 7 2 3/4

Third Quarter 5 1/2 3 5/8 3 3/8 1

Fourth Quarter 9 3 3/4 6 1/4

16
<PAGE>

High Low High Low
---- --- ---- ---

First Quarter 5 3/4 3 3/4 3 1/4 1 3/4

Second Quarter 4 15/16 2 15/16 3 3/4

Third Quarter 4 1/2 2 1 1/2 1/4

Fourth Quarter 13 1/4 3 5/8 16 1/2 7/8

1999
First Quarter (January 1 - 18 11 1/8 26 1/2 12 5/8
March 25)

As of March 16, 1999, there were 63 holders of record of our common stock,
and we estimate that as of such date there were more than 400 beneficial holders
of our common stock.

17
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Overview

Since our inception in June 1990, we have devoted our resources primarily
to fund research and product development programs. We have been unprofitable
since inception and have no revenues from the sale of our products. We expect to
continue to incur losses as we expand our research and development activities
and sponsorship of clinical trials. As of December 31, 1998, our accumulated
deficit was approximately $5.5 million.

Results of operations

Years Ended December 31, 1998, 1997 and 1996

We had no operating revenues during the three fiscal years ended December
31, 1998 except for a $550,000 payment received from BioChem Pharma in 1997 as
part of a licensing and distribution agreement. Interest income for 1998 totaled
$88,752. We completed our initial public offering in January 1996. Cash in
excess of funds needed to retire debt, pay for issuance costs or pay outstanding
payables was invested in short term investments.

We incurred research and development expenses of approximately $1,611,000
in 1998 as compared to approximately $1,412,000 in 1997 and $1,100,000 in 1996.
The increase in 1998 research and development expenses is primarily due to the
increased research activity and the addition of two new employees related to our
liposome products. 1998, 1997 and 1996 expenses include payments made by us to
Georgetown and the National Cancer Institute pursuant to our license and
sponsored research agreements with Georgetown, our cooperative research and
development agreement with the National Cancer Institute, payments to U.S. Food
and Drug Administration pursuant to the cooperative research and development
agreement, and the National Institute of Health pursuant to our license
agreement. We expect research and development spending to increase over the next
several years.

General and administrative expenses increased to approximately $1,691,000
in 1998 from approximately $1,370,000 in 1997. The increase was primarily the
result of increased professional fees of $103,000, executive recruitment costs
of $81,000, increased public relations costs of $29,000, increased insurance
costs of $9,000, increased space costs of $35,000 and an increase in other
miscellaneous expenses of $64,000. General and administrative expenses for 1997
compared to 1996 increased approximately $413,000. This increase was primarily
the result of increased professional fees of $103,000 related to corporate
public filings, increased personal costs and compensation expense related to
non-employee stock options of $144,000, executive relocation expenses of
$76,000, increased travel costs of $37,000 and an increase of miscellaneous
office expense of $53,000.

We incurred zero interest expense in both 1998 and 1997. Interest expense
for 1997 compared to 1996 decreased approximately $47,000. We had outstanding
debt for a portion of 1996. Proceeds from our initial public offering, completed
in January, 1996, were used to retire both the debt owed to our principal
shareholder and the line of credit provided by Harris Bank and Trust N.A. Our
principal stockholder converted the principal of and interest on the loan into
shares of our common stock and warrants at the initial public offering price.
Interest expense totaled approximately $356,000 in 1995. The proceeds of
borrowings were used to fund our operations during the period from 1994 to 1996.

18
<PAGE>

Inception to December 31, 1998

We were taxed as an S Corporation from inception through October 11, 1995
when we voluntarily terminated the S Corporation status. Because we were taxed
as an S Corporation, all of our net losses from inception through October 11,
1995 were passed through to our stockholders. Accordingly, we did not accumulate
operating loss carry forwards prior to October 11, 1995. The deficit accumulated
while under S Corporation status was reclassified to additional paid-in capital
in 1995. We began accruing net operating loss carry forwards.

Liquidity and Capital Resources

At December 31, 1998, we had approximately $41 thousand dollars in cash and
cash equivalents and net working capital of approximately $1.1 million. On
October 22, 1998, we established a $3,000,000 line of credit with the John N.
Kapoor Trust, dated September 20, 1989, an entity affiliated with our Chairman.
Interest on borrowings on the line of credit were accrued at the rate of 2% over
the prime rate of the Northern Trust Bank. The accrued interest and outstanding
principal were repaid on January 29, 1999 and the line of credit was terminated
upon the signing of the Pharmacia and UpJohn Compnay licensing agreement in
February 1999. We believe that cash and cash equivalents should be adequate to
fund operations for the next 12 months. However, our management can offer no
assurances that additional funding will not be required during that period.

Our assets at December 31, 1998 were $1,781,548 compared to $2,854,499 at
December 31, 1997. This decrease in assets was primarily due to a reduction of
cash and cash equivalents of approximately $2,736,000 as a result of cash used
in operating activities of approximately $2,716,000, cash used to purchase
equipment and furniture of approximately, $102,000 and cash provided by issuance
of stock of approximately $82,000.

Our liabilities at December 31, 1998 increased to approximately $603,000
from approximately $480,000 at December 31, 1997.

All of the products we are currently developing will require approval by
the FDA before they can be sold commercially in the United States. The results
of the preclinical and clinical testing on a nonbiologic drug and certain
diagnostic drugs are submitted to the FDA in the form of a new drug application
for approval to commence commercial sales. In responding to a new drug
application, the FDA may grant marketing approval, request additional
information or deny the application if the FDA determines that the application
does not satisfy its regulatory approval criteria.

We may seek to satisfy our future funding requirements through public or
private offerings of securities, with collaborative or other arrangements with
corporate partners or from other sources. Additional financing may not be
available when needed or on terms acceptable to us. If adequate financing is not
available, we may be required to delay, scale back or eliminate certain of our
research and development programs, to relinquish rights to certain of our
technologies, therapeutic and diagnostic agents, product candidates or products,
or to license third parties to commercialize products or technologies that we
would otherwise seek to develop ourself.

The Year 2000 Issue

The year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of our
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. We have conducted a review of our computer systems
and our management believes that the Year 2000 issue will not materially impact
us.

19
<PAGE>

We are in the process of identifying and assessing potential operating and
software problems related to the year 2000 issue both internally and externally.
It is our intention to complete the identification phase by June 30, 1999 and
take any required corrective action by September 30, 1999.

We have completed an internal review of our hardware and software used in
our operations and have assessed the Year 2000 readiness. Based on this review,
we have not identified any material Year 2000 issues. The cost of this review is
expected to be less than $5,000.

Additionally, we are in the process of communicating with our significant
vendors, service providers and collaboration partners to determine if such
parties are Year 2000 compliant or have effective plans in place to address the
Year 2000 issue and to determine the extent of our vulnerability to the failure
of third parties to remedy such issues. Based upon the responses that we have
received from these third parties, we will assess our risks and develop
appropriate contingency plans as needed.

We do not expect the impact of the Year 2000 to have a material adverse
impact on our business or results of operations. However, we cannot be certain
that any failure to effectively complete the necessary changes to our software
or operating systems on a timely basis or that unanticipated or undiscovered
Year 2000 problems arise that could have a material adverse effect on our
business and results of operations. In addition, there can be no assurance that
Year 2000 non-compliance by any of our significant vendors, service providers or
collaboration partners will not have a material adverse effect on our business
or results of operations.

20
<PAGE>

BUSINESS

Neopharm, Inc.

We are a pharmaceutical company engaged in the research and development of
drugs for the diagnosis and treatment of various forms of cancer. Presently we
have several drugs which are in varying stages of development: BUdR
(Broxuridine), liposome encapsulated doxorubicin ("LED"), liposome encapsulated
paclitaxel ("LEP"), liposome encapsulated antisense oligodeoxynucleotide
("LE-AON" and with LED and LEP the "liposome products"), IL-13 PE38QQR ("IL-13")
and Mesothelin ss-dsFv PE38 ("Mesothelin Mab") IL-13 and Mesothelin Mab are both
ligand target cytotoxins that specifically target cancer cells and leave normal
cells unaffected.

We have obtained rights to our various products as a result of agreements
and relationships that we have with various third parties including the National
Cancer Institute, the United States Food and Drug Administration, the National
Institute of Health and Georgetown University.

To date, we have been engaged primarily in the research and development of
our development stage products. We have developed expertise in identifying,
developing and preparing for regulatory approval cancer drugs for both
therapeutic and diagnostic purposes, although we currently don't have any
products approved for sale. We currently have no marketing or sales staff and
have conducted our activities primarily through consultants and at university
research facilities. We will need to hire additional personnel and gain access
to marketing and sales resources in order for us to continue to develop and
commercialize products.

We were incorporated in Delaware under the name OncoMed, Inc. in June 1990,
and we changed our name to NeoPharm, Inc. in March, 1995. Our principal offices
are located at 100 Corporate North, Suite 215, Bannockburn, Illinois 60015, and
our telephone number is (847) 295-8678.

Our products

We are currently developing six compounds which all target various forms of
cancer. Cancer is the second largest cause of death in the United States and
there are a large number of new cases of cancer each year. However, for some
types of cancer, there are no acceptable treatments, while for others, the
currently available treatments are limited due to severe side effects. Our
products under development offer either improvements to currently available
technology or new technology that improves the efficacy and reduces the side
effects. Before new drugs can be approved by the U.S. Food and Drug
Administration, they must go through several test phases, from pre-clinical
trials to Phase I to Phase II and Phase III trials. The products that we are
currently developing are detailed in the following table:

21
<PAGE>

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Development U.S. Patent
Compounds Use or Advantage Status Cancer Indication Position
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LEP We believe LEP allows cancer Phase I in Ovarian, Breast, Lung 1 Patent
patients to tolerate higher September 1998
dosages of chemotherapy,
providing greater therapeutic
value in a number of types of
cancer tumors.
- ----------------------------------------------------------------------------------------------------------
LE-AON LE-AON is an antisense drug Pre-clinical Head & Neck, Lung, 1 Patent
useful in enhancing the trials Brain
lethality and effectiveness ongoing,
of radiation initiate
Phase I in
the 2nd
Quarter, 1999
- ----------------------------------------------------------------------------------------------------------
IL-13 Chimeric IL-13 Chimeric Protein Pre-clinical Renal Cell, Brain, 2 Patents
Protein Exotoxin Exotoxin is a genetically trials Kaposi's Sarcoma,
engineered compound ongoing, Breast
incorporating a highly toxic initiate
material that destroys cells Phase I in
once linked to the target the 1st
receptor on its surface. Quarter, 1999
- ----------------------------------------------------------------------------------------------------------
Mesothelin Mab Mesothelin Mab specifically Phase I to be Ovarian, Head, Neck 5 Patents
(Pending) targets those tumors that initiated in Mesotheliomas
express mesothelin antigen on 4th Quarter
the surface of the cancer 1999.
cells.
- ----------------------------------------------------------------------------------------------------------
Broxine We believe Broxine will prove New drug Breast, Colon, 0 Patents
useful in characterizing application Prostate, Hematologic
tumor cell growth in nearly pending
all solid tumors. before the FDA
- ----------------------------------------------------------------------------------------------------------
</TABLE>

Our short term goal is to use our proprietary technology to significantly
enhance the efficiency and reduce the side effects of currently available
chemotherapy compounds.

Our long term goal is to be a leading worldwide oncology drug development
company. To reach our goals, we have developed the following strategies:

22
<PAGE>

o focus our resources exclusively on the expanding cancer market;

o develop a balanced portfolio of anti-cancer drugs based on enhancing
proven compounds;

o develop novel therapeutic agents and leverage our expertise to
identify compounds we can license; and

o form strategic alliances with larger pharmaceutical and biotechnology
companies to obtain financial and marketing support for certain of our
product development activities.

We cannot be certain that any of our products will receive the required
regulatory approvals, be successfully commercialized and achieve market
acceptance, or that any products that we commercialize will not be rendered
obsolete by other developments in the field of cancer treatment. In addition,
the continued development of our products will require us to obtain additional
sources of capital and we cannot be certain that this capital will be available
to us when we need it or on terms acceptable to us.

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

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

In February, 1999, we signed a license agreement with Pharmacia and UpJohn
to develop and commercialize LEP and LED worldwide. We received a substantial
up-front payment upon execution of the license agreement and will receive
milestone payments as clinical progress occurs under the license agreement. We
will also receive royalties on overseas sales and a co-promotion profit split on
sales in the United States. Pursuant to the license agreement, Pharmacia and
UpJohn agreed to assume all further responsibility for, and the costs associated
with, the further development and testing of LED and LEP and the obtaining of
all regulatory approvals. In addition, we have agreed to sell $8,000,000 of our
common stock to Pharmacia and UpJohn when we transfer certain investigatory new
drug applications to Pharmacia and UpJohn in accordance with a separate stock
purchase agreement at a price per share equal to 110% of the then market price
of our common stock during the sixty (60) day period preceding the transfer of
the investigatory new drug applications.

Ligand targeted cytotoxins. In October 1997, we entered into an exclusive
worldwide licensing agreement with the FDA and the National Institute of Health
to develop and commercialize a chimeric human protein known as "IL13-PE38QQR."
This is the fusion of receptor-binding with a derivative of pseudomonas exotoxin
(PE38QQR). We also entered into a cooperative research and development agreement
with the FDA for the clinical and commercial development of the IL-13 as an
anticancer agent.

23
<PAGE>

Extensive research by scientists at the FDA and the National Cancer
Institute have demonstrated that some solid human tumors such as kidney cancer
(renal cell carcinoma), brain cancer (glioblastoma), Kaposi's sarcoma and breast
carcinoma express high numbers of IL-13 receptors on their cell surfaces. These
receptor sites become a specific target for the IL-13 chimeric protein for
inducing cytotoxicity at nanogram concentration. On the other hand, normal
organs of the body are shown to exhibit minimal receptor sites thereby sparing
these organs from any toxic effect. We expect to scale up the production of this
chimeric protein to complete preclinical studies in the second quarter of 1999
to be followed later in the year by Phase I clinical program in humans with
renal cell carcinoma and glioblastoma.

We recently executed another cooperative research and development agreement
and licensing agreement with the National Institute of Health for mesothelin mab
for head and neck cancer and mesothelioma and are awaiting confirmation from the
National Institute of Health regarding their acceptance of these agreements.
Like IL-13, Mesothelin Mab targets mesothelin receptors on cancer cells and
delivers a cytotoxin to destroy the cancer cell while leaving normal cells
alone. Mesothelin Mab is expected to enter Phase I clinical studies in the later
part of 1999.

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

In December 1996, we filed a new drug application with the FDA for BUdR as
a prognostic agent in the treatment of breast cancer. Our new drug application
as it relates to BUdR as a prognostic indication in the treatment of breast
cancer was accepted for review by the FDA and was reviewed by the FDA's Oncology
Advisory Committee on December 19, 1997, at which time Oncology Advisory
Committee voted not to recommend this indication to the FDA for approval. Since
the Oncology Advisory Committee action, we met with the FDA to respond to
concerns raised by the Oncology Advisory Committee for the purpose of continuing
to pursue FDA approval. Based on these discussions we are gathering additional
data and reanalyzing the existing data in order to obtain the FDA's approval of
our new drug application. The original new drug application was filed in
December, 1996. The application was extended once and we were informed on March
31, 1998 that the time for processing the original application has expired. We
are continuing to work with FDA to explore the requirements for a prognostic
application.

In May 1997, we entered into a collaboration agreement with BioChem
Therapeutics, Inc., which is as wholly owned subsidiary of BioChem Pharma.
Pursuant to this collaboration agreement, BioChem Pharma will develop, market
and distribute BUdR in Canada after receipt of approval from the Canadian Health
Protection Branch of BUdR for certain specific uses, the applications for which
will be submitted by BioChem Pharma.

Research and development, collaborative relationships and licenses

Research and Development. During the three year period ended December 31,
1998, we spent the following amounts on research and development: $1,611,000 for
the fiscal year ended December 31, 1998, $1,412,000 for the fiscal year ended
December 31, 1997 and $1,100,000 for the fiscal year ended December 31, 1996. We
anticipate that we will need to conduct additional research and development
beyond 1999 and this may require us to obtain additional capital.

Collaborative relationships and licenses. We have entered into a clinical
trials agreement with the National Cancer Institute, a cooperative research and
development agreement with the FDA, a licensing agreement with the National
Institute of Health and have licensed certain technology relating to our
liposome products from Georgetown University. The principal terms of these
agreements and the license are as follows:

National Cancer Institute. In 1992 we entered into a cooperative research
and development agreement with the National Cancer Institute. Under the terms of
the National Cancer Institute cooperative research and development agreement, we
have exclusive rights to the data generated with respect to BUdR by

24
<PAGE>

National Cancer Institute for certain indications contained in the cooperative
research and development agreement including tumors mestastic to the brain,
astrocytomas, gastrointestinal cancers, colon cancer, pancreatic cancer, lung
cancer, soft tissue sarcomas, head and neck cancer and leukemia. The National
Cancer Institute cooperative research and development agreement expired on
September 13, 1998 and we then entered into a clinical trials agreement with the
National Cancer Institute effective October 29, 1998. The clinical trials
agreement covers the same research that was the subject of the National Cancer
Institute cooperative research and development agreement. The clinical trials
agreement provides for collaboration on the clinical development for BUdR and
access to related clinical data required for regulatory approval. Although BUdR
is not covered by patents or patent applications, we believe that our exclusive
access to the clinical data collected by National Cancer Institute represents a
significant competitive advantage for us in the development and eventual
commercialization of BUdR.

FDA cooperative research and development agreement. We entered into a
cooperative research and development agreement with the FDA in October 1997
covering IL-13. Pursuant to the FDA cooperative research and development
agreement, we are committed to commercialize the IL-13 chimeric protein product
which we licensed from the National Institute of Health and the FDA. The FDA has
agreed to collaborate on the clinical development and commercialization of the
licensed product.

We are committed to pay $100,000 per year for the reasonable and necessary
expenses incurred by the FDA in carrying out the FDA's responsibilities under
the FDA cooperative research and development agreement. The FDA cooperative
research and development agreement has a term of four years. During 1997 and
1998, we expensed $100,000 per year on research and development costs. The term
of the FDA cooperative research and development agreement runs to August 27,
2001.

National Institute of Health cooperative research and development agreement
and licensing agreements. We entered into an exclusive worldwide licensing
agreement with the National Institute of Health and the FDA to develop and
commercialize an IL-13 chimeric protein therapy. The National Institute of
Health license required a $75,000 non-refundable license issue payment and
minimum annual royalty payments of $10,000, which increase to $25,000 after our
first commercial sale. The National Institute of Health license also provides
for milestone payments and royalties based on future product sales. We are
required to pay the costs of filing and maintaining product patents on the
licensed products. We also recently executed and are awaiting confirmation from
the National Institute of Health on a cooperative research and development
agreement and a license agreement with National Cancer Institute for mesothelin
mab. The terms and conditions of the mesothelin mab agreements with National
Institute of Health are substantially the same as our agreement with the
National Institute of Health for IL-13 chimeric protein therapy.

Georgetown University Agreements. We previously entered into two license
and sponsored research agreements with Georgetown University relating to LED,
LEP, and LE-AON. Under the Georgetown licenses, and in return for the
sponsorship of supportive research, we have exclusive licenses to manufacture
and sell LED, LEP, and LE-AON. We are also obligated to pay Georgetown royalties
on commercial sales of the liposome products. In addition, we are obligated to
make certain advance royalty payments to Georgetown, and these payments will be
credited against future royalties that we are required to pay under our
agreements with Georgetown. The Georgetown licenses are generally not terminable
by Georgetown, except if we are in default. Our rights under the Georgetown
Licenses with respect to LED and LEP have recently been sublicensed to Pharmacia
and UpJohn.

Any default and resulting termination of the Georgetown licenses would be
materially adverse to our liposome program, could require curtailment or
termination of this program and could therefore have a material adverse effect
on us. Dr. Aquilur Rahman, our Chief Scientific Officer, is an Adjunct Professor
of Radiology at Georgetown and Dr. Anatoly Dritaschilo, a director of ours, is
the Chairman of the Department of Radiation Medicine and Medical Director of the
Georgetown University Medical Center in Washington, D.C.

25
<PAGE>

Marketing and Sales

Treating cancer is a highly specialized activity where the treating
oncologists are generally concentrated in major medical centers. Our marketing
strategy is designed to enable us to operate with a relatively small direct
sales force in the United States. As our products receive regulatory approval,
we plan to develop a sales force of modest size to service the approximately
3,500 practicing oncologists in the United States. We also intend to pursue
collaborative agreements with other companies to market our products elsewhere
in the world.

In May 1997, we entered into a collaboration agreement with BioChem Pharma,
where BioChem Pharma will develop, market and distribute BUdR in Canada after
receipt of approval from the Canadian Health Protection Branch of BUdR for
certain specific uses, the applications for which will be submitted by BioChem
Pharma.

In February l999, we licensed our LEP and LED to Pharmacia & UpJohn
Company. As part of Pharmacia & UpJohn's responsibilities under the license
agreement, Pharmacia & UpJohn will have to actively market and promote LED and
LEP products throughout the world once they have been approved for commercial
sale, which we do not expect to occur for several more years, if ever. Under the
provisions of our license agreement with Pharmacia & Upjohn, we have the right
to co-promote the product within the United States.

Manufacturing

We don't have dedicated manufacturing facilities and we don't plan to
acquire or establish our own dedicated manufacturing facilities in the
foreseeable future. Rather, we plan to develop manufacturing relationships with
established pharmaceutical manufacturers to produce BudR, our liposome products,
IL-13 and Mesothelin Mab.

There are a number of FDA approved suppliers of raw materials used in our
products in existence. There are also a number of facilities with FDA Good
Manufacturing Practice approval for contract manufacturing of our proposed
products. We have a source for the manufacture of BudR and we are in the process
of arranging for sources for the manufacture of certain of our planned liposome
products and the IL-13 chimeric protein. We believe that, in the event of the
termination of our existing services for product supplies and manufacture, that
we will be able to enter into agreements with other suppliers and/or
manufacturers on similar terms. We cannot be certain that there will be
manufacturing capacity available to us, at the time that we are ready to
manufacture our products.

Patents and Proprietary Rights

Our policy is to, whenever possible, file patent applications to protect
our technology, inventions and improvements that are important to our business.
Under our agreements with Georgetown University, we have licensed rights to four
United States patents and one pending United States patent application relating
to our liposome products under development. Under our agreements with the
National Institute of Health, we have licensed rights to two United States
patents relating to the IL-13 chimeric protein under development and three
United States patents and two pending United States patents relating to the
pending agreements for Mesothelin Mab. BudR is not currently the subject of
patents or patent applications and we don't expect to obtain patent protection
for our BudR product. Our principal advantage with respect to the development
and planned commercialization of BUdR and IUdR is our exclusive access under the
cooperative research and development agreement to the National Cancer
Institutes's clinical data regarding the compounds.

The patent position of participants in the pharmaceutical field generally
is highly uncertain, involves complex legal and factual questions, and has been
the subject of much litigation. We don't know if any patent applications will
result in patents being issued, or that the resulting patents, if any, will
provide us with protection against competitors who successfully challenge our
patents, obtain patents that may have an adverse effect on our ability to
conduct business, or are able to circumvent our patent position. It is possible
that other parties have conducted or are conducting research and could make
discoveries of compounds or processes that would precede any discoveries, which
could prevent us from obtaining patent protection for these discoveries.
Finally, we cannot be certain that others will not independently develop
pharmaceutical products similar to or obsoleting those that we plan to develop,
or duplicate any of our products.

26
<PAGE>

We depend upon unpatented trade secrets to protect our competitive
position. To protect our trade secrets, we require our employees, Scientific
Advisors, consultants and advisors to execute proprietary information and
invention assignment agreements upon commencement of their employment or
consulting relationships with us. These agreements provide that all confidential
information developed or made known to the individual during the course of their
relationship with us must be kept confidential, except in specified
circumstances. However, we can not be certain that these agreements will provide
us with meaningful protection for our trade secrets or other proprietary
information in the event of unauthorized use or disclosure of confidential
information. Invention assignment agreements executed by our Scientific
Advisors, consultants and advisors may conflict with, or be subject to, the
rights of third parties with whom these individuals have employment or
consulting relationships. In addition, we do not know if others will
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, that our trade secrets
will not be disclosed or that we can effectively protect our rights to
unpatented trade secrets.

We might have to obtain licenses to patents or proprietary rights of
others. We don't know if any licenses required under any patents or proprietary
rights would be made available on terms acceptable to us, or at all. If we do
not obtain those licenses, we could encounter delays in product market
introductions while we attempt to design around such patents, or we could find
that the development, manufacture or sale of products requiring these licenses
could be foreclosed. Litigation may be necessary to defend against or assert
claims of infringement, to enforce patents issued to us, to protect trade
secrets or know-how owned by us, or to determine the scope and validity of the
proprietary rights of others. In addition, interference proceedings declared by
the United States Patent and Trademark Office may be necessary to determine the
priority of inventions with respect to our patent applications or our licensors.
Litigation or interference proceedings could result in substantial costs to and
diversion of effort by, and may have a material adverse impact on us. In
addition, there can be no assurance that any such efforts by us in this area
would be successful.

Government Regulation

Introduction. Regulation by governmental authorities in the United States
and foreign countries is a significant factor in the development, manufacture
and marketing of our products and in our ongoing research and product
development activities. The nature and extent to which this regulation will
apply to us will vary depending on the nature of any products that we may
develop. We anticipate that all of our products will require regulatory approval
by governmental agencies prior to commercialization. In particular, human
therapeutic and some diagnostic products are subject to rigorous preclinical and
clinical testing and other approval procedures of the FDA and similar regulatory
authorities in foreign countries. Various Federal statutes and regulations also
govern or influence testing, manufacturing, safety, labeling, storage and
record-keeping related to such products and their marketing. To obtain these
approvals and the subsequent compliance with appropriate Federal statutes and
regulations requires substantial time and financial resources. If we or our
collaborators fail to obtain, or experience any delay in obtaining regulatory
approval, this could adversely affect the marketing of any of our products, our
ability to receive product revenues and our liquidity and capital resources.

FDA approval process. Prior to the commencement of clinical studies
involving human beings, preclinical testing of new pharmaceutical products is
generally conducted on animals in the laboratory to evaluate the potential
efficacy and the safety of the product. The results of these studies are
submitted to the FDA as a part of an investigational new drug application. The
investigative new drug application must become effective before clinical testing
in humans can begin. Typically, clinical evaluation involves a time consuming
and costly three-phase process. In Phase I, clinical trials are conducted with a
small number of subjects to determine the early safety profile, the pattern of
drug distribution and metabolism. In Phase II, clinical trials are conducted
with groups of patients afflicted with a specific disease in order to determine
preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase
III, large-scale, multi-center, comparative trials are conducted with patients
afflicted with a target disease in order to provide enough data to demonstrate
the efficacy and safety required by the FDA. The FDA closely monitors each of
the three phases of clinical testing and may, at its discretion, re-evaluate,
alter, suspend or terminate the testing based upon the data and its assessment
of the risk/benefit ratio to the patient.

27
<PAGE>

The results of preclinical and clinical testing on a nonbiologic drug and
certain diagnostic drugs and certain diagnostic drugs are submitted to the FDA
in the form of a new drug application for approval to commence commercial sales.
In responding to a new drug application, the FDA may grant marketing approval,
request additional information or deny the application. The FDA may deny the
application if the FDA determines that the application does not satisfy its
approval criteria. Similar procedures are in place in countries outside the
United States.

In 1988, the FDA issued "fast-track" regulations intended to accelerate the
approval process for the development, evaluation and marketing of new
therapeutic and diagnostic products used to treat life-threatening and severely
debilitating illnesses, especially those for which no satisfactory alternative
therapies exist. Fast-track designation affords us with early interaction with
the FDA in terms of protocol design and permits. However, fast-track does not
require the FDA to grant approval after completion of Phase II clinical trials
(although the FDA may require subsequent Phase III clinical trials or even
post-approval Phase IV efficacy studies). We believe that a number of our
product candidates may fall under these regulations, but we don't know if any of
our products will receive this or other similar regulatory treatment.

In late 1992, legislation imposing FDA user fees on drug manufacturers was
enacted. We will have to pay fees for each commercial marketing drug application
that we submit for FDA approval, and annual product and establishment fees will
also be imposed upon approval. The revenues raised from these fees are intended
to increase the resources of the FDA, and by doing so, to increase the speed
with which the FDA reviews and approves drug marketing applications. Currently,
the user fee for a new drug application is approximately $260,000 and the
statute provides for periodic fee increases. The statute currently provides
small companies (defined as companies with less than 500 employees that are not
marketing a prescription drug product) with a reduction in the initial
application fee and contains limited provisions for fee waivers. In 1996, we
were granted a waiver of the user fee required with the filing of our new drug
application for BudR.

Waxman-Hatch Act. The Drug Price Competition and Patent Restoration Act of
1984, also known as the Waxman-Hatch Act, contains provisions relating to
marketing exclusivity from generic competition for most non-biological drugs and
patent restoration for most pharmaceutical products. A five-year marketing
exclusivity period is provided for new chemical entities, and a three-year
marketing exclusivity period is provided for approved drugs for which new
clinical investigations are essential to the receipt of FDA approval to market
the product. For purposes of the Waxman-Hatch Act, a new chemical entity is
defined as a drug product that contains an active moiety not previously approved
by the FDA for marketing. The five year exclusivity period would not prevent a
competitive product from being marketed based upon new preclinical and clinical
studies conducted by the competitor.

Orphan Drug Act. Under the Orphan Drug Act, the FDA may designate drug
products as orphan drugs if there is no reasonable expectation of recovery of
the costs of research and development from sales in the United States or if the
drugs are intended to treat a rare disease or condition. A rare disease or
condition is defined as a disease or condition that affects less than 200,000
persons in the United States. If certain conditions are met, designation as an
orphan drug confers upon the sponsor, marketing exclusivity for seven years
following FDA approval of the product. This means that the FDA cannot approve
another version of the "same" product for the same use during this seven year
period. However, the market exclusivity provision does not prevent the FDA from
approving a different orphan drug for the same use or the same orphan drug for a
different use. The Orphan Drug Act has been controversial and many legislative
proposals have been introduced in Congress to modify various aspects of the
Orphan Drug Act, particularly the market exclusivity provisions. We don't know
if new legislation will be introduced in the future that may adversely impact
the availability or attractiveness of orphan drug status for any of our
products.

Other Regulations. We are subject to various Federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
manufacturing practices and the use and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and infectious disease
agents, used in connection with our research work. We can not predict the extent
of government regulation which might result

28
<PAGE>

from future legislation or administrative action. We have has not made and don't
plan on making material capital expenditures with respect to the protection of
the environment

Product Liability and Insurance

Our business exposes us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of human therapeutic
products. We don't have any product liability insurance at this time. Even
though we plan to obtain product liability insurance, we don't know if we will
be able to obtain or maintain this insurance on acceptable terms or that any
insurance we obtain will provide adequate coverage against potential
liabilities. Claims or losses in excess of any liability insurance coverage we
obtain could have a material adverse effect on our business, financial condition
or results of operations.

Competition

Competition in the discovery and development of methods for treating cancer
is intense. Numerous pharmaceutical, biotechnology and medical companies and
academic and research institutions in the United States and elsewhere are
engaged in the discovery, development, marketing and sale of products for the
treatment of cancer. These include surgical approaches, new pharmaceutical
products and new biologically derived products. We expect to encounter
significant competition for the products we plan to develop. Companies that
complete clinical trials, obtain regulatory approvals and commence commercial
sales of their products before we or our competitors do may achieve a
significant competitive advantage. A number of pharmaceutical companies are
developing new products for the treatment of the same diseases that we are
targeting. In some instances, our competitors already have products in clinical
trials. In addition, certain pharmaceutical companies are currently marketing
drugs for the treatment of the same diseases that we are targeting, and may also
be developing new drugs to address these disorders.

We believe that our competitive success is dependent upon our ability to
create and maintain scientifically advanced technology, develop proprietary
products, attract and retain scientific personnel and obtain patent or other
protection for our products. We also believe our competitive success is
dependent upon our ability to obtain required regulatory approvals, obtain
orphan drug status for certain products and manufacture and successfully market
our products either independently or through outside parties. Many of our
competitors have substantially greater financial, clinical testing, regulatory
compliance, manufacturing, marketing, human and other resources. In addition, we
will continue to seek licenses for key technologies related to our fields of
interest and we may face competition with respect to such efforts.

Human Resources

As of March 16, 1999 we have six full-time employees, and one part-time
employee. We also have consulting agreements with eight consultants. None of our
employees or consultants are represented by a collective bargaining arrangement
and we believe that our relationship with our employees and consultants is good.
We intend to continue to retain consultants and to add personnel as we implement
our business strategy.

Facilities

Our administrative offices are located in approximately 1,330 square feet
of subleased office space in Bannockburn, Illinois. This subleased space is
provided to us at a market rate by Option Care, Inc., an affiliate of our
principal stockholder and chairman of our Board of Directors.

Scientific Advisory Board

We have assembled a seven member Scientific Advisory Board. The members of
our Scientific Advisory Board provide us with expertise in areas of scientific
and medical interest. We have entered into agreements with the Scientific
Advisors providing that all inventions made by our Scientific Advisors when
working for us will belong to us; however, most of the members of our Scientific
Advisory Board are employed on a full-time

29
<PAGE>

basis by academic or research institutions. The members of our Scientific
Advisory Board are permitted to share information among themselves regarding the
projects that they are working on with us. As of March 16, 1999, we have granted
options to acquire an aggregate of 68,324 shares of our common stock to members
of our Scientific Advisory Board, and we pay a retainer to compensate our
Scientific Advisory Board members.

The members of our Scientific Advisory Board and their principal positions
and experience are set forth below:

William Bradner, Ph.D., Preclinical Dr. Bradner is a consultant in research
and development of cancer therapeutics. He has five years of academic experience
and 28 years of industrial experience prior to starting his consulting firm in
1987. His industry work included experience as Head of the Antitumor Biology
Department for Bristol-Myers Squibb and supervision of all government contract
research efforts. He has been extensively involved in all aspects of drug
discovery and development including testing, manufacture, formulation, clinical
trials and regulatory affairs.

Timothy J. Kinsella, M.D. Clinical Dr. Kinsella is Professor and Chairman
of the Department of Human Oncology, University of Wisconsin Medical School,
Madison, Wisconsin, and Deputy Director of the University of Wisconsin Clinical
Cancer Center. Dr. Kinsella is Board Certified in internal medicine, medical
oncology, and therapeutic radiology, providing a broad background for
multidisciplinary research and patient care. He has published over 100 papers on
the uses of ionizing radiation with chemical sensitizers and protectors, and is
an internationally recognized expert on the clinical uses of BUdR and IUdR.

Theodore S. Lawrence, M.D., Ph.D., Clinical. Dr. Lawrence is an Associate
Professor in the Department of Radiation Oncology at the University of Michigan
Medical Center. Dr. Lawrence is Board Certified in internal medicine, medical
oncology and therapeutic radiology. He has published laboratory and clinical
research papers on drug-x-ray interactions in the treatment of cancers. He is an
expert on the clinical uses of BUdR and IUdR and is directing clinical trials
with these agents.

Harvey D. Preisler, M.D., Clinical. Dr. Preisler is the Director of Rush
Cancer Institute and a Professor of Medicine at Rush Medical Center in Chicago,
Illinois. Dr. Preisler is Board Certified in internal medicine and medical
oncology, and has approximately 290 publications to his credit in peer reviewed
journals.

Ralph R. Weichselbaum, M.D., Clinical. Dr. Weichselbaum is Professor and
Chairman of the Department of Radiation and Cellular Oncology, University of
Chicago. Dr. Weichselbaum has over 300 publications in radiation biology, gene
regulation and experimental cancer therapeutics. He is internationally known for
his discoveries of repair of radiation damage and is a leader in extending gene
therapy to clinical application.

Alfred Yung, M.D. Dr. Yung is Professor of Neurology and Deputy Chairman in
the Department of Neuro-Oncology and Tumor Biology at the University of Texas
M.D. Anderson Cancer Center. Dr. Yung completed his Bachelor of Science summa
cum laude at the University of Minnesota and received his M.D. from the
University of Chicago, Pritzker School of Medicine. Dr. Yung's post graduate
training was completed at the University of California and he also completed a
fellowship in Neuro-Oncology at the Memorial Sloan-Kettering Cancer Center in
New York. Dr. Yung sits on the editorial board of several scientific journals.

Michael D. Prados, M.D., FACP. Dr. Prados is Professor and Chief,
Neuro-Oncology Service, University of California at San Francisco. Dr. Prados
completed his Bachelor of Science at the University of New Orleans and received
his M.D. from Louisiana State University School of Medicine. He is a
neuro-surgeon with expertise in the treatment of brain tumors and brain
metastasis. He has over 200 professsional publications to his credit.

Although, our Scientific Advisory Board has not had a formal meeting of the
entire Board, Dr. Rahman has contacted each of the members of the Scientific
Advisory Board to discuss the results of clinical trials with which the Advisory
Board members are involved and to solicit advice on the design and execution of
our preclinical studies.

30
<PAGE>

Legal Proceedings

We are not a party to any litigation or other legal proceedings.

31
<PAGE>

MANAGEMENT

Our directors and executive officers are as follows:

<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John N. Kapoor, Ph.D. 55 Director, Chairman of the Board
James M. Hussey 39 President, Chief Executive Officer, and Director
Aquilur Rahman, Ph.D. 56 Director, Chief Scientific Officer
Anatoly Dritschilo, M.D. 54 Director
Erick E. Hanson 52 Director
Sander A. Flaum 57 Director
Mahendra G. Shah, Ph.D. 54 Vice President, Corporate and Business Development
Kevin Harris 38 Chief Financial Officer
Lewis Strauss, M.D. 48 Vice President, Chief Medical Officer
</TABLE>

All directors hold office until the next annual meeting of the stockholders
and until their successors are duly elected. Officers are appointed to serve,
subject to the discretion of our Board of Directors, until their successors are
appointed.

John N. Kapoor, Ph.D., Chairman of the Board of Directors, has been a
director of ours since July 1990. Prior to forming us, Dr. Kapoor formed EJ
Financial Enterprises, Inc., a health care consulting and investment company, in
March 1990, of which Dr. Kapoor is currently President. Dr. Kapoor is presently
Chairman of Option Care, Inc., a provider of home healthcare services; Chairman
of Unimed Pharmaceuticals. Inc., a developer and marketer of pharmaceuticals for
cancer, endocrine disorders and infectious diseases; and Chairman of Akorn,
Inc., a manufacturer, distributor, and marketer of generic ophthalmic products.
Dr. Kapoor received his Ph.D. in medicinal chemistry from the State University
of New York in 1970 and a B.S. in pharmacy from Bombay University in India.

James M. Hussey joined us in March 1998 as our President, Chief Executive
Officer, and a member of our Board of Directors. Mr. Hussey was previously the
Chief Executive Officer of Physicians Quality Care, a managed care organization
from 1994 to January 1998. Previous to that, Mr. Hussey held several positions
with Bristol-Myers Squibb from 1984 to 1994, most recently as the General
Manager Midwest Integrated Regional Business Unit. Mr. Hussey received a B.S.
from the College of Pharmacy at Butler University and an M.B.A. from the
University of Illinois.

Aquilur Rahman, Ph.D., joined us as Chief Scientific Officer and as a
member of our Board of Directors in July 1990. Dr. Rahman joined us on a full
time basis in March 1996. Dr. Rahman is currently adjunct professor of radiology
and was an associate professor of pathology and pharmacology at Georgetown
University until March 1996. Dr. Rahman has more than 15 years of research
experience in developing methods of chemotherapy treatment for cancer. Dr.
Rahman received his Masters of Science in Biochemistry from the University of
Dacca (Bangladesh) in 1964 and his Ph.D. in Pharmaceutics from the University of
Strathclyde (Glasgow, U.K.) in 1972.

Anatoly Dritschilo, M.D., joined us as a member of our Board of Directors
in July 1990. Since August 1979, Dr. Dritschilo has been Chairman of the
Department of Radiation Medicine and Medical Director of the Georgetown
University Medical Center in Washington, D.C. Dr. Dritschilo received his B.S.
in Chemical Engineering from the University of Pennsylvania, his M.S. in
Engineering in 1969 from Newark College of Engineering, and his M.D. in 1973
from the College of Medicine of New Jersey.

Erick E. Hanson, joined us as a Director in April 1997. Mr. Hanson is
currently President of Hanson and Associates, a consulting firm working with
venture capital companies. Previously, Mr. Hanson served as President and Chief
Executive Officer of Option Care, Inc., a provider of home healthcare

32
<PAGE>

services. Prior to joining Option Care, Inc. Mr. Hanson held a variety of
positions with Caremark, Inc., including from 1991-1995, Vice President Sales
and Marketing. Mr. Hanson served as President and Chief Operating officer of
Clinical Partners, Inc. in Boston, MA, from 1989-1991 and prior to 1989 was
associated with Blue Cross and Blue Shield of Indiana for over twenty years. Mr.
Hanson presently serves on the Board of Directors for Condell Medical Centers.

Sander Flaum, joined us as a Director in July 1998. Mr. Flaum is President
and CEO of Robert A. Becker EURO/RSCG, a marketing and advertising company.
Prior to becoming President of Robert A. Becker, Mr. Flaum was Executive Vice
President of Kleinter Advertising and prior to that, served as Marketing
Director of Lederle Pharmaceuticals, a division of American Cyanimid
Corporation, where he was employed from 1965 - 1984.

Mahendra G. Shah, Ph.D., has served as our Vice President of Corporate and
Business Development since October 1991. Dr. Shah is also a Vice President of EJ
Financial Enterprises, Inc., a position he has held since October 1991. Prior to
joining us, Dr. Shah was the Senior Director of New Business Development with
Fujisawa USA from January 1987 to October 1991. Dr. Shah received his M.S. in
1978 and Ph.D. in 1984 in Industrial Pharmacy from St. John's University and an
M.S. in 1969 and a B.S. in 1967 in Pharmaceutical Chemistry from Gujarat
University in India.

Kevin Harris, has served as our Chief Financial Officer and Secretary since
June 1998. Mr. Harris is also Director of Taxes and Planning at E.J. Financial
Enterprises, Inc. a health care consulting and investment company. Prior to
joining E.J. Financial Enterprises, Inc. Mr. Harris was Vice-President of
Finance of Duo-Fast Corporation. Previously, Mr. Harris worked eleven years in
public accounting, including six years with Arthur Andersen & Company. Mr.
Harris received a B.Sc. in accounting from Illinois State University in 1983 and
a M.S. from DePaul University in 1988. Mr. Harris is a Certified Public
Accountant and a Certified Financial Planner.

Lewis Strauss, M.D. has served as our Chief Medical Officer since April
1998. After medical training at Cornell Medical College and pediatric residency
at The John Hopkins School of Medicine in Baltimore, Dr. Strauss served as a
Pediatric Oncologist at John Hopkins Oncology Center from 1980 to 1991 and at
Northwestern University from 1991 to 1997.

Director Compensation

Our directors do not receive any cash compensation for attendance at
directors' meetings or for serving on any committee of our Board of Directors.
Our directors are reimbursed for certain out-of-pocket expenses incurred in
connection with attendance at such meetings.

Non-employee directors are eligible to participate in our equity incentive
plan. Eligible directors receive nonstatutory stock options, pursuant to an
automatic, non-discretionary grant mechanism, whereby each eligible director is
granted an option to purchase 5,000 shares of common stock upon his or her
initial and subsequent election as a director. Options granted to outside
directors vest after one year of service. Currently, three of our directors are
eligible to participate in this program.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for our directors, officers and other
employees and administers various incentive compensation and benefit plans. The
Compensation Committee consists of Messrs. Kapoor and Dritschilo, each of whom
is a non-employee director of ours. In 1998, we paid EJ Financial $125,000
pursuant to a consulting agreement for certain business and financial services,
plus reimbursement of expenses. Dr. Kapoor, our Chairman, is the president and a
director of EJ

33
<PAGE>

Financial. Dr. Mahendra Shah, our Vice President, is also a Vice President of EJ
Financial and Kevin Harris, our Chief Financial Officer, is Director of Taxes
and Planning of EJ Financial. We believe the charges provided for in the
consulting agreement are reasonable and accurately reflect the cost of the
services provided. Unless terminated by the parties, the consulting agreement
automatically renews for a one year term each June. Until March 1, 1996, Dr.
Aquilur Rahman, a Director and the Company's Chief Scientific Officer, was
employed by Georgetown University as an associate professor. Dr. Anatoly
Dritschilo, a Director of ours, is currently employed by Georgetown University
as Chairman of the Department of Radiation Medicine and Medical Director of the
Georgetown University Medical Center in Washington, D.C. We previously entered
into license and sponsored research agreements with Georgetown University that
were conducted in the laboratory of Dr. Rahman, and Drs. Dritschillo and Rahman
have agreements with Georgetown which provide for a sharing of monies, if any,
which may be paid by us to Georgetown pursuant to those license agreements for
our liposome compounds. As of April 27, 1996, our obligation to fund further
research pursuant to its agreements with Georgetown was terminated. Finally, Dr.
Kapoor is Chairman of Option Care, Inc., a company from which we lease our
principal offices. See "Certain Transactions."

Employment Agreements

We entered into an employment agreement with James Hussey, our President,
Chief Executive Officer and a member of our Board of Directors in March 1998.
Mr. Hussey's employment agreement is terminable by either Mr. Hussey or us on 90
days written notice. Under the terms of his employment agreement we pay Mr.
Hussey an annual salary of $225,000, and he is also eligible for a bonus payment
up to 80% of his salary, based upon the achievement of certain goals set by our
Board of Directors. Pursuant to his employment contract, we granted Mr. Hussey
options to purchase 400,000 shares of our common stock at an exercise price of
$4.75 per share. 25% of the options vest yearly, commencing January 12, 1999.

We entered into an employment agreement with Dr. Lewis Strauss, our Vice
President - Chief Medical Officer in April 1998. Under the terms of his
employment agreement, we pay Mr. Strauss an annual salary of $140,000, and he is
also eligible for a bonus payment of up to 50% of his salary, based upon the
achievement of certain goals set by our Board of Directors. Pursuant to his
employment contract, we granted Mr. Strauss options to purchase 12,000 shares of
our common stock at an exercise price of $3.875 per share. 25% of the options
vest yearly, commencing July 23, 1999.

Executive Compensation

The following table summarizes the total compensation for services rendered
to us for the fiscal year ended December 31, 1998, by those persons holding the
position of Chief Executive Officer and for each executive officer who received
more than $100,000 in salary and bonus in 1998.

<TABLE>
<CAPTION>
Summary Compensation Table

Long-Term
Annual Compensation Compensation Awards
---------------------------------------------------- -----------------------
Annual Other Restricted
Fiscal Compensation Annual Stock
Name and Principal Position Year Salary ($) Bonus($) Compensation($) Awards($) Options(#)
- --------------------------- ------ ---------- ------------ -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1998 $5,800 $0 $0 $0 0
William C. Govier, 1997 138,600 0 0 0 0
Chief Executive Officer 1996 121,000 39,600 0 0 0
and President(1)
</TABLE>

34
<PAGE>

<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
---------------------------------------------------- -----------------------
Annual Other Restricted
Fiscal Compensation Annual Stock
Name and Principal Position Year Salary ($) Bonus($) Compensation($) Awards($) Options(#)
- --------------------------- ------ ---------- ------------ -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James M. Hussey, 1998 $197,900 $90,000 $7,100 $187,500 400,00(3)
Chief Executive Officer
And President(1)

Aquilur Rahman, 1998 $178,000 $54,000 $9,600 $0 0
Chief Scientific Officer 1997 167,000 51,000 0 0 50,000(4)
1996 144,100 45,000 0 0 0

Lewis Strauss, M.D. (2) 1998 $110,000 $16,800 $20,000 $35,000 20,000(5)
</TABLE>

- ----------
(1) Dr Govier resigned as our President, Chief Executive Officer and a Director
effective January 18, 1998. Effective March 16, 1998, Mr. James M. Hussey
succeeded Dr. Govier as President and Chief Executive Officer and was
appointed to fill the vacancy in the Board of Directors created by Dr.
Govier's departure.

(2) Dr. Strauss joined us as Chief Medical Officer on April 6, 1998.

(3) The stock options became exercisable for 25% of the covered shares on
January 16, 1999 and will become exercisable with respect to an additional
25% on each anniversary of such date.

(4) The stock options became exercisable for 50% of the covered shares on
August 13, 1997 and the remaining shares became exercisable on August 15,
1998 in accordance with the 1995 Stock Option Plan.

(5) The stock options became exercisable for 25% of the covered shares on April
6, 1999, and will become exercisable with respect to an additional 25% of
each anniversary of such date.

Option Grants In Last Fiscal Year

The following table sets forth information with respect to grants of options to
purchase common stock granted to the Named Executive Officers during the fiscal
year ended December 31, 1998.

<TABLE>
<CAPTION>
Individual Grants
Name Granted # of Total Exercise Expiration Potential Realizable
Options (#) Options Granted Price Per Share Date Value as Assumed
to Employees in Annual Rates of Stock
Fiscal Year Price Appreciation
For Option Term
5% 10%
<S> <C> <C> <C> <C> <C> <C>
James M. Hussey 400,000 71.81% $4.75 1/16/08 $1,194,900 $3,028,11
Lewis Strauss 20,000 3.59% $3.75 4/06/08 $47,167 $119,531
</TABLE>

Aggregated Option Exercises In Last Fiscal
Year, And Fiscal Year-End Option Values

35
<PAGE>

The following table sets forth information with respect to stock options
exercised during the fiscal year ended December 31, 1998, and the value at
December 31, 1998 of unexercised stock options held by our executive officers:

Fiscal Year End Option Values

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE MONEY AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
SHARES ACQUIRED REALIZED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) VALUE ($) UNEXERCISABLE (#) UNEXERCISABLE ($)
- ----------------- --------------- ---------- -------------------------- -----------------------
<S> <C> <C> <C> <C>
William C. Govier 0 0 0/0 0/$0
James M. Hussey 0 0 0/400,000 0/$2,950,000
Aquilur Rahman 0 0 50,000/0 0/$256,250
</TABLE>

- ----------
* Represents the fair market value at December 31, 1998, of the common stock
underlying the options minus the exercise price.

Stock Option Plans

1998 Equity Incentive Plan

On July 23, 1998, our Board of Directors adopted the 1998 Equity Incentive
Plan. The 1998 Equity Incentive Plan will be presented to our stockholders for
approval at our 1999 Annual Meeting.

Under the 1998 Equity Incentive Plan, our Board of Directors as a whole, or
a committee of outside directors, is authorized to award stock options,
restricted stock, performance shares, performance units and bonus stock. The
1998 Equity Incentive Plan has a 10-year term. Subject to anti-dilution
adjustments, a maximum of 2,000,000 shares of our common stock may be granted,
of which no more than 250,000 shares may be for awards of options, restricted
stock or bonus stock. All of our full-time employees, as well as consultants and
directors, are eligible to receive awards.

The administrators of the plan have the discretion to determine the persons
to whom awards shall be made, and subject to the terms of the plan, the terms
and conditions of each award. The administrators of the plan may, among other
things, cancel outstanding awards and grant substitute awards with an exercise
price determined by reference to the value of our common stock on the date of
substitute awards, accelerate vesting and waive terms and conditions of
outstanding awards and permit eligible employees or consultants to elect to
acquire, prior to earning compensation, options in lieu of receiving such
compensation. All awards become fully vested upon a change of control of us.

Options. The exercise price of options must be no less than 85% of the fair
market value of a share of common stock on the grant date (100% for incentive
stock options and 110% for incentive stock options granted to an individual
possessing more than 10% of our voting rights). Options become exercisable as to
25% of the shares subject to the award on each of the first four anniversaries
of the grant date unless the administrator specifies a different vesting
schedule. Options have a maximum term of 10 years. The option exercise price may
be paid (i) in cash or by check, (ii) in stock, (iii) in restricted stock, (iv)
through a simultaneous sale through a broker of unrestricted stock acquired upon
exercise of the option, (v) through a loan or loan guaranty made by us or (vi)
any combination of the foregoing. Options may be designated by the administrator
as incentive stock options for which the amount of option "spread" at the time
of exercise, assuming no disqualifying disposition, is generally not to be
taxable income to the

36
<PAGE>

grantee (except for possible alternative minimum tax liability) and is not
deductible by us for federal income tax purposes.

Restricted stock and bonus stock. The administrator will determine the
purchase price applicable to grants of restricted stock, which may be as low as
the par value of the common stock. The administrator will determine the
restrictions, if any, applicable to the restricted stock, which may include
performance goals. The administrator may also grant bonus stock.

Grant of performance units and performance shares. Before performance units
or performance shares are granted, the administrator is required to (i)
determine objective performance goals and the amount of compensation under the
goals applicable to the grant, (ii) designate the measuring period of between
one and seven years to ascertain the achievement of the goals and (iii) assign a
performance percentage to each level of attainment of performance goals during
the measuring period. The administrator may use any performance factors it deems
appropriate. A grant of performance units or performance share may, but need
not, be identified with another award under the 1998 Equity Incentive Plan.

Exercise of performance units and performance shares. If the minimum
performance goals applicable to an award of performance units or performance
shares are achieved, then the award generally becomes exercisable on the later
of the first anniversary of the grant date or the first day after the end of the
measuring period. The benefit of a performance unit is dependent upon the
percentage of performance goals attained and the value of each performance unit
(which is fixed at the time of its grant). If the minimum performance goals of a
performance unit award are achieved, then we will deliver to the grantee (i) in
the case of performance units, cash in an amount equal to the product of the
number of performance units successively multiplied by the value of each
performance unit and the performance percentage achieved during the measuring
period, or (ii) in the case of an award of performance shares, shares of common
stock equal in number to the product of the number of performance shares subject
to the award multiplied by the performance percentage achieved during the
measuring period, in either case except to the extent that the administrator
determines that cash or common stock should be paid in lieu of some or all of
such common stock or cash, as applicable. Any performance unit or performance
share award with respect to which the performance goals are not achieved shall
expire.

Loans and loan guarantees. The administrator may allow a grantee to defer
payment to us of all or part of the exercise price of an option, the purchase
price of restricted stock or any taxes associated with any non-cash benefit
under the 1998 Equity Incentive Plan. The administrator also may cause us to
guarantee a third-party loan to cover such amounts. The terms of any such
deferral or guarantee shall include an interest rate not more favorable to the
grantee than the terms applicable to funds borrowed by us from time to time. The
administrator may forgive the repayment of any or all of the principal of or
interest on any such deferred payment obligation.

Exercise after termination of continuance status as an employee or
consultant. If a grantee's continuance status as an employee or consultant is
terminated for cause, all unvested or unexercised awards will terminate and be
forfeited. In the event of death or disability of a grantee, any restricted
stock will become vested, any unexercised option may be exercised for 180 days
following the date of termination, and any unexercised performance share or
performance units may be exercised for 180 days following such date, provided
that if a measuring period has not ended, the benefit will be pro-rated on the
basis of the elapsed portion of the measuring period and the actual or
extrapolated performance, as determined by the committee, over the full
measuring period. If a grantee's continuance status as an employee or consultant
terminates for any other reason, any restricted stock will be forfeited, the
then-exercisable portion of any unexercised option may be exercised for 90 days
and any unexercised performance shares or performance units may be exercised if
and to the extent determined by the committee. The committee has the discretion
to extend such post-termination exercisability.

37
<PAGE>

Section 162(m) Compensation Deductibility Limit. Under Section 162(m) of
the Internal Revenue Code, relating to the disallowance of deductions for
compensation of certain executive officers in excess of $1,000,000 per year, the
limitation on such deductions (the "162(m) Limit") the following provisions
shall apply with respect to such grant: (i) the exercise price of any option
shall equal 100% of the value of the common stock on the grant date, (ii) the
performance units or performance share to any grantee for any measuring period
shall not have a value (as of the date of the grant) in excess of the grantee's
base annual salary at the time of the grant multiplied by the number of years in
the measuring period and the performance percentage for such performance units
or performance shares shall not exceed 150% and (iii) the value (as of the date
of grant) of any stock bonus awarded to a grantee for each calendar year shall
not exceed the grantee's base annual salary in effect for such year. The
administrator shall certify in writing prior to payment of compensation related
to any performance unit, performance share or stock bonus that the performance
goals and any other material terms were in fact satisfied.

Amendments. The 1998 Equity Incentive Plan may be amended by the Board of
Directors without stockholder approval except as may be required to permit
transactions in common stock to be excepted from liability under Section 16(b)
of the Securities Exchange Act of 1934, or under the listing requirements of any
securities exchange or national market system on which any of our equity
securities are listed.

1995 Stock Option Plan

In January 1995, our Board of Directors and our stockholders approved the
1995 Stock Option Plan. Currently, grants under the 1995 Stock Option Plan have
been suspended and if our stockholders approve the 1998 Equity Incentive Plan,
the 1995 Stock Option Plan will be terminated and any unissued shares of common
stock reserved for issuance under the 1995 Stock Option Plan became included
within the number of shares of common stock reserved for issuance under the 1998
Equity Incentive Plan.

The 1995 Stock Option Plan provides for the granting to employees
(including officers and employee directors) of "incentive stock options" within
the meaning of Section 422 of the Internal Revenue Code of 1986, the granting to
employees (including officers, employees, directors, and consultants) of
non-statutory stock options. The purpose of the 1995 Stock Option Plan was to
attract and retain the best available personnel to us and to encourage stock
ownership by our employees, officers, directors and consultants to give them a
greater personal stake in our success. In May 1997, our stockholders amended the
1995 Stock Option Plan to provide for the reservation of a total of 1,400,000
shares of our common stock for issuance under the 1995 Stock Option Plan.

The 1995 Stock Option Plan is administered by our Board of Directors, which
determines the terms of the options granted under the 1995 Stock Option Plan,
including the exercise price, number of shares subject to the award and the
exercisability thereof. Generally, options granted to employees and consultants
under the 1995 Stock Option Plan vest and become exercisable at a rate of 25% of
the shares subject to the option one year from the date of grant, but our Board
of Directors has the discretion to determine the vesting of shares subject to
option. The terms of incentive stock options and non-statutory stock options
granted under the 1995 Stock Option Plan may not exceed ten (10) years. No
option granted under the 1995 Stock Option Plan may be transferred by the
optionee other than by will or the laws of descent or distribution and each
option may be exercised, during the lifetime of the optionee, only by such
optionee. In the event we merge with or into another corporation or sell of
substantially all of our assets, each option may be assumed or an equivalent
option substituted by the successor corporation, or the administrator, in lieu
of assumption or substitution, may provide for the optionee to have the right to
exercise the option as to all or a portion of the covered shares.

In the event any change is made in our capitalization, such as a stock
split or stock dividend, which results in greater or lesser number of shares of
our common stock, appropriate adjustment shall be made in the option price and
in the number of shares subject to the options. In the event of the proposed

38
<PAGE>

dissolution or liquidation of us, to the extent that an option has not been
previously exercised, it will terminate immediately prior to the consummation of
such proposed action.

The exercise price of all incentive stock options granted under the 1995
Stock Option Plan must be at least equal to the fair market value of the shares
of common stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting rights of our outstanding capital
stock, the exercise price of any incentive stock option granted must equal at
least 110% of the fair market value on the date of grant. No incentive stock
options may be granted to a participation, that, when aggregated with all other
incentive stock options granted to such participant would have an aggregate fair
market value in excess of $100,000 becoming exercisable in any calendar year. No
options have been granted to date at prices less than 100% of the fair market
value on the date of the grant. To date, a total of 1,188,000 shares have been
granted under the 1995 Stock Option Plan.

Director Option Plan

The Director Option Plan was adopted by our Board of Directors in January
1995, approved by our stockholders in January 1995 and amended by our Board of
Directors in March 1997. Upon the adoption of the 1998 Equity Incentive Plan,
which allows for issuances of options to directors, by our Board of Directors,
the Director Option Plan has been suspended and will be terminated upon approval
of the 1998 Equity Incentive Plan by our shareholders. While it was in
operation, the Director Option Plan provided for the grant of nonstatutory stock
options to non-employee directors of ours who do not hold more than 5% of our
outstanding common stock, pursuant to an automatic, non-discretionary grant
mechanism. A total of 100,000 shares of common stock were authorized under the
1995 Director Option Plan. At the time of the adoption of the 1998 Equity
Incentive Plan, two directors were eligible to participate in the plan.

The exercise price of options granted to outside directors was required to
be 100% of the fair market value of our common stock on the date of grant. The
consideration for exercising options granted to outside directors could only
consist of cash, check, previously owned shares of our common stock or cashless
exercise. Options granted to outside directors have a five (5) year term, or
shorter upon termination of their tenure as a director. Options granted to the
outside directors vest at the rate of 25% one year from the date of grant and
6.25% at the end of each full quarter thereafter.

The Director Option Plan provided that each outside director was
automatically granted an option to purchase 5,000 shares of our common stock
upon his or her initial election as a director. Subsequently, each outside
director was granted an additional option to purchase 5,000 shares of common
stock on January 1 of each year thereafter (if, on such date, he or she has
served as a director for at least six (6) months), so long as he or she remains
an outside director. No option granted under the Director Option Plan could be
transferred by the optionee other than by will or the laws of descent or
distribution and each option could be exercised by the optionee only during his
or her lifetime.

In the event a change is made in our capitalization resulting in a greater
or lesser number of shares of our common stock, appropriate adjustment is made
in the option price and in the number of shares subject to the options. In the
event of a proposed dissolution or liquidation of us, unexercised options
terminate immediately prior to the consummation of such proposed action. In the
event of the merger or sale of substantially all of our assets, all outstanding
options are assumed or substituted by the successor corporation, or if they are
not assumed or substituted, they shall become fully vested unless the Board of
Directors determines otherwise.

Our Board of Directors may amend or terminate the Director Option Plan at
any time without approval of our stockholders. However, no such action by the
Board of Directors may unilaterally alter or impair any option previously
granted under the 1995 Director Option Plan without the consent of the optionee.

39
<PAGE>

1990 Stock Option Plan

We terminated our 1990 Stock Option Plan in January 1995. Upon termination
of the 1990 Stock Option Plan, there were 24,866 shares subject to options
outstanding under the plan. The weighted average exercise price of such
outstanding options is $.3217 per share. Options for 9,324 shares are currently
exercisable.

Limitation of Liability and Indemnification

Our certificate of incorporation limits, to the maximum extent permitted by
Delaware General Corporation Law, the personal liability of directors for
monetary damages for breach of their fiduciary duties as a director. Our bylaws
provide that we shall indemnify our officers and directors and may indemnify our
employees and other agents to the fullest extent permitted by law. We have
entered into indemnification agreements with our officers and directors
containing provisions which are in some respects broader than the specific
indemnification provisions contained in Delaware Law. Delaware Law, our bylaws
or the indemnification agreements may require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance, if
available on reasonable terms. We believe that these agreements are necessary to
attract and retain qualified persons as directors and officers.

Delaware Law does not permit a corporation to eliminate a director's duty
of care, and the provisions of our certificate of incorporation have no effect
on the availability of equitable remedies, such as injunction or rescission, for
a director's breach of the duty of care. Insofar as indemnification for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act") may be permitted for directors, officers or persons
controlling us pursuant to the foregoing provisions and agreements, we have been
informed that in the opinion of the staff of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 19, 1999 for (i) all people that we
know that beneficially own more than 5% of our outstanding common stock, (ii)
all of our directors, (iii) all of our executive officers and (iv) all of our
executive officers and directors as a group. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Percentage of beneficial ownership is based on 8,454,261 shares of our common
stock outstanding as of March 19, 1999, plus 559,004 shares subject to warrants
and options that are considered to be beneficially owned by the persons listed.
Shares of common stock subject to options or warrants exercisable or convertible
within 60 days of March 19, 1999, are deemed outstanding for computing the
percentage of the person or group holding such options or warrants.

40
<PAGE>

Amount and Nature of
Name and Address of Percentage of Beneficial Prior to Shares
Beneficial Owner Ownership(3) Benefically
- ---------------------------------- ------------------------ ---------------
John N. Kapoor 2,146,957(1) 23.82%
EJ Financial Enterprises, Inc.
225 E. Deerpath, Suite 250
Lake Forest, IL 60045

John N. Kapoor 1994-A 1,550,453(2) 17.20%
Annuity Trust
225 E. Deerpath, Suite 250
Lake Forest, IL 60045

Aquilur Rahman 915,540 10.16%
100 Corporate North, Suite 215
Bannockburn, IL 60015

Anatoly Dritschilo 259,136 2.87%
100 Corporate North, Suite 215
Bannockburn, IL 60015

James M. Hussey 166,373 1.85%
100 Corporate North, Suite 215
Bannockburn, IL 60015

Erick E. Hanson 2,000 .02%
100 Corporate North, Suite 212
Bannockburn, IL 60015

Sander Flaum 2,000 .02%
100 Corporate North, Suite 215
Bannockburn, IL 60015

William C. Govier 233,134 2.59%
225 E. Deerpath, Suite 250
Lake Forest, IL 60045

Mahendra Shah 187,106 2.08%
225 E. Deerpath, Suite 250
Lake Forest, IL 60045

Kevin M. Harris 600 .01%
225 E. Deerpath, Suite 250
Lake Forest, IL 60045

Lewis Strauss 15,862 .18%
100 Corporate North, Suite 215
Bannockburn, IL 60015

All officers and a directors as
group (10 persons) 5,479,161 60.79%

41
<PAGE>

(1) Includes 620,059 shares held by John N. Kapoor Trust, dtd 9/20/89, of which
Dr. Kapoor is the sole trustee and sole beneficiary and 904,812 shares held
by EJ Financial/NEO Management, L.P. of which John N. Kapoor is the
Managing General Partner. The address of the John N. Kapoor Trust and the
Limited Partnership is 225 East Deerpath, Suite 250, Lake Forest, Illinois
60045. The John N. Kapoor Trust also owns warrants to purchase 287,004
shares of common stock, which are assumed to have been exercised for
purposes of disclosing the ownership indicated the amount shown also
includes 300,000 shares of common stock which are held by the John N.
Kapoor Charitable Trust of which Dr. Kapoor and his spouse are co-trustees.
Dr. Kapoor disclaims beneficial ownership of the shares held by the
charitable trust.

(2) The sole trustee of the John N. Kapoor 1994-A Annuity Trust is Editha
Kapoor, Dr. Kapoor's spouse. Mrs. Kapoor also serves as trustee for four
trusts which have been established for their children and which
collectively own 310,848 shares. In addition, Ms. Kapoor serves as
co-trustee with Dr. Kapoor of the John N. Kapoor Charitable Trust which
shares are not included in the reported shares.

(3) Does not include shares held by family members of officers or directors, or
trusts established for the family members of officers or directors,
provided that such officers or directors do not have or share voting or
investment power with such family members or trusts and such officers or
directors have disclaimed beneficial ownership over such shares.

42
<PAGE>

CERTAIN TRANSACTIONS

In November, 1997 we relocated our principal corporate office to space
subleased from Option Care, Inc. Mr. Hanson, one of our directors, was formerly
President, CEO and a Director of Option Care. In addition, Dr. Kapoor, the
Chairman of our Board of Directors, is a director and principal shareholder of
Option Care, owning approximately 57.5% of Option Care outstanding shares. The
sublease was negotiated at arms length. We expensed approximately $38,700 for
rent under the Option Care sublease during 1998.

On July 1, 1994, we entered into a consulting agreement with EJ. Financial
Enterprises, Inc. The consulting agreement provides that we will pay EJ
Financial $125,000 per year (paid quarterly) for certain business and financial
services, including having certain officers of EJ Financial serve as officers of
ours. Dr. Kapoor, is the President and a director of EJ Financial. Mr. Kevin
Harris, our Chief Financial Officer is Director of Taxes and Planning of E.J.
Financial. Dr. Mahendra Shah, our Vice President, is also a Vice President of EJ
Financial. Dr. Kapoor and Dr. Shah are paid by EJ Financial. We do not
compensate Dr. Kapoor, Dr. Shah or Mr. Harris. These charges reflect the
increased need for EJ Financial's services in connection with our operation as a
publicly-held company. Unless terminated by the parties, the management services
agreement with EJ Financial automatically renews in June of each year for a one
year term.

On October 22, 1998, we established a $3,000,000 line of credit with the
John N. Kapoor Trust dated September 20, 1989, the sole trustee and sole
beneficiary of which is John N. Kapoor, our Chairman. Interest on borrowings on
the line of credit accrued at the rate of 2% over the prime rate charged by the
Northern Trust Bank. The accrued interest and outstanding principal became due
and payable on the earlier of October 1, 2001 or the date on which we completed
a public or private offering of debt or equity securities or a licensing
agreement for our products. There were no borrowings on the line of credit
during 1998 and borrowings of $250,000 in 1999. The line of credit was
terminated in February 1999 as a result of us entering into a license agreement
with Pharmacia and UpJohn Company and the line of credit was repaid in the
amount of $250,000 of principal and $1,100 of interest.

Dr. Acquilur Rahman, our Chief Scientific Officer and a Director of ours,
was formerly an associate professor of pathology and pharmacology at Georgetown
University. Dr. Anatholy Dritschilo, a Director of ours, is currently chairman
of the Department of Radiation Medicine and Medical Director of the Georgetown
Medical Center in Washington, D.C. As a result of their respective positions
with Georgetown University both Dr. Rahman and Dr. Dritschilo entered into
agreements with Georgetown relating to the ownership of inventions and other
intellectual property developed while in Georgetown's employ. As part of their
agreements with Georgetown University, Drs. Rahman and Dritschilo have advised
us that Georgetown University will share with each of them payments which
Georgetown receives from us under our license agreements with Georgetown. While
there were no royalty or other payments to Georgetown University by us in 1998,
as a result of us entering into a license agreement with P&U in February 1999, a
payment of $800,000 was recently made to Georgetown University and, assuming
regulatory approval is obtained in the future for our LED and LEP compounds,
additional royalty payments, which could be substantial, would be made by the
Company to Georgetown in the future which we understand Georgetown would then
split with the foregoing named individuals.

In connection with our initial public offering, we adopted a policy whereby
any further transactions between us and our officers, directors, principal
stockholders and any affiliates of the foregoing persons will be on terms no
less favorable to us than we could reasonably obtain in arm's length
transactions with independent third parties, and that any such transactions also
be approved by a majority of our disinterested outside directors.

43
<PAGE>

DESCRIPTION OF SECURITIES

Our authorized capital stock consists of 15,000,000 shares of common stock,
par value $.0002145 per share.

Common Stock

The holders of our common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Subject
to any outstanding preferred stock preference, the holders of our common stock
are entitled to receive ratably the dividends, if any, that may be declared from
time to time by our board of directors out of funds legally available for such
dividends. We have never declared a dividend and do not anticipate doing so.
Subject to any outstanding preferred stock preference, in the event of a
liquidation, dissolution or winding up of us, the holders of our common stock
are entitled to share ratably in all assets remaining after the payment of
liabilities. Holders of our common stock have no preemptive rights and no right
to convert their shares of common stock into any other securities. There are no
redemption or sinking fund provisions applicable to our common stock. All the
outstanding shares of our common stock are validly issued, fully paid and
nonassessable.

Redeemable Warrants

The following is a brief summary of certain provisions of our redeemable
warrants, but this summary is not necessarily complete. You should read the
actual text of the warrant agreement between us, National Securities
Corporation, the representative of the several underwriters of our initial
public offering and Harris Trust and Savings Bank, (our warrant agent).

Exercise Price and Terms. Each redeemable warrant entitles the registered
holder to purchase, at any time over a forty-eight-month period commencing
January 25, 1997, two shares of our common stock at a price of $9.80, subject to
adjustment in accordance with the anti-dilution and other provisions. The holder
of any redeemable warrant may exercise such redeemable warrant by surrendering
the certificate representing the redeemable warrant to the warrant agent, with
the subscription form properly completed and executed, together with payment of
the exercise price. The redeemable warrants may be exercised at any time, in
whole or in part, until expiration of the warrants. No fractional shares will be
issued upon the exercise of the redeemable warrants.

The exercise price of the redeemable warrants bears no relationship to any
objective criteria of value and should not be regarded as an indication of any
future market price of the securities offered by this prospectus.

Adjustments. The exercise price and the number of shares of our common
stock purchasable upon the exercise of the redeemable warrants will be adjusted
upon the occurrence of the following events, including:

o stock dividends;

o stock splits;

o combinations or reclassification of our common stock;

o our sale of shares of our common stock or other securities convertible
into common stock at a price below the then exercise price of the
warrants

o a reclassification or exchange of our common stock;

44
<PAGE>

o our consolidation or merger with or into another corporation (other
than a consolidation or merger in which we are the surviving
corporation); or

o sale of all or substantially all of our assets in order to enable the
redeemable warrantholders to acquire the kind and number of shares of
stock or other securities or property receivable in such event by a
holder of the number of shares of common stock that might otherwise
have been purchased upon the exercise of the redeemable warrant.

Redemption Provisions.

Transfer, Exchange and Exercise. The redeemable warrants are in registered
form and may be presented to our warrant agent for transfer, exchange or
exercise at any time on or prior to their expiration date. The expiration date
is five (5) years from the date of issuance, at which time the redeemable
warrants are void and of no value. Although the redeemable warrants are
currently traded on the American Stock Exchange, we do not know if a market for
the redeemable warrants will continue.

Warrantholder Not a Stockholder. The redeemable warrants do not grant their
holders any voting, dividend or other rights of our stockholders.

Modification of Warrants. We and the warrant agent may modify the
redeemable warrants as is necessary and desirable that do not adversely affect
the interests of the redeemable warrantholders. We may, in our sole discretion,
lower the exercise price of the redeemable warrants for a period of not less
than thirty (30) days on not less than thirty (30) days' prior written notice to
the warrantholders and National Securities Corporation, the representative of
the several underwriters of our initial public offering. In order to modify the
number of securities purchasable upon the exercise of any redeemable warrant,
the exercise price and the expiration date with respect to any redeemable
warrant requires the consent of two-thirds of the redeemable warrantholders. No
other modifications may be made to the redeemable warrants, without the consent
of two-thirds of the redeemable warrantholders.

The redeemable warrants may not be exercised, unless, at the time of the
exercise, we have a current prospectus covering the shares of common stock
issuable upon exercise of the redeemable warrants, and these shares have been
registered, qualified exempt under the securities laws of the state of residence
of the exercising holder of the redeemable warrants. Although we will use our
best efforts to have all the shares of common stock issuable upon exercise of
the redeemable warrants registered or qualified on or before the exercise date
and to maintain a current prospectus until the expiration of the redeemable
warrants, there can be no assurance that we will be able to do so.

Although the securities will not knowingly be sold to purchasers in
jurisdictions in which the securities are not registered or otherwise qualified
for sale, purchasers may buy redeemable warrants in the aftermarket or may move
to jurisdictions in which the shares underlying the redeemable warrants are not
so registered or qualified during the period that the redeemable warrants are
exercisable. In this event, we can't issue shares to those persons desiring to
exercise their redeemable warrants, and holders of redeemable warrants would
have to sell the redeemable warrants in a jurisdiction where the sale is
permissible or allow the redeemable warrants to expire unexercised.

45
<PAGE>

Transfer Agent and Registrar and Warrant Agent

The transfer agent and registrar for our common stock and the warrant agent
for our redeemable warrants is Harris Trust and Savings Bank.

46
<PAGE>

SELLING SECURITYHOLDERS

The following table sets forth information provided to us, as of January
31, 1999, with respect to the number of shares of common stock, redeemable
warrants and the warrants originally issued to the representative of the several
underwriters of our initial public offering, beneficially owned by each of the
selling securityholders both before and after the sale of the shares offered by
this prospectus.

The number of shares shown in the following table does not include a
currently unknown number of additional shares of common stock that we may issue
as a result of stock splits, stock dividends and similar transactions, but which
shares are, in accordance with Rule 416 under the Securities Act, included in
the registration statement of which this prospectus forms as part.

Any or all of the shares of common stock listed below may be offered for
sale pursuant to this prospectus by the selling securityholders from time to
time. Accordingly, we cannot estimate the amount of shares of common stock that
will be held by the selling securityholders following any sales. In addition,
the selling securityholders identified below may have sold, transferred or
otherwise disposed of all or a portion of their shares of common stock since
they provided us with information in transactions exempt from the registration
requirements of the Securities Act.

The number of securities beneficially owned by the selling securityholders
after this offering will depend on the number of securities sold by each selling
securityholder in this offering. Except as indicated in this prospectus, none of
the selling securityholders has had a material relationship with us during the
past three years other than as a result of the ownership of our shares or other
securities. See "Plan of Distribution."

The shares covered by this prospectus may be offered from time to time by
the selling securityholders named below:

<TABLE>
<CAPTION>
Percent of Securities
Amount of Amount of Amount of Owned After Offering
Securities Securities Securities (Assuming the sale of
Owned Prior To Being Owned After all of the securities
Name of Selling Securityholder Offering Registered Offering offered hereby)
- ----------------------------------------- -------------- ---------- ---------- ---------------------
<S> <C> <C> <C> <C>
John N. Kapoor
common stock ....................... 2,146,957(1) 287,004 2,146,957(1) 23.82%
redeemable warrants ................ 143,502 143,502 0 *
warrants ........................... 0 0 0 *
</TABLE>

*less than 1%

(1) Includes 620,059 shares of common stock held by the John N. Kapoor Trust,
dated September 20, 1989, of which Dr. Kapoor is the sole trustee and sole
beneficiary, and 904,812 shares which are held by E.J. Financial/New
Management, L.P., a Delaware limited partnership of which Dr. Kapoor is the
managing general partner. The address of the Trust and the Limited
Partnership is 225 East Deerpath, Suite 250, Lake Forest, Illinois 60045.
The Trust also owns warrants to purchase 287,004 shares of common stock,
which are assumed to have been

47
<PAGE>

exercised for purposes of disclosing the ownership indicated. The amount
shown also includes 300,000 shares which are held by the John N. Kapoor
Charitable Trust of which Dr. Kapoor disclaims beneficial ownership of the
shares held by the Charitable Trust. The amount shown does not include
1,550,453 shares of common stock which are owned by the John N. Kapoor
1994-A Annuity Trust of which the sole trustee is Editha Kapoor, Dr.
Kapoor's spouse. In addition, the amount shown does not include 310,848
shares of common stock which are owned by four trusts which have been
established for Dr. Kapoor's children of which the sole trustee is Dr.
Kapoor's spouse, Editha Kapoor. Dr. Kapoor does not have or share voting,
investment or dispositive power with regards to the shares owned by the
Annuity Trust or the Children's Trusts and Dr. Kapoor disclaims beneficial
ownership of such shares.

48
<PAGE>

PLAN OF DISTRIBUTION

The offering of the shares of common stock is not being underwritten, and
we will not receive any proceeds from this offering. We will, however, receive
proceeds from the exercise of the redeemable warrants, the warrants underlying
the representative's warrants and possibly from the exercise of the
representative's warrants. The selling securityholders (or, subject to
applicable law, their pledgees, distributees, transferees or other successors in
interest) may offer their shares at various times in one or more of the
following transactions:

o on the American Stock Exchange or any other exchange where our common
stock is listed;

o in the over-the-counter market;

o in negotiated transactions not on an exchange or over-the-counter;

o in connection with short sales of our common stock;

o by pledge to secure debts or other obligations;

o in connection with the writing of call options, in hedge transactions
and to settle other transactions in standardized or over-the-counter
options; or

o in a combination of any of the above transactions.

The selling securityholders may also sell shares under Rule 144 of the
Securities Act, where applicable.

The selling securityholders may sell the shares through public or private
transactions at prevailing market prices, or at prices related to prevailing
market prices or at privately negotiated prices.

The selling securityholders may use broker-dealers to sell the shares. In
order to comply with the securities laws of various states, if applicable, the
shares will be sold in those jurisdictions only through registered or licensed
brokers or dealers. In addition, in certain states, the shares may not be sold
unless they have been registered or qualified for sale in the applicable state
or an exemption from the registration or qualification requirement is available
and followed.

If broker-dealers are used, they will either receive discounts or
commissions from the selling securityholders, or they will receive commissions
from the purchasers of shares for whom they act as agents. The selling
securityholders and any broker-dealers or agents that participate with the
selling securityholders in the distribution of the shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any commissions
received by them and any profit on the resale of the shares they purchase may be
deemed to be underwriting commissions or discounts under the Securities Act.

Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the shares may not bid for or purchase shares of
common stock during a period which commences one business day (five business
days, if our public float is less than $25 million or our average daily trading
volume is less than $100,000) prior to such person's participation in the
distribution, subject to exceptions for certain passive market making
activities. In addition and without limiting the foregoing, each selling
securityholder will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M, which provisions may limit the timing of purchases and sales of shares of our
common stock by that selling securityholder.

At the time a particular offer of shares is made by or on behalf of the
selling securityholders, or by us upon exercise of the redeemable warrants, we
will deliver a prospectus as required by the Securities Act.

49
<PAGE>

Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the selling securityholder securities may not
simultaneously engage in market-making activities with respect to any of our
securities during the applicable "cooling off" period (currently a period of up
to five business days) prior to the commencement of such distribution. In
addition, each selling securityholder desiring to sell redeemable warrants will
be subject to the applicable provisions of the Exchange Act and its rules and
regulations, which provisions may limit the securities by such selling
securityholders.

We have agreed to pay substantially all of the expenses incident to the
registration of all of the securities covered by this prospectus, other than
transfer taxes, if any, and commissions and discounts of dealers and agents.

SHARES ELIGIBLE FOR FUTURE SALE

As of this prospectus, we have outstanding approximately 8,454,621 shares
of our common stock. Of these shares, the 3,792,746 shares are freely tradable
without restriction or registration under the Securities Act by persons other
than "affiliates," as defined by Rule 144 promulgated under the Securities Act.
The remaining 4,661,875 shares are "restricted shares" as that term is defined
by Rule 144.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year, including persons who may be deemed "affiliates" of ours,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of one percent of the number of shares of common
stock then outstanding or the average weekly trading volume of the common stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us. In addition, a person who is not deemed to have been an
affiliate of ours at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above.

We cannot predict the effect, if any, that the sales of our common stock or
the availability of such shares for sale in the public market will have on the
market price for our common stock prevailing from time to time. Nevertheless,
sales of substantial amounts of our common stock in the public market after the
restrictions described above lapse could adversely affect prevailing market
prices for our common stock and impair our ability to raise capital through an
offering of our equity securities in the future.

LEGAL MATTERS

Orrick, Herrington & Sutcliffe LLP, New York, New York, will pass upon the
validity and issuance of the securities offered by this prospectus.

EXPERTS

The financial statements included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, as independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.

50
<PAGE>

WHERE YOU CAN FIND MORE INFORMATION ABOUT US

We file reports, proxy statements and other information with the Securities
and Exchange Commission. You may read and copy any document we file at the SEC's
Public Reference Room at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C., 20549, and at the following regional offices of the SEC:

o Seven World Trade Center, 13th Floor, New York, New York, 10048; and
at

o Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois, 60661.

Copies can also be obtained from the Public Reference Room of the SEC at
450 Fifth Street, N.W., Washington, D.C., 20549, following payment of certain
fees. You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at (800) SEC-0300. Our SEC filings are also available on
the SEC's Internet site at http://www.sec.gov. Our common stock and redeemable
warrants are quoted on the American Stock Exchange and you may obtain
information about us on the American Stock Exchange's Internet site at
http://www.Nasdaq-Amex.com.

This prospectus is only part of a registration statement on Form S-1 that
we have filed with the SEC under the Securities Act, and therefore omits certain
information contained in the registration statement. We have also filed exhibits
and schedules with the registration statement that are not included in this
prospectus, and you should refer to the applicable exhibit or schedule for a
complete description of any statement referring to any contract or other
document. A copy of the registration statement, including the exhibits and
schedules thereto, may be inspected without charge at the Public Reference Room
of the SEC described above, and copies of such material may be obtained from
such office upon payment of the fees prescribed by the SEC.

51
<PAGE>

INDEX TO FINANCIAL STATEMENTS

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

Page
----

Report of Arthur Andersen LLP, Independent Public Accountants ............ F-2
Balance Sheets ........................................................... F-3
Statements of Operations ................................................. F-4
Statements of Stockholders' Equity (Deficit) ............................. F-5
Statements of Cash Flows ................................................. F-8
Notes to Financial Statements ............................................ F-10

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of NeoPharm, Inc.:

We have audited the accompanying balance sheets of NeoPharm, Inc. (a
Delaware corporation in the development stage) as of December 31, 1997 and 1998,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1998 and
for the period from inception (June 15, 1990) to December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NeoPharm, Inc. as of
December 31, 1997 and 1998, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1998 and for the period
from inception (June 15, 1990) to December 31, 1998, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 22, 1999

F-2
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 2,776,697 $ 40,681
Notes receivable--shareholder .................................................. 52,634 --
Deferred taxes (Note 5) ........................................................ -- 1,640,000
----------- -----------
Total current assets ........................................................ 2,829,331 1,680,681
Equipment and furniture:
Equipment ...................................................................... 32,492 82,690
Furniture ...................................................................... 26,231 78,877
Less accumulated depreciation .................................................. (33,555) (60,700)
----------- -----------
Total equipment and furniture, net .......................................... 25,168 100,867
----------- -----------
Total assets ................................................................ $ 2,854,499 $ 1,781,548
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Obligations under research agreements .......................................... 150,000 260,000
Accounts payable ............................................................... 275,427 275,926
Accrued compensation ........................................................... 55,000 67,500
----------- -----------
Total current liabilities ................................................... 480,427 603,426
----------- -----------
Commitments and contingencies (Notes 6 and 7)
Stockholders' equity:
Common stock, $.0002145 par value; 15,000,000 shares authorized,
8,195,810 and 8,341,779 shares issued and outstanding as of
December 31, 1997 and 1998, respectively .................................... 1,758 1,789
Additional paid-in capital ..................................................... 6,259,636 6,637,378
Deficit accumulated during the development stage ............................... (3,887,322) (5,461,045)
----------- -----------
Total stockholders' equity .................................................. 2,374,072 1,178,122
----------- -----------
Total liabilities and stockholders' equity .................................. $ 2,854,499 $ 1,781,548
=========== ===========
</TABLE>

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

F-3
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Inception
For the Years Ended (June 15, 1990)
December 31, Through
---------------------------------------------------- December 31,
1996 1997 1998 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ........................................... $ -- $ 550,000 $ -- $ 550,000
Expenses:
Research and development ........................... 1,099,631 1,411,692 1,611,343 7,085,874
General and administrative ......................... 956,924 1,370,486 1,691,132 4,837,984
Total expenses .................................. 2,056,555 2,782,178 3,302,475 11,923,858
Loss from operations ....................... (2,056,555) (2,232,178) (3,302,475) (11,373,858)
Interest income .................................... 238,275 210,501 88,752 537,528
Interest expense ................................... (47,365) -- -- (735,606)
Interest income (expense)-net ................ 190,910 210,501 88,752 (198,078)
Loss before income taxes ........................... $ (1,865,645) $ (2,021,677) $ (3,213,723) $(11,571,936)
Income taxes ....................................... -- -- (1,640,000) (1,640,000)
Net income/(loss) .................................. $ (1,865,645) $ (2,021,677) $ (1,573,723) $ (9,931,936)
Net income/(loss) per share
Basic ........................................... $ (.24) $ (.25) $ (.19)
Diluted ......................................... $ (.24) $ (.25) $ (.19)
Weighted average shares outstanding
Basic ........................................... 7,803,412 8,146,746 8,213,980
Diluted ......................................... 8,312,378 8,939,143 8,757,187
</TABLE>

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

F-4
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE PERIOD FROM INCEPTION (JUNE 15, 1990)
THROUGH DECEMBER 31, 1998

<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated Total
------------------------ Additional During Stockholders'
Par Paid-in Development Equity
Shares Value Capital Stage (Deficit)
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at inception, June 15, 1990 ........................ -- $ -- $ -- $ -- $ --
Initial issuance of stock for cash on June 21,
1990 ($.0002145 per share) .............................. 3,263,888 700 -- -- 700
Services contributed to Company by related party ........... -- -- 13,542 -- 13,542
Net loss ................................................... -- -- -- (188,441) (188,441)
---------- ---------- ---------- ----------- -----------
Balance at December 31, 1990 ............................... 3,263,888 700 13,542 (188,441) (174,199)
---------- ---------- ---------- ----------- -----------
Services contributed to Company by related party ........... -- -- 25,000 -- 25,000
Net loss ................................................... -- -- -- (468,771) (468,771)
---------- ---------- ---------- ----------- -----------
Balance at December 31, 1991 ............................... 3,263,888 700 38,542 (657,212) (617,970)
---------- ---------- ---------- ----------- -----------
Services contributed to Company by related party ........... -- -- 25,000 -- 25,000
Net loss ................................................... -- -- -- (567,962) (567,962)
---------- ---------- ---------- ----------- -----------
Balance at December 31, 1992 ............................... 3,263,888 700 63,542 (1,225,174) (1,160,932)
---------- ---------- ---------- ----------- -----------
Services contributed to Company by related party ........... -- -- 25,000 -- 25,000
Net loss ................................................... -- -- -- (492,423) (492,423)
---------- ---------- ---------- ----------- -----------
Balance at December 31, 1993 ............................... 3,263,888 700 88,542 (1,717,597) (1,628,355)
---------- ---------- ---------- ----------- -----------
Issuance of stock pursuant to exercise of stock ............ 1,398,810 300 7,449 -- 7,749
options
Services contributed to Company by related party ........... -- -- 12,500 -- 12,500
Net loss ................................................... -- -- -- (1,083,667) (1,083,667)
---------- ---------- ---------- ----------- -----------
Balance at December 31, 1994 ............................... 4,662,698 1,000 108,491 (2,801,264) (2,691,773)
---------- ---------- ---------- ----------- -----------
</TABLE>

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

F-5
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)

FOR THE PERIOD FROM INCEPTION (JUNE 15, 1990)
THROUGH DECEMBER 31, 1998

<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated Total
------------------------ Additional During Stockholders'
Par Paid-in Development Equity
Shares Value Capital Stage (Deficit)
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ......................... 4,662,698 1,000 108,491 (2,801,264) (2,691,773)
---------- ---------- ---------- ----------- -----------
Issuance of stock pursuant to exercise of stock
options ........................................... 37,302 8 -- -- 8
Net loss ............................................. -- -- -- (1,669,627) (1,669,627)
Reclassification of the deficit accumulated as
the result of the termination of the
Company's S Corporation status .................... -- -- (4,470,891) 4,470,891 --
---------- ---------- ---------- ----------- -----------
Balance at December 31, 1995 ......................... 4,700,000 1,008 (4,362,400) -- (4,361,392)
---------- ---------- ---------- ----------- -----------
Conversion of interest and loan payable to
principal stockholder into common stock
($3.525 per share) ................................ 574,008 123 2,023,262 -- 2,023,385
Issuance of stock pursuant to the Company's
public offering net of costs incurred ............. 2,772,260 595 7,896,521 -- 7,897,116
Issuance of stock pursuant to exercise of stock
options ........................................... 84,000 18 259,304 -- 259,322
Net Loss ............................................. -- -- -- (1,865,645) (1,865,645)
Issuance of options to non-employees ................. -- -- 73,391 -- 73,391
---------- ---------- ---------- ----------- -----------
Balance at December 31, 1996 ......................... 8,130,268 $ 1,744 $ 5,890,078 $(1,865,645) $ 4,026,177
---------- ---------- ---------- ----------- -----------
</TABLE>

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

F-6
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)

FOR THE PERIOD FROM INCEPTION (JUNE 15, 1990)
THROUGH DECEMBER 31, 1998

<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated Total
------------------------ Additional During Stockholders'
Par Paid-in Development Equity
Shares Value Capital Stage (Deficit)
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ......................... 8,130,268 $ 1,744 $5,890,078 $(1,865,645) $ 4,026,177
---------- ---------- ---------- ----------- -----------
Issuance of stock pursuant to exercise of stock
options ........................................... 55,542 12 175,166 -- 175,178
Issuance of stock pursuant to restricted stock
grants ............................................ 10,000 2 48,748 -- 48,750
Net Loss ............................................. -- -- -- (2,021,677) (2,021,677)
Issuance of options to non-employees ................. -- -- 145,644 -- 145,644
---------- ---------- ---------- ----------- -----------
Balance at December 31, 1997 ......................... 8,195,810 $ 1,758 $6,259,636 $(3,887,322) $ 2,374,072
---------- ---------- ---------- ----------- -----------
Issuance of stock pursuant to exercise of stock
options ........................................... 22,500 5 82,339 -- 82,344
Issuance of stock Pursuant to Restricted stock
Grants ............................................ 74,235 16 263,109 -- 263,125
Exercise of warrants ................................. 49,234 10 (10) -- --
Net loss ............................................. -- -- -- (1,573,723) (1,573,723)
Issuance of options to non-employees ................. -- -- 32,304 -- 32,304
---------- ---------- ---------- ----------- -----------
Balance at December 31, 1998 ......................... 8,341,779 $ 1,789 $6,637,378 $(5,461,045) $ 1,178,122
========== ========== ========== =========== ===========
</TABLE>

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

F-7
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Inception
For the Years Ended (June 15, 1990)
December 31, Through
----------------------------------------------- December 31,
1996 1997 1998 1998
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Cash flows used in operating activities:
Net loss ................................................... $(1,865,645) $(2,021,677) $(1,573,723) $(9,931,936)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization .............................. 6,279 6,727 27,145 72,499
Gain on disposal of equipment .............................. -- -- -- (408)
Deferred income taxes ...................................... -- -- (1,640,000) (1,640,000)
Services contributed (non-cash) by related party ........... -- -- -- 101,042
Interest payable to principal shareholder
converted to stock ...................................... 523,385 -- -- 523,385
Compensation expense from non-employee
stock option ............................................ 73,391 145,644 32,304 251,339
Restricted stock grants in lieu of cash
compensation ............................................ -- 48,750 263,125 311,875
(Increase)Decrease in other assets ......................... -- (52,634) 52,634 (11,100)
(Decrease)Increase accounts payable and accrued
liabilities ............................................. (883,600) 14,396 122,999 603,426
----------- ----------- ----------- -----------
Net cash and cash equivalents used in
operating activities ............................ (2,146,190) (1,858,794) (2,715,516) (9,719,878)
----------- ----------- ----------- -----------
Cash flows used in investing activities:
Purchase of equipment and furniture ........................ (10,663) (18,728) (102,844) (162,669)
Proceeds from disposal of equipment ........................ -- -- -- 810
----------- ----------- ----------- -----------
Net cash and cash equivalents used in investing
activities .............................................. (10,663) (18,728) (102,844) (161,859)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from loan payable to principal stockholder ........ -- -- -- 1,500,000
Advance on line of credit .................................. 107,000 -- -- 2,114,652
Reduction in line of credit ................................ (2,114,652) -- -- (2,114,652)
Costs incurred related to the initial public
offering ................................................ (201,885) -- (484,955) (1,173,276)
Proceeds from initial public offering ...................... 8,585,438 -- -- 8,585,438
Proceeds from issuance of common stock ..................... 259,322 175,178 567,299 1,010,256
Net cash and cash equivalents provided by
financing activities ............................ 6,635,223 175,178 82,344 9,922,418
----------- ----------- ----------- -----------
Net increase (decrease) in cash ............................ 4,478,370 (1,702,344) (2,736,016) 40,681
Cash and cash equivalents, beginning of period ............. 671 4,479,041 2,776,697 --
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period ................... $ 4,479,041 $ 2,776,697 $ 40,681 $ 40,681
=========== =========== =========== ===========
Supplemental disclosure of cash paid for:
Interest ................................................... $ 113,846 $ 84,585 $ -- $ 212,222
Income taxes ............................................... -- -- -- --
</TABLE>

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

F-8
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

STATEMENTS OF CASH FLOWS

(Continued)

Supplemental disclosure of non-cash transactions:

In 1996, the Company converted the $2,023,385 loan and $523,385 of accrued
interest expense owed to the principal shareholder into 574,008 shares of common
stock and 143,502 warrants to purchase common stock. The loan and accrued
interest were converted at the initial public offering price.

In 1997, two consultants to the Company each received 5,000 shares of
restricted common stock as compensation. These grants were valued at the closing
price of the traded common shares on the date of the grants.

In 1998, the Company granted 69,235 shares of restricted common stock to
employees as compensation. The Company also donated a total of 5,000 shares of
restricted common stock to two charitable organizations on behalf of a
consultant who provided services to the Company. Additionally, holders of the
Company's Representatives warrants that were issued as part of the initial
public offering exercised on a cashless basis 49,234 of the 135,000 outstanding
warrants. Each warrant entitles the holder to two shares of common stock for an
exercise price of $9.80. The cashless exercise of these warrants resulted in a
charge of $484,955 to Additional Paid In Capital as cost related to the initial
public offering.

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

F-9
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1998

1. ORGANIZATION AND BUSINESS:

NeoPharm, Inc. (the "Company"), a Delaware corporation in the development
stage, was incorporated on June 15, 1990, under the name of OncoMed, Inc. In
March 1995, the Company changed its name to NeoPharm, Inc. The Company is
developing products to provide therapeutic and prognostic benefits in the
treatment of various forms of cancer. The Company has one product which is the
subject of a Cooperative Research and Development Agreement ("CRADA") with the
National Cancer Institute ("NCI"), a unit of the National Institute of Health
("NIH") and a product, licensed from the NIH, that is the subject of a CRADA
with the United States Food and Drug Administration ("FDA"). The Company also
has rights to products developed under license and sponsored research agreements
with Georgetown University ("Georgetown").

The Company is in the development stage that requires substantial capital
for research, product development and market development activities. The Company
has not yet initiated marketing of a commercial product. The Company has filed
one New Drug Application ("NDA") with the FDA for BUdR (Broxuridine) in a
prognostic application. This and other proposed products will require clinical
testing, regulatory approval and substantial additional investment prior to
commercialization. The future success of the Company is dependent on its ability
to obtain additional working capital to develop, manufacture and market its
products and, ultimately, upon its ability to attain future profitable
operations. There can be no assurance that the Company will be able to obtain
necessary financing or regulatory approvals to be able to successfully develop,
manufacture and market its products, or attain successful future operations.
Insufficient funds could require the Company to delay, scale back or eliminate
one or more of its research and development programs or to license third parties
to commercialize products or technologies that the Company would otherwise seek
to develop without relinquishing its rights thereto. Accordingly, the
predictability of the Company's future success is uncertain.

The Company's rights to its products are subject to the terms of its
agreements with NCI, NIH, FDA and Georgetown. Termination of any, or all, of
these agreements would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, uncertainty exists
as to the Company's ability to protect its rights to patents and its proprietary
information. There can also be no assurance that research and discoveries by
others will not render some or all of the Company's programs or products
noncompetitive or obsolete. Nor can there be any assurance that unforeseen
problems will not develop with the Company's technologies or applications, or
that the Company will be able to address successfully technological challenges
it encounters in its research and development programs. Although the Company
plans to obtain product liability insurance, it currently does not have any nor
is there any assurance that it will be able to attain or maintain such insurance
on acceptable terms or with adequate coverage against potential liabilities.

2. SIGNIFICANT ACCOUNTING POLICIES:

Research and Development

Research and development costs are expensed when incurred. These costs
include, among other things, consulting fees and costs reimbursed to Georgetown
pursuant to the agreements as described in Note 6. Payments related to the
acquisition of technology rights, for which development work is in process, are
expensed and considered a component of research and development costs. The
Company also allocates

F-10
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 1998

2. SIGNIFICANT ACCOUNTING POLICIES: (Continued)

indirect costs, consisting primarily of operational costs for administering
research and development activities, to research and development expenses.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

Segment Reporting

The Company currently operated under a single segment.

Equipment and Furniture

Equipment and furniture are recorded at cost and are depreciated using an
accelerated method over the estimated useful economic lives of the assets
involved. The estimated useful lives employed in computing depreciation are five
years for computer equipment and seven years for furniture. Maintenance and
repairs that do not extend the life of assets are charged to expense when
incurred.

Income per Share

In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings Per Share, which establishes standards for computing
and presenting earnings per share for publicly held common stock or potential
common stock. Effective December 31, 1997, the Company adopted the principles of
Statement No. 128 in calculating and presenting its earnings per share. The
computation of net earnings (loss) per share is based on the weighted average
common shares outstanding during the periods, and includes, when dilutive,
common stock equivalents consisting of warrants and stock options.

F-11
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 1998

2. SIGNIFICANT ACCOUNTING POLICIES: (Continued)

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

<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
Numerator:
<S> <C> <C> <C>
Net loss from continuing operations .................. ($1,865,645) ($2,021,677) ($1,573,723)
=========== =========== ===========

Denominator:
Denominator for basic loss per share
Weighted average shares .............................. 7,803,412 8,146,746 8,213,980

Effect of dilutive securities:
Stock options .................................. 508,966 445,742 467,379
Warrant exercise ............................... 0 346,655 75,829
----------- ----------- -----------

Dilutive potential common shares ..................... 508,966 792,397 543,207

Denominator for diluted loss per share
Weighted average shares and assumed
Conversions .......................................... 8,312,378 8,939,143 8,757,187
=========== =========== ===========

Basic (loss) per share ............................... $ (0.24) $ (0.25) $ (0.19)
=========== =========== ===========

Diluted (loss) per share ............................. $ (0.24) $ (0.25) $ (0.19)
=========== =========== ===========
</TABLE>

Options to purchase 99,925, 255,962 and 242,521 shares of common stock were
outstanding as of December 31, 1996, 1997 and 1998, respectively but were not
included in the computation of diluted earnings per share because the options
exercise prices were greater than the average market price of the common shares
and, therefore, would be antidilutive. The Company's warrants first became
exercisable on January 25, 1997. The underlying Representatives warrants to
purchase 135,000 shares of common stock were not included in the computation of
diluted earnings per share because the warrant exercise price was greater than
the average market price of the common shares and, therefore would be
antidilutive. For additional disclosure regarding the stock options and
warrants, see Notes 4 and 9.

Management's Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.

Stock-Based Compensation

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). As provided by SFAS 123, the Company has elected to continue to account
for its stock-based compensation programs according to the

F-12
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 1998

2. SIGNIFICANT ACCOUNTING POLICIES: (Continued)

provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". Accordingly, compensation expense has been recognized to
the extent of employee or director services rendered based on the intrinsic
value of compensatory options or shares granted under the plans. The Company has
adopted the disclosure provisions required by SFAS 123 (see "Note 4--Stock
Options" in Notes to Financial Statements).

Reclassification

Certain amounts in previously issued financial statements have been
reclassified to conform to 1998 classifications.

Segment Reporting

The Company currently operates under a single segment.

3. DEBT:

On June 18, 1990, the Company executed a loan agreement with Dr. John N.
Kapoor, a principal stockholder. The loan agreement allowed the Company to
borrow up to $1,500,000. Funds borrowed under the agreement incurred interest at
the lesser of 10% or the prime rate as determined by the Northern Trust Bank.
The Company had borrowed funds up to the maximum of $1,500,000 at December 31,
1995.

Interest on borrowed funds accrued until the second anniversary of the
funding. Thereafter, principal and interest were to be repaid in 12 quarterly
installments. Any principal payment not paid within 5 days of the date when due
was subject to additional interest of 15% per annum.

From June 1990 through April 1994, the Company financed its operations by
borrowing under this loan agreement. No payments of interest or principal were
made during this period. In January of 1996, in accordance with the agreement
between the principal stockholder and the Company, with the completion of the
initial public offering, the principal stockholder converted the outstanding
loan balance, plus accrued interest through November 30, 1995, into shares of
the Company's common stock and common stock purchase warrants at a per share
conversion price equal to the offering price, $3.525 per share, $.10 per
warrant. The Company issued 574,008 shares and 143,502 warrants.

During 1995 and early 1996, the Company maintained a line of credit with
Harris Bank with maximum borrowings of $2,500,000. The line of credit was
personally guaranteed by the principal stockholder. In early 1996, the Company
paid all outstanding balances and closed the line of credit.

On October 22,1998, the Company established a $3,000,000 line of credit
with the John N. Kapoor Trust dtd. 9/20/89, an entity affiliated with the
Company's Chairman. Interest on borrowings on the line of credit will accrue at
the rate of 2% over the prime rate of the Northern Trust Bank. The accrued
interest and outstanding principal becomes due and payable the earlier of
October 1, 2001 or the date upon which the Company completes a public or private
offering of debt or equity securities or a licensing agreement for its products.
There were no borrowings on this line of credit at December 31, 1998.

4. STOCK OPTIONS

Option Agreements

The Company adopted a stock plan in 1990. The Company granted options under
the plan to purchase 1,460,978 shares. The options have an exercise price of
$.0002145 per share with the exception of

F-13
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 1998

4. STOCK OPTIONS (Continued)

options to purchase 248,676 shares issued in December 1993, which have an
exercise price of $.03217 per share. Effective January 1995, this plan has been
terminated. No additional grants will be made under this plan.

On January 25, 1995, the board of directors approved the NeoPharm, Inc.
1995 Stock Option Plan (the "Plan"), which provided for the grant of up to
900,000 options to acquire the Company's common stock. The board of directors
amended the Plan on May 16, 1997, increasing the number of options to 1,400,000.
The option prices shall be not less than 85 percent of the fair market value of
the stock as determined by the Administrator pursuant to the Plan. The board
also approved the NeoPharm, Inc. 1995 Director Option Plan, which provides for
the grant of up to 100,000 options to acquire the Company's common stock. The
option prices shall be the fair market value on the date of grant. Vesting under
these plans range from 0 to 4 years and all options expire after 10 years.
Effective July 23, 1998 the 1995 Stock Option Plan and the 1995 Directors Option
Plan were suspended. No additional grants will be made under either plan.

On July 23, 1998, the board of directors approved the NeoPharm, Inc. 1998
Equity Incentive Plan (the "1998 Plan"), which provides for the grant of options
to acquire up to 2,000,000 shares of the Company's common stock. Additionally,
250,000 of the 2,000,000 shares can be used for restricted stock grants to
employees and consultants. The option prices shall be not less than 85% of the
fair market value of the stock as determined by the Administrator pursuant to
the 1998 Plan. The consideration paid for shares of restricted stock shall not
be less that the par value of the Company's common stock.

The Company accounts for the plans under APB Opinion No. 25, under which no
compensation cost has been recognized for stock option awards to employees. Had
compensation cost for such stock option awards under the plans been determined
consistent with FASB Statement No. 123, the Company's net income and earnings
per share would have been reduced to the following pro forma amounts:

<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income/(Loss): As Reported (1,865,645) (2,021,677) (1,573,723)
Pro Forma (2,061,099) (2,379,751) (1,827,864)
Primary EPS: As Reported (.24) (.25) (.19)
Pro Forma (.26) (.29) (.22)
Fully Diluted EPS: As Reported (.24) (.25) (.19)
Pro Forma (.26) (.29) (.22)
</TABLE>

Included in the grants described above are options to purchase 413,824
shares granted to non-employees. The Company accounts for these options using a
fair value method with the fair value of these options determined at the date of
grant. From inception through December 31, 1995 the Company deemed the fair
value of these options on the date of grant to be nominal, and no expense was
recorded. For the year ended December 31, 1996, 1997 and 1998, the fair value
was calculated using the Black-Scholes pricing model, and an expense of $73,391,
$145,644 and $32,304 was recorded respectively.

F-14
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 1998

4. STOCK OPTIONS (Continued)

A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------
Number of Exercise Price
Grant/Exercise Date Shares Per Share
- ------------------- ---------- -------------------------
<S> <C> <C>
Grants:
1990 ........................................ 1,184,324 $ .0002145
1992 ........................................ 27,978 .0002145
1993 ........................................ 248,676 .03217
---------- -------------------------
Balance at December 31, 1993 .................. 1,460,978 $ .0002145-$.03217
---------- -------------------------
Exercises:
November 17, 1994--issued Jan. 1995 .......... (1,398,810) $ .0002145-$.03217
November 17, 1994--issued Jan. 1995 .......... (37,302) $ .0002145
---------- -------------------------
Balance at December 31, 1994 .................. 24,866 $ .03217
---------- -------------------------
Grants:
February, 1995 .............................. 308,000 $ 3.50
May, 1995 ................................... 10,000 3.50
September, 1995 ............................. 100,000 3.50
November, 1995 .............................. 100,000 3.50
---------- -------------------------
Balance at December 31, 1995 .................. 542,866 $ .03217-$3.50
---------- -------------------------
Grants:
May, 1996 ................................... 30,000 $ 6.00
August, 1996 ................................ 260,000 $ 7.00
Exercises:
June, 1996 .................................. (19,000) $ 3.50
July, 1996 .................................. (43,000) 3.50
August, 1996 ................................ (10,000) 3.50
September, 1996 ............................. (2,000) 3.50
December, 1996 .............................. (10,000) .03217
---------- -------------------------
Balance at December 31, 1996 .................. 748,866 $.03217, 3.50, 6.00, 7.00
========== -------------------------

Grants:
January, 1997 ............................... 1,000 $ 7.38
April, 1997 ................................. 2,000 7.00
May, 1997 ................................... 5,000 4.88
August, 1997 ................................ 5,000 4.94
Exercises:
June, 1997 .................................. (7,000) $ 3.50
July, 1997 .................................. (15,000) 3.50
October, 1997 ............................... (9,042) 3.50, .03217
November, 1997 .............................. (1,500) 3.50
December, 1997 .............................. (23,000) 3.50
Cancellations: July 1997 ...................... (15,000) 7.00
---------- -------------------------
Balance at December 31, 1997 .................. 691,324 $ .03217-7.38
========== -------------------------
</TABLE>

F-15
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 1998

4. STOCK OPTIONS (Continued)

Options eligible for exercise on December 31, 1993 included 1,212,302
options at an exercise price of $.0002145 and 248,676 options at an exercise
price of $.03217. Options eligible for exercise on December 31, 1994 included
24,866 options at an exercise price of $.03217. Options eligible for exercise on
December 31, 1995 included 24,866 options at an exercise price of $.03217 and
518,000 options at an exercise price of $3.50. Options eligible for exercise on
December 31, 1996 included 14,866 at an exercise price of $.03217 and 444,000
options at an exercise price of $3.50. Options eligible for exercise on December
31, 1997 included 9,324 at an exercise price of $.03217, 394,000 options at an
exercise price of $3.50, 15,000 options at an exercise price of $6.00, 124,500
options at an exercise price of $7.00, and 1000 options at an exercise price of
$7.375. Options eligible for exercise on December 31, 1998 include 9,324 options
at an exercise price of $0.03217, 374,000 options at an exercise price of $3.50,
2500 options at an exercise price of $4,875, 30,000 options at an exercise price
of $6.00, 197,000 options at an exercise price of $7.00 and 1000 options at an
exercise price of $7.375.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for the option grants in 1996, 1997 and 1998 respectively:
risk-free interest rates of 6.45 percent, 6.58 percent and 5.50 percent;
expected dividend yields of 0.00 percent; expected life of 5 years; expected
volatility of 76.21 percent, 79.93 percent and 89.82 percent.

5. FEDERAL INCOME TAXES:

From inception through October 11, 1995, the Company operated as an S
Corporation for income tax purposes. Losses incurred during this period are
reported on the stockholders' tax return, and are not available to the Company
as a net operating loss carryforward.

On October 11, 1995, the Company voluntarily terminated its S Corporation
election. Since that time, losses incurred represent net operating loss
carryforwards which can be used to offset future taxable income. Total net
operating loss carryforwards were approximately $5,330,000 and approximately
$8,582,000 as of December 31, 1997 and 1998, respectively. Additionally, the
Company has general business credit carry forwards of approximately $128,000. In
accordance with the provisions of Statement of Financial Accounting Standard No.
109, a 100% valuation allowance had been established on the net

F-16
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 1998

5. FEDERAL INCOME TAXES: (Continued)

operating loss tax asset due to the uncertainty of its realization as of
December 31, 1997. Based on subsequent events which are discussed further in
footnote 10, the valuation allowance was reduced and the tax benefit related to
a portion of the general business credits and net operating loss carry forwards
was recognized as of December 31, 1998.

6. COMMITMENTS:

License and Research Agreements

From time to time the Company enters into license and research agreements
with third parties. At December 31, 1998, the Company had five agreements in
effect as described below.

National Cancer Institute

The Company entered into a CRADA with NCI. Pursuant to the agreement, the
Company committed to commercialize certain products received from NCI. The
Company agreed to provide product to support NCI sponsored clinical trials and
use its best efforts to file an NDA. NCI agreed to collaborate on the clinical
development of the products and to provide access to the data necessary to
obtain pharmaceutical regulatory approval.

During the years ended December 31, 1998, 1997 and 1996, the Company paid
approximately $0, $102,000 and $0, respectively, for product used in clinical
trials. The Company is committed to pay NCI $120,000 per year for reasonable and
necessary expenses incurred by NCI in carrying out NCI's responsibilities under
the CRADA. During 1998, 1997 and 1996, the Company expensed, as research and
development costs, the $120,000 payable to NCI for these expenses. NCI was
required to provide the Company an accounting of the use of funds. Any amounts
not expended at the end of the agreement were refundable to the Company. All
amounts were expended pursuant to the CRADA.

The CRADA expired on September 13, 1998. The Company then entered into a
Clinical Trials Agreement ("CTA") with the NCI. The CTA covers the same research
that were the subject of the NCI CRADA. The CTA provides for collaboration on
the clinical development of the products and access to clinical data necessary
for future regulatory approval. The Company has no further financial obligations
to NCI other than an agreement to provide supplies of test product for the
covered clinical protocols.

U.S. Food and Drug Administration

In 1997 the Company entered into a CRADA with the FDA. Pursuant to the
CRADA, the Company committed to commercialize the IL-13 chimeric protein product
which it licensed from the NIH and FDA. The FDA agreed to collaborate on the
clinical development and commercialization of the licensed product.

The Company is committed to pay $100,000 per year for the reasonable and
necessary expenses incurred by the FDA in carrying out the FDA's
responsibilities under the CRADA. The CRADA has a term of four years. During
1998, and 1997 the Company expensed $100,000 per year as research and
development costs. The CRADA will expire on August 27, 2001.

F-17
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 1998

6. COMMITMENTS: (Continued)

National Institute of Health

The Company entered into an exclusive worldwide licensing agreement with
the NIH and the FDA to develop and commercialize an IL-13 chimeric protein
therapy. The agreement required a $75,000 non-refundable license issue payment
and minimum annual royalty payments of $10,000 which increases to $25,000 after
the first commercial sale. The agreement further provided for milestone payments
and royalties based on future product sales. The Company is required to pay the
costs of filing and maintaining product patents on the licensed products. The
agreement shall extend to the expiration of the last to expire of the patents on
the licensed products, if not terminated earlier. The agreement may be
terminated by mutual consent of NIH and the Company. 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. During 1998 and 1997, the Company expensed
approximately $117,000 and $10,000 respectively on research and development
costs.

Biochem Pharma

The Company entered into a collaboration agreement with BioChem
Therapeutics, Inc., the wholly owned subsidiary of BioChem Pharma, under which
BioChem will have an exclusive license to develop, market and distribute
broxuridine in Canada. The agreement required BioChem to make an initial
non-refundable up-front payment of $550,000 and subsequent milestone-based
payments. The Company and BioChem will share product revenue from any future
sales of broxuridine in Canada.

Pharmacia and Upjohn

Subsequent to year end, the Company entered into a Licensing Agreement on
February 19, 1999 with Pharmacia and Upjohn to license LEP and LED worldwide.
The Company received certain upfront and milestone payment opportunities and
royalties on sales outside the United States and co-promotion profit splits on
sales within the United States. The Company also has the option to license two
additional products in its liposomal drug delivery platform from the Pharmacia
and Upjohn product portfolio.

Georgetown University

The Company entered into two license and research agreements with
Georgetown whereby the Company obtained an exclusive worldwide license to use
certain technologies. In exchange for the grant of these exclusive licenses, the
Company will pay Georgetown, beginning with the first commercial sale of a
product incorporating the licensed technologies, a royalty on net sales by the
Company of products incorporating any of such technologies. The royalty will be
payable for the life of the related patents.

During the years ended December 31, 1998, 1997 and 1996, the Company paid
and expensed approximately $123,000, $247,000 and $204,000 respectively,
pursuant to the license and research agreements.

Other

The Company entered into consulting arrangements with members of its
Scientific Advisory Board who are also employed on a full-time basis by academic
or research institutions. Since inception through

F-18
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 1998

6. COMMITMENTS: (Continued)

December 31, 1998, members of the Scientific Advisory Board were issued options
(see Note 4) to purchase an aggregate 68,324 shares of Company stock at the fair
market value at the date of grant. Additionally, the Scientific Advisory Board
members received aggregate payments of approximately $88,000 since the inception
of these consulting arrangements for work performed and expenses incurred
through December 31, 1998.

The Company is obligated for rental payments under a sublease arrangement
with OptionCare, Inc. for office space in Bannockburn, Illinois. Until moving to
the Bannockburn location in November of 1997, the Company occupied office space
in Lake Forest, Illinois. This space was provided as part of a consulting
agreement with EJ Financial. (See Note 8). This sublease expired on November 30,
1998. The Company continues to sublease the same space on comparable terms under
a month to month lease.

7. CONTINGENCIES

The pharmaceutical industry has traditionally experienced difficulty in
maintaining product liability insurance coverage at desired levels. To date, no
significant product liability suit has ever been filed against the Company.
However, if a suit were filed and a judgment entered against the Company that
significantly exceeded the policy limits, it could have a material adverse
effect upon the Company's operations and financial condition.

Currently, the Company is not a party to any litigation or other legal
proceedings.

8. TRANSACTIONS WITH RELATED PARTIES

The Company receives management services from EJ Financial Enterprises,
Inc. ("EJ Financial"), a healthcare consulting and investment firm in which Dr.
Kapoor is the principal stockholder. From inception through June 30, 1994, EJ
Financial charged the Company $25,000 per year for services provided plus actual
expenses incurred. Through June 30, 1994, no payment for these services was
made, but rather was treated as additional capital contributions by Dr. Kapoor
in the accompanying statements of stockholders' equity (deficit). Effective July
1, 1994, EJ Financial increased its charge for management services provided to
$125,000 per year plus actual expenses. The agreement reflected an increased
need for technical support in the areas of research and development and
operations. Charges to the Company are based on actual time spent by EJ
Financial personnel on the Company's affairs. Management believes that the cost
for management services allocated to the Company represents the cost of the
services provided. From inception through December 31, 1998, the Company
expensed approximately $562,900 for management services and $266,800 as
reimbursement of actual expenses incurred by EJ Financial that directly related
to the Company.

The Company subleases office space from Option Care Inc., a home infusion
company in which Dr. Kapoor, the Company's Chairman, is a major stockholder.
From inception through December 31, 1998, the Company expensed approximately
$38,700 for rent under the Option Care subleases.

From June 1990 through April 1994, the Company financed its operations by
borrowing under a loan agreement with Dr. Kapoor, a principal shareholder. No
payments of interest or principal were made during this period. In January 1996,
in accordance with the agreement between the principal stockholder and the
Company, with the completion of the initial public offering, the principal
stockholder converted

F-19
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 1998

8. TRANSACTIONS WITH RELATED PARTIES (Continued)

the outstanding loan balance of $1,500,000 plus accrued interest through
November 30, 1995 of $523,385 into shares of the Company's common stock and
common stock purchase warrants at a per share conversion price equal to the
offering price, $3.525 per share, $.10 per warrant. The Company issued 574,008
shares and 143,502 warrants.

From October, 1998 through February, 1999 the Company had a $3,000,000 line
of credit in place with the John N. Kapoor Trust dtd 9/20/89, an entity
affiliated with the Company's Chairman. The Company borrowed $250,000 on the
line of credit on January 8, 1999. The $250,000 plus all accrued interest was
repaid on January 29, 1999. The line of credit terminated upon the signing of
the licensing agreement on February 19, 1999 (See Note 10).

The Company's Chief Scientific Officer, Dr. Aquilur Rahman, was employed on
a full-time basis by Georgetown until joining the Company in March 1996. As was
previously mentioned, Georgetown and the Company are parties to license and
sponsored research agreements for product research and development (see Note 6).
During 1998, 1997 and 1996, the Company expensed approximately $123,000,
$247,000 and $204,000 related to work performed and expenses incurred by
Georgetown. Since inception through December 31, 1998, the Company has expensed
approximately $2,119,000 under the agreements. Additionally, Dr. Rahman received
options in June 1990 (See Note 4) to purchase 932,540 shares of Company stock at
the fair market value on the date of the grant of the options.

On July 16, 1997, the Company loaned $50,000 to Dr. Rahman pursuant to a
promissory note. The note accrued interest at a rate of 9%. The principal
together with accrued interest of $3,255 was repaid on April 6, 1998.

Prior to February 1996, the Company's former President and Chief Executive
Officer ("CEO"), William C. Govier, was a consultant to the Company on clinical
trials and NDA filing matters, both as an individual and as a consultant with
Aegis Technology, Inc. ("Aegis"), an entity co-founded by Govier. Dr. Govier
retired from the Company on January 16, 1998. As the Company's President and
CEO, Govier received options in December 1993, to purchase 233,134 shares of
Company stock at the fair market value on the date of grant, which were later
fully exercised (See Note 4). His colleague and co-founder of Aegis, Gail
Salzberg, also received options in December 1993 (see Note 4) to purchase 15,542
shares of Company stock at the fair market value on the date of grant, of which
7,770 options were 100% vested and 7,772 options vested upon future performance
of services. The Company expensed approximately $1,095,800 since inception
through December 31, 1998, related to work performed and expenses incurred by
Govier, his colleague and Aegis. During 1998, 1997 and 1996, the Company
expensed approximately $232,300, $262,500 and $159,500 respectively, related to
these arrangements.

9. STOCKHOLDERS' EQUITY

In January 1995, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of common stock to 15,000,000 shares.
In October 1995, the Company amended its Certificate of Incorporation to convert
each 1.28681 shares of outstanding Common Stock into one share of Common Stock
and to restate the par value of the Common Stock from $0.000333 per share to
$0.000429 per share. The reverse stock split has been reflected retroactively in
these financial statements for all periods presented.

F-20
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 1998

9. STOCKHOLDERS' EQUITY (Continued)

In January 1996, the Company completed a public offering of newly issued
1,350,000 shares of common stock and 675,000 warrants, for proceeds of
approximately $8,585,000 net of expenses. On March 8, 1996 the Company issued
36,130 shares of common stock and 18,565 warrants related to the underwriter's
over-allotment option for proceeds of approximately $267,000, net of expenses.
Additionally, the Company issued 574,008 shares and 143,502 warrants upon
conversion of its debt (see note 3). Since July 25, 1997, the warrants have been
subject to redemption at $0.01 per warrant on thirty (30) days prior written
notice to the warrant holders. However, the warrants can only be redeemed if the
average closing price of the Company's stock as reported on AMEX equals or
exceeds $5.60 per share for twenty (20) trading days within a period of thirty
(30) consecutive trading days ending on the fifth trading day prior to the date
of the notice of redemption. Each warrant can be converted into two shares of
common stock at $4.90 per share.

In connection with the public offering, the Company issued 135,000
Representative's warrants to the underwriter. The warrants can be converted into
270,000 shares of common stock at $4.90 per share and/or 67,500 underlying
warrants at $0.14 per warrant. The underlying warrants in turn can be converted
into 135,000 shares of common stock at $6.86 per share.

On August 14, 1996, the Company's Board of Directors declared a two-for-one
stock split of issued and outstanding Common Stock for stockholders of record as
of the close of business on August 26, 1996. Accordingly, all numbers of common
shares and per share data have been restated to reflect the stock split. The par
value of common stock has been adjusted from $0.000429 per share to $0.0002145
per share.

10. SUBSEQUENT EVENTS

Pharmacia and Upjohn License Agreement

On February 19, 1999, the Company entered into an exclusive world wide
license agreement with Pharmacia and Upjohn Company ("PNU"). Pursuant to the
agreement, the Company granted PNU and exclusive worldwide license to develop,
use, manufacture, distribute, market, and sell the Company's Liposomal
Encapsulated Doxorubicin ("LED") and Liposomal Encapsulated Paclitaxel ("LEP")
products for all approved indications. All of the development costs, clinical
and pre-clinical, regulatory and manufacturing scale up expenses for LED and LEP
incurred after the date of the agreement shall be borne by PNU.

The Company received a nonrefundable license fee upon signing the
agreement. Upon the transfer of the U.S. Investigational New Drug ("IND")
applications for LED and LEP to PNU, PNU shall purchase $8,000,000 of the
Company's newly issued common stock. The share price shall be equal to 110% of
the average closing price of the Company's Common Stock for the 60 day period
preceding the PNU purchase date. The Company shall receive milestone payments
upon the completion of each phase of clinical development and upon regulatory
approval for both LED and LEP.

Beginning with the first commercial sale of LED and/or LEP, the Company
shall receive a royalty, based on a percentage of net product sales, for a
period of ten years. The Company may elect up to 90 days prior to the NDA filing
of each product, to forgo royalties on product sales in the United States and
instead receive a co-promotion profit split on those sales. If the co-promotion
election is made, the

F-21
<PAGE>

NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 1998

10. SUBSEQUENT EVENTS (Continued)

Company will be required to reimburse PNU for a portion of the development costs
for LEP and/or LED respectively.

The agreement may be terminated by the Company at any time in the event of
a continuing material breach by PNU. PNU may terminate the agreement at any time
without penalty; however, all amounts paid to the Company prior to the date of
termination would be non-refundable. Further, PNU must transfer back to the
Company all rights to LEP and LED upon termination of the agreement.

Amendment of Georgetown Agreements

The Company has two license and research agreements with Georgetown
University that cover the use of certain technologies used in the Company's LED
and LEP products (See Note 6). In January 1999, the Company and Georgetown
University agreed to amend the agreements to reduce the level of future
sublicense royalties on LEP and LED sales payable to Georgetown in return for a
one time sublicense fee of $800,000. The Company made the $800,000 payment to
Georgetown in March 1999, after the execution of the PNU agreement.

National Institute of Health

On March 5, 1999, the Company executed and forwarded to NIH an exclusive
worldwide licensing Agreement with the NIH to develop and commercialize a
Mesothelium Antigen Therapy (Mesothelin Mab). The agreement, which is awaiting
NIH execution, requires a $75,000 non-refundable license issue payment and a
minimum annual royalty payment of $20,000 per year beginning January 1, 2001.
The agreement further provides for milestone payments and royalties based on
future product sales. The Company is required to pay the costs of filing and
maintaining product patents on the licensed products. The agreement, once it is
executed by NIH, shall extend to the expiration of the last to expire of the
patents on the licensed products, if not terminated earlier. The agreement may
be terminated by mutual consent of NIH and the Company. 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, each party may
unilaterally terminate by giving advanced notice.

F-22
<PAGE>

NEOPHARM, INC.

PROSPECTUS

_____________, 1999

<PAGE>

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth an itemized statement of all estimated
expenses, all of which will be paid by the Company, in connection with the
issuance and the distribution of the securities being registered.

SEC Registration Fee....................................... $2,909

Accounting Fees and Expenses............................... $9,000

Legal Fees and Expenses.................................... $25,000

Printing Fees and Expenses................................. $5,000

Miscellaneous.............................................. $5,091
=======

Total...................................................... $47,000

Item 14. Indemnification of Directors and Officers.

The Company's Certificate of Incorporation limits, to the maximum extent
permitted by Delaware Law, the personal liability of directors for monetary
damages for breach of their fiduciary duties as a director. The Company's Bylaws
provide that the Company shall indemnify its officers and directors and may
indemnify its employees and other agents to the fullest extent permitted by law.
The Company has entered into indemnification agreements with its officers and
directors containing provisions which are in some respects broader than the
specific indemnification provisions contained in Delaware Law. The
indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance, if
available on reasonable terms. The Company believes that these agreements are
necessary to attract and retain qualified persons as directors and officers.

Section 145 of the Delaware Law provides that a corporation may indemnify a
director, officer, employee or agent made or threatened to be made a party to an
action by reason of the fact that he was a director, officer, employee or agent
of the corporation or was serving at the request of the corporation against
expenses actually and reasonably incurred in connection with such action if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.

Delaware Law does not permit a corporation to eliminate a director's duty
of care, and the provisions of the Company's Certificate of Incorporation have
no effect on the availability of equitable

II-1
<PAGE>

remedies, such as injunction or rescission, for a director's breach of the duty
of care. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to directors,
officers or persons controlling the Company pursuant to the foregoing provisions
and agreements, the Company has been informed that in the opinion of the staff
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.

Item 15. Recent Sales of Unregistered Securities.

(a) Since June 1990, the Registrant has sold and issued the following
securities:

1. On June 18, 1990, the Company issued to Aquilur Rahman an option to
acquire 466,270 shares of Common Stock at an exercise price of $0.000429 per
share.

2. On June 21, 1990, the Company sold 1,631,944 shares of its Common Stock
to the John N. Kapoor Trust for an aggregate cash consideration of $700.

3. On September 20, 1990, the Company issued to Timothy J. Kinsella an
option to acquire 3,108 shares of Common Stock at an exercise price of $0.000429
per share.

4. On September 21, 1990, the Company issued to Anatoly Dritschilo an
option to acquire 116,568 shares of Common Stock at an exercise price of
$0.000429 per share.

5. On October 19, 1990, the Company issued to Ralph R. Weichselbaum an
option to acquire 3,108 shares of Common Stock at an exercise price of $0.000429
per share.

6. On October 31, 1990, the Company issued to William Bradner an option to
acquire 3,108 shares of Common Stock at an exercise price of $0.000429 per
share.

7. On October 19, 1992, the Company issued to Ralph R. Weichselbaum an
option to acquire 4,663 shares of Common Stock at an exercise price of $0.000429
per share.

8. On October 21, 1992, the Company issued to William Bradner an option to
acquire 4,663 shares of Common Stock at an exercise price of $0.000429 per
share.

9. On November 20, 1992, the Company issued to Timothy J. Kinsella an
option to acquire 4,663 shares of Common Stock at an exercise price of $0.000429
per share.

10. On December 1, 1993, the Company issued to Gail Salzberg an option to
acquire 7,771 shares of Common Stock at an exercise price of $0.06434 per share.

11. On December 1, 1993, the Company issued to William C. Govier an option
to acquire 116,567 shares of Common Stock at an exercise price of $0.06434 per
share.

12. On November 17, 1994, the Company issued to Anatoly Dritschilo 116,568
shares of the Company's Common Stock pursuant to an exercise of options for an
aggregate consideration of $49.95.

13. On November 17, 1994, the Company issued to Aquilur Rahman 466,270
shares of Common Stock pursuant to an exercise of options for an aggregate
consideration of $199.80.

14. On November 17, 1994, the Company issued to William C. Govier 116,567
shares of Common Stock pursuant to an exercise of options for an aggregate
consideration of $7,500.00.

II-2
<PAGE>

15. On January 24, 1995, the Company issued to William Bradner 6,217 shares
of Common Stock pursuant to an exercise of options for an aggregate
consideration of $2.66.

16. On January 24, 1995, the Company issued to Ralph R. Weichselbaum 6,217
shares of Common Stock pursuant to an exercise of options for an aggregate
consideration of $2.66.

17. On January 24, 1995, the Company issued to Timothy J. Kinsella 6,217
shares of Common Stock pursuant to an exercise of options for an aggregate
consideration of $2.66.

18. On February 15, 1995, the Company issued to sixteen persons, all of
whom were officers, directors, consultants, or employees of the Company, options
to purchase an aggregate of 142,000 shares at an exercise price that will be
equal to the initial public offering price per share.

19. On May 15, 1995, the Company issued to a new Scientific Advisory Board
member, options to purchase 5,000 shares at an exercise price that will be equal
to the initial public offering price per share.

20. On September 11, 1995, the Company issued to 5 persons, all of whom are
consultants or advisors to the Company, options to purchase an aggregate of
50,000 shares at an exercise price that will be equal to the initial public
offering price per share.

21. On November 22, 1995 the Company issued to its Chief Financial Officer
options to purchase 50,000 shares at an exercise price that will be equal to the
initial public offering price per share.

22. On May 16, 1997, in consideration for their services to the Company as
consultants, the Company issued to two individuals, 10,000 shares of its Common
Stock at a price of $4.875 per share.

23. On November 23, 1998, in consideration for services to the Company as
consultant and at the direction of and in lieu of payments to the individual,
the Company made a charitable contribution of 5,000 shares of its Common Stock
at a price of $5.00 per share to two not for profit entities.

24. On November 12, 1998, the Company issued 24,187 shares of its Common
Stock to two persons who had acquired representative's warrants in the Company's
initial public offering at an exercise price of $4.90 per share. The exercise of
the representative's warrants was done on a cashless basis.

25. On December 4, 1998, the Company issued 25,047 shares of its Common
Stock to an individual who had acquired representative's warrants in the
Company's initial public offering at an exercise price of $4.90 per share. The
exercise of the representative's warrants was done on a cashless basis.

26. On January 26, 1999, the Company issued 60,482 shares of its Common
Stock to two individuals who had acquired representative's warrants in the
Company's initial public offering at an exercise price of $4.90 per share. The
exercise of the representative's warrants was done on a cashless basis.

(b) There were no underwriters, brokers or finders employed in connection
with any of the transactions set forth in Item 15.

(c) The issuances described in Item 15(a) were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
In addition, certain of the issuances described in Item 15(a) were deemed exempt
from registration under the Securities Act in reliance upon Rule 701 promulgated
under the Securities Act. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Registrant.

II-3
<PAGE>

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits

Exhibit
Number Description
- ------ -----------

3.1 Certificate of Incorporation, as amended, filed with the Commission as
Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (File
No. 33-90516), is incorporated by reference.

3.2 Bylaws of the Registrant, as amended, filed with the Commission as
Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (File
No. 33-90516), is incorporated by reference.

4.1 Specimen Common Stock Certificate filed with the Commission as Exhibit
4.1 to the Registrant's Registration Statement on Form S-1 (File No.
33-90516), is incorporated by reference.

4.2 Specimen Warrant Certificate filed with the Commission as Exhibit 4.2 to
the Registrant's Registration Statement on Form S-1 (File No. 33-90516),
is incorporated by reference.

4.3 Form of Representative's Warrant Agreement between the Registrant and
the Representative, including form of Representative's Warrant filed
with the Commission as Exhibit 4.3 to the Registrant's Registration
Statement on Form S-1 (File No. 33-90516), is incorporated by reference.

4.4 Form of Warrant Agreement between the Registrant, the Representative and
Harris Trust and Savings Bank, including form of Warrant filed with the
Commission as Exhibit 4.4 to the Registrant's Registration Statement on
Form S-1 (File No. 33-90516), is incorporated by reference.

5.1 Opinion of Orrick, Herrington & Sutcliffe LLP.*

10.1 1995 Stock Option Plan, with forms of Incentive and Nonstatutory Stock
Option Agreements filed with the Commission as Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1 (File No. 33-90516), is
incorporated by reference.

10.2 1995 Director Option Plan, with form of Director Stock Option Agreement
filed with the Commission as Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1 (File No. 33-90516), is incorporated
by reference.

10.3 Form of Director and Officer Indemnification Agreement filed with the
Commission as Exhibit 10.3 to the Registrant's Registration Statement on
Form S-1 (File No. 33-90516), is incorporated by reference.

10.4 Cooperative Research and Development Agreement between the Company and
the National Cancer Institute dated September 13, 1993 filed with the
Commission as Exhibit 10.4 to the Registrant's Registration Statement on
Form S-1 (File No. 33-90516), is incorporated by reference.

II-4
<PAGE>

10.5 License Agreement between the Registrant and Georgetown University dated
July, 1990 filed with the Commission as Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1 (File No. 33-90516), is incorporated
by reference.

10.6 License Agreement between the Registrant and Georgetown University dated
April 18, 1994 filed with the Commission as Exhibit 10.6 to the
Registrant's Registration Statement on Form S-1 (File No. 33-90516), is
incorporated by reference.

10.7 Loan Repayment Note, dated June 18, 1990, by and between the Registrant
and the John N. Kapoor Trust filed with the Commission as Exhibit 10.7
to the Registrant's Registration Statement on Form S-1 (File No.
33-90516), is incorporated by reference.

10.8 Consulting Agreement, dated July 1, 1994, by and between the Registrant
and EJ Financial Services, Inc. filed with the Commission as Exhibit
10.8 to the Registrant's Registration Statement on Form S-1 (File No.
33-90516), is incorporated by reference.

10.9 Harris Bank and Trust Company Loan Agreement dated March 16, 1995, as
amended on October 5, 1995, filed with the Commission as Exhibit 10.09
to the Registrant's Registration Statement on Form S-1 (File No.
33-90516), is incorporated by reference.

10.10 Form of Option Agreement filed with the Commission as Exhibit 10.10 of
the Registrant's report on Form 10-K for the fiscal year ended December
31, 1996, is incorporated by reference.

10.11 Cooperative Research and Development Agreement between the Registrant
and the Food and Drug Administration dated August 27, 1997 filed with
the Commission as Exhibit 10.11 to the Registrant's report on Form 10-K
for the fiscal year ended December 31, 1998, is incorporated by
reference.

10.12 License Agreement between the Registrant and the National Institute of
Health dated September 23, 1997 filed with the Commission as Exhibit
10.12 to the Registrant's report on Form 10-K for the fiscal year ended
December 31, 1998, is incorporated by reference.

10.13 Employment Agreement between James M. Hussey and the Registrant dated
March 16, 1998 filed with the Commission as Exhibit 10.13 to the
Registrant's report on Form 10-K for the fiscal year ended December 31,
1998, is incorporated by reference.

10.14 1998 Equity Incentive Plan filed with the Commission on October 30, 1998
as Exhibit 4.1 to the Registrant's Registration Statement on Form S-8
(File No. 333-66365), is incorporated by reference.

10.15 Collaboration Agreement by and between the Company and BioChem
Therapeutics dated May 12, 1997 filed with the Commission as Exhibit
10.15 to the Registrant's report on Form 10-K for the fiscal year ended
December 31, 1998, is incorporated by reference.

II-5
<PAGE>

10.16 Line of Credit Agreement, dated as of September 30, 1998 by and between
the Registrant and the John N. Kapoor Trust filed with the Commission on
November 16, 1998 as Exhibit 10.15 to the Registrant's report on Form
10-Q (File No. 33-09516), is incorporated by reference.

10.17 License Agreement, dated February 19, 1999 between Pharmacia & Upjohn
Company and the Registrant filed with the Commission as Exhibit 10.1 to
the Registrant's report on Form 8-K (File No. 33-09516), is incorporated
by reference.

10.18 Stock Purchase Agreement, dated February 19, 1999 between Pharmacia &
Upjohn and the Registrant filed with the Commission as Exhibit 10.2 to
the Registrant's report on Form 8-K (File No. 33-09516), is incorporated
by reference.

10.19 Amendment No. 1 dated January 22, 1999 to the License Agreement between
the Registrant and Georgetown University dated January, 1990 filed with
the Commission as Exhibit 10.18 to the Registrant's report on Form 10-K
for the fiscal year ended December 31, 1998, is incorporated by
reference.

10.20 Amendment No. 1 dated January 22, 1999 to the License Agreement between
the Registrant and Georgetown University dated April 18, 1994, filed
with the Commission as Exhibit 10.19 to the Registrant's report on Form
10-K for the fiscal year ended December 31, 1998 is incorporated by
reference.

23.1 Consent of Arthur Andersen LLP.**

23.2 Consent of Orrick, Herrington & Sutcliffe LLP (See Exhibit 5.1).*

24.1 Power of Attorney.*

27 Financial Data Schedule.

* Previously filed

** To be filed by amendment

(b) Financial Statement Schedules

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or shown in the financial
statements or notes thereto.

Item 16. Undertakings.

The undersigned Registrant hereby undertakes:

(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement

II-6
<PAGE>

relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

II-7
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Bannockburn, State of
Illinois on the 29 day of March, 1999.

NEOPHARM, INC.

/s/James M. Hussey
-------------------------------------
By: James M. Hussey
President and Chief Executive Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.

Signature Title Date
- -------------------------- ---------------------------------- --------------

/s/John N. Kapoor Director, Chairman of the Board March 29, 1999
- --------------------------
Dr. John N. Kapoor

* Director, President, and March 29, 1999
- -------------------------- Chief Executive Officer
Mr. James M. Hussey (Principal Executive Officer)

* Director March 29, 1999
- --------------------------
Dr. Anatoly Dritschilo

* Director, Chief Scientific Officer March 29, 1999
- --------------------------
Dr. Aquilur Rahman

* Director March 29, 1999
- --------------------------
Mr. Sander A. Flaum

* Director March 29, 1999
- --------------------------
Mr. Erick E. Hanson

* Chief Financial Officer (Principal March 29, 1999
- -------------------------- Financial Officer and Principal
Mr. Kevin M. Harris Accounting Officer)

* John N. Kapoor
as power of attorney

II-8

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 40,681
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,680,681
<PP&E> 161,567
<DEPRECIATION> 60,700
<TOTAL-ASSETS> 1,781,548
<CURRENT-LIABILITIES> 603,428
<BONDS> 0
0
0
<COMMON> 1,789
<OTHER-SE> 1,176,333
<TOTAL-LIABILITY-AND-EQUITY> 1,781,548
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,213,723
<INCOME-TAX> 1,640,000
<INCOME-CONTINUING> 1,573,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,573,723)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)

</TABLE>