10-K

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

FORM 10-K

(MARK ONE)

ý
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2001

Or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From            To                           

COMMISSION FILE NUMBER 33-90516

NEOPHARM, INC.
(Exact Name of Registrant as Specified in its Charter)

DELAWARE (State or other jurisdiction of incorporation or organization)	51-0327886 (I.R.S. Employer Identification Number)
	60045 (Zip Code)

150 FIELD DRIVE
SUITE 195
LAKE FOREST, ILLINOIS
(Address of Principal Executive Offices)

(847) 295-8678
(Registrant's Telephone Number, Including Area Code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.0002145 PAR VALUE
(Title of class)

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

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

        The aggregate market value of the Registrant's common stock held by non-affiliates (affiliates being, for these purposes only, directors, executive officers and holders of 5% of the registrant's stock) of the registrant, par value $.0002145 per share, (based on the closing price of such shares on the NASDAQ on March 1, 2002) was $172,803,738. As of March 1, 2002 there were 16,252,529 shares of Common Stock outstanding.

FORM 10-K TABLE OF CONTENTS

PART I		Page
Item 1.	Business	3
Item 2.	Properties	25
Item 3.	Legal Proceedings	25
Item 4.	Submission of Matters to a Vote of Security Holders	25
PART II
Item 5.	Market for the Registrant's Common Equity and Related Stockholder Matters	26
Item 6.	Selected Financial Data	27
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 8.	Financial Statements and Supplemental Data	32
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	32
PART III
Item 10.	Directors and Executive Officers of the Registrant	33
Item 11.	Executive Compensation	35
Item 12.	Security Ownership of Certain Beneficial Owners and Management	36
Item 13.	Certain Relationships and Related Transactions	36
PART IV
Item 14.	Exhibits and Financial Statement Schedules	37
	Signatures	38

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BUSINESS

OVERVIEW

        NeoPharm is a biopharmaceutical company engaged in the research, development and commercialization of drugs for the treatment of various cancers. We currently have a portfolio of eight anti-cancer drugs, six of which are in clinical trials. We have built our drug portfolio based on our two novel proprietary technology platforms: the proprietary NeoLipid™ electrostatic liposome drug delivery platform and a tumor-targeting platform.

        We currently have eight products under development. Under our NeoLipid platform, we began Phase I/II clinical trials in March 2001 for LE-AON, our electrostatic liposome encapsulated gene inhibitor for radiation resistant tumors, and we submitted an investigational new drug application (IND) in March 2001 and initiated Phase I/II clinical trials in September 2001 for electrostatic liposome encapsulated mitoxantrone, or LEM. Pre-clinical studies are currently in progress for electrostatic liposome encapsulated SN38, or LE-SN38, and electrostatic liposome encapsulated epirubicin, or LEE. Under our tumor-targeting platform, we are currently in Phase I/II clinical trials for IL13-PE38, a tumor-targeting product using intratumoral administration for the treatment of brain tumors and systemic administration for the treatment of kidney cancer. We began Phase I/II clinical trials in the fourth quarter of 2000 for our other tumor-targeting product, SS1 (dsFv)-PE38, for the treatment of various forms of cancer. In addition, in February 1999, we entered into a license agreement with Pharmacia Corporation ("Pharmacia") to develop and commercialize two of our products: liposome encapsulated doxorubicin, or LED, and liposome encapsulated paclitaxel, or LEP.

        As of March 1, 2002, we had 72 full time employees.

MARKET OVERVIEW

        Cancer is the second leading cause of death in the United States. The American Cancer Society estimates that doctors will diagnose 1.3 million new cases of cancer in the United States in 2002. The National Cancer Institute (NCI) estimates that the annual cost of cancer is approximately $157 billion, including $56 billion in direct medical costs and $16 billion for morbidity costs, which includes the cost of lost productivity.

        Cancer is characterized by uncontrolled cell division resulting in the growth of a mass of cells commonly known as a tumor. Cancerous tumors can arise in almost any tissue or organ and cancer cells, if not eradicated, spread, or metastasize, throughout the body. Cancer is believed to occur as a result of a number of factors, including heredity and environmental factors.

        For the most part, cancer treatment depends on the type of cancer and the stage of disease progression. Generally, staging is based on the size of the tumor and whether the cancer has metastasized. Following diagnosis, solid tumors are typically surgically removed or the patient is given radiation therapy. Chemotherapy is the principal treatment for tumors that are likely to or have metastasized. Chemotherapy involves the administration of cytotoxic drugs, which are designed to kill cancer cells, or the administration of hormones, which affect the growth of tumors.

        Because in most cases metastatic cancer is fatal, cancer specialists attempt to attack the cancer aggressively and with as many therapies as available and with as much dosage as the patient can tolerate. Since chemotherapy attacks both normal and cancerous cells, treatment often tends to result in complicating side effects. Additionally, cells which have been exposed to several rounds of chemotherapy develop a resistance to the cancer drugs that are being administered. This is known as "multi-drug resistance." The side effects of chemotherapy often limit the effectiveness of treatment. Cancers often recur and mortality rates remain high. Despite the large sums of money spent on cancer research, current treatments are inadequate and improved cancer agents are needed.

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        The products we currently have under development target a broad range of solid tumors. The table below shows the incidence and mortality estimated for the year 2002 for various types of solid tumor cancers that our products seek to treat:

Cancer Indication	New Cases	Deaths
Breast	205,000	40,000
Prostate	189,000	30,200
Lung	169,400	154,900
Colorectal	148,300	56,600
Kidney	31,800	11,600
Head and Neck	28,900	7,400
Ovarian	23,300	13,900
Brain	17,000	13,100

Source: American Cancer Society, 2002 Cancer Facts and Figures

BUSINESS STRATEGY

        Our corporate strategy is to become a leader in the research, development and commercialization of new and innovative anti-cancer treatments. Our strategy involves the following elements:

Focus on the growing cancer market.

        The worldwide cancer drug market was estimated at $20 billion in 2001, representing a 4% increase over 2000. Despite the large sums of money spent, cancer is the second leading cause of death in the United States, and current treatments remain inadequate. Given the life-threatening nature of cancer and the lack of effective treatments, the FDA has adopted procedures to accelerate the approval of cancer drugs. We intend to use our expertise in the field of cancer research to target this significant market opportunity for cancer drug development.

Develop our existing product portfolio.

        We have a portfolio of eight anti-cancer drugs, six of which have advanced to clinical trials. We intend to further develop six of these products both by expanding our internal resources and by continuing to collaborate with leading corporate, governmental and educational institutions. We have previously licensed Pharmacia to develop and commercialize two of these products. We believe this strategy will maximize the commercial value of our products by giving us the option to either directly market our products or to license our products on more favorable terms.

Create new products by capitalizing on our unique NeoLipid platform.

        We intend to use our NeoLipid electrostatic liposome technology platform to create new products in two ways: by extending the patent life of existing cancer drugs and by utilizing our unique platform to develop new drugs. We believe that several widely used cancer drugs are nearing patent expiration. Many of these drugs, while effective, have been limited in their use because of adverse side effects and difficulties in administration. Using our NeoLipid technology, we believe opportunities exist for us to increase the usefulness of these compounds as improved anti-cancer treatments. When a drug is combined with another agent or delivery system in a novel way, its patent life may be extended. We are intending to extend the marketing exclusivity for paclitaxel, doxorubicin and mitoxantrone through our LEP, LED and LEM products, respectively.

        We believe that our electrostatic liposome technology may provide us with a platform for the development of novel therapeutic agents for cancer drug development. For example, we are developing

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LE-AON, the encapsulation of a gene therapy which inhibits a protein associated with radiation resistant tumors, to treat various solid tumors.

Reduce risk through a broad portfolio of products.

        We are currently developing eight products based on our electrostatic liposome and tumor-targeting platforms. We are developing multiple products simultaneously in order to reduce the impact of any single product failure. In addition, by broadening our product portfolio, we increase our flexibility to eliminate products which we determine have less market potential while applying additional resources to products which show promise.

Develop specialized sales and marketing capabilities for the United States and form strategic international collaborations for foreign markets.

        Under the terms of our current license agreement with Pharmacia, we will have the right to purchase co-promotion rights for LEP and LED in the United States. We intend to develop a specialized cancer sales and marketing capability within the United States for LEP, LED and other products that we may develop. With respect to foreign sales, we may enter into collaborations with established international drug companies.

OUR TECHNOLOGY

NeoLipid™ Electrostatic Liposome Drug Delivery Platform

        Liposomes, microscopic spheres composed of lipid membranes, were discovered in the late 1960's and have been extensively investigated as drug delivery vehicles. Liposomes were believed to be particularly suitable for the delivery of toxic drugs, such as cancer drugs, because drugs encapsulated in liposomes are preferentially absorbed into certain organs such as the liver, spleen and gall bladder. Furthermore, liposomes and the cytotoxic agents encapsulated therein, are not readily absorbed by the nervous system or key organs, like the heart, thereby helping to reduce toxicity.

        While liposomes were initially viewed as an important advance in drug delivery technology, there have been limited commercial successes. We estimate that in excess of $700 million has been spent on the research and development of liposomes, resulting in the commercialization of only two liposomal drugs, doxorubicin and amphotercin B.

        To date, liposomes have been commonly produced with uncharged lipids. Attempts at using uncharged liposomes as drug delivery vehicles have resulted in many difficulties, including:

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difficulty in achieving encapsulation that severely limits the scope of drugs available for encapsulation;



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a need for expensive, complex manufacturing processes that result in higher manufacturing costs;



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cumbersome and time-consuming reconstitution procedures required of pharmacy personnel; and



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product stability being limited to hours.

        We believe that our second generation, proprietary electrostatic liposome technology may overcome these limitations. Our electrostatic liposome technology uses charged lipids rather than neutral lipids. By encapsulating a drug within an oppositely charge liposome, we achieve a powerful electrostatic attraction between these two agents which creates a stable drug formulation. We believe

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that our proprietary electrostatic liposome technology provides a number of advantages over previous liposome products, including the following:

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Broadened range of drugs which can be encapsulated

Our technology provides an opportunity to efficiently encapsulate a wide range of compounds. Based on our research to date, we believe we can improve the delivery of a variety of cytokines and chemotherapy drugs, including paclitaxel, the number one selling chemotherapy drug which previously has not been successfully encapsulated in liposomes. In addition, we believe our electrostatic liposome technology may allow for the delivery of antisense compounds and genes, thereby avoiding the potential problems associated with viral delivery systems.

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Reduced toxicity at higher doses

Our electrostatic liposome delivery system may allow for the treatment of patients with reduced toxic side effects. Accordingly, our delivery system may enable the administration of the liposome encapsulated drug in higher doses, thereby potentially increasing efficacy and possibly allowing for treatment over longer periods of time.

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Increased stability, resulting in simplified handling and increased shelf life

The stability of our liposomal drugs makes freeze-drying possible, which provides for longer shelf life and simplified handling during preparation in the pharmacy and administration of the drug by the oncologist.

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Reduced manufacturing cost

Our electrostatic liposome technology does not require complex manufacturing techniques. The electrostatic interaction between the oppositely-charged liposome and the drug typically results in an encapsulation efficiency of over 95%, resulting in reduced manufacturing costs.

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Reduced multi-drug resistance, increasing the killing of otherwise resistant tumors

Multi-drug resistance is the resistance that a patient's tumors usually develop after they have been exposed to several doses of chemotherapy. Some tumor cells remove the chemotherapy drugs via a pump which exists on the cell membrane of most cells. Previous liposomes have not had any significant inhibitory effects on this pump, and the tumors have been able to pump out the tumor-killing drugs. Based on our pre-clinical studies, we believe that cardiolipin, one of the patented ingredient lipids in our two lead liposome products, inhibits the function of the pump. As a result, we may be able to significantly increase the effectiveness of our cardiolipin containing liposomes against tumors, thereby maximizing the killing of otherwise resistant tumors.

Tumor-Targeting Platform

        The products in our tumor-targeting platform each consist of a single molecule composed of two parts, a tumor-targeting mechanism and a cytotoxic agent. Our tumor targeting mechanism is a protein or monoclonal antibody that detects and binds to a specific marker on the surface of cancer cells. Since cancer cells may have unique markers on their surface, a tumor-targeting mechanism with the appropriate specificity for those cells may be used to deliver the cytotoxic agent directly to the tumors. The key to making a useful tumor-targeting drug is the targeting mechanism that selects tumor cells while ignoring healthy cells.

        Two tumor-targeting products have been approved by the FDA and commercialized for the treatment of cancer: American Home Products Corporation's Mylotarg® in May 2000 for relapsed adult acute myloid leukemia and Ligand Pharmaceuticals Incorporated's Ontak® in February 1999 for

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persistent or recurrent cutaneous T-cell lymphoma. While these drugs are being marketed for leukemia, our tumor-targeting products are being developed for the larger solid tumor market.

        We and our collaborative partners, the FDA and the National Institutes of Health, referred to as NIH, have identified two targeting mechanisms which we believe possess the requisite characteristics for successful use in tumor-targeting anti-cancer products. Both IL13, and SS1(dsFv), target receptors which are present in significantly higher numbers on solid tumor cells than on healthy cells. Specifically, IL13 targets receptors in kidney cancer, brain cancer, Kaposi's sarcoma and possibly breast cancer, and SS1(dsFv) targets receptors in ovarian cancer and head and neck cancers. We use PE38 as the cytotoxic component in both of our tumor-targeting products. We selected PE38 because of its effective cell killing action on a wide variety of tumor types.

        Based upon our pre-clinical studies, we believe our tumor-targeting products may provide the following benefits:

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specifically target tumor cells with minimal toxicity to healthy cells;



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successfully attack cancer cells resistant to standard cancer treatments;



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kill slow-growing tumors, which are often difficult to treat;



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a tolerable side-effect profile with minimal disturbance to a patient's quality of life during treatment; and



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product stability and extended shelf life.

OUR PRODUCTS

        We have utilized both our electrostatic liposome platform and our tumor-targeting platform to develop a group of novel anti-cancer products. Presently, we have six products in clinical trials and two in preclinical development.

NeoLipid™ Electrostatic Liposome Drug Delivery Platform

Liposome Encapsulated Antisense Oligonucleotides

        Product Description.    We have developed an electrostatic liposome encapsulated antisense cRaf oligonucleotide, LE-AON, which we believe inhibits the expression of the cRaf protein and thus may have potential to enhance the effectiveness of radiation in the treatment of certain cancers. cRaf is a protein which is expressed at higher levels in cancer cells which are resistant to radiation therapy than in healthy cells. By inhibiting expression of this gene, the cell becomes more susceptible to radiation therapy. In addition, further pre-clinical studies indicate that LE-AON may be effective in enhancing the effect of chemotherapy in the treatment of various forms of cancer. Our liposomes provide a non-viral method of delivering the gene inhibitor into the cell. An additional advantage of LE-AON is that it can be administered intravenously and is relatively easy to manufacture.

        Development Status.    We intend to develop LE-AON as a treatment for radiation resistant tumors and as an enhancement to standard chemotherapeutic agents. In our pre-clinical studies, intravenous administration of LE-AON appeared to inhibit cRaf gene expression in tumor tissue. When LE-AON was given in combination with radiation treatment, tumor regression for at least 60 days was observed. We filed an investigational new drug application for LE-AON for patients with radiation resistant solid tumors in July, 2000, and began Phase I/II clinical trials for LE-AON in the first quarter of 2001.

Liposome Encapsulated Mitoxantrone

        Product Description.    We recently encapsulated mitoxantrone in our NeoLipid system. Mitoxantrone is used for the treatment of prostate cancer and multiple sclerosis, but its use is limited

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due to cardiac toxicity. We believe LEM will demonstrate a safety and efficacy advantage over unencapsulated mitoxantrone.

        Development Status.    We submitted an IND in March 2001 and initiated Phase I/II clinical trials in September 2001 for LEM. Pre-clinical studies in LEM demonstrated a survival advantage, in addition to a better side effect profile, when compared with unencapsulated mitoxantrone.

Liposome Encapsulated Paclitaxel

        Product Description.    LEP is an electrostatic liposome encapsulated formulation of the widely-used cancer drug, paclitaxel. Paclitaxel is marketed by Bristol-Myers Squibb Company under the trade name "Taxol®" and is used in the treatment of a number of tumors, including breast, ovarian and lung cancer. Despite paclitaxel's wide use and its anti-tumor characteristics, its effectiveness is limited by its side effects, which can include nausea, vomiting, hair loss and nerve and muscle pain. Because of the chemical characteristics of paclitaxel, it cannot be introduced into the body unless it is first formulated in a toxic mixture of castor oil and ethanol, which requires premedication of the patient. In addition, paclitaxel must be infused over a period of at least three hours.

        We believe our technology may overcome many of the current limitations of paclitaxel by utilizing cardiolipin, a naturally occurring negatively charged lipid found in cardiac tissue, to increase the solubility of paclitaxel. We have been able to standardize the preparation of cardiolipin through the development of a proprietary form of synthetic cardiolipin. Using cardiolipin eliminates the need for administration of castor oil and ethanol and reduces the need for the accompanying premedication. Since paclitaxel has a positive charge and cardiolipin has a negative charge, cardiolipin electrostatically combines with the paclitaxel to form a stable product that can be freeze dried and easily reconstituted. Based on preclinical studies, we believe another potential advantage of LEP may be the ability of cardiolipin to overcome multi-drug resistance. As a result, we may be able to significantly increase the effectiveness of LEP against tumors, thereby maximizing the killing of otherwise resistant cells.

        Development Status.    LEP is being developed for various solid tumors. We believe LEP is the first, and only, liposomal form of paclitaxel to enter clinical trials. Enrollment of patients in our Phase I/II clinical trials for LEP was completed in April 2000 by our licensee, Pharmacia. These Phase I/II trials involved the treatment of 31 cancer patients, none of whom were then responding to other forms of treatment. Phase I/II trials have provided evidence that LEP may be able to be administered at higher levels than paclitaxel is currently administered, with fewer side effects. Although not designed to measure efficacy, six patients in the Phase I/II trial experienced tumor reductions greater than 35%. The tumors in twelve other patients did not increase in size after 12 weeks, and in four of these twelve patients, the tumors were still stable in size one year later. Some patients received significantly more cycles of LEP than can be given with unencapsulated paclitaxel, including two patients who received greater than 30 cycles of LEP. None of the patients showed signs of the nerve and muscle pain commonly associated with paclitaxel, and most patients did not experience the hair loss or nausea often associated with paclitaxel treatment.

        Currently, our licensee, Pharmacia, is responsible for the commercial development of LEP, including conducting clinical trials and working with the FDA to successfully commercialize the drug. As of the date of this filing, we are endeavoring to obtain definitive information on the development status of LEP from Pharmacia. See "Collaborative Relationships and Licenses—Pharmacia License Agreement".

Liposome Encapsulated Doxorubicin

        Product Description.    LED is an electrostatic liposome encapsulated formulation of the widely used cancer drug doxorubicin. Doxorubicin is used to treat a number of cancers including solid tumors and leukemia, a form of blood cancer. Though effective in treating these and other cancers, doxorubicin

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may produce irreversible heart damage. The risk of heart failure increases with increasing total cumulative doses of doxorubicin. Doxorubicin also causes suppression of white blood cell production, which may limit the dose that may be administered, and produces side effects such as nausea, vomiting and hair loss. Clinical results to date suggest that LED may reduce these side effects. In addition, since doxorubicin has a positive charge and cardiolipin has a negative charge, cardiolipin electrostatically binds to the doxorubicin to form a stable product that can be freeze dried and easily reconstituted. We believe LED, unlike other liposomal doxorubicin products currently available, may reduce multi-drug resistance and be easier to manufacture because of its formulation with cardiolipin.

        Development Status.    We intend to develop LED for breast, prostate and blood cancers. We completed a Phase I/II trial in May 1998, which provided evidence that LED demonstrated lower toxicity when compared to unencapsulated doxorubicin and could be given at approximately double the current standard dose for doxorubicin. In June 1998, Phase II clinical trials for the treatment of advanced prostate cancer in 10 patients were initiated. After four rounds of treatment, the level of prostate specific antigen, an indicator of the extent of disease progression, decreased by greater than 35% in two patients and stabilized in two other patients. These four patients reported a significant reduction in pain.

        Currently, our licensee, Pharmacia, is responsible for the commercial development of LED, including conducting clinical trials and working with the FDA to successfully commercialize the drug. As of the date of this filing, we are endeavoring to obtain definitive information on the development status of LED from Pharmacia. See "Collaborative Relationships and Licenses—Pharmacia License Agreement".

Liposome Encapsulated SN38

        Product Description.    SN38 is the major active metabolite of Camptosar, a product marketed by our partner, Pharmacia, for the treatment of colorectal cancer. Historically, although SN38 is known to be highly toxic to tumor cells, there is no practical way to deliver the drug to destroy tumor cells. Currently, the only way to deliver SN38 to cancer cells is to administer an irinotecan such as Camptosar, which is then converted into SN38 in the tumor cells, and results in cell death. Unfortunately, only a small percentage of Camptosar is converted in the tumor, and this leads to some severe side effects. In 2001, we were able to successfully encapsulate SN38 in our NeoLipid system. Pre-clinical studies are being conducted to evaluate safety and efficacy advantages of LE-SN38 over unencapsulated SN38.

        Development Status.    Preclinical research is currently underway and we expect to file an IND in the first half of 2002. As a result, we anticipate the initiation of Phase I clinical trials before the end of 2002.

Liposome Encapsulated Epirubicin

        Epirubicin is a drug that is widely used in Europe for the treatment of breast cancer and was recently introduced in the U.S. market by our collaborative partner, Pharmacia. We believe LEE will demonstrate a safety and efficacy advantage over unencapsulated epirubicin. We have recently encapsulated epirubicin in our liposomes and intend to evaluate its properties as a treatment for breast cancer. Preclinical studies are currently underway to evaluate the profile of this drug, and we expect to file an IND late in 2002.

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Tumor-Targeting Platform

IL13-PE38

        Product Description.    IL13-PE38 is a tumor-targeting agent we are developing for the treatment of kidney and brain cancers. Research by scientists at the FDA and the NIH has demonstrated that some solid tumors express high numbers of IL13 receptors on their cell surfaces in comparison with healthy cells. IL13-PE38 links the cytotoxin PE38 to the tumor-targeting agent IL13. When administered, IL13-PE38 is expected to target the IL13 receptors, thereby killing the tumor cells with minimal damage to the healthy cells.

        In September 1997, we entered into an exclusive worldwide licensing agreement with the FDA and the NIH giving us rights to develop and commercialize IL13-PE38. We also entered into a cooperative research and development agreement with the FDA for the clinical and commercial development of IL13-PE38 as an anti-cancer agent. We believe this is the first collaboration between the FDA and a biopharmaceutical company.

        Development Status.    We are evaluating IL13-PE38 as a treatment for kidney and brain cancers. In preclinical studies, IL13-PE38 has provided evidence of tumor regression in a number of cancers, which suggests the potential for a favorable toxicity profile. We filed an investigational new drug application for IL13-PE38 in June 1999 for the treatment of refractory kidney cancer and entered Phase I/II clinical trials in October 1999 for this indication. In our Phase I/II clinical trials we determined the maximum tolerated dose and schedule and we are currently working to establish the proper dosage level and schedule. We also filed an investigational new drug application in March 2000 for brain cancer and entered Phase I/II clinical trials for brain cancer in the fourth quarter of 2000. In addition, in late 2001, NeoPharm received orphan drug designation for IL13-PE38 for the treatment of glioblastoma multiforme and anaplastic astrocytoma, two very deadly forms of brain cancer with practically no effective treatment options.

        Preliminary Phase I/II data from two ongoing clinical trials for the treatment of brain tumors was presented in November 2001. This preliminary data appeared to show that four out of eleven evaluable patients experienced a significant reduction in the size of their tumors. Patients continue to enroll in these studies as we determine the most effective dose.

SS1(dsFv)-PE38

        Product Description.    SS1(dsFv)-PE38 links the cytotoxin PE38 to the antibody SS1(dsFv). As is the case with IL13, SS1(dsFv) targets specific receptors on cancer cells and delivers the cytotoxin directly to the cancer cells with minimal effect on healthy cells. In March 1999, we executed a worldwide exclusive licensing agreement with the NIH giving us rights to develop and commercialize SS1(dsFv)-PE38. We also entered into a cooperative research and development agreement with the NIH for the clinical and commercial development of SS1(dsFv)-PE38 as an anti-cancer agent.

        Development Status.    We are evaluating SS1(dsFv)-PE38 as a treatment for ovarian cancer, head and neck cancer, and mesothelioma, a type of lung cancer. In March 2000, we filed an investigational new drug application for SS1(dsFv)-PE38 for the treatment of certain common cancers and entered Phase I/II clinical studies in the fourth quarter of 2000. In preclinical studies, SS1(dsFv)-PE38 demonstrated very specific targeting to receptors for ovarian cancer and head and neck cancers and a high level of tumor toxicity. Preclinical studies demonstrated a high rate of response in ovarian tumors. In addition, in early 2002, NeoPharm received orphan drug designation for SS1(dsFv)-PE38 for the treatment of both ovarian cancer and mesothelioma, a virulent and deadly form of lung cancer with practically no effective treatment options.

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Collaborative Relationships and Licenses

Pharmacia License Agreement

        In February 1999, we signed a license agreement with Pharmacia giving them certain rights to develop and commercialize LEP and LED worldwide. The license agreement provides for up to $69 million in payments to us from Pharmacia, as follows:

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a $9 million non-refundable up-front payment on execution of the license agreement;



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up to $52 million in milestone payments as clinical progress occurs; and



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an $8 million equity investment in our common stock.

        We have already received the $9 million non-refundable up-front payment upon execution of the license agreement, the $8 million equity investment, a $2 million milestone payment in July 1999 for transferring the investigational new drug applications for LED and LEP to Pharmacia, and a $3 million milestone payment in March 2000 upon initiation of the Phase II clinical trials for LEP. Pharmacia has assumed all further responsibility for, and the costs associated with, the development and testing of LEP and LED and obtaining all regulatory approvals. We have the right to purchase from Pharmacia co-promotion rights in lieu of receiving royalties on United States sales, for a price based upon a percentage of Pharmacia's development costs. The co-promote right allows us to collect a larger royalty in exchange for contributing to the promotional expenses of any products developed under the Agreement. We will also receive a fixed royalty on foreign sales.

        We may terminate the license agreement upon a material breach by Pharmacia and Pharmacia may terminate the agreement upon our material breach. Upon termination of the agreement by either party, Pharmacia's rights to the relevant licenses granted under the agreement automatically revert to us. If Pharmacia ceases to market, sell or launch the products relating to the licenses granted under the agreement in the United States, certain European markets or Japan and upon our request, Pharmacia is required to transfer the regulatory approvals to market the products in those countries, unless Pharmacia's cessation is due to reasons related to the safety or efficacy of a product.

        In January 2002, Pharmacia informed us that the LEP and LED development programs were experiencing delays. At the time of that meeting, Pharmacia was unable to determine when Phase II/III studies were expected to begin. We continue to work with Pharmacia to determine the development status of both LEP and LED, but as of the date of this filing, Pharmacia has not provided us with new target dates for starting Phase II/III clinical trials in these products.

Georgetown University Agreements.

        We have entered into two license agreements, two contract research agreements and three sponsored research agreements with Georgetown University relating to various liposome-related products. Under the Georgetown licenses, and in return for sponsoring related research, we were granted exclusive licenses to manufacture and sell LED, LEP, and LE-AON. We are obligated to pay royalties to Georgetown on commercial sales of these products. In addition, we are obligated to make certain advance royalty payments, which will be credited against future royalties. The Georgetown licenses may be terminated in the event of a default. Our rights under the Georgetown licenses with respect to LED and LEP have been sublicensed to Pharmacia.

        Under the contract research agreements, we pay or reimburse Georgetown for all direct and indirect costs associated with research on specific projects. In return, and upon making various one-time payments, we retain all rights to all inventions, developments, discoveries and other proprietary ideas which are first conceived, discovered or developed during the conduct of the research.

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        Under the terms of the sponsored research agreement with Georgetown, we have agreed to pay the costs associated with additional research relating to certain proprietary research information previously developed by Georgetown as well as making certain milestone and royalty payments to Georgetown. In return for this sponsored research, Georgetown has given us a license for certain existing patent rights now owned by Georgetown as well as a right of first refusal to exclusively license any invention or discovery conceived or reduced to practice during the research. The terms of any such license would be subject to good faith negotiations.

NIH

        In September 1997, we entered into an exclusive worldwide licensing agreement with the NIH and the FDA whereby we were granted the right to develop and commercialize IL13-PE38. The IL13-PE38 license required us to pay NIH an initial $75,000 non-refundable payment and requires minimum annual royalty payments to NIH of $10,000, which increase to $25,000 after the first commercial sale. The IL13-PE38 license also provides for milestone payments and royalties based on future product sales. The NIH and FDA may terminate the agreement upon our default in performing any material obligations under the agreement or if they determine that such action is necessary to meet the requirements for public use specified by federal regulations and we do not reasonably satisfy such requirements. While providing us with an exclusive license, it should be noted that, as is typical in such agreements, neither the NIH nor the FDA make any representations or warranties in the license agreement as to the validity or enforceability of the licensed rights.

        In March 1999, we entered into a license agreement with the NIH for SS1(dsFv)-PE38. The SS1(dsFv)-PE38 license required us to pay the NIH an initial $75,000 non-refundable payment and requires minimum annual royalty payments to the NIH beginning on January 1, 2001 of $20,000, which increase to $150,000 per year if we fail to reach certain benchmarks. The other terms and conditions of the SS1(dsFv)-PE38 license are substantially the same as those of the NIH IL13-PE38 license described above. We have also entered into a cooperative research and development agreement with the NIH in May 1999, for SS1(dsFv)-PE38.

FDA

        In August 1997, we entered into a cooperative research and development agreement with the FDA covering the IL13-PE38 product licensed from the NIH and FDA. Pursuant to the FDA agreement, we agree to commercialize IL13-PE38 and the FDA agrees to collaborate on the clinical development and commercialization of the licensed product. In January 2001 the agreement was revised and expanded and is now set to expire on December 31, 2003. However, under the revised agreement, we are required to pay $400,000 per year, through 2003, for expenses incurred by the FDA in carrying out its responsibilities under this agreement. Research and development costs related to this research totaled $100,000 in each of 1997 and 1998, $150,000 in each of 1999 and 2000 and $400,000 in 2001.

National Cancer Institute

        In May 1999, we entered into a cooperative research and development agreement with the NCI. Pursuant to the agreement, the Company committed to commercialize the SS1 (dsFv)-PE38 monoclonal antibody product which it licensed from the NIH and the FDA. The NCI agreed to collaborate on the clinical development and commercialization of the licensed product. The Company was originally committed to pay $100,000 per year over four years for the reasonable and necessary expenses incurred by the NCI in carrying out their responsibilities under the agreement. During each of 1999 and 2000, NeoPharm spent $100,000 under this agreement. In 2000, the parties agreed to expand the scope of the agreement and increase the Company's annual funding requirement to $150,000 for the final two years of the agreement. In 2001, we spent $150,000 under the agreement.

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        Amounts paid to our major research and development collaborators under our various agreements during the last three years, as well as our commitments under these agreements for 2002, are included in the following table:

Research and Development Collaboration Expenses
	Actual			Scheduled(1)
	1999	2000	2001	2002
Georgetown	1,019,000	456,000	2,458,000	2,500,000
FDA	150,000	150,000	400,000	400,000
NCI	100,000	100,000	150,000	150,000
NIH	110,000	35,000	30,000	30,000
Total Collaboration Expenses	1,379,000	741,000	3,038,000	3,080,000

(1)

The agreements listed in this table can be terminated at any time with, at most, 90 days written notice.

Manufacturing

        Currently, we do not have the commercial manufacturing capacity for any of the products we are developing. All of our electrostatic liposome products are produced at the Center for Advanced Drug Development at the University of Iowa Pharmacy School which we believe has sufficient production capabilities to satisfy our clinical trial needs through the end of Phase I/II clinical testing. While commercial production of LEP and LED is expected to be handled by Pharmacia, we have retained the right, under the terms of our agreement with Pharmacia, to supply any electrostatic liposome products if we can do so at lower cost.

        In December 2001 we entered into an agreement with Akorn, Inc., an independent public traded company, to secure cGMP manufacturing capacity for both our anticipated Phase II/III clinical supply requirements as well as our anticipated commercial manufacturing capacity requirements. Under the Agreement, NeoPharm loaned Akorn $3,250,000 to assist in the completion and validation of Akorn's state-of-the-art lyopholization facility at its plant in Decatur, Illinois. The note is due in December 2006 and the terms of the agreement call for interest on the note receivable to accrue at the rate NeoPharm receives on its investments in marketable securities, which is less than the interest rate Akorn pays on its other outstanding debt. In exchange, Akorn has granted NeoPharm the option to secure at least 15% of Akorn's lyophilization manufacturing capacity for up to 15 years, preferred pricing on all NeoPharm products manufactured at Akorn, and confidential treatment of all trade secrets relating to NeoPharm's Easy-to-Use NeoLipid technology. Akorn anticipates the facility coming online in 2003, at approximately the time that NeoPharm anticipates that we will need to manufacture our lyophilized products for Phase II/III clinical trials. Dr. John N. Kapoor, NeoPharm's Chairman, is also Chairman and Chief Executive Officer of Akorn, and holds a substantial stock position in both companies. Because of his role in both companies, Dr. Kapoor refrained from participating in the NeoPharm Board of Directors' deliberation on this transaction (See "Notes to Financial Statements—Note 9").

        We have also entered into an exclusive supply agreement with Avanti Polar Lipids, Inc. providing for the manufacture and supply of synthetic cardiolipin, an important ingredient in our electrostatic liposome products. Under the terms of the agreement, Avanti has agreed to supply us with synthetic cardiolipin in an amount sufficient to commercialize our electrostatic liposome products. In addition, Avanti agreed not to sell synthetic cardiolipin to competing third parties. Unless terminated in accordance with its terms, the supply agreement will automatically renew for additional two year terms on and after the initial expiration date of May 1, 2008. If Avanti elects to terminate the manufacture of synthetic cardiolipin, we have the right to obtain a non-exclusive license from Avanti to allow us to continue the manufacture of synthetic cardiolipin.

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        There are a number of suppliers of raw materials used in our other products that appear to be acceptable to FDA. There are also a number of facilities for contract manufacturing of our proposed products that have current Good Manufacturing Practices that appear to be acceptable to FDA. We believe that, in the event of the termination of our existing sources for product supplies and manufacture, we will be able to enter into agreements with other suppliers or manufacturers on similar terms. However, we cannot assure you that there will be manufacturing capacity available to us at the time we are ready to manufacture our products.

Research and Development

        In 2001 we significantly increased our research and development staff and opened a new 35,500 square foot research and development facility in Waukegan, Illinois, where we employed 39 individuals as of March 1, 2002. We have incurred research and development expenses of approximately $13,548,000 in 2001, $3,972,000 in 2000 and $3,759,000 in 1999 to develop our products.

Patents and Proprietary Rights

        We have licenses to 19 United States patents or patent applications relating to our products. In addition, we own one issued patent and two pending United States patent applications covering methods of administering LEP, as well as five United States patent applications relating to our other products in development. We have also filed applications in a number of foreign jurisdictions which are counterparts of our issued United States patents and patent applications. We believe all of our products under development are protected by patents owned or licensed to us.

        Patent protection is important to our business. The patent position of companies in the pharmaceutical field generally is highly uncertain, involves complex legal and factual questions, and has recently been the subject of much litigation. Therefore, we cannot assure you that any patent applications relating to our products or processes will result in patents being issued, or that the resulting patents, if any, will provide 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 of our discoveries. Finally, there can be no assurance that others will not independently develop similar pharmaceutical products which will compete against ours or cause our products to become obsolete.

        Our competitive position is also dependent upon unpatented trade secrets. In an effort to protect our trade secrets, we have a policy of requiring our employees, scientific advisory board members, consultants and advisors to execute proprietary information and invention assignment agreements upon commencement of 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 cannot assure you that these agreements will provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure of confidential information. Further, invention assignment agreements executed by scientific advisory board members, consultants and advisors may conflict with, or be subject to, the rights of third parties with whom such individuals have employment or consulting relationships. In addition, we cannot assure you that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets, that such trade secrets will not be disclosed or that we can effectively protect our rights to unpatented trade secrets.

        We may be required to obtain licenses to patents or proprietary rights of others. We cannot assure you that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to us or at all. If we do not obtain such licenses, we could encounter delays in

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product market introductions while we attempt to design around such patents, or could find that the development, manufacture or sale of products requiring such licenses could be foreclosed. Litigation may be necessary to defend against or assert claims of infringement to enforce patents issued to us or exclusively licensed 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, we may become involved in oppositions in foreign jurisdictions or interference proceedings declared by the United States Patent and Trademark Office to determine the priority of inventions with respect to our patent applications or those of our licensors. Litigation, opposition 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, we cannot assure you that our efforts in these proceedings will be successful.

Government Regulation

        Regulation by governmental authorities in the United States and foreign countries is a significant factor in the development, manufacture and marketing of our proposed products and in our ongoing research and product development activities. The nature and extent to which such regulation will apply to us will vary depending on the nature of any products developed. We anticipate that all of our products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic 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. The process of obtaining these approvals and the subsequent compliance with the appropriate federal statutes and regulations requires substantial time and financial resources. Any failure by us or our collaborators to obtain, or any delay in obtaining, regulatory approval could adversely affect the marketing of any products developed by us, our ability to receive product revenues and our liquidity and capital resources.

        The development, manufacture, marketing and distribution of drug products is extensively regulated by the FDA in the U.S. and similar regulatory agencies in other countries. The steps ordinarily required before a new drug may be marketed in the U.S., which are similar to steps required in most other countries, include:

•

preclinical laboratory tests, preclinical studies in animals, formulation studies and the submission to the FDA of an investigational new drug application;



•

adequate and well-controlled clinical trials to establish the safety and efficacy of the drug for each type of cancer;



•

the submission of a new drug application to the FDA; and



•

FDA review and approval of the new drug application.

        Preclinical tests include laboratory evaluation of product chemistry toxicity and formulation, as well as animal studies. The results of preclinical testing are submitted to the FDA as part of an investigational new drug application. A 30-day waiting period after the filing of each investigational new drug application is required prior to the commencement of clinical testing in humans. At any time during this 30-day period or at any time thereafter, the FDA may halt proposed or ongoing clinical trials until the FDA authorizes trials under specified terms. The investigational new drug application process may be extremely costly and substantially delay development of our products. Moreover, positive results of preclinical tests will not necessarily indicate positive results in subsequent clinical trials.

        Clinical trials to support new drug applications are typically conducted in three sequential phases, although the phases may overlap. During Phase I, clinical trials are conducted with a small number of subjects to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side

15

effects associated with increasing doses. Phase II usually involves studies in a limited patient population to:

•

assess the efficacy of the drug in specific, targeted indications;



•

assess dosage tolerance and optimal dosage; and



•

identify possible adverse effects and safety risks.

        If a compound is found to be potentially effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further demonstrate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical trial sites.

        After successful completion of the required clinical trials, a new drug application is generally submitted. The FDA may request additional information before accepting a new drug application for filing, in which case the application must be resubmitted with the additional information. Once the submission has been accepted for filing, the FDA reviews the application and responds to the applicant. FDA requests for additional information or clarification often significantly extend the review process. The FDA may refer the new drug application to an appropriate advisory committee for review, evaluation and recommendation as to whether the application should be approved, but the FDA is not bound by the recommendation of an advisory committee.

        If the FDA evaluations of the new drug application and the manufacturing facilities are favorable, the FDA may issue an approval letter or an "approvable" letter. An approvable letter will usually contain a number of conditions that must be met in order to secure final approval of the new drug application and authorization of commercial marketing of the drug for certain indications. The FDA may also refuse to approve the new drug application or issue a "not approvable" letter outlining the deficiencies in the submission and often requiring additional testing or information.

        On November 21, 1997, President Clinton signed into law the Food and Drug Administration Modernization Act. That act codified the FDA's policy of granting "fast track" approval for cancer therapies and other therapies intended to treat severe or life threatening diseases and having potential to address unmet medical needs. Previously, the FDA approved cancer therapies primarily based on patient survival rates or data on improved quality of life. The FDA considered evidence of partial tumor shrinkage, while often part of the data relied on for approval, insufficient by itself to warrant approval of a cancer therapy, except in limited situations. Under the FDA's new policy, which became effective on February 19, 1998, the FDA has broadened authority to consider evidence of partial tumor shrinkage or other clinical outcomes for approval. This new policy is intended to facilitate the study of cancer therapies and shorten the total time for marketing approvals. We intend to take advantage of this policy; however, it is too early to tell what effect, if any, these provisions may have on the approval of our products.

        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 such drugs are intended to treat a rare disease or condition, which 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, meaning that the FDA cannot approve another version of the "same" product for the same use during such seven year period unless the FDA finds that the sponsor is not able to supply adequate quantities of the drug. The market exclusivity provision does not, however, 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 from time to time been introduced in Congress to modify various aspects of the Orphan Drug Act, particularly the market exclusivity provisions. We cannot assure you that new legislation will not be

16

introduced in the future that may adversely impact the availability or attractiveness of orphan drug status for any of our products.

        Sales outside the United States of products we develop will also be subject to regulatory requirements governing human clinical trials and marketing for drugs. The requirements vary widely from country to country, but typically the registration and approval process takes several years and requires significant resources. In most cases, if the FDA has not approved a product for sale in the United States the product may be exported for sale outside of the United States only if it has been approved in any one of the following countries: the European Union, Canada, Australia, New Zealand, Japan, Israel, Switzerland and South Africa. There are specific FDA regulations that govern this process.

        We are also subject to various Federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and 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 cannot accurately predict the extent of government regulation that might result from future legislation or administrative action.

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RISK FACTORS

        You should carefully consider the following risk factors, in addition to the other information set forth in this prospectus, before purchasing shares of our common stock. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as the value of an investment in our common stock. This investment involves a high degree of risk.

RISKS RELATED TO OUR BUSINESS

If we lose or are unable to secure collaborative partners, or if our collaborators do not apply adequate resources to our collaborations or mishandle the development of our products, our product development efforts and profitability may suffer.

        Our business strategy includes entering into collaborations with academic, governmental and corporate partners, primarily pharmaceutical companies, for the research, development, manufacturing, marketing and other commercialization activities relating to our products. We have entered into an important license agreement with Pharmacia covering our LEP and LED products. The success of this license depends for the most part on Pharmacia's efforts. Adverse developments in our relationship with Pharmacia, or failure by Pharmacia to properly develop our technology, can have a significant and adverse effect on us and our stock price. Pursuant to our agreement with Pharmacia, we have granted them an exclusive worldwide license to manufacture, develop, use, market and sell LEP and LED. We will receive royalties on any foreign sales, and in the United States we have the right to purchase co-promotion rights for these products from Pharmacia, instead of receiving royalties. As a result of our agreement with Pharmacia, we are dependent on Pharmacia to fund testing, to make regulatory filings and to manufacture and market LEP and LED and potentially any future products resulting from this license.

        The resources dedicated by Pharmacia and our other partners to our respective collaborations are not within our control. If any collaborator breaches or terminates their agreement with us, fails to conduct their collaborative activities in a timely manner, fails to devote sufficient resources to our collaborations, or mishandles the development of our products, the commercialization of our products could be slowed down or halted. We cannot assure you that Pharmacia or our other collaborative partners will not change their strategic focus, or pursue alternate technologies or develop competitive products, either on their own or in collaboration with others, as a means for treating the diseases targeted by these collaborative programs. Our revenues and earnings also will be dependent on the effectiveness of our collaborative partners in marketing any successfully developed products and our marketing efforts, if we choose to develop our own sales and marketing force.

        We cannot assure you that our collaborations with Pharmacia or others will continue or succeed or that we will receive any further research funding or milestone or royalty payments. If our partners do not develop products under these collaborations, we cannot assure you that we would be able to do so on our own. Disputes may arise between us and Pharmacia, or our other collaborators, as to a variety of matters, including financial or other obligations under our contracts, the most promising scientific or regulatory route to pursue or ownership of intellectual property rights. These disputes may be both expensive and time consuming and may result in delays in the development and commercialization of our products. Any delay by Pharmacia would delay our receipt of not only our milestone payments, but also royalties, if any.

If we are unsuccessful in developing our products, our ability to generate revenues may be significantly impaired.

        Our research and development programs are at various stages and we have not successfully completed the development of nor have we received regulatory approval for any products. If we, or our collaborators, do not successfully complete development of or receive regulatory approvals for our product candidates, our ability to generate revenues from operations will be significantly impaired and

18

our stock price will be harmed. We will need to conduct substantial additional clinical research in order to develop our products. We do not know whether our research and development will lead to commercially viable products that will be approved by the United States Food and Drug Administration, referred to as the FDA. Our products will also require additional clinical testing, regulatory approval and substantial additional investment prior to commercialization. Our products are subject to the risks of failure inherent in the development of pharmaceutical products. These risks include the following:

•

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;



•

the results of preclinical trials may be inconclusive or they may not be indicative of results that will be obtained in human clinical trials;



•

safety and efficacy results attained in early human clinical trials with a relatively small number of patients, as in our LEP and LED trials, may not be indicative of results that may be obtained in later clinical trials with much larger number of patients;



•

we, our collaborators or regulators may suspend or terminate clinical trials if the participating subjects or patients are being exposed to unacceptable health risks;



•

our potential products may not have the desired effects or may include undesirable side effects or other characteristics that preclude regulatory approval or limit their commercial use if approved;



•

we may not meet expected testing and development schedules, which has occurred in the past; and



•

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

        As a result of these and other factors, we do not know whether we will successfully develop any of our products, or if our products will become commercially viable or achieve market acceptance.

We have a history of operating losses and an accumulated deficit as of December 31, 2001 of $42,408,481; we expect to continue to incur losses for the near future and may never be profitable.

        We have only a limited history and our operations consist primarily of the development of our products and the sponsorship of research and clinical trials. Until 1999, when we received $11,000,000 in payments from Pharmacia, we had incurred losses every year since we began operations and as of December 31, 2001, our accumulated deficit was $42,408,481. We have not generated revenues from the sale of our products and it is possible that revenues from product sales will never be achieved. Until we executed our agreement with Pharmacia, we generated only limited amounts of revenue from our license fees and it is possible that additional license revenue will not be significant. 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 business is subject to extensive governmental regulation, which can be costly, time consuming and subject us to unanticipated delays; even if we obtain regulatory approval for some of our products, those products may still face regulatory difficulties.

        Public health authorities in the United States and other countries regulate the research, testing, manufacturing, labeling, distribution, marketing and advertising activities with respect to all of our products. The FDA and comparable agencies in foreign countries impose substantial burdens on our ability and the ability of others to introduce pharmaceutical products to the public, including lengthy and detailed clinical testing procedures to demonstrate safety and efficacy and manufacturing procedures to insure compliance with good manufacturing practices. This process can last many years,

19

be very costly and still be unsuccessful. All clinical, manufacturing, labeling and other information developed for proprietary products will be required to be filed with the FDA in new drug applications for review and be subject to approval by that agency. We cannot assure you that this lengthy regulatory review process will result in the approval and subsequent marketing of our products.

        Once we submit our products for review, we do not know whether the FDA or other regulatory agencies will grant approvals for any of our products on a timely basis or at all. The FDA can delay, limit or not grant approval for many reasons, including:

•

A product candidate may not be safe or effective;



•

FDA officials may interpret data from preclinical testing and clinical trials in different ways than we interpret it;



•

The FDA might not approve our manufacturing processes or facilities or the processes or facilities of our collaboration partners;



•

The FDA may change its approval policies or adopt new regulations; and



•

The FDA may approve a product candidate for fewer than all the indications requested.

        The process of obtaining approvals in foreign countries is subject to delay and failure for the same reasons.

        The FDA's policy of granting "fast track" approval for cancer therapies may reduce the risk of delays in the approval process of our products, but the policy may also expedite the regulatory approval of our competitors' products. In addition, any marketed product and its manufacturer continue to be subject to strict regulation. Any unforeseen problems with an approved product or delays in receiving regulatory approval as fast as previously received approvals, or failing to receive such approval, would delay or prevent product commercialization and harm our business and stock price. Approval of a product could also depend on post-marketing studies. Even if our products are approved by the FDA, but we fail to comply with FDA marketing, manufacturing and other regulatory requirements applicable to regulated products, 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.

Competition in the biopharmaceutical field is intense and subject to rapid technological change, which could result in our competitors developing products superior to ours.

        The extent to which any of our products achieve market acceptance will depend, in part, on competitive factors. Competition in our industry is intense, and it is increased by the rapid pace of technological development. Existing products or new products developed by our competitors may be more effective or have fewer side effects, or be more effectively marketed and sold, than any that we may develop. Many of our competitors have substantially greater research and development capabilities and experience and greater manufacturing, marketing, financial and managerial resources than do we. Competitive products may render our technology and products obsolete or noncompetitive prior to our recovery of research, development or commercialization expenses incurred with respect to any of our products.

We may need to raise additional capital in the future.

        We require substantial funds to conduct research and development, preclinical and clinical testing and to manufacture and market our potential 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. Our future revenues may not be sufficient to fund our operations.

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        We may need additional financing depending on a number of factors, including the following:

•

Our degree of success in commercializing our products;



•

The amount of milestone payments we receive from our collaborators;



•

The rate of progress and cost of research and development and clinical trial activities relating to our products;



•

The costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights;



•

Emergence of competing technologies and other adverse market developments;



•

Changes in or terminations of our existing collaboration and licensing arrangements;



•

The costs of acquiring or licensing new technology, products or businesses if we desire to expand our product portfolio; and



•

The cost of manufacturing scale-up and development of marketing operations, if we undertake those activities.

        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 or products, or to license to third parties to commercialize products or technologies that we would otherwise seek to develop ourselves. We could also be required to cease operations. If additional capital is raised through the sale of equity, our stockholders' ownership interest could be diluted and such securities may have rights, preferences or privileges superior to those of our other stockholders. The terms of any debt securities we sell to raise additional capital may place restrictions on our operating activities.

We depend on third parties for a variety of functions, including the research and development, manufacturing, clinical testing and regulatory compliance of our products. We cannot assure you that these arrangements will allow us to successfully develop and manufacture our products.

        We rely, in part, on third parties to perform a variety of functions, including research and development, clinical trials and regulatory affairs management and production of our products. As of March 1, 2002, we have only 72 full-time employees. We currently do not possess the internal infrastructure to independently conduct clinical testing or meet other regulatory responsibilities. If we develop compounds with commercial potential, we will either have to hire additional personnel skilled in the clinical testing and the regulatory compliance processes or engage third parties to perform such services. We currently are a party to several agreements which place substantial responsibility on third parties for clinical development of our products. We also in-license technology from governmental and academic institutions in order to minimize investments in early research, and we enter into collaborative arrangements with certain of these entities with respect to clinical trials of products. We cannot assure you that we will be able to maintain any of these relationships or establish new ones on beneficial terms, that we can enter into these arrangements without undue delays or expenditures, or that these arrangements will allow us to compete successfully.

        We do not have any manufacturing capacity for any products we are developing and do not intend to develop manufacturing capacity in the future. Currently, all of our electrostatic liposome products are produced at the Center for Advanced Drug Development which is affiliated with the University of Iowa Pharmacy School. The center has indicated that it is currently able to meet our needs for research and clinical trials, but we cannot be sure that they will be able to do so on a time or cost-effective basis in the future or that suitable alternatives can be found in a timely manner, or at all. Any failure to obtain adequate supplies of our products could delay or prevent our product development efforts. In order to commercialize our products successfully, we or our collaborators must be able to manufacture products in commercial quantities in compliance with the FDA's current good manufacturing practices,

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at acceptable costs and in a timely manner. As our products have never been produced in commercial quantities, we cannot be sure that the ease of manufacture, stability, cost and yield we have experienced in small-scale production can be duplicated.

We do not have marketing or sales resources, which makes us dependent on third parties to successfully commercialize our products.

        We have no experience in sales, marketing or distribution. To date, our focus has been on research and development and we currently do not have internal marketing or sales resources. If we receive the required regulatory approvals, we expect to market and sell our products principally through distribution co-marketing, co-promotion or licensing arrangements with third parties. Our agreement with Pharmacia grants Pharmacia exclusive worldwide marketing rights with respect to LED and LEP, although we have the option in the United States to purchase co-promotion rights for these products from Pharmacia, in lieu of receiving royalty payments. To the extent that we enter into distribution, co-marketing, co-promotion or licensing arrangements with third parties for the marketing and sale of our products, any revenues we receive will depend primarily on the efforts of these third parties. We will not control the amount and timing of marketing resources such third parties devote to our products. In addition, if we market products directly, significant additional expenditures and management resources will be required to develop an internal sales force. We have no experience in establishing or maintaining an effective sales and marketing effort. We cannot assure you that we would be able to establish a successful sales force should we choose to do so.

If sufficient quantities of the materials needed to make our products are not available, product development and commercialization could be slowed or stopped.

        We cannot assure you that sufficient quantities of the materials needed to make our products will be available to support the continued research, development or commercial manufacture of our products. We currently obtain synthetic cardiolipin, an important ingredient in our liposome products, from a single source, Avanti Polar Lipids, Inc. We have entered into an exclusive supply agreement with Avanti that will supply us with all of our synthetic cardiolipin requirements. However, we cannot assure you that Avanti will be able to supply sufficient quantities of synthetic cardiolipin that meet all FDA manufacturing requirements. In the event that Avanti elects to terminate this supply agreement or cannot supply sufficient quantities to us, we have a right under the agreement to obtain a non-exclusive license from Avanti that will allow us to continue the manufacture of synthetic cardiolipin. In such an event, we cannot assure you that we will have the capability to manufacture sufficient quantities of synthetic cardiolipin or that we will be able to obtain an alternate supplier.

        FDA regulatory requirements applicable to pharmaceutical products tend to make changes in suppliers costly and time consuming. The unavailability of adequate commercial quantities, the termination of existing supply agreements, the supplier's inability to provide materials due to the failure to meet FDA regulatory requirements, the inability to develop alternative sources, a reduction or interruption in supply or a significant increase in the price of materials could impair our ability to manufacture and commercialize our products, which could adversely affect our business.

Our lack of operating experience may cause us difficulty in managing our growth.

        We have no experience in selling pharmaceutical products and in manufacturing or procuring products in commercial quantities in compliance with FDA rules and only limited experience in negotiating, establishing and maintaining collaborative relationships and conducting later-stage phases of the regulatory approval process. Our ability to manage our growth, if any, will require us to improve and expand our management and our operational and financial systems and controls. If our management is unable to manage growth effectively, our business and financial condition would be adversely affected. In addition, if rapid growth occurs, it may strain our operational, managerial and financial resources, which are limited.

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If we are unable to protect our proprietary rights, we may not be able to compete effectively or operate profitably.

        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 essential to us. We have obtained licenses to 19 United States patents or patent applications relating to our products, and we own one issued patent and two pending United States patent applications covering methods of administering LEP, as well as five United States patent applications relating to our other products in development. With respect to these patents and patent applications, however, no assurance can be given that:

•

any patents under any currently pending or future applications will be issued;



•

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



•

any of our patents that may be issued or patents licensed to us will be held valid or will not be limited in scope if subsequently challenged;



•

our exclusive licenses will not be terminated;



•

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



•

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

        We also rely on trade secrets, know-how and technological advantages 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 or may otherwise be of limited effectiveness or enforceability. Litigation to protect our trade secrets and other unpatented know-how could result in significant costs to us as well as the diversion of management's attention away from our business. Adverse determinations in any such proceedings or unauthorized disclosure of our trade secrets could adversely affect our business. In addition, the laws of certain foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. We cannot assure you that we will be able to protect our intellectual property in these markets.

The use of our technologies could potentially conflict with the rights of others.

        Our commercial success depends to a large extent on our ability to operate without infringing the patents and proprietary rights of others. 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 opposition proceedings in foreign jurisdictions to determine the validity of our patents, or 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 prohibited from pursuing research, development or commercialization of our products or be forced to seek licenses, which may not be available on commercially reasonable terms, if at all, or be subjected to significant liabilities to third parties. Any of these events could have a material adverse effect on us.

Certain of our executive officers have conflicting obligations and may not devote sufficient time to our business.

        Dr. John N. Kapoor, our chairman, is also associated with EJ financial Enterprises, Inc., a health care investment firm which is wholly owned by him, and therefore will have conflicts of interest in allocating his time among various business activities and may have legal obligations to multiple entities.

23

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 management consulting services, which is based on anticipated time spent by EJ Financial personnel on the Company's affairs. EJ Financial is involved in the management of health care companies in various fields, and Dr. Kapoor is involved in various capacities with the management and operation of these companies. In addition, EJ Financial is involved with other companies in the cancer 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. Further, in December 2001, we entered into a loan agreement with Akorn, Inc., a company controlled by Dr. Kapoor, to obtain manufacturing rights at Akorn's lyophilization facility. See "Business—Manufacturing."

If we lose key management and scientific personnel or are unable to attract and retain the talent required for our business, our business could be harmed.

        We are highly dependent on the principal members of our management and scientific staff, including our President, Mr. James M. Hussey. The inability to replace Mr. Hussey might delay product development or the achievement of our strategic objectives. In addition, our success will depend on our ability to attract and retain qualified scientific, technical and managerial personnel. There is intense competition for qualified staff and we cannot assure you that we will be able to retain existing personnel or attract and retain qualified staff in the future.

Our scientific advisors commit only a portion of their time to our business and research activities and we may not have rights to their inventions or discoveries.

        Due to limited internal staff and resources, we rely heavily on scientific consultants to advance our research and development programs. 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. In addition 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. 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.

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

        In recent years, there have been numerous proposals to change the health care system in the United States. Some of these proposals have included measures that would limit or eliminate payments for medical procedures and treatments or subject the pricing of pharmaceuticals to government control. 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 with respect to new drug products in particular. If we or any of our collaborators succeed in bringing one of our products to the market, we cannot be certain that our products will be considered cost-effective and that reimbursement to the consumer will be available or will be sufficient to allow us or our collaborators to sell our products on a competitive basis.

24

Physicians, patients, payors, or the medical community in general may be unwilling to accept, utilize or recommend any of our products, and the failure to achieve market acceptance will harm our business.

        Even if approved for marketing, our products may not achieve market acceptance. The degree of market acceptance of our products will depend upon a number of factors, including:

•

the establishment and demonstration in the medical community of the safety and clinical efficacy of our products and their potential advantages over existing therapeutic products, including unencapsulated forms of the active agents included in our products; and



•

pricing and reimbursement policies of government and third-party payors such as insurance companies, health maintenance organizations and other plan administrators.

We deal with hazardous materials and must comply with environmental laws and regulations, which can be expensive and restrict how we do business. We could also be liable for damages, penalties or other forms of censure if we are involved in a hazardous waste spill or other accident.

        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 might be required to incur significant cost to comply with environmental laws and regulations. In the event of an accident, even by a third party, we could be held liable for any damages that result, and such liability would probably exceed our current insurance coverage and financial resources.

We may have product liability exposure and insurance against such claims may not be available to us at reasonable rates or at all.

        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, we cannot assure you 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.

ITEM 2. PROPERTIES

        The Company's administrative offices are located in approximately 13,037 square feet of leased office space in Lake Forest, Illinois. Prior to moving to the current Lake Forest location in December 2000, the Company subleased approximately 2,158 square feet of space at a market rate rent from Option Care, Inc, an affiliate of the Company's Chairman and principal shareholder, John N. Kapoor. (See Note 9—"Transactions with Related Parties" in Notes to Financial Statements). Additionally, the Company has leased a 35,500 square foot research and development facility in Waukegan, Illinois. We consider these facilities as suitable and adequate for our current and immediate future needs.

ITEM 3. LEGAL PROCEEDINGS

        The Company is not a party to any litigation or other legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

        No matters were submitted to a vote of security holders during the quarter ended December 31, 2001.

25

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS

        From January 25, 1996 until December 2, 1996 the Company's Common Stock was quoted on the Nasdaq Stock Market's SmallCap Market under the trading symbol NPRM. From December 2, 1996 until April 13, 2000 the Common Stock was traded on the American Stock Exchange under the symbol NEO. Beginning on April 14, 2000, and continuing through the date of this report, the Common Stock has been traded on the Nasdaq National Market under the symbol NEOL. The following table provides the high and low sales prices as reported on the exchange on which the Company's stock was listed for the periods indicated.

2000	High	Low
First Quarter	29.545	16.705
Second Quarter	16.062	14.817
Third Quarter	37.330	16.364
Fourth Quarter	36.705	20.000

2001	High	Low
First Quarter	34.489	13.239
Second Quarter	25.573	17.557
Third Quarter	22.955	12.318
Fourth Quarter	27.000	11.818

        As of March 1, 2002, there were 44 holders of record of the Common Stock, and the Company estimates that as of such date there were more than 2,100 beneficial holders of the Common Stock. The Company has never paid a cash dividend on its Common Stock and has no present intention of paying cash dividends in the foreseeable future. Any determination in the future to pay cash dividends will depend on the Company's financial condition, capital requirements, results of operations, contractual limitations and other factors deemed relevant by the Board of Directors.

26

ITEM 6. SELECTED FINANCIAL DATA

	For the Years Ended December 31,
	1997			1998			1999			2000			2001
Statement of Operations Data:
Revenues	$	550,000		$	—		$	11,000,000		$	3,000,000		$	—
Operating expenses:
Research and development		1,411,692			1,611,343			3,758,980			3,791,667			14,814,169
General and administrative		1,370,486			1,691,132			2,446,926			3,040,671			4,414,469
Income/(loss) from operations		(2,232,178	)		(3,302,475	)		4,794,094			(3,832,338	)		(19,228,638	)
Other income	$	—		$	—		$	—		$	—		$	8,049
Other expense		—			—			—			—			—
Other income (expense)-net		—			—			—			—		$	8,049
Interest income	$	210,501		$	88,752			626,508			3,322,163			5,796,552
Interest expense		—			—			(2,126	)		—			—
Interest income (expense)-net		210,501			88,752			624,382			3,322,163			5,796,552
Income/(loss) before income taxes	$	(2,021,677	)	$	(3,213,723	)	$	5,418,476		$	(510,175	)	$	(13,424,037	)
Income taxes		—			(1,640,000	)		1,664,000			15,653			—
Income/(loss) before cumulative effect of accounting change	$	(2,021,677	)	$	(1,573,723	)	$	3,754,476		$	(525,828	)	$	(13,424,037	)
Cumulative effect of accounting change (see Note 5—"Change in Stock Compensation Method" in Notes to Financial Statements)		—			—			—		$	139,598			—
Net income/(loss)	$	(2,021,677	)	$	(1,573,723	)	$	3,754,476		$	(386,230	)	$	(13,424,037	)
Basic net income/(loss) per share	$	(.25	)	$	(.19	)	$	.39		$	(.03	)	$	(.83	)
Diluted net income/(loss) per share	$	(.25	)	$	(.19	)	$	.34		$	(.03	)	$	(.83	)

	December 31,
	1997			1998			1999			2000			2001
Balance Sheet Data:
Cash & cash equivalents	$	2,776,697		$	40,681		$	24,664,567		$	139,777,330		$	106,525,864
Working capital		2,348,904			1,077,255			23,938,684			139,841,734			120,305,964
Total assets		2,854,499			1,781,548			25,051,748			140,531,777			129,195,075
Accumulated deficit		(3,887,322	)		(5,461,045	)		(1,706,569	)		(2,092,799	)		(42,408,481	)
Total stockholders' equity		2,374,072			1,178,122			24,005,058			140,092,078			127,343,550

27

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Overview

        Since we began doing business in June 1990, we have devoted our resources primarily to funding research and product development programs. We expect to continue to incur losses as we expand our research and development activities and sponsorship of clinical trials. As of December 31, 2001, we had an accumulated deficit of approximately $42,408,000.

Results of Operations

Years Ended December 31, 2001, 2000, and 1999

        Operating revenues during the three fiscal years ended December 31, 2001, 2000 and 1999, were $0, $3,000,000, and $11,000,000, respectively. Operating revenue in 2000 consisted of a milestone payment from our partner, Pharmacia, upon initiation of Phase II clinical trials for LEP. 1999 operating revenue consisted of a $9,000,000 non-refundable license fee from Pharmacia upon execution of the LEP/LED license agreement, as well as a $2,000,000 milestone payment for transferring the investigational new drug applications for LEP and LED to Pharmacia. Potential total milestone payments of $47,000,000 from Pharmacia are still available under the agreement.

        We incurred research and development expenses of approximately $14,814,000 in 2001 as compared to $3,792,000 in 2000 and $3,759,000 in 1999. In 2001, we significantly increased our ability to accelerate the development progress of our products through the development of our own research and development facility in Waukegan, Illinois, as well as the addition of our own internal clinical research group to monitor the numerous Phase I clinical trials being conducted on our products. As a result, research and development expenses increased in 2001 due to increased spending of approximately $5,376,000 for the preclinical and clinical development of our products as a result of expanded research collaborations and conducting more Phase I/II clinical trials, increased payroll and consulting related expenses of approximately $3,324,000 from the increases in our clinical and pre-clinical research and development staff, expenses of approximately $1,050,000 incurred in the operation of our new research and development facility, which began operations during the first quarter of 2001 and an expense of approximately $1,267,000 to establish the valuation allowance on the loan made to Akorn, Inc. (See "Business—Manufacturing" and "Notes to Financial Statements—Note 9"). Research and development expenses increased in 2000 due to an increase in spending of $700,000 related primarily to the development of our LE-AON, LEM, LEE, LE-SN38, IL13-PE38 and SS1(dsFv)-PE38 products, and increased payroll, consulting and related expenses of $500,000 due to increased staffing requirements. Due to the assumption of all future expenses related to the development of LEP and LED by Pharmacia, research and development expenses for these products decreased by $1,170,000 in 2000.

28

        Amounts paid to our major research and development collaborators under our various agreements during the last three years, as well as our commitments under these agreements for 2002, are included in the following table:

Research and Development Collaboration Expenses
	Actual			Scheduled(1)
	1999	2000	2001	2002
Georgetown	1,019,000	456,000	2,458,000	2,500,000
FDA	150,000	150,000	400,000	400,000
NCI	100,000	100,000	150,000	150,000
NIH	110,000	35,000	30,000	30,000
Total Collaboration Expenses	1,379,000	741,000	3,038,000	3,080,000

(1)

The agreements listed in this table can be terminated at any time with, at most, 90 days written notice.

        We incurred general and administrative expenses of approximately $4,414,000 in 2001 as compared to $3,041,000 in 2000 and $2,447,000 in 1999. The increase in general and administrative expenses in 2001 was primarily due to increased payroll and consulting expenses of approximately $738,000 related to increases in staff, increased rent expense of approximately $126,000 as a result of moving into new, larger offices in 2001, increased depreciation expense of approximately $91,000 from the purchase of new furniture and equipment used in our new offices, increased insurance expense of approximately $83,000 due to an increase in levels of insurance for various policies and an increase in other miscellaneous office expenses of approximately $335,000. General and administrative expenses increased in 2000 primarily as a result of an increase in payroll, consulting and related expenses of $200,000 due to increased staffing requirements, increased registration fees of $90,000 from the increase in the Company's authorized shares, increased insurance costs of $70,000 to increase the amount of insurance coverage, increased printing expenses of $60,000, increased travel expenses of $50,000, moving expenses of $50,000 and an increase in other miscellaneous office expenses of approximately $70,000.

        Interest income for 2001, 2000 and 1999 totaled approximately $5,797,000, $3,322,000, and $627,000, respectively. The increase in interest income over the last three years reflects higher levels of cash equivalent investments resulting from the proceeds received from the sale of 3,480,000 shares of the Company's common stock completed in October 2000.

Liquidity and Capital Resources

        At December 31, 2001, we had approximately $106,526,000 in cash and cash equivalents and net working capital of approximately $120,306,000, as compared with $139,777,000 and $139,842,000, respectively, at December 31, 2000. We believe that our cash and cash equivalents should be adequate to fund operations for the next 12 months. However, we can offer no assurances that additional funding will not be required during that period. All excess cash has been invested in short-term investments and marketable securities with less than two years to maturity.

        Our assets at December 31, 2001 were approximately $129,195,000 compared to $140,532,000 at December 31, 2000. This decrease in assets was primarily due to a decrease of cash and cash equivalents of approximately $11,416,000 as a result of cash used in operating activities for the year. In 2002, we anticipate a significant increase in cash used in operating activities as a result of our planned increase in research and development spending.

        The Company invested approximately $2,600,000 in furniture, equipment and leasehold improvements in 2001 for our new corporate offices, as well as for our new research and development

29

facility. As a result of the relocation of the Company's corporate offices to larger, more functional space in Lake Forest, Illinois to accommodate the larger staff, the Company invested approximately $250,000 in office furniture and equipment in 2000. The Company anticipates making further investments in scientific equipment in 2002 to further equip the Company's new research and development facility in Waukegan, Illinois.

        On October 22, 1998, we established a $3,000,000 line of credit (the "Line of Credit") with the John N. Kapoor Trust dtd. 9/20/89, an entity affiliated with our Chairman. Interest on borrowings on the Line of Credit was accrued at the rate of 2% over the prime rate of the Northern Trust Bank. We 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 Pharmacia licensing agreement on February 19, 1999.

        Our liabilities at December 31, 2001 increased to approximately $1,852,000 from approximately $440,000 at December 31, 2000. This increase was attributable to an increase in accrued clinical trial expenses at year-end of approximately $633,000 for our ongoing and newly initiated Phase I/II clinical trial programs, an increase in accrued compensation of approximately $222,000 in 2001 from the increase in staff in 2001, an increase in trade payables of approximately $213,000 and an increase in accrued expenses of approximately $344,000.

        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, relinquish rights to certain of our technologies, cancer drugs or products, or license third parties to commercialize products or technologies that we would otherwise seek to develop ourselves.

Recent Accounting Pronouncements

        In June 1998, the Financial Accounting Standards Board Issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years beginning after June 15, 1999, which requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. In June 1999, the Financial Accounting Standards Board Issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," effective for all fiscal quarters beginning after June 15, 2000. SFAS No. 137 allows companies that have not applied early adoption of SFAS No. 133 to delay implementation until quarters beginning after June 15, 2000. Implementation of SFAS No. 133/SFAS No. 137 had no material impact on the Company's 2001 financial statements since it has already been adopted.

        On July 20, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141") and Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). These pronouncements change the accounting for business combinations, goodwill, and intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS No. 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. SFAS No. 142 states goodwill and indefinite lived intangible assets are no longer amortized but are reviewed for impairment annually (or more frequently if impairment indicators arise). Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives and assessed for impairment under the provisions of SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of."

30

The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt the pronouncement in their fiscal year beginning after December 15, 2001. We believe that the provisions of SFAS No. 142, described above will have no impact on our financial position and results of operations.

Forward Looking Statements

        This annual report on Form 10-K includes forward looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward-looking statements are subject to a number of risks, uncertainties and assumptions about us, including, among other things:

•

general economic and business conditions, both nationally and in our markets;



•

our expectations and estimates concerning future financial performance and financial plans;



•

anticipated trends in our business;



•

the impact of competition and technological change;



•

relationships with our collaborative partners;



•

our ability to enter into future collaborative relationships;



•

variability of our royalty, license and other revenues;



•

results of our research and development activities;



•

existing and future regulations affecting our business;



•

our ability to obtain rights to technology;



•

our ability to obtain and enforce patents;



•

our ability to obtain FDA approvals for our products;



•

the availability of qualified personnel; and



•

exisiting and future factors set forth under "Risk Factors" in this annual report.

        In addition, in this annual report, the words "believe," "may," will," "estimate," "continue," "anticipate," "intend," "expect" and similar expressions, as they relate to us, our business or our management, are intended to identify forward-looking statements.

        We do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this annual report. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this annual report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

31

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

        The Financial Statements and Supplementary Data are incorporated herein by reference to the Company's Financial Statements included as Exhibit 1. The information is contained as follows:

	Page
Report of Arthur Andersen LLP, Independent Public Accountants	39
Balance Sheets	40
Statements of Operations	41
Statements of Stockholders' Equity (Deficit)	42
Statements of Cash Flows	43
Notes to Financial Statements	45

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

        None.

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PART III

ITEM 10. MANAGEMENT

        The directors and executive officers of NeoPharm are as follows:

Name	Age	Position	Position Held Since
John N. Kapoor, Ph.D	58	Director, Chairman of the Board	1990
James M. Hussey	42	President, Chief Executive Officer, and Director	1998
Erick E. Hanson(1)(2)	55	Director	1997
Sander A. Flaum(1)(2)	64	Director	1998
Matthew P. Rogan, M.D.(1)(2)	56	Director	2000
Kaveh T. Safavi, M.D., J.D.(1)(2)	41	Director	2000
Jeffrey W. Sherman, M.D., F.A.C.P	47	Executive Vice President, Chief Medical Officer	2000
Lawrence A. Kenyon, C.P.A	36	Chief Financial Officer, Secretary	2000
Imran Ahmad, Ph.D	37	Senior Vice President—Research and Development, Chief Scientific Officer	2000
Lewis C. Strauss, M.D	50	Vice President, Clinical Development	1998
Kirk Rosemark	37	Vice President, Regulatory Affairs	2001
Amy Y. Grahn	43	Vice President, Clinical Research Management	2001

(1)

Member of the Audit Committee.

(2)

Member of the Compensation Committee.

        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 the Board of Directors, until their successors are appointed.

John N. Kapoor, Ph.D., Chairman of the Board of Directors, joined us in July 1990 as a member of our Board of Directors. Prior to forming our company, 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 health care services, Chairman and interim CEO of Akorn, Inc., a manufacturer, distributor and marketer of generic ophthalmic products, a director of Introgen Therapeutics, Inc., a gene therapy company, and a director of First Horizon Pharmaceuticals, Inc., a distributor of pharmaceuticals. 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 President, Chief Executive Officer, and a member of the Board of Directors. Mr. Hussey was previously the Chief Executive Officer and founder of Physicians Quality Care, a managed care organization from 1994 until its sale in January 1998. Previous to that, Mr. Hussey held several positions with Bristol-Myers Squibb Company from 1984 to 1994, most recently as the General Manager Midwest Integrated Regional Business Unit. Mr. Hussey is currently a director of Option Care, Inc., a provider of home health care services. Mr. Hussey, a licensed pharmacist, received a B.S. from the College of Pharmacy at Butler University and an M.B.A. from the University of Illinois.

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,

33

Mr. Hanson served as President and Chief Executive Officer of Option Care, Inc., a provider of home health care 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 Integrity Healthcare, Inc., a home healthcare provider.

Sander A. Flaum joined us as a director in July 1998. Mr. Flaum is Chairman and Chief Executive Officer of Robert A. Becker EURO RSCG, a marketing and advertising company. Prior to joining Robert A. Becker, Mr. Flaum was Executive Vice President of Kleinter Advertising and prior to that served as Marketing Director of Lederle Laboratories, a division of American Cyanamid where he was employed from 1965-1984. Mr. Flaum is Adjunct Professor of Management at the Fordham University Graduate School of Business and also serves on the Board of Directors of Hollins Communications Research Institute, Atrix Laboratories and Integrity Pharmaceuticals.

Dr. Matthew P. Rogan is President and CEO of Unicorn Pharma Consulting, Inc., a provider of customized pharmaceutical and biotechnology medical services. From 1997 to 1999, Dr. Rogan was Vice President, Medical Affairs for Sanofi Pharmaceuticals in the United States. Prior to joining Sanofi, Dr. Rogan served as Senior Medical Director, Medical Affairs for Zeneca Pharmaceuticals from 1996-1997 and was director of Clinical Support at Burroughs Wellcome from 1993-1995. Prior to 1993, Dr. Rogan held senior positions with Bristol-Myers Squibb. Dr. Rogan is a Diplomate of the American Board of Pediatrics, a Fellow of the American Academy of Pediatrics and a member of the American Academy of Pharmaceutical Physicians.

Dr. Kaveh T. Safavi is Vice President of Business and Strategic Development for Alexian Brothers of Illinois, Inc., a multi-hospital health system in metropolitan Chicago, Illinois. Prior to assuming his current position in January 2000, Dr. Safavi served as Vice President, Medical Affairs for United Healthcare of Illinois, Inc., a large managed care organization from 1996-1999 and served as President of Health Springs Medical Group of Illinois, a primary care group practice and physician practice management company from 1993 to 1995. Dr. Safavi is board certified in Internal Medicine and Pediatrics and is licensed to practice law in the State of Illinois.

Dr. Jeffrey W. Sherman, M.D., F.A.C.P., joined us in September 2000 as Executive Vice President and Chief Medical Officer. Dr. Sherman joined us from Searle/Pharmacia where, since joining that firm in 1992, he has held a variety of positions, serving as Executive Director, Clinical Research, with his focus being on Oncology Clinical Research and Head of Oncology Global Medical Operations in Medical Marketing. Dr. Sherman received his medical degree from the Finch University of Health Sciences/The Chicago Medical School and is a member of numerous professional societies and a Diplomate of the National Board of Medical Examiners and the American Board of Internal Medicine.

Lawrence A. Kenyon joined us in September 2000 as our Chief Financial Officer. From October 1999 until September 2000 Mr. Kenyon was Senior Vice President of the Gabelli Mathers Fund, a regulated investment company. Prior to that, Mr. Kenyon held a variety of positions with Mathers and Company, Inc., an investment management firm, most recently serving as the Chief Financial Officer for both Mathers and Company, Inc. and Mathers Fund, Inc. Mr. Kenyon is a Certified Public Accountant and received his B.B.A. in Accounting from the University of Wisconsin—Whitewater in 1987.

Imran Ahmad, Ph.D., Vice President, Research and Development, joined NeoPharm in July 2000. Prior to joining NeoPharm, Dr. Ahmad held a variety of positions at the Liposome Company from 1993 until 2000, most recently serving as Assistant Director of Research and Development where his responsibilities included directing the pre-clinical research program. Dr. Ahmad conducted his post-doctoral work at the University of Alberta, Canada.

34

Dr. Lewis C. Strauss, M.D., joined us as Chief Medical Officer, in April 1998. After completing his medical training at Cornell Medical College and his pediatric residency at The Johns Hopkins School of Medicine in Baltimore, Dr. Strauss served as Assistant Professor, Oncology and Pediatrics at Johns Hopkins Oncology Center (1980-1991) and Associate Professor, Pediatrics (Hematology—Oncology) at Northwestern University (1991-1997). Upon Dr. Jeffrey Sherman joining us in September 2000 as Chief Medical Officer, Dr. Strauss became Vice President, Clinical Development.

Kirk Rosemark, RAC, joined us as Vice President of Regulatory Affairs in April 2001. Mr. Rosemark joined us from Solvay Pharmaceuticals where, since joining that firm in March 1998, he has held a variety of positions, most recently serving as Director of Regulatory Affairs for Unimed Pharmaceuticals, a Solvay Pharmaceuticals company. Prior to that, Mr. Rosemark held various Regulatory Affairs positions with Novartis Ophthalmics and Bausch & Lomb Pharmaceuticals.

Amy Y. Grahn joined us as Vice President of Clinical Research Management in August 2001. Prior to that, from September 2000 until August 2001, Ms. Grahn was Senior Project Manager at Takeda Pharmaceuticals, North America. From 1998 until 2000, Ms. Grahn served as Associate Director of Oncology Clinical Research and G.D. Searle & Co. Prior to 1998, Ms. Grahn held a variety of positions in clinical research at Abbott Laboratories. Ms. Grahn received her M.S. from the Illinois Institute of Technology in 1988.

        John N. Kapoor, PhD., one of our directors and a principal stockholder, was previously the Chairman and President of Lyphomed, Inc. Fujisawa Pharmaceutical Co., Ltd. was a major stockholder of Lyphomed from the mid-1980's until 1990, at which time Fujisawa completed a tender offer for the remaining shares of Lyphomed, including the shares held by Dr. Kapoor. In 1992, 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 make certain disclosures to Fujisawa constituted a violation of federal securities laws and the Racketeer Influenced and Corrupt Organizations Act. Fujisawa also alleged state law claims. Dr. Kapoor countersued, and in 1999, the litigation was settled on terms mutually acceptable to the parties. The terms of the settlement are subject to a confidentiality agreement.

        Officers serve at the discretion of the Board of Directors. There are no family relationships between any of our directors or executive officers.

Section 16(a) Beneficial Ownership Reporting Compliance

        Based solely on a review of the copies of reports furnished to the Company or written representations that no reports were required, the Company believes that, during the 2001 fiscal year, all filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with.

ITEM 11. EXECUTIVE COMPENSATION

        The information required by this item as to executive compensation is hereby incorporated by reference from the information appearing under the captions "Executive Compensation", "Compensation of Directors," "Election of Directors-Compensation Committee Interlocks and Insider Participation", and "Compensation Committee Report" in the Company's definitive Proxy Statement which is filed with the Securities and Exchange Commission (the "commission") within 120 days of the Company's fiscal year ended December 31, 2001.

35

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT

        The information required by this item as to the ownership of management and others of securities of the Company is hereby incorporated by reference from the information appearing under the caption "Security Ownership" in the Company's definitive Proxy Statement which is to be filed with the Commission within 120 days of the Company's fiscal year ended December 31, 2001.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this item as to certain business relationships and transactions with management and other related parties of the Company is hereby incorporated by reference from the information appearing under the caption "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement which is to be filed with the Commission within 120 days of the Company's fiscal year ended December 31, 2001.

36

PART IV

ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)	Exhibits
	3.1	Amended and Restated Certificate of Incorporation filed with the Commission as Exhibit 3.1 to the Company's Registration Statement on Form S-3 (File No. 333-44396), is incorporated by reference
	3.2	Bylaws of the Company filed with the Commission as Exhibit 3.2 to the Company's Registration Statement on Form S-3 (File No. 333-44396), is incorporated by reference
	10.01	Consulting Agreement dated as of November 12, 2001 by and between the Company and Unicorn Pharma Consulting, Inc.
	10.02	Promissory Note dated as of December 20, 2001 by and between the Company and Akorn, Inc.
	10.03	Processing Agreement dated as of December 20, 2001 by and between the Company and Akorn, Inc.
	10.04	Subordination and Intercreditor Agreement dated as of December 20, 2001 by and between the Company and John N. Kapoor, as Trustee under the John N. Kapoor Trust, dated September 20, 1989.
	10.05	Subordination, Standby and Intercreditor Agreement dated as of December 20, 2001 by and between the Company and the Northern Trust Company.
	99.01	Letter regarding independent public accountants
(b)	Financial Statements
	(1)	Financial Statements
	The financial statements filed as part of this Registration Statement are listed in the Index to Financial Statements of the Company on Page 38.
(c)	Reports on Form 8-K
	On December 31, 2001, the Company filed a report on Form 8-K reporting the execution of a promissory note and processing agreement between the Company and Akorn, Inc., a related party, describing the general terms of the agreements.

37

SIGNATURES

        PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

NEOPHARM, INC.
By:	/s/  JAMES M. HUSSEY James M. Hussey President and Chief Executive Officer

        PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS ANNUAL REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.

Signature	Title	Date
/s/  JOHN N. KAPOOR John N. Kapoor	Director, Chairman of the Board	April 10, 2002
/s/  JAMES M. HUSSEY James M. Hussey	Director, President, and Chief Executive Officer (Principal Executive Officer)	April 10, 2002
/s/  ERICK E. HANSON Erick E. Hanson	Director	April 10, 2002
/s/  SANDER FLAUM Sander Flaum	Director	April 10, 2002
/s/  MATTHEW P. ROGAN Matthew P. Rogan	Director	April 10, 2002
/s/  KAVEH T. SAFAVI Kaveh T. Safavi	Director	April 10, 2002
/s/  LAWRENCE A. KENYON Lawrence A. Kenyon	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	April 10, 2002

38

INDEX TO FINANCIAL STATEMENTS

NEOPHARM, INC.
(A DELAWARE CORPORATION)

	Page
Report of Arthur Andersen LLP, Independent Public Accountants	40
Balance Sheets	41
Statements of Operations	42
Statements of Stockholders' Equity	43
Statements of Cash Flows	44
Notes to Financial Statements	46

39

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of NeoPharm, Inc.:

        We have audited the accompanying balance sheets of NeoPharm, Inc. (a Delaware corporation) as of December 31, 2000 and 2001, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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, 2000 and 2001, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.

        As explained in Note 5 to the financial statements, effective July 2000, the Company changed its method of accounting for non-employee director stock compensation.

	ARTHUR ANDERSEN LLP
Chicago, Illinois April 9, 2002

40

NEOPHARM, INC.
(A DELAWARE CORPORATION)

BALANCE SHEETS

			December 31,
			2000			2001
ASSETS
Current assets:
	Cash and cash equivalents		$	139,777,330		$	106,525,864
	Short-term investment in marketable securities			—			15,030,045
	Other receivables			3,366			131,718
	Prepaid expenses			500,737			469,862
		Total current assets	$	140,281,433		$	122,157,489
Equipment and furniture:
	Equipment			131,981			2,260,949
	Furniture			205,903			486,658
	Leasehold improvements			76,840			254,096
	Less accumulated depreciation			(164,380	)		(686,061	)
		Total equipment and furniture, net	$	250,344		$	2,315,642
	Long-term investment in marketable securities			—			2,738,563
	Related party note receivable, net (Note 9)			—			1,983,381
		Total assets	$	140,531,777		$	129,195,075
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accrued clinical trial expenses		$	—		$	632,365
	Accounts payable			323,797			537,465
	Accrued compensation			—			221,862
	Other accrued expenses			115,902			459,833
		Total current liabilities	$	439,699		$	1,851,525
Stockholders' equity:
	Common stock, $.0002145 par value; 25,000,000 shares authorized, 14,656,588 and 16,237,779 shares issued and outstanding as of December 31, 2000 and 2001, respectively			3,145			3,484
	Additional paid-in capital			142,181,732			169,748,547
	Accumulated deficit			(2,092,799	)		(42,408,481	)
		Total stockholders' equity	$	140,092,078		$	127,343,550
		Total liabilities and stockholders' equity	$	140,531,777		$	129,195,075

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

41

NEOPHARM, INC.
(A DELAWARE CORPORATION)

STATEMENTS OF OPERATIONS

			For the Years Ended December 31,
			1999		2000			2001
Revenues			$	11,000,000	$	3,000,000		$	—
Expenses:
Research and development				2,375,458		3,051,003			14,814,169
General and administrative				2,413,901		3,007,546			4,252,309
Related party expenses (Note 9)				1,416,547		773,789			162,160
		Total expenses		6,205,906		6,832,338			19,228,638
Income/(loss) from operations				4,794,094		(3,832,338	)		(19,228,638	)
Other income				—		—			8,049
Other expense				—		—			—
Other income - net				—		—			8,049
Interest income				626,508		3,322,163			5,796,552
Interest expense				2,126		—			—
Interest income - net				624,382		3,322,163			5,796,552
Income/(loss) before income taxes			$	5,418,476	$	(510,175	)	$	(13,424,037	)
Income taxes (benefit)/expense				1,664,000		15,653			—
Income/(loss) before cumulative effect of accounting change			$	3,754,476	$	(525,828	)	$	(13,424,037	)
Cumulative effect on prior years (to December 15, 1998) of changing to a different stock compensation method (Note 5)				—		139,598			—
Net income/(loss)			$	3,754,476	$	(386,230	)	$	(13,424,037	)
Net income/(loss) per share
Basic
	Net income/(loss) before cumulative effect of accounting change		$	.36	$	(.04	)	$	(.83	)
	Cumulative effect of accounting change on prior years (Note 5)			—	$	.01			—
	Net income/(loss) per share - basic		$	.36	$	(.03	)	$	(.83	)
Diluted
	Net income/(loss) before cumulative effect of accounting change		$	.31	$	(.04	)	$	(.83	)
	Cumulative effect of accounting change on prior years (Note 5)			—	$	.01			—
	Net income/(loss) per share - diluted		$	.31	$	(.03	)	$	(.83	)
Pro forma amounts assuming new stock compensation method applied retroactively
	Net income/(loss) before cumulative effect of accounting change		$	3,894,074	$	(525,828	)	$	(13,424,037	)
	Net income/(loss) per share - basic		$	.37	$	(.04	)	$	(.83	)
	Net income/(loss) per share - diluted		$	.32	$	(.04	)	$	(.83	)
Weighted average shares outstanding
	Basic			10,524,427		13,199,927			16,140,725
	Diluted			12,270,601		14,179,909			16,683,147

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

42

NEOPHARM, INC.
(A DELAWARE CORPORATION)

STATEMENT OF STOCKHOLDERS' EQUITY

	Common Stock Shares	Par Value		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders' Equity
Balance at December 31, 1998	8,341,779	$	1,789	$	6,637,378		$	(5,461,045	)	$	1,178,122
Issuance of stock pursuant to exercise of stock options	356,000		76		1,495,424			—			1,495,500
Issuance of stock pursuant to restricted stock grants	5,372		1		79,826			—			79,827
Issuance of stock to Pharmacia & Upjohn	452,861		97		7,999,903			—			8,000,000
Exercise of warrants	1,872,605		403		9,073,983			—			9,074,386
Net income	—		—		—			3,754,476			3,754,476
Issuance of options to non-employees	—		—		422,747			—			422,747
Balance at December 31, 1999	11,028,617	$	2,366	$	25,709,261		$	(1,706,569	)	$	24,005,058
Issuance of stock pursuant to exercise of stock options	77,324		17		370,252			—			370,269
Issuance of stock pursuant to restricted stock grants	3,229		1		66,898			—			66,899
Issuance of stock pursuant to follow-on offering	3,480,000		747		115,673,334			—			115,674,081
Exercise of warrants	67,418		14		(14	)		—			—
Net loss	—		—		—			(386,230	)		(386,230	)
Issuance of options to non-employees	—		—		501,599			—			501,599
Cumulative effect of accounting change (Note 5)	—		—		(139,598	)		—			(139,598	)
Balance at December 31, 2000	14,656,588	$	3,145	$	142,181,732		$	(2,092,799	)	$	140,092,078
Issuance of stock pursuant to exercise of stock options	105,250		23		503,820			—			503,843
Issuance of stock pursuant to 10% stock dividend	1,475,941		316		26,891,329			(26,891,645	)		—
Net loss	—		—		—			(13,424,037	)		(13,424,037	)
Issuance of options to non-employees	—		—		171,666			—			171,666
Balance at December 31, 2001	16,237,779	$	3,484	$	169,748,547		$	(42,408,481	)	$	127,343,550

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

43

NEOPHARM, INC.
(A DELAWARE CORPORATION)

STATEMENTS OF CASH FLOWS

		For the Years Ended December 31,
		1999			2000			2001
Cash flows provided by/(used in) operating activities:
Net income/(loss)		$	3,754,476		$	(386,230	)	$	(13,424,037	)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Depreciation and amortization			38,583			65,097			521,681
Deferred income taxes			1,640,000			—			—
Expense from non-employee stock options			422,747			501,599			171,666
Cumulative effect of accounting change (Note 5)			—			(139,598	)		—
Restricted stock grants in lieu of cash compensation			79,827			66,899			—
Income tax refunds received			—			110,347			—
(Increase)/decrease in other assets			(320,807	)		(293,642	)		(97,479	)
Increase/(decrease) in accrued liabilities			151,833			(363,032	)		1,198,158
Increase/(decrease) in accounts payable			291,431			(243,960	)		213,668
	Net cash and cash equivalents provided by/(used in) operating activities		6,058,090			(682,520	)		(11,416,343	)
Cash flows used in investing activities:
Purchase of marketable securities			—			—			(17,768,607	)
Purchase of equipment and furniture			(4,090	)		(249,067	)		(2,586,978	)
Issuance of related party note receivable, net (Note 9)			—			—			(1,983,381	)
	Net cash and cash equivalents used in investing activities		(4,090	)		(249,067	)		(22,338,966	)
Cash flows provided by financing activities:
Proceeds from issuance of common stock			9,495,500			116,044,350			503,843
Proceeds from exercise of warrants			9,074,386			—			—
Cashless exercise of warrants, charge			(1,074,208	)		(1,844,314	)		—
Cashless exercise of warrants, proceeds			1,074,208			1,844,314			—
	Net cash and cash equivalents provided by financing activities		18,569,886			116,044,350			503,843
Net increase/(decrease) in cash			24,623,886			115,112,763			(33,251,466	)
Cash and cash equivalents, beginning of period			40,681			24,664,567			139,777,330
Cash and cash equivalents, end of period		$	24,664,567		$	139,777,330		$	106,525,864
Supplemental disclosure of cash paid for:
Interest		$	2,126		$	—		$	—
Income taxes		$	150,000		$	—		$	—

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

44

        Supplemental disclosure of cash flow information:

        In 1999, the company granted 5,372 shares of restricted common stock to employees as compensation and recorded compensation expense of $79,827 based on the fair market value of the shares on the date of grant. Additionally, holders of the Company's Representative warrants that were issued as part of the initial public offering exercised on a cashless basis 44,935 of 86,000 outstanding warrants. Each warrant entitles the holder to two shares of common stock for an exercise price of $9.80. The Company called its 837,067 redeemable common stock purchase warrants and the 67,500 warrants underlying its representative's warrants on June 24, 1999. The period for exercising the outstanding warrants closed at the close of business on July 27, 1999. Warrant holders exercised 836,942 of the redeemable warrants and 67,500 of the underlying warrants for total net proceeds to the Company of $9,074,386. Pursuant to its license agreement, Pharmacia purchased 452,861 shares of the Company's common stock at a price of $17.6655 per share on July 23, 1999.

        In 2000, the company granted 3,229 shares of restricted common stock to employees as compensation and recorded compensation expense of $66,899 based on the fair market value of the shares on the date of grant. Additionally, holders of the Company's Representative warrants that were issued as part of the initial public offering exercised on a cashless basis the remaining 41,065 outstanding warrants. Each warrant entitles the holder to two shares of common stock for an exercise price of $9.80. As of December 31, 2000 there were no warrants outstanding.

        The Company sold 3,000,000 shares of common stock to the public at a price of $35.50 per share on September 25, 2000. In addition, the underwriters exercised their option to purchase an additional 480,000 shares at $35.50 per share on October 4, 2000. These sales of common stock resulted in net proceeds to the Company of $115,674,081 after expenses.

        During 2001, the Company loaned $3,250,000 to Akorn, Inc. to assist Akorn in the completion of its manufacturing facility in Decatur, Illinois. The note receivable issued to Akorn is due in December 2006, and accrues interest at a rate equal to that received on the Company's investments in marketable securities. In exchange, the Company has been granted access to at least 15% of the annual lyophilization capacity at Akorn at a discounted price, upon completion of the facility (See Note 9). A valuation allowance of $1,266,619 was established, and fully expensed in 2001, based on the difference between the actual loan amount and the present value of the loan using an estimated market interest rate of 10%.

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

45

NEOPHARM, INC.
(A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2000 and 2001

1. ORGANIZATION AND BUSINESS:

        NeoPharm, Inc. (the "Company"), a Delaware corporation, 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 engaged in the research, development and commercialization of drugs for the treatment of various forms of cancer. At December 31, 2001, the Company has a portfolio of eight anticancer drugs, six of which are in human clinical trials.

        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 two products, licensed from the NIH, one of which 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 continuing to develop its products, which requires substantial capital for research, product development and market development activities. The Company has not yet initiated marketing of a commercial product. Future product development 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 make progress in the development of its products and, ultimately, upon its ability to attain future profitable operations through the successful manufacturing and marketing of those products. 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 could 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. A description of the risks related to the Company's business can be found in the Risk Factors section of the Company's most recent annual report on Form 10-K, which is on file with the Securities and Exchange Commission.

        From its inception on June 15, 1990, through December 31, 1998, the Company was classified as a development stage entity. The Company completed its development stage upon the out-licensing of its first major compound to Pharmacia & Upjohn ("Pharmacia") in February of 1999. Accordingly, the inception to date information is not presented in these financial statements.

46

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

Investments

        The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying value of these investments approximate the fair market value. Short -term investment in marketable securities includes liquid investments purchased with an original maturity of between three months and one year while long-term investment in marketable securities includes liquid investments purchased with an original maturity of greater than one year but less than two years. As provided by SFAS No. 115, the Company has elected to treat all of its investments in marketable securities as "available-for-sale", which requires these investments to be recorded at fair market value. At December 31, 2001, the Company recorded its investments in marketable securities using cost plus accrued interest as this approximated the fair market value of the securities held. No investments were sold during the period.

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 computers and scientific equipment, seven years for furniture, and leasehold improvements are amortized over the lesser of the life of the improvements or the life of the lease. Maintenance and repairs that do not extend the life of assets are charged to expense when incurred.

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

        As provided by SFAS No. 123, the Company has elected to continue to account for its stock-based compensation programs according to the 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

47

options or shares granted under the plans. The Company has adopted the disclosure provisions required by SFAS No. 123 (see Note 4).

Revenue Recognition-License Fees

        The Company has licensed certain of its technologies to third parties in return for up-front license fees and subsequent milestone-based payments. The Company's policy is to recognize revenue upon receipt of the license fees or milestone payments provided the payments are non-refundable and are not subject to future performance obligations. All payments received to-date have been non-refundable. Further, the Company has no material obligations to provide future services or financial support under the terms of the license agreements. The Company was required to implement Staff Accounting Bulletin ("SAB") 101 in the fourth quarter of 2000. Adoption of SAB 101 had no material effect on the Company's financial statements since the Company had been in compliance with SAB 101 prior to adoption.

Reclassification

        Certain amounts in previously issued financial statements have been reclassified to conform to 2001 classifications.

Recent Accounting Pronouncements

        In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years beginning after June 15, 1999, which requires an entry to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133," effective for all fiscal quarters beginning after June 15, 2000. SFAS No. 137 allows companies that have not applied early adoption of SFAS No. 133 to delay implementation until quarters beginning after June 15, 2000. Implementation of SFAS No. 133/SFAS No. 137 had no material impact on the Company's 2001 financial statements since it has already been adopted.

        On July 20, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141") and Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). These pronouncements change the accounting for business combinations, goodwill, and intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS No. 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. SFAS No. 142 states goodwill and indefinite lived intangible assets are no longer amortized but are reviewed for impairment annually (or more frequently if impairment indicators arise). Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives and assessed for impairment under the provisions of SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of." The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after

48

June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt the pronouncement in their fiscal year beginning after December 15, 2001. The Company believes that the provisions of SFAS No. 142, described above, will have no impact on its financial position and results of operations.

3. INCOME PER SHARE

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

		1999		2000			2001
Numerator:
	Net income/(loss)	$	3,754,476	$	(386,230	)	$	(13,424,037	)
Denominator:
	Denominator for basic income/(loss) per share
	Weighted average shares		10,524,427		13,199,927			16,140,725
Effect of dilutive securities:
	Stock options		917,063		966,467			542,422
	Warrant exercise		829,111		13,515			—
Dilutive potential common shares			1,746,174		979,982			542,422
	Denominator for diluted income/(loss) per share-
	Weighted average shares and assumed Conversions		12,270,601		14,179,909			16,683,147
	Basic income/(loss) per share	$	.36	$	(.03	)	$	(.83	)
	Diluted income/(loss) per share	$	.31	$	(.03	)	$	(.83	)

        Options to purchase 11,000, 67,650 and 1,061,525 shares of common stock were outstanding as of December 31, 1999, 2000 and 2001, 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. For additional disclosure regarding the Company's stock options and warrants, see Notes 4, 5 and 10.

4. STOCK OPTIONS

Option Agreements

        On July 23, 1998, the board of directors approved the NeoPharm, Inc. 1998 Equity Incentive Plan (the "1998 Plan"), which replaced all prior equity incentive plans, and provides for the grant of options to acquire up to 2,200,000 shares of the Company's common stock. Additionally, 275,000 of the 2,200,000 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 than

49

the par value of the Company's common stock. At December 31, 2001 approximately 390,000 shares were available under the 1998 Plan.

        The following table summarizes the transactions in the Company's stock option plans for the three year period ended December 31, 2001.

	Number of Shares		Weighted Average Exercise Price Per Share
Unexercised stock options outstanding, December 31, 1998	1,293,406		$	4.06
Options granted	381,700		$	10.97
Options exercised	(391,600	)	$	3.83
Unexercised stock options outstanding, December 31, 1999	1,283,506		$	6.19
Options granted	518,650		$	20.65
Options exercised	(85,056	)	$	4.35
Options cancelled	(15,400	)	$	13.94
Unexercised stock options outstanding, December 31, 2000	1,701,700		$	10.75
Options granted	526,850		$	22.46
Options exercised	(115,775	)	$	4.35
Unexercised stock options outstanding, December 31, 2001	2,112,775		$	14.02
Detail of unexercised stock options outstanding, December 31, 2001—
Price range $2.05 - $16.82 (weighted average contractual life of 5.9 years)	1,072,775		$	6.49
Price range $11.49 - $32.95 (weighted average contractual life of 8.9 years)	1,040,000		$	21.79
Exercisable options, December 31, 2001	813,633		$	7.61

        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 since the exercise price of options granted is equal to market value on the date of grant. Had compensation cost for such stock option awards under the plans been determined consistent with SFAS No. 123, the Company's earnings per share would have been reduced to the following pro forma amounts using the Black Scholes option pricing model:

		1999		2000			2001
Net Income/(Loss):	As Reported	$	3,754,476	$	(386,230	)	$	(13,424,037	)
	Pro Forma		2,981,413		(2,296,850	)		(16,974,255	)
Basic EPS:	As Reported		.36		(.03	)		(.83	)
	Pro Forma		.28		(.17	)		(1.05	)
Diluted EPS:	As Reported		.31		(.03	)		(.83	)
	Pro Forma		.24		(.17	)		(1.05	)

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        The Company has granted options to purchase 770,866 shares to certain non-employees of which 328,075 such options remain outstanding and unexercised at December 31, 2001. These consultants served as scientific and/or business advisors to the Company. 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 all subsequent years, the fair value of option grants was calculated using the Black-Scholes pricing model. For the year ended December 31, 1999, 2000 and 2001, an expense of $422,747, $501,599 and $171,666 was recorded respectively. The Black Scholes option pricing model weighted average fair value of options granted in the three most recent fiscal years is included in the following table, along with key assumptions used to determine fair value.

	1999			2000			2001
Weighted average fair value of option grants	$	10.66		$	20.27		$	19.83
Weighted average risk-free interest rate		5.31	%		5.77	%		5.08	%
Dividend yield		0.00	%		0.00	%		0.00	%
Volatility factor		91.05	%		91.24	%		88.91	%
Weighted average expected life		10 years			10 years			10 years

5. CHANGE IN STOCK COMPENSATION METHOD

        In 2000, FASB issued its Interpretation 44, which required all non-employee directors of the Company to be treated as employees for computing stock compensation expense. Stock compensation in prior years, beginning in 1999, was computed assuming that the Company's non-employee members of the Board of Directors were not employees. The new method of stock compensation was adopted retroactively and has been applied to stock compensation expense in prior years. The effect of the change in 2000 was to increase income by $139,598 ($.01 per share). The pro forma amounts shown on the income statement have been adjusted for the effect of retroactive application on stock compensation had the new method been in effect.

6. 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 carry forward.

        On October 11, 1995, the Company voluntarily terminated its S Corporation election. Since that time, losses incurred represent net operating loss carry forwards which can be used to offset future taxable income. Total net operating loss carry forwards were approximately $8,200,000 and

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approximately $22,394,000 as of December 31, 2000 and 2001, respectively. The net operating loss carry forwards will expire as follows:

Year of Expiration	Amount
2011	$	1,773,000
2012		1,969,000
2013		3,122,000
2015		1,336,000
2016		14,194,000

        The Company has general business credit carry forwards of approximately $851,000 which expire in the years 2011-2016.

        The Company made payments of $150,000 towards federal alternative minimum tax during 1999 of which $110,347 was refunded during 2000. Of the remaining payments, of $24,000 generated alternative minimum tax credit carry forwards of a like amount that are available to reduce future federal regular income taxes, if any, over an indefinite period, and $15,653 was charged against the year 2000 income tax provision.

        The components of income tax expense/(benefit) consist of the following:

		1999			2000			2001
Current:
	Federal	$	—		$	15,653		$	—
	State		—			—			—
Total Current Expenses		$	—		$	15,653		$	—
Deferred:
	Federal	$	1,456,000		$	(528,500	)	$	(6,376,406	)
	State		208,000			(75,500	)		(910,915	)
Total Deferred Expense		$	1,664,000		$	(604,000	)	$	(7,287,321	)
(Increase)/Decrease in Valuation Allowance			(1,664,000	)		(604,000	)		(7,287,321	)
Total Income Tax Expense/(Benefit)		$	—		$	—		$	—

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        Significant components of the Company's deferred tax assets as of December 31 are as follows:

	1999			2000			2001
Net Operating Loss Carry Forwards	$	2,746,000		$	3,442,000		$	9,764,000
General Business Credit Carry Forwards		276,000			276,000			851,000
Alternative Minimum Tax Carry Forwards		24,000			24,000			40,000
Expenses Not Currently Deductible for tax purposes		181,000			88,000			463,000
Total Deferred Tax Assets		3,227,000			3,830,000			11,118,000
Valuation Allowance		(3,227,000	)		(3,830,000	)		(11,118,000	)
Net Deferred Tax Assets	$	—		$	—		$	—

        At December 31, 1999, December 31, 2000 and December 31, 2001, in accordance with the provisions of SFAS No. 109, a valuation allowance has been established on the deferred tax asset due to the uncertainty of its realization.

7. COMMITMENTS:

License and Research Agreements

        From time to time the Company enters into license and research agreements with third parties. At December 31, 2001, the Company had significant agreements with five parties in effect, as described below.

National Cancer Institute

        In May 1999, the Company entered into a CRADA with the NCI. Pursuant to the CRADA, the Company committed to work to commercialize the SS1 (dsFv)-PE38 monoclonal antibody product which it licensed from the NIH and the FDA. The NCI agreed to collaborate on the clinical development and commercialization of the licensed product.

        The Company was originally committed to pay $100,000 per year over four years for the reasonable and necessary expenses incurred by the NCI in carrying out their responsibilities under the CRADA. During each of 1999 and 2000, NeoPharm spent $100,000 under this agreement. In 2000, the parties agreed to expand the scope of the CRADA and increase the Company's annual funding requirement to $150,000 for the final two years of the agreement. In 2001, the Company spent $150,000 under the agreement.

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 work to commercialize the IL13-PE38 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.

53

        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. During 1999, the parties agreed to expand the scope of the CRADA and increase the Company's funding requirement to $150,000 for the final two years of the agreement. During 1998, 1999 and 2000, the Company spent $100,000, $150,000 and $150,000 respectively under these agreements. In January 2001 the parties agreed to further expand the scope of the CRADA and increase the Company's funding requirement to $400,000 per year and extend the term of the agreement through December 31, 2003.

National Institute of Health

        The Company entered into an exclusive worldwide licensing agreement with the NIH and the FDA to develop and commercialize an IL13-PE38 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 made its first milestone payment of $25,000 to NIH in November 1999 after the filing of the U.S. Investigational New Drug ("IND") application for IL13-PE38. 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 1999, 2000 and 2001, the Company expensed approximately $35,000, $10,000 and $10,000, respectively under this agreement.

        In March 1999 the Company entered into a license agreement with the NIH for SS1 (dsFv)-PE38. The agreement required a $75,000 non-refundable payment and requires minimum annual royalty payments of $20,000 to the NIH beginning January 1, 2001, which increase to $150,000 per year if certain benchmarks are not achieved. The other terms and conditions of the SS1 (dsFv)-PE38 license are substantially the same as those of the NIH IL13-PE38 license described above. During 1999, 2000 and 2001, the Company expensed approximately $75,000, $0 and $20,000, respectively under this agreement.

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. In January 1999, the Company and Georgetown University agreed to amend the agreements in addition to other modifications 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 Pharmacia agreement. During 2001, the Company expanded its relationship with Georgetown by entering three new research agreements to

54

develop new compounds for the treatment of cancer. If successful, the Company will have the opportunity to purchase or license any new drugs developed under these agreements.

        During the years ended December 31, 1999, 2000 and 2001, the Company paid and expensed approximately $1,019,000, $456,000 and $2,458,000 respectively, pursuant to the license and research agreements. The $800,000 payment referred to above is included in the 1999 total.

        Amounts paid to our major research and development collaborators under our various agreements during the last three years, as well as our commitments under these agreements for 2002, are included in the following table:

Research and Development Collaboration Expenses
	Actual			Scheduled(1)
	1999	2000	2001	2002
Georgetown	1,019,000	456,000	2,458,000	2,500,000
FDA	150,000	150,000	400,000	400,000
NCI	100,000	100,000	150,000	150,000
NIH	110,000	35,000	30,000	30,000
Total Collaboration Expenses	1,379,000	741,000	3,038,000	3,080,000

(1)

The agreements listed in this table can be terminated with, at most, 90 days written notice.

Pharmacia Corporation

        On February 19, 1999 the Company entered into an exclusive worldwide license agreement with Pharmacia and Upjohn Company ("Pharmacia"). Pursuant to the agreement, the Company granted Pharmacia an exclusive worldwide license to develop, use, manufacture, distribute, market, and sell the Company's Electrostatic Liposome Encapsulated Doxorubicin ("LED") and Electrostatic Liposome 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 Pharmacia. The Company shall use reasonable efforts to assist Pharmacia in obtaining and confirming the rights granted to Pharmacia under the agreement. However, any reasonable costs or expenses incurred by the Company to provide such assistance shall be reimbursed by Pharmacia.

        The Company received a $9,000,000 non-refundable license fee upon signing the agreement. Upon the transfer of the IND's for LED and LEP to Pharmacia, Pharmacia was to purchase $8,000,000 of the Company's newly issued common stock. The share price was equal to 110% of the average closing price of the Company's Common Stock for the 60-day period preceding the Pharmacia purchase date. On July 23, 1999, Pharmacia purchased 452,861 shares of the Company's common stock at a per share price of $17.6655. The Company recorded the newly issued shares at $.0002145 par value with the remaining proceeds reflected as additional paid in capital.

        The Company shall receive milestone payments upon the completion of each phase of clinical development and upon regulatory approval for both LED and LEP. If all milestone goals set forth in

55

the agreement are met, the Company would be eligible to receive $52,000,000 in milestone payments. During 1999, the Company received a $2,000,000 milestone payment in addition to the $9,000,000 license fee. During 2000, a $3,000,000 milestone payment was received under the agreement. No milestone payments were received in 2001.

        If the LED product were to be approved for commercial sale and thereafter marketed, the Company would receive a royalty payment for sales outside of the U.S. for the first seven years after commercial sale at a rate of 8% declining to 5% for the eighth through tenth years of such commercial sales. With respect to the LEP product, the Company is entitled to receive a royalty of 12.5% for LEP products sold outside of the United States for the valid life of an enforceable NeoPharm patent, determined on a country-by-country basis. With respect to sales of both LEP and LED products in the United States, the Company is permitted to elect, in lieu of royalty payments for U.S. sales, to co-promote the products within the United States. Under the terms of the co-promotion, the Company's participations in net profits is to be in proportion to its monetary contribution to the promotion of each product in the United States, but in no event shall the Company's share of profits exceed 37.5% of total net profits. In addition, the Company's right to co-promote is contingent upon the Company reimbursing Pharmacia for an amount equal to the amount of the Company's net profit percentage multiplied by the amount expended by Pharmacia in development costs for the products in the United States (which may not exceed 60 percent of Pharmacia's total development costs throughout the world). If the Company does not elect to co-promote the product within the U.S., then the Company would receive a flat royalty with respect to LED equal to 10% of net sales for the first ten years of sales in the United States, and with respect to LEP, a royalty equal to 12.5% of net sales for the period in which Pharmacia has exclusivity to LEP product. Because of the uncertainty surrounding the ability of the Company to attain the milestones and obtain FDA approval for the product, and the uncertainty that the product would be accepted by the medical community, it is not possible to project with any degree of certainty what the potential revenues (other than the milestone payments) under the contract would be.

        In January 2002, Pharmacia informed the Company that the LEP and LED development programs were experiencing delays. At the time of that meeting, Pharmacia was unable to determine when Phase II/III studies were expected to begin. The Company continues to work with Pharmacia to determine the development status of both LEP and LED, but as of the date of this filing, Pharmacia has not provided the Company with new target dates for starting Phase II/III clinical trials in these products.

Properties

        The Company currently leases 6,440 square feet of office space in Lake Forest, Illinois, for a term of five years with a minimum annual rent of approximately $118,000. As of January 2002, the Company has subleased an additional 6,597 square feet of office space in the same Lake Forest location for a term of 18 months at a minimum annual rent of approximately $160,000. Additionally, in January 2001, the Company entered into a sublease for a 35,500 square foot research and development facility in Waukegan, Illinois. The term of the sublease is three years at a minimum annual rent of approximately $195,000.

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Biochem Pharma

        In 1997, 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 were to share product revenue from any future sales of broxuridine in Canada. The Company terminated this agreement in October, 1999 by making a $50,000 termination payment to BioChem Pharma. The Company retained the Canadian rights to BUdR under the termination agreements.

Other

        The Company entered into consulting arrangements with its Scientific Advisors who are also employed on a full-time basis by academic or research institutions. Since inception through December 31, 2001, these advisors were issued options (see Note 4) to purchase an aggregate 168,324 shares of Company stock at the fair market value at the dates of grant. At December 31, 2001, 115,500 options remained unexercised.

8. 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, 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.

9. TRANSACTIONS WITH RELATED PARTIES

        The Company receives management consulting services from EJ Financial Enterprises, Inc. ("EJ Financial"), a healthcare consulting and investment firm in which Dr. Kapoor is the principal stockholder. Under its management consulting agreement, EJ Financial charges the Company $125,000 per year for services provided plus actual expenses incurred. The agreement provides for technical management support in the areas of research and development and operations. Charges to the Company are based on estimated time spent by EJ Financial personnel on the Company's affairs. For the years ended December 31, 1999, 2000 and 2001, the Company expensed $131,251, $136,750 and $126,877 respectively under this agreement.

        Prior to moving into new corporate offices in Lake Forest, Illinois in December 2000, the Company subleased office space from Option Care Inc., a home infusion company in which Dr. Kapoor, the Company's Chairman, is a major stockholder. For the years ended December 31, 1999 and 2000, the Company expensed $33,025 and $33,125 respectively under the subleases.

        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

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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 Pharmacia licensing agreement on February 19, 1999 (See Note 7).

        The Company's former Chief Scientific Officer, Dr. Aquilur Rahman, was employed on a full-time basis by Georgetown until joining the Company in March 1996. Dr. Rahman retired from NeoPharm in January 2001. Additionally, Anatoly Dritschilo, M.D., the Chairman of the Department of Radiation Medicine and Medical Director of the Georgetown University Medical Center was a Director of the Company from June, 1990 through June, 1999. 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 1999 and 2000, the Company paid approximately $1,019,000 and $456,000 related to work performed and expenses incurred by Georgetown. As of the retirement of Dr. Rahman in January 2001, the Company no longer considers Georgetown a related party.

        In June 2000 the Company entered into a consulting agreement with Unicorn Pharma Consulting, Inc. ("Unicorn") to assist the Company in the clinical development of Company products. Dr. Matthew P. Rogan, a Director of the Company, is also President and CEO of Unicorn. The Company paid Unicorn approximately $91,000 in 2000 for work performed under the consulting agreement. The agreement was terminated by mutual consent in October 2000 and renewed in November 2001. The Company paid Unicorn approximately $35,283 under the agreement in 2001.

        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 and Gail Salzberg. Dr. Govier retired from the Company on January 16, 1998. Salzberg also provided consulting services to the Company both as an individual and as a consultant with Aegis. During 1999, 2000 and 2001, the Company paid to Salzberg and expensed approximately $196,800, $3,100 and $0 respectively, related to these arrangements.

        During 1999, the Company paid $36,825 to Taylor Pharmaceuticals for the consulting services of Dr. Abu Alam regarding the manufacturing scale-up of the Company's electrostatic liposome products. Taylor Pharmaceuticals is a subsidiary of Akorn, Inc., a company in which Dr. Kapoor is a major shareholder and Chairman.

        In December 2001, following approval by the Company's Board of Directors, the Company loaned $3,250,000 to Akorn, Inc., an independent publicly traded company, to assist Akorn in the completion of its manufacturing facility in Decatur, Illinois. The note receivable issued to Akorn is due in December 2006, and accrues interest at a rate equal to that received on the Company's investments in marketable securities, which is lower than the interest rate paid by Akorn on its other outstanding debt. In exchange, the Company has entered into a manufacturing processing agreement that grants the Company access to at least 15% of the annual lyophilization manufacturing capacity at Akorn at a discounted price, upon completion of the facility. The Company has recorded the note receivable net of a valuation allowance of $1,266,619 reflecting the difference between the actual loan amount and the present value of the loan using an estimated market interest rate of 10%. The valuation allowance was fully expensed in 2001 and will be amortized over the life of the loan.

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        In connection with the Note, Neopharm entered into a Subordination Agreement, dated December 20, 2001, with The Northern Trust Company ("Northern"), Akorn's primary lender pursuant to an Amended and Restated Credit Agreement, dated September 15, 1999, as amended by a Forbearance Agreement, dated July 12, 2001 ("Akorn's Credit Facility"). This Subordination Agreement provides that Neopharm will subordinate its rights to repayment of amounts due under the Note to Northern's rights to repayment of amounts due under Akorn's Credit Facility. In addition, Neopharm entered into a Subordination and Intercreditor Agreement, dated December 20, 2001, with John N. Kapoor, Ph.D., as Trustee under The John N. Kapoor Trust, dated September 20, 1989 (the "Trust"). Pursuant to this Subordination and Intercreditor Agreement, Dr. Kapoor, on behalf of the Trust, subordinated the Trust's rights to repayment of amounts due under a Convertible Bridge Loan and Warrant Agreement, dated July 13, 2001, between Akorn and the Trust, to Neopharm's rights to repayment of amounts due under the Note. Dr. John N. Kapoor, Neopharm's Chairman, is also Chairman and Chief Executive Officer of Akorn, and holds a substantial stock position in both companies. Because of his role in both companies, Dr. Kapoor refrained from participating in the deliberations by the Company's Board of Directors.

        The Following table summarizes the related party expenses discussed above:

		For the Years Ended December 31,
Related Party
	Expense Type	1999		2000		2001
Georgetown University	Research & Fees	$	1,018,639	$	509,934		—
Gail Salzberg	Consulting		196,807		3,097		—
Taylor Pharmaceuticals	Consulting		36,825		—		—
Unicorn Pharma Consulting, Inc.	Consulting		—		90,883		—
E.J. Financial Enterprises	Consulting		125,000		125,000		—
E.J. Financial Enterprises	Direct Expense		6,251		11,750		—
Total Research and Development expenses		$	1,383,522	$	740,664	$	—
E.J. Financial Enterprises	Consulting		—		—	$	125,000
E.J. Financial Enterprises	Direct Expense		—		—		1,877
Option Care, Inc.	Rent and Expenses		33,025		33,125		—
Unicorn Pharma Consulting, Inc.	Consulting		—		—		35,283
Total General and Administration expenses		$	33,025	$	33,125	$	162,160
Total Related Party expenses:		$	1,416,547	$	773,789	$	162,160

10. STOCKHOLDERS' EQUITY

        During 2000, holders of the Company's Representative warrants that were issued as part of the initial public offering exercised on a cashless basis the remaining 41,065 outstanding warrants. At December 31, 2000 the Company had no warrants outstanding.

59

        In October 2000, the Company completed a public offering of 3,480,000 shares of newly issued common stock (including the underwriters overallotment) resulting in the Company receiving net proceeds of $115,674,081 after expenses.

        On September 28, 2001, the Company's Board of Directors authorized a stock repurchase program to purchase up to 1,000,000 shares of the Company's outstanding common stock at market prices over a period not to exceed one year. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from time-to-time without prior notice. Repurchased shares may be used for the Company's employee benefit plans, subsequent acquisitions or other general corporate purposes. As of December 31, 2001, no shares had been repurchased under the plan. In addition, on November 6, 2001, the Company declared a 10% stock dividend payable on December 4, 2001 to shareholders of record on November 27, 2001. A total of 1,457,941 shares were distributed as part of the stock dividend. All basic and diluted (loss) earnings per share in this report have been restated to reflect the stock dividend.

11. QUARTERLY FINANCIAL DATA (unaudited)

        The following table summarizes the quarterly financial data for the years ended December 31, 2001 and 2000:

	Net Revenues	Research & Development Expense	General & Administrative Expense	Operating Income/(Loss)		Net Income/(Loss)		Earnings Per Basic		Share Diluted
2001
March 31, 2001	—	1,583,397	977,043	(2,560,440	)	(583,827	)	(0.04	)	(0.04	)
June 30, 2001	—	2,982,161	1,061,572	(4,043,733	)	(2,506,542	)	(0.16	)	(0.16	)
September 30, 2001	—	4,091,492	1,054,784	(5,146,276	)	(3,876,749	)	(0.24	)	(0.24	)
December 31, 2001	—	6,157,119	1,321,070	(7,478,189	)	(6,456,919	)	(0.40	)	(0.40	)
2000
March 31, 2000	3,000,000	652,826	505,674	1,841,500		2,254,673		0.19		0.17
June 30, 2000	—	976,555	714,919	(1,691,474	)	(1,297,588	)	(0.11	)	(0.11	)
September 30, 2000	—	879,000	687,371	(1,566,371	)	(1,163,797	)	(0.09	)	(0.09	)
December 31, 2000	—	1,283,286	1,132,707	(2,415,993	)	(179,518	)	(0.01	)	(0.01	)

60

QuickLinks

TABLE OF CONTENTS
BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
PART III
ITEM 10. MANAGEMENT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
SIGNATURES
INDEX TO FINANCIAL STATEMENTS
NEOPHARM, INC. (A DELAWARE CORPORATION)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
BALANCE SHEETS
STATEMENTS OF OPERATIONS
STATEMENT OF STOCKHOLDERS
STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS

EX-10.01

                                                             EXHIBIT 10.01

                              CONSULTING AGREEMENT



         THIS CONSULTING AGREEMENT (this "Agreement") is made and entered into
as of the 12th day of November, 2001, by and between NeoPharm, Inc., a Delaware
corporation (the "Company"), and Unicorn Pharma Consulting, Inc., a North
Carolina corporation ("Consulting Company") and its employee, Matthew P. Rogan,
M.D. (the "Supervising Consultant" and with the Consulting Company, the
"Consultant").

         In consideration of the mutual covenants, agreements and warranties
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:

1. DEFINITIONS.

         (a) "BUSINESS" means the business of researching, developing, testing,
licensing, manufacturing, distributing and marketing pharmaceutical products
used in the treatment of cancer or any other business, operation, or commercial
endeavor that is the same or reasonably similar thereto, including any business
engaged in or conducted by the Company or its affiliates or subsidiaries at any
time during the term of this Agreement.

         (b) "CONFIDENTIAL INFORMATION" means any information, observation,
idea, patent, design, improvements, plan, invention, trade secret or data, in
whatever form or medium, concerning the business or affairs of the Company,
including, without limitation, products, processes, inventions (whether or not
patentable or registrable under copyright or similar laws and whether or not
reduced to practice), discoveries, concepts, ideas, improvements, techniques,
methods, specifications, data, know-how, products in development, investment
opportunities, the identity of potential or actual collaborators, customers or
suppliers, records, computer software (including data and related
documentation), methods of operation, pricing and bid strategies, technical and
research data, financial information, financing plans, business or marketing
techniques, strategies, forecasts or developments, product or system ideas or
designs, and other trade secrets; provided that "Confidential Information" shall
not include any information which is in the public domain through no fault of
Consulting Company or the Supervising Consultant.

2. ACKNOWLEDGMENTS.

         (a) As a condition to entering into this Agreement, Company requires
the receipt and performance of the covenants described herein from Consulting
Company and the Supervising Consultant, which covenants Consulting Company and
the Supervising Consultant acknowledge and agree are fair and reasonable.
Consulting Company and the Supervising Consultant acknowledge that: (i) the
Confidential Information is highly confidential and valuable, and constitutes
trade secrets, (ii) the Services rendered by the Consultant will be of a special
character which have a unique value to the Company, (iii) the terms, provisions
and restrictions contained in this Agreement are in addition to, and not in lieu
of the Illinois Trade Secrets Act, as amended from time to time.


         (b) Consulting Company and the Supervising Consultant further
acknowledge and agree that the Consulting Company and the Supervising Consultant
will act as independent contractors in the performance and satisfaction of their
duties and obligations under this Agreement. Accordingly, Consultant
acknowledges and agrees to be responsible for the payment of all federal, state
and local taxes arising out of or related to this Agreement and the Services (as
defined below) to be provided by the Consultant.

3. DUTIES AND RESPONSIBILITIES OF CONSULTANT. The Consultant shall provide,
principally through the Supervising Consultant, certain services to the Company
("Services") during the term of this Agreement. Such Services shall include, but
are not limited to, those Services set forth on Schedule A. Such Services shall
be performed in accordance with the highest standards, customs and ethical
principles generally applicable to the provision of services such as the
Services. The Consultant agrees that the Supervising Consultant shall dedicate a
minimum of twenty-five (25) hours per week to providing the Services to the
Company.

4. COMPENSATION. The Company shall pay the Consulting Company in accordance with
Schedule A. The Company will also provide, without charge to the Consultant,
such support facilities and office space at the Company's principal offices, as
may be required, in the Company's reasonable judgment, to allow the Consultant
to perform the Services. All fees paid hereunder shall be paid to the Consulting
Company. The Consulting Company shall provide invoices to the Company for
Services performed by the Consultant, and expenses incurred, on a monthly basis,
with the exception, however, that an initial payment of $30,000 shall be paid by
the Company to the Consulting Company upon execution of this Agreement, which
advance payment shall be set off against amounts thereafter invoiced by the
Consulting Company.

5. CONFLICTS OF INTEREST. The Consultant represents and warrants to the Company
that the Consulting Company and the Supervising Consultant do not have any
relationship with a third party which would represent a conflict of interest
with the rendering of the Services or the performance of duties by the
Consultant hereunder, prevent the Consultant from entering into or carrying out
the terms of this Agreement, or present any opportunity for the disclosure of
any Confidential Information of the Company. The Consultant represents and
warrants to the Company that any information that the Consultant provides to the
Company shall not be in violation of or in conflict with the Illinois Trade
Secret Act.

6. RESTRICTIVE COVENANTS.

         (a) COVENANTS REGARDING CONFIDENTIAL INFORMATION. The Consultant
covenants and agrees that, during the term of this Agreement and continuing
thereafter, the Consulting Company and the Supervising Consultant shall hold all
Confidential Information in the strictest confidence and shall not: (i) disclose
or make use of the Confidential Information for any purpose whatsoever other
than the performance of Services to the Company, or (ii) disclose to any person
or entity or use for the Consultant's benefit or for the benefit of others,
directly or indirectly, any Confidential Information. Upon the termination of
this Agreement, the Consultant shall cease use of and deliver to the Company all
Confidential Information in the possession or control of the Consultant. Prior
to disclosing any Confidential Information, pursuant to subclause (i) above, the
Consultant shall (y) obtain the prior written authorization of


the Company and (z) cause the party to whom such disclosure is made to provide
the Company with reasonable assurances (in form and substance satisfactory to
the Company in its sole and absolute discretion) that it will not further
disclose such Confidential Information without the Company's consent.

         (b) NON-SOLICITATION & NON-INTERFERENCE. The Consultant covenants and
agrees that, except to the extent required to perform Services hereunder, during
the term of this Agreement and for a period of one (1) year thereafter, the
Consulting Company and the Supervising Consultant shall not: (i) persuade or
attempt to persuade any consultant, supplier, customer or business associates of
the Company to terminate or modify his or her or its relationship with the
Company or (ii) hire any employee or former employee of the Company or knowingly
solicit any business from any supplier or potential supplier, or customer or
potential client or business associates of the Company.

         (c) OWNERSHIP OF CONFIDENTIAL INFORMATION. All Confidential
Information, including without limitation trade secrets, conceived, created or
acquired by the Consultant, alone or with others, during the term of or
resulting from this Agreement or any prior Services provided by the Consultant
to the Company that is within the scope of the Business is the exclusive
property of Company. The phrase "within the scope of the Business" shall be
broadly construed. The Consultant agrees to disclose promptly to the Company any
and all such Confidential Information and to assist the Company in every way to
secure the Company's rights in such Confidential Information including without
limitation any copyrights, patents, trademarks, or other rights relating
thereto.

         (d) RETURN OF PROPERTY. The Consultant acknowledges and agrees that all
Company property, including Confidential Information, keys, credit cards, books,
manuals, records, reports, notes, contracts, customer lists, and other
information defined as confidential and proprietary in any other agreement
between the parties, copies of any of the foregoing, and any equipment furnished
to the Consultant by the Company, including, but not limited to computer
software, belong to the Company and shall be promptly returned to the Company
upon termination of this Agreement.

         (e) DEVELOPMENTS OF THE COMPANY. All ideas, inventions, trademarks,
works of art, photographs, publishable materials, and other developments or
improvements created, conceived or developed by the Consultant, alone or with
others, during the term of this Agreement, whether or not during working hours,
that are within the scope of the Company's Business, or that relate to any
Company work or projects, shall be conclusively presumed to have been created
for or on behalf of the Company ("Developments"). The Consultant shall disclose
promptly to the Company any and all such Developments. Such Developments are the
exclusive property of the Company without the payment of consideration therefor,
and the Consultant hereby transfers, assigns and conveys all of the Consultant's
rights, titles and interests in any such Developments to the Company and agrees
to execute and deliver any documents that the Company deems necessary to effect
such transfer on the demand of the Company. The Consultant agrees to assist the
Company, at its expense, to obtain patents on any such patentable ideas,
inventions, trademarks, and other developments, and agree to execute all
documents necessary to obtain such patents in the name of the Company. This
Agreement does not apply to any inventions


which were made prior to the date of this Agreement and which are listed on
Schedule B attached hereto (if any) or for which no equipment, supplies,
facility or trade secret information of the Company was used and which was
developed entirely on the Consultant's own time unless: (1) the invention
relates (a) to the Business of the Company or (b) to the Company's actual
demonstratively anticipated research or development, or (2) the invention
results from any work performed by the Supervising Consultant for the Company.

         (f) WORK MADE FOR HIRE. The Consultant recognizes and understands that
the Consultant's duties at the Company may include the preparation of materials,
including written or graphic materials and other Developments, and that any such
materials conceived or written by Consultant shall be done as "work made for
hire" as defined and used in the Federal Copyright Act, 17 U.S.C. Section 101.
In the event of publication of such materials, the Consultant understands that
since such work is "work made for hire," the Company shall solely retain and own
all rights in such materials, including any right of copyright.

         (g) REMEDIES. If the Consultant breaches, or threatens to commit a
breach of, this Section, the Company shall have the following rights and
remedies, each of which rights and remedies shall be independent of the other
and severally enforceable, and all of which rights and remedies shall be in
addition to, and not in lieu of, any other rights and remedies available to the
Company under law or in equity:

                           (i) the right and remedy to have this Section
         specifically enforced by any court having equity jurisdiction, it being
         acknowledged and agreed that any such breach of threatened breach will
         cause irreparable injury to the Company and that money damages alone
         will not provide an adequate remedy to the Company; and

                           (ii) the right and remedy to require the Consultant
         to account for and pay over to the Company all compensation, profits,
         monies, accruals, increments or other benefits derived or received by
         the Consultant as the result of any actions or transactions
         constituting a breach of this Section.

The Company may exercise its rights and remedies under this Section without the
necessity of proving actual damages or posting bond. Moreover, if the Consultant
breaches any of the provisions of this Section, the running of any restrictive
period shall be suspended during the continuance of any actual breach or
violation.

                  (h) BLUE-PENCILING. If any court determines that this
Agreement, or any part thereof, is unenforceable because of the duration of such
provision or the area covered thereby, such court shall have the power to reduce
the duration or area of such provision and, in its reduced form, such provision
shall then be enforceable and shall be enforced. If any provision of this
Agreement is held by a court to be invalid, void, or unenforceable and the court
does not elect to reduce such provision, this Agreement shall be deemed amended
to delete therefrom such provision or portion adjudicated to be invalid or
unenforceable without in any way affecting the remaining parts of this
Agreement.


7. TERM AND TERMINATION. The initial term of this Agreement will be for four (4)
months and will automatically renew for successive one (1) month terms unless
prior thereto the Consultant has completed the Services hereunder or the
Consultant provides notice to Company, or the Company provides notice to the
Consultant, of an intention to terminate this Agreement no earlier than seven
(7) days after the date of such notice. Notwithstanding the foregoing, the
Company may terminate this Agreement at any time based on the Consultant's
failure to provide the Services to the reasonable satisfaction of the Company.
The Company may also terminate this Agreement based on the Consultant's failure
to comply with Paragraphs 2, 3, 5, 6, 9 and 17. Upon any termination (including
wrongful termination) of this Agreement by the Company, the Company shall only
be liable to the Consultant for Services actually provided and the Consultant
shall not be entitled to any additional compensation or payments from the
Company

         The Consultant specifically acknowledges and agrees that
notwithstanding any other provision contained herein, Sections 2, 6, 9, 14, 16,
and 17 shall survive the termination of this Agreement.

8. ENTIRE AGREEMENT; AMENDMENT; WAIVER; ASSIGNMENT. This Agreement constitutes
the entire agreement between the parties respecting the subject matter contained
herein, and supersedes all other prior agreements, contracts or arrangements and
may not be modified or amended except in a writing signed by both parties. No
waiver or discharge of any breach of this Agreement shall be effective unless it
is in a writing signed by all parties hereto. Any waiver of any breach of any
provision of this Agreement shall not be a waiver of any subsequent breach of
the same or of any other provision of this Agreement. The Consultant may not
assign or transfer this Agreement or any rights hereunder. The Company may
assign or transfer this Agreement and the rights hereunder at any time upon
providing written notice to the Consultant. This Agreement shall inure to the
benefit of Company's successors and assigns.

9. INDEMNIFICATION. The Consultant shall indemnify the Company and the Company's
respective officers, directors, independent contractors, representatives
shareholders, affiliates and subsidiaries (collectively the "Company
Affiliates") against, and agree to defend and hold harmless from, any and all
liabilities, losses, costs, damages, penalties or expenses (including, without
limitation, reasonable attorneys' fees and expenses and costs of investigation
and action, suit or proceeding) incurred or suffered by the Company or any
Company Affiliate arising out of any breach or threatened breach of this
Agreement by the Consultant.

10. WAIVER. The failure of a party hereto at any time or times to require
performance of any provision hereof shall in no manner effect its right at a
later time to enforce the same. No waiver by a party of any condition or of any
breach of any term, covenant, representation or warranty contained in this
Agreement shall be effective unless in writing, and no waiver in any one or more
instances shall be deemed to be a further or continuing waiver of any such
condition or breach in other instances or a waiver of any other condition or
breach of any other term, covenant, representation or warranty.

11. COUNTERPARTS. This Agreement may be executed simultaneously in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.


12. HEADINGS. The headings preceding the text of Sections of this Agreement are
for convenience of reference only and shall not be deemed part of this
Agreement.

13. APPLICABLE LAW. This Agreement shall be governed by and construed enforced
in accordance with the internal laws of the State of Illinois, without regard to
its conflict of law rules.

14. VENUE; JURISDICTION.

         (a) The Consultant irrevocably agrees that all actions or proceedings
in any way, manner or respect, arising out of or from or related to this
Agreement shall be litigated only in courts having situs within the City of
Chicago, State of Illinois. The Consultant hereby consents to the jurisdiction
of any local, state, or federal court located within said City and State and
hereby waives any objections based on improper venue or forum non conveniens to
the conduct of any proceeding instituted hereunder.

         (b) The Consultant irrevocably waives any right to trial by jury in any
action or proceeding (i) to enforce or defend any rights under or in connection
with this Agreement or any amendment, instrument, document or other agreement
delivered or which may in the future be delivered in connection herewith or
therewith or (ii) arising from any dispute or controversy in connection with or
related to this agreement or any such amendment, instrument, document or other
agreement, and agree that any such action or proceeding shall be tried before a
court and not before a jury.

15. CONSULTATION WITH AN ATTORNEY. This Agreement is a legal document. The
Consultant is advised to consult with an attorney before signing this Agreement.

16. ATTORNEYS' FEES. In the event any legal proceeding is commenced for the
purpose of interpreting, construing, enforcing or claiming under this Agreement,
the Company shall be entitled to recover reasonable attorney fees in such
proceeding, or on any appeal therefrom

17. ILLINOIS TRADE SECRETS ACT. Without in any way limiting the Consultant's
other obligations, duties and responsibilities hereunder, the Consultant agrees
to be subject to, bound by and comply with the Illinois Trade Secrets Act, as
amended from time to time.

18. LOCATION OF WORK. The Consultant agrees that the Consultant shall perform
the Services principally at the offices of the Company set forth in paragraph
19, or such other location as the Company may reasonably request from time to
time, it being acknowledged by the Company, however, that certain aspects of the
Services may be performed, with the Company's consent, at locations other than
the Company's offices

19. NOTICES. All notices, demands, requests or communications which may be
required to be given by one party to the other party shall be in wiring, shall
be delivered either personally, by registered or certified mail, by messenger
service, or by facsimile transmission, and shall be addressed as follows:


         If to Company:                     NeoPharm, Inc.
                                            150 Field Drive, Suite 195
                                            Lake Forest, IL 60045
                                            Fax No.:  (847) 295-8854
                                            Attn: James M. Hussey, President

         If to Consulting Company:          Unicorn Pharma Consulting, Inc.
                                            103 High Country Drive
                                            Cary, NC 27513
                                            Fax No.: (919) 468-1427
                                            Attn: President

         If to Supervising Consultant:      Dr. Matthew P. Rogan
                                            c/o Unicorn Pharma Consultants, Inc.
                                            103 HighCountry Drive
                                            Cary, NC   27513
                                            Fax No.: (919) 468-1427



                            [SIGNATURE PAGE FOLLOWS]


         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

NEOPHARM, INC.                              UNICORN PHARMA CONSULTING, INC.



By: ______________________________          By: _____________________________
Name: ____________________________          Name: ___________________________
Title: ___________________________          Title: __________________________


                                            SUPERVISING CONSULTANT:



                                            ---------------------------------
                                            Matthew P. Rogan, M.D.


                                   SCHEDULE A

                             DESCRIPTION OF SERVICES

         The Company wishes to enlist the services of the Consulting Company to
assist with an anticipated expansion of staff during 2002 in the Pre-Clinical
and Clinical Development areas. Responsibilities of this role will include: 1)
consulting with the Company's CSO and CMO in defining the skill set of personnel
needed to achieve the goals and objectives of their respective groups during
2002; 2) screening and helping select executive search firms needed to achieve
the objective described previously; 3) helping to establish a timeline for the
hiring of the necessary staff to achieve the Company's 2002 objectives; 4)
advising the Company regarding infrastructure and process issues to most
efficiently achieve the 2002 goals; and 5) performing additional tasks as
requested by the Company.

         The compensation to the Consulting Company for consulting services
rendered under this Agreement will be $300.00 per hour. The Company anticipates
that this assignment should be completed within four months and the Consulting
Company will be available to perform services hereunder for approximately
twenty-five (25) hours per week (the Consulting Company staff will provide
consulting services at the Company site two days per week on average). A
retainer of $30,000.00 will be paid upon the execution of this Agreement and
repeated within one week after each 100 hour segment of invoiced services have
been billed. The Company will reimburse the Consulting Company for lodging, meal
and transportation expenses related to this project. Any monies remaining from
the last retainer, once the final invoice is submitted, will be returned to the
Company at the termination of this Agreement.


                                   SCHEDULE B


         INVENTIONS MADE PRIOR TO THIS AGREEMENT AND EXCLUDED FROM
PARAGRAPH 6(e):



                                      NONE

EX-10.02

                                                                EXHIBIT 10.02

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED,
PLEDGED OR OTHERWISE DISTRIBUTED UNLESS REGISTERED UNDER THE SECURITIES ACT OF
1933 AND APPLICABLE STATE SECURITIES LAWS OR SUCH SALE, TRANSFER, ASSIGNMENT,
OFFER, PLEDGE OR OTHER DISTRIBUTION FOR VALUE IS EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF SUCH ACT AND SUCH LAWS.





                                 PROMISSORY NOTE





$3,250,000.00                                                 December 20, 2001
                                                        Buffalo Grove, Illinois



         FOR VALUE RECEIVED, AKORN, INC., a Louisiana corporation ("Borrower"),
promises to pay to the order of NEOPHARM, INC., a Delaware corporation
("NeoPharm," together with any person or entity to whom all or any portion of
this Note may be transferred being hereinafter referred to as "Lender"), at its
principal offices located at 150 Field Drive, Suite 195, Lake Forest, Illinois
60045, or at such other place as Lender may direct, the principal sum of THREE
MILLION TWO HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS ($3,250,000.00), and to
pay interest thereon in accordance with the terms hereof, on December 20, 2006
(the "Maturity Date").

         This Promissory Note (this "Note") has been executed in connection with
(a) that certain Processing Agreement, of even date herewith (the "Processing
Agreement"), between Lender and Borrower; and (b) that certain Subordination and
Intercreditor Agreement, of even date herewith (the "Subordination Agreement"),
between Borrower and John N. Kapoor, as Trustee under The John N. Kapoor Trust,
dated September 20, 1989, (the trustee and the trust, together, "Kapoor"), to
which reference is hereby made.


                                   ARTICLE 1
                                    INTEREST

         1.1 CALCULATION OF INTEREST RATE. Interest shall begin to accrue on the
date hereof in accordance with the terms of this Section 1.1 and shall be
compounded as of the first business day of each calendar quarter until all
principal and accrued interest is paid. Commencing on the date hereof, interest
shall accrue at a rate of 3.6% per annum. As of the first business day of each
calendar quarter (each, a "Change Date"), commencing on January 1, 2002, Lender
shall adjust the interest rate charged on all amounts of outstanding principal
and interest accrued during the previous calendar quarter to a rate which is
equal to the average return on all of


Lender's cash and readily tradable long- and short-term securities during such
previous calendar quarter; thereafter, interest shall accrue on the unpaid
outstanding principal and accrued interest at the most recently adjusted
interest rate until the next Change Date. Lender shall furnish to Borrower a
statement showing all such cash and securities and the return thereon for the
prior calendar quarter in support of each adjustment to the interest rate.
Interest shall be computed for the actual number of days elapsed on the basis of
a year consisting of 365 days, including the date the loan is made and excluding
the date the loan or any portion thereof is paid or prepaid.

         1.2 DEFAULT RATE. After an Event of Default, interest shall accrue and
be payable at a rate equal to (a) the interest rate calculated in accordance
with Section 1.1, plus (b) three percent (3%) (the "Default Rate").

                                   ARTICLE 2
                                    PAYMENTS

         2.1 REQUIRED REPAYMENT. Borrower shall pay all amounts of outstanding
principal and accrued but unpaid interest hereunder on the Maturity Date.
Borrower may prepay all outstanding principal and accrued but unpaid interest at
any time without penalty or premium.


         2.2 MANNER OF PAYMENTS. All payments made by Borrower hereunder shall
be made to Lender at its principal offices located at 150 Field Drive, Suite
195, Lake Forest, Illinois 60045, Attn: Chief Financial Officer or at such other
places as Lender may designate. All payments hereunder shall be made in
immediately available funds, and shall be applied first to accrued interest and
then to principal; however, if an Event of Default occurs, Lender may, in its
sole discretion, and in such order as it may choose, apply any payment to
interest, principal and/or lawful charges and expenses then accrued. All
payments shall be made without deduction for or on account of any present or
future taxes, duties or other charges levied or imposed on this Note or the
proceeds thereof by any government or political subdivision thereof, except as
required by law.


                                    ARTICLE 3
                        OPERATIONS/LYOPHILIZATION RAMP-UP

         3.1 USE OF PROCEEDS. Borrower agrees that the proceeds from the loan
evidenced by this Note shall be used solely (a) to achieve removal of all
warning letter sanctions pursuant to Form 483 or current Good Manufacturing
Practice regulations issued or imposed by the Food and Drug Administration
("FDA") with regard to Borrower's ability to handle and manufacture sterile
pharmaceuticals and provide lyophilization services; (b) to obtain FDA
validation for Borrower's operation of its facility located at 1222 West Grand
Avenue, Decatur, Illinois (the "Facility") to offer and provide lyophilization
services for the handling and manufacturing of sterile pharmaceuticals; (c) to
obtain any other required license, consent, permit or approval from the FDA or
any other governmental authority in the United States or its political
subdivisions as shall be required to establish operations at the Facility to
handle and manufacture sterile pharmaceuticals and provide lyophilization
services; (d) to establish operations at the Facility to provide lyophilization
services and to handle and manufacture sterile pharmaceuticals; and (e) to


                                       2


make any capital expenditure necessary to provide lyophilization services (the
items set forth in subsections (a), (b), (c), (d), and (e) collectively, the
"Lyophilization Ramp-Up").

         3.2 ADDITIONAL COSTS. Borrower shall be responsible for all costs
whatsoever related to the Lyophilization Ramp-Up in excess of the proceeds
hereunder and shall not require, request or demand additional amounts from
Lender to fund the Lyophilization Ramp-Up other than the amounts loaned by
Lender to Borrower or evidenced by this Note.

         3.3 JUNE 30, 2003. By June 30, 2003, Borrower shall (a) complete the
Lyophilization Ramp-Up; (b) maintain the continued removal of all warning letter
sanctions pursuant to Form 483 related to the Facility; and (c) be prepared to
immediately begin development of the procedures for manufacture of Lender's
products.

         3.4 CHANGE IN CONTROL. If Borrower experiences (a) a change in control
of greater than fifty percent (50%) of Borrower's voting securities or (b) a
change in control through a merger or the sale of all or substantially all of
Borrower's assets, then Lender may declare all amounts of principal and interest
under this Note immediately due and payable and/or terminate the Processing
Agreement.

                                    ARTICLE 4
                                 REPRESENTATIONS

         4.1 ORGANIZATION AND QUALIFICATION. Borrower is duly organized, validly
existing and in good standing under the laws of the State of Louisiana, its
state of incorporation. Borrower is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the failure to
receive or retain such qualification would have a material adverse effect on the
business, operations or financial condition of Borrower.

         4.2 CORPORATE AUTHORITY AND AUTHORIZATION. Borrower has all requisite
corporate, power, authority and legal right to execute and deliver and perform
its obligations under this Note and all of Borrower's obligations described
herein have been duly and validly authorized by all necessary corporate
proceedings on the part of Borrower.

         4.3 EXECUTION AND BINDING EFFECT. This Note has been or shall be duly
and validly executed and delivered by Borrower and this Note when executed and
delivered shall constitute the legal, valid and binding obligations of Borrower
enforceable in accordance with the terms hereof and thereof, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
receivership, moratorium or other laws affecting creditors' rights generally.

         4.4 ABSENCE OF CONFLICTS. The execution and delivery of this Note,
consummation of the transactions herein or Borrower's performance of or
compliance with the terms and conditions hereof or in the Processing Agreement
shall not (a) materially violate any applicable law or regulation; (b) conflict
with or result in a material breach of or a default under the certificate of
incorporation or bylaws of Borrower, or any agreement or instrument to which
Borrower is a party or by which Borrower or its properties is bound; or (c)
result in the creation or imposition of any lien upon any property (now owned or
hereafter acquired) of Borrower except as otherwise contemplated by this Note.


                                       3


         4.5 NO EVENT OF DEFAULT; COMPLIANCE WITH INSTRUMENTS CORPORATE
DOCUMENTS AND MATERIAL AGREEMENTS. As of the date hereof Borrower is not in
violation of any term of its certificate of incorporation and/or bylaws and
Borrower is not in violation of any term of its material agreements or
instruments including, without limitation, (a) that certain Amended and Restated
Credit Agreement, dated September 15, 1999, as most recently amended by that
certain Forbearance Agreement (the "Forbearance Agreement"), dated July 12, 2001
(the Amended and Restated Credit Agreement and the Forbearance Agreement,
together, the "Northern Trust Credit Facility"), among Borrower, Borrower's
wholly owned subsidiary, Akorn (New Jersey), Inc., an Illinois corporation and
the Northern Trust Company ("Northern Trust"); (b) that certain Junior Mortgage,
dated March 21, 2001 between Borrower and Northern Trust (the "Northern
Mortgage"); (c) two Mortgage Notes (together, the "Primary Mortgage"), each
dated April 27, 1997, by and between Borrower and Standard Mortgage Investors
("Standard Investors"); (d) that certain Master Equipment Lease Agreement No.
08197, dated December 9, 1999, as amended December 26, 2000 (the "Asset Lease"),
by and between Borrower and National City Leasing Corporation ("National City");
(e) that certain Convertible Bridge Loan and Warrant Agreement, dated July 12,
2001, by and between Borrower and the John N. Kapoor Trust, dated September 20,
1989 (the "Kapoor Loans"), or (f) any other material agreement or instrument to
which Borrower is a party or by which it or its properties is bound.

         4.6 LITIGATION. There is no pending action, suit or threatened
proceeding by or before any governmental authority against or affecting Borrower
which if adversely decided would have a material adverse effect on its financial
condition or on its ability to comply with its obligations herein, except those
disclosed on Exhibit A attached hereto.

         4.7 RIGHTS TO PROPERTY. Except for the security interests (a) granted
by Borrower to Northern Trust under the terms of the Northern Credit Facility
and the Northern Mortgage; (b) granted to Standard Investors under the terms of
the Primary Mortgage; and (c) retained by National City under the terms of the
Asset Lease, Borrower has good and marketable title to all personal and real
property purported to be owned by it.

         4.8 TAXES. All tax returns required to be filed by Borrower have been
properly prepared, executed and filed, and all taxes, assessments, fees and
other governmental charges levied upon Borrower or upon any of its properties,
incomes, sales or franchises which are shown to be due and payable thereon have
been paid, other than taxes or assessments the validity or amount of which
Borrower is contesting in good faith. The reserves and provisions for taxes on
the books of Borrower are adequate for all open years and for its current fiscal
period.

         4.9 FINANCIAL ACCOUNTING PRACTICES. Borrower and each of its
subsidiaries have made and kept books, records and accounts which, in reasonable
detail, accurately and fairly reflect their respective dealings or transactions
of or in relation to the plants, properties, business and affairs of the
Borrower and of each subsidiary, and Borrower shall keep, and cause each of its
subsidiaries to keep, proper books of account, in which full and correct entries
shall be made of all dealings or transactions of or in relation to the plants,
properties, business and affairs of the Borrower and of each subsidiary in
accordance with generally accepted accounting principles applied on a consistent
basis. The Borrower will at any and all times, upon the written request of the
Lender and at the Lender's expense, permit the Lender by its representatives to
inspect the plants and properties, books of account, records, reports and other
papers of the Borrower and of


                                       4


each subsidiary, and to take copies and extracts therefrom, and will afford and
procure a reasonable opportunity to make any such inspection.

         4.10 ACCURATE AND COMPLETE DISCLOSURE. To the best of Borrower's
knowledge, no representation made by Borrower under this Note and no statement
made by Borrower in any financial statement, report filed with the Securities
and Exchange Commission, certificate, exhibit or document furnished by Borrower
to Lender pursuant to or in connection with this Note is false or misleading as
of the date made in any material respect (including by omission of material
information necessary to make such representation, warranty or statement not
misleading). Lender has had adequate access to Borrower's management and
opportunity to conduct it own due diligence examination of the plants and
properties, books of account, records, reports and other papers of the Borrower
and each of its subsidiaries.

         4.11 OTHER INDEBTEDNESS. With the exception of (a) the Northern Credit
Facility together with the Northern Mortgage; (b) the Primary Mortgage; (c) the
Asset Lease; and (d) the Kapoor Loans, Borrower has no Indebtedness in excess of
$100,000.

         4.12 CAPITAL STOCK. All of the outstanding capital stock of Borrower
has been duly authorized and validly issued, and is non-assessable.

         4.13 ENVIRONMENTAL WARRANTIES. To the best of Borrower's knowledge,
Borrower and each of its subsidiaries is in substantial compliance with all
environmental laws, regulations, rules, ordinances, permits, orders, and other
requirements applicable to it, the operations of each or the real or personal
property owned, leased or operated by each, including without limitation, all
such laws governing employment, the generation, use, storage, disposal or
transportation of toxic or hazardous substances or wastes. Borrower has not
received notice of, and is not aware of, any violations or alleged violations,
or any liability or asserted liability, under any such environmental laws, with
respect to Borrower, its subsidiaries, or their respective businesses or
properties.

                                    ARTICLE 5
                                    COVENANTS

         Except as otherwise permitted under the Northern Trust Credit Facility
or consented to in writing by Northern Trust, Borrower covenants and agrees
that, without the prior written consent of Lender, from and after the date
hereof until all amounts of principal and interest hereunder are repaid and
discharged:

         5.1 INDEBTEDNESS. Borrower shall not create, incur, assume or permit to
exist any Indebtedness, after the date hereof except (a) deferred taxes; (b)
unfunded pension fund and other employee benefit plan obligations and
liabilities to the extent they are permitted to remain unfunded under applicable
law; (c) existing Indebtedness, which includes (i) amounts outstanding under the
Northern Credit Facility and any additional advances or borrowings under the
Northern Credit Facility in accordance with the terms thereof, (ii) the Primary
Mortgage, (iii) the Northern Mortgage and any additional advances or borrowings
under the Northern Mortgage, in accordance with the terms thereof, (iv) the
Asset Lease, (v) the Kapoor Loans, and (vi) the loans made by Lender evidenced
by this Note, or the refinancing of any of the documents or


                                       5


facilities set forth in subparagraphs (i) through (vi), the refinanced terms of
which shall in any event be on terms no less favorable to Borrower or Lender
than the terms of the Indebtedness being refinanced; (d) any financing secured
by any real estate owned by Borrower; and (e) the unsecured financing by a
seller of product lines to Borrower.

         "Indebtedness" shall mean (a) any obligation for the repayment of
borrowed money or, with respect to the purchase price of property, any payment
which is deferred six (6) months or more after the date of acquisition, but
excluding obligations to trade creditors incurred in the ordinary course of
business that are not overdue by more than six (6) months unless being contested
in good faith; (b) reimbursement and all other obligations with respect to
letters of credit, bankers' acceptances and surety bonds, whether or not
matured; (c) all obligations evidenced by notes, bonds, debentures or similar
instruments; (d) any obligation for the payment of money created or arising
under any conditional sale or other title retention agreement; (e) all capital
leases; and (f) any agreement to guarantee the indebtedness of a subsidiary of
Borrower or any other person or business entity.

         5.2 BUSINESS. Borrower shall not make any changes in its business
objectives, purposes or operations which could in any way adversely affect the
repayment of this Note or Borrower's ability to comply with its obligations
contained in the Processing Agreement.

         5.3 LIENS. Borrower shall not create, incur, assume or permit to exist
any Lien on or with respect to any of its properties or assets whether now owned
or hereafter acquired, except (a) presently existing or hereafter created Liens
in favor of Lender; (b) Liens created after the date hereof by conditional sale
or other title retention agreements (including, without limitation, capital
leases) or in connection with purchase money Indebtedness with respect to
properties acquired by Borrower in the ordinary course of business, involving
the incurrence of an aggregate amount of purchase money Indebtedness and capital
lease obligations of not more than $1,000,000 outstanding at any one time for
all such Liens (provided that such Liens attach only to the assets subject to
such purchase money Indebtedness and such Indebtedness is incurred within twenty
(20) days following such purchase and does not exceed 100% of the purchase price
of the subject assets); (c) Liens in connection with any financing secured by
any real estate owned by Borrower; and (d) Liens existing on the date hereof and
described in EXHIBIT A hereto.

         In addition, Borrower shall not become a party to any agreement, note,
indenture or instrument, or take any other action, which would prohibit the
creation of a Lien on any of its properties or other assets in favor of Lender,
as collateral for payment and satisfaction of the outstanding principal and
accrued interest under this Note, except operating leases, capital leases or
intellectual property licenses which prohibit liens upon the assets that are
subject thereto.

         "Lien" shall mean any mortgage or deed of trust, pledge, hypothecation,
assignment, deposit arrangement, lien, charge, claim, security interest,
easement or encumbrance, or preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever (including any lease
or title retention agreement, any financing lease having substantially the same
economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement perfecting a security interest under the Uniform
Commercial Code or comparable law of any jurisdiction).


                                       6


         5.4 CANCELLATION OF INDEBTEDNESS. Borrower shall not cancel any claim
or debt owing to it, except for reasonable consideration negotiated on an
arm's-length basis and in the ordinary course of its business consistent with
past practices.

                                    ARTICLE 6
                     EVENTS OF DEFAULT: RIGHTS AND REMEDIES

         6.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following events (regardless of the reason therefor) shall constitute an "Event
of Default" hereunder: (a) Borrower shall fail to make any payment of principal
of, or interest on, or any other amount owing in respect of this Note when due
and payable; (b) Borrower shall fail to pay any costs or expenses payable or
reimbursable by Borrower under this Note, and such failure shall have remained
unremedied for a period of thirty (30) days or more; (c) Borrower shall fail or
neglect to perform, keep or observe any of the provisions of this Note (and not
constituting an Event of Default under any of the other subsections of this
Section 6.1) and such failure shall have remained unremedied for a period of
thirty (30) days or more; (d) Borrower shall fail to perform, keep or observe
any provision of the Processing Agreement after the grace period (if any) set
forth therein or the Processing Agreement shall not be effective on or before
June 30, 2003; (e) a default or breach that is not waived in writing shall occur
under the Northern Credit Facility, The Northern Mortgage, the Primary Mortgage,
the Asset Lease or the Kapoor Loans; (f) a default under any agreement, document
or instrument, excluding those specified in subsection 6.1(e), to which Borrower
is a party and such default is not cured or waived within any applicable grace
period and such default or breach (i) involves the failure to make any payment
when due in respect of any Indebtedness of Borrower or any subsidiary of
Borrower in excess of $50,000 in the aggregate, or (ii) causes such Indebtedness
or a portion thereof in excess of $100,000 in the aggregate to become due prior
to its stated maturity or prior to its regularly scheduled dates of payment, or
(iii) entitles any holder of such Indebtedness to cause such Indebtedness or a
portion thereof in excess of $100,000 in the aggregate to become due prior to
its stated maturity or prior to its regularly scheduled dates of payment,
regardless of whether such right is exercised or waived by such holder or
trustee; (g) The Forbearance Agreement expires, unless the same expires without
Borrower being in breach or default thereof; (h) Kapoor breaches or repudiates
or attempts to breach or repudiate, the Subordination Agreement or the
Subordination Agreement is terminated by operation of its terms or operation of
law; (i) any representation or warranty herein or in any written statement,
report filed with the Securities and Exchange Commission, financial statement or
certificate made or delivered to Lender by Borrower shall be untrue or incorrect
in any material respect, as of the date when made or deemed made; (j) assets of
Borrower or any subsidiary thereof with a fair market value of $100,000 or more
shall be attached, seized, levied upon or subjected to a writ or distress
warrant, or come within the possession of any receiver, trustee, custodian or
assignee for the benefit of creditors of Borrower or any subsidiary thereof and
such condition shall continue for thirty (30) days or more; (k) a case or
proceeding shall have been commenced against Borrower or any subsidiary thereof
in a court having competent jurisdiction seeking a decree or order in respect of
Borrower or any subsidiary thereof (i) under Title 11 of the United States Code,
as now constituted or hereafter amended or any other applicable federal, state
or foreign bankruptcy or other similar law, (ii) appointing a custodian,
receiver, liquidator, assignee, trustee or sequestrator (or similar official)
for Borrower or any subsidiary thereof or of any substantial part of the assets
thereof, or (iii) ordering the winding-up or liquidation of the affairs of
Borrower or any subsidiary thereof and


                                       7


such case or proceeding shall remain undismissed or unstayed for forty-five (45)
days or more or such court shall enter a decree or order granting the relief
sought in such case or proceeding; (l) Borrower or any subsidiary thereof shall
(i) file a petition seeking relief under Title 11 of the United States Code, as
now constituted or hereafter amended, or any other applicable federal, State or
foreign bankruptcy or other similar law, (ii) consent to the institution of
proceedings thereunder or to the filing of any such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee or sequestrator (or similar official) of Borrower or any
subsidiary thereof or of any substantial part of its respective assets, (iii)
make an assignment for the benefit of creditors, or (iv) take any corporate
action in furtherance of any such action; or (m) a final judgment or judgments
for the payment of money in excess of $250,000 in the aggregate shall be
rendered against Borrower or any subsidiary thereof and the same shall not (i)
be fully covered by insurance, or (ii) within thirty (30) days after the entry
thereof, have been discharged or execution thereof stayed pending appeal, or
shall not have been paid or otherwise discharged prior to the expiration of any
such stay.

         6.2 REMEDIES. If any Event of Default shall have occurred and be
continuing (a) all of the outstanding principal and accrued and unpaid interest
under this Note shall be immediately due and payable without presentment,
demand, protest or further notice of any kind, all of which are expressly waived
by Borrower; (b) the rate of interest applicable to this Note shall be increased
to the Default Rate; and (c) Borrower may exercise any rights and remedies
provided to Lender under this Note and/or at law or equity.

         6.3 WAIVERS BY BORROWER. Except as otherwise provided for in this Note
or by applicable law, Borrower waives presentment, demand and protest and notice
of presentment, dishonor, notice of intent to accelerate, notice of
acceleration, protest, default, nonpayment, maturity, release, compromise,
settlement, extension or renewal of any or all commercial paper, accounts,
contract rights, documents, instruments, chattel paper and guaranties at any
time held by Lender on which Borrower may in any way be liable, and hereby
ratifies and confirms whatever Lender may do in this regard. Borrower
acknowledges that it has been advised by counsel of its choice with respect to
this Note and the transactions evidenced by this Note.

                                    ARTICLE 7
                             SUCCESSORS AND ASSIGNS

         This Note shall be binding on and shall inure to the benefit of
Borrower and Lender and their respective successors and assigns, except as
otherwise provided herein. Borrower may not assign, transfer, hypothecate or
otherwise convey its rights, benefits, obligations or duties hereunder without
the prior express written consent of Lender. Any such purported assignment,
transfer, hypothecation or other conveyance by Borrower without the prior
express written consent of Lender shall be void. The terms and provisions of
this Note are for the purpose of defining the relative rights and obligations of
Borrower and Lender with respect to the transactions contemplated hereby and
there shall be no third party beneficiaries of any of the terms and provisions
of this Note.


                                       8


                                    ARTICLE 8
                                  SUBORDINATION

         Anything in this Note to the contrary notwithstanding, the Indebtedness
evidenced by this Note, both principal and interest, and the right to seek
enforcement of any of the rights granted to Lender herein, shall be subordinate
and junior to all obligations of Borrower incurred under the Northern Credit
Facility, between Borrower and Northern Trust.

                                    ARTICLE 9
                                     NOTICES

         All notices, requests, demands and payments of principal and interest
given to or made under this Note shall, except as otherwise specified in this
Note, be in writing and shall be effective upon the earlier of (a) receipt or
(b) the fifth (5th) day following the date such notice was mailed properly
addressed, first class, registered or certified mail, return receipt requested,
postage prepaid, to the other party at the following addresses (which may be
changed at any time by notice under this Article 9):

        If to NeoPharm, Inc.
                                   150 Field Drive, Suite 195
                                   Lake Forest, Illinois 60045
                                   Facsimile No.:  (847) 295-8854
                                   Attn:  James Hussey

        With a copy to:
                                   Ross & Hardies
                                   150 North Michigan Avenue
                                   Chicago, Illinois  60601-7567
                                   Facsimile No.:  (312) 750-8600
                                   Attn:  Scott Becker

        If to Akorn, Inc.
                                   Akorn, Inc.
                                   2500 Millbrook Drive
                                   Buffalo Grove, IL 60089-4694
                                   Facsimile No.    (847) 279-6123
                                   Attn:  Antonio Pera

        With a copy to:
                                   Tressler, Soderstrom, Maloney
                                            & Priess
                                   2100 Manchester Road, Suite 950
                                   Wheaton, Illinois
                                   Facsimile No.:  (630) 668-3003
                                   Attn:  William A. Kindorf, III


                                       9


                                   ARTICLE 10
                      GOVERNING LAW & WAIVER OF JURY TRIAL

         This Note and any document or instrument executed in connection
herewith shall be governed by and construed in accordance with the internal law
of the State of Illinois, and shall be deemed to have been executed in the State
of Illinois. Unless the context requires otherwise, wherever used herein the
singular shall include the plural and vice versa, and the use of one gender
shall also denote the other. Captions herein are for convenience of reference
only and shall not define or limit any of the terms or provisions hereof;
references herein to Articles or provisions without reference to the document in
which they are contained are references to this Note. This Note shall bind
Borrower, its trustees (including without limitation successor and replacement
trustees), successors and assigns, and shall inure to the benefit of Lender, its
successors and assigns, except that Borrower may not transfer or assign any of
its rights or interest hereunder without the prior written consent of Lender.

         BORROWER HEREBY IRREVOCABLY AGREES THAT, SUBJECT TO LENDER'S SOLE AND
ABSOLUTE ELECTION, ALL SUITS, ACTIONS OR OTHER PROCEEDINGS WITH RESPECT TO,
ARISING OUT OF OR IN CONNECTION WITH THIS NOTE OR ANY DOCUMENT OR INSTRUMENT
EXECUTED IN CONNECTION HEREWITH SHALL BE SUBJECT TO LITIGATION IN COURTS HAVING
SITUS WITHIN OR JURISDICTION OVER COOK COUNTY, ILLINOIS. BORROWER HEREBY
CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT
LOCATED IN OR HAVING JURISDICTION OVER SUCH COUNTY, AND HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE TO REQUEST OR DEMAND TRIAL BY JURY, TO TRANSFER OR
CHANGE THE VENUE OF ANY SUIT, ACTION OR OTHER PROCEEDING BROUGHT BY LENDER IN
ACCORDANCE WITH THIS PARAGRAPH, OR TO CLAIM THAT ANY SUCH PROCEEDING HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM.


                                   ARTICLE 11
                                  MISCELLANEOUS

         11.1 CONSTRUCTION. Wherever possible, each provision of this Note shall
be interpreted in such a manner as to be effective and valid under applicable
law, but if any provision of this Note is prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity without invalidating the remainder of such provision
or the remaining provisions of this Note.

         11.2 AMENDMENTS. This Note may not be and shall not be deemed or
construed to have been modified, amended, rescinded, canceled, or waived in
whole or in part, except by written instruments signed by Borrower and Lender.

         11.3 NO WAIVER. Lender's failure at any time or times, to require
strict performance by Borrower of any provision of this Note or Promissory
Agreement shall not waive, affect or diminish any right of Lender thereafter to
demand strict compliance and performance therewith. Any suspension or waiver of
an Event of Default under this Note or Promissory Agreement shall


                                       10


not suspend, waive or affect any other Event of Default under this Note or
Promissory Agreement whether the same is prior or subsequent thereto and whether
of the same or of a different type. None of the undertakings, agreements,
warranties, covenants and representations of Borrower contained in this Note or
Promissory Agreement and no Event of Default by Borrower under this Note or
Promissory Agreement shall be deemed to have been suspended or waived by Lender
unless such waiver or suspension is by an instrument in writing signed by an
officer of or other authorized employee of Lender and directed to Borrower
specifying such suspension or waiver.


                                       11


         IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed
as of the day and year first above written.

                                             AKORN, INC.
                                             By:
                                                ----------------------------
                                             Its:
                                                 ---------------------------
Accepted:

NEOPHARM, INC.
By:
   ----------------------------
Its: President and Chief Executive Officer


Acknowledged:

THE NORTHERN TRUST COMPANY
By:
Its:


                                       12

EX-10.03

                                                                 EXHIBIT 10.03

                              PROCESSING AGREEMENT

         THIS PROCESSING AGREEMENT (the "Agreement") is made and entered into
this 20th day of December, 2001, between Akorn, Inc., a Louisiana Corporation
("Akorn") and NeoPharm, Inc., a Delaware Corporation ("NeoPharm").

         WHEREAS, NeoPharm is a pharmaceutical company which has developed
certain chemotherapeutic agents (the "Products");

         WHEREAS, Akorn owns and operates a lyophilization facility located at
1222 West Grand Avenue, Decatur, Illinois (the "Facility") and has the ability
and capacity to process and finish pharmaceutical products; and

         WHEREAS, NeoPharm desires to contract with Akorn to process and finish
the Products at the Facility, and Akorn desires to provide such services, on the
terms and conditions set forth herein

         NOW, THEREFORE, in consideration of the mutual covenants and promises
set forth herein, the parties agree as follows:


                                   ARTICLE I
                    PROCESSING ESTIMATE/DELIVERY OF PRODUCTS

         Section 1.1. PROCESSING ESTIMATE. At least thirty (30) days prior to
the Effective Date (as defined herein), and at least thirty (30) days prior to
the commencement of each twelve (12) month period thereafter, NeoPharm shall
deliver to Akorn its good faith estimate (the "Estimate") of the quantity of
Products to be Processed (as defined herein) by Akorn hereunder for the upcoming
twelve (12) month period. Such estimate shall be non-binding, and NeoPharm shall
update the Estimate quarterly based upon its expected Processing needs. Akorn
agrees to allocate to the Processing of NeoPharm's Products no less than fifteen
percent (15%) of the Facility's Processing capacity during every twelve (12)
month period during the Term of this Agreement; the actual allocation of the
Facility's capacity to NeoPharm for such period shall be agreed upon by the
parties and is referred to herein as the "Processing Maximum". Processing
Capacity shall be measured in terms of hours usage of the Facility. NeoPharm
shall have the right to audit Akorn's books and records to ascertain compliance
with this Section 1.1.

         Section 1.2. PURCHASE ORDERS. From time to time, NeoPharm shall provide
Akorn with a purchase order (the "Purchase Order") which shall set forth the
Product to be Processed and the quantity of Bulk Product to be Processed by
Akorn (the "Batch"). Akorn shall provide NeoPharm with written acceptance of the
Purchase Order, which acceptance shall set forth the date the Processing Run (as
defined herein) for the Batch covered by such Purchase Order shall commence (the
"Processing Run Commencement Date"). Akorn agrees that the Pocessing Run
Commencement Date shall be no later than fourteen (14) days after Akorn's
receipt of the


Purchase Order. Akorn shall use its best efforts to accommodate NeoPharm's
request to amend a Purchase order to modify the size of a Batch to be Processed.

         Section 1.3. ESTIMATED YIELD. Upon Akorn's acceptance of a Purchase
Order, Akorn shall calculate the estimated Final Product to be manufactured
(the "Estimated Yield") from the Batch that is the subject of the Purchase
Order. The Estimated Yield factor to be applied to each Purchase Order shall
be based upon the optimum yield determined from the first (3) Processing Runs
of a particular Product. Such determination and each such Processing Run
shall be performed and conducted in the presence of a NeoPharm
representative. In the event NeoPharm disagrees with Akorn's Estimated Yield,
the Parties shall in good faith agree upon a third party to review the data
Akorn utilized to calculate the Estimated Yield. The findings of such third
party shall be binding on both parties. In the event that the actual yield of
any Batch is less than ninety-five percent (95%) of the Estimated Yield,
NeoPharm shall be entitled to an investigation of the reason(s) for the
reduced yield of the Batch, and NeoPharm shall be entitled to an equitable
reduction (the "Yield Credit") in the Processing Fee (as defined herein).

         Section 1.4. DELIVERY OF BULK PRODUCTS. At least fifteen (15)
business days prior to each Processing Run Commencement Date, NeoPharm shall
deliver to Akorn sufficient amounts of Bulk Product for such Processing Run
along with any applicable vial labeling materials. For purposes of this
Agreement, Bulk Product shall mean formulated solutions of the Products.
NeoPharm warrants that all Bulk Product provided hereunder shall meet all
applicable specifications and shall have been produced in compliance with
applicable federal, state and local laws and regulations, including, without
limitation, the Good Manufacturing Practices Regulations ("GMPs") of the
United States Food and Drug Administration ("FDA"), 21 C.F.R. part 211, in
effect at the time of Processing. In connection with the delivery of Bulk
Product, NeoPharm shall provide Akorn with written certification of the
sterility of Bulk Product.

         Section 1.5. OWNERSHIP/RISK OF LOSS. NeoPharm shall own all Bulk
Product delivered by NeoPharm and all Finished Product (as defined herein)
Processed by Akorn and, except in a case giving rise to Akorn's
indemnification responsibilities hereunder, NeoPharm shall bear the risk of
loss with respect to such materials.

                                   ARTICLE II
                           PROCESSING OF BULK PRODUCTS

         Section 2.1. PROCESSING OBLIGATIONS. Commencing with each Processing
Run Commencement Date, Akorn shall Process the Bulk Product corresponding to
the applicable Purchase Order in accordance with the terms of this Article II
(each a "Processing Run"). For purposes of this Agreement, "Processing" shall
mean filling into vials, lyophilizing, inspecting and packaging the Bulk
Product in order to produce finished pharmaceutical dosage forms of the
Products (the "Finished Product"). The parameters (the "Processing
Parameters") under which Akorn shall Process the Bulk Product shall be
mutually agreed upon by the Parties at least thirty (30) days prior to the
Effective Date and shall be attached hereto as Schedule 2.1. Any amendments
and/or additions to the Processing Parameters or the equipment, test methods,

                                       2


specifications or any other requirement of this Agreement or with respect to the
operation of the Facility, must be mutually agreed to by the parties in writing
and shall be attached to Schedule 2.1. Notwithstanding the foregoing and in
addition to any supplemental parameters agreed to by the parties with respect to
a particular Processing Run, Akorn's Processing at a minimum shall consist of
the following components:

                  (a)      Preparation and retention of the master production
                           and control records required by the FDA for each
                           Product pursuant to 21 CFR 600.12 (the "Batch
                           Records") as approved by Akorn and NeoPharm.

                  (b)      Compliance with the applicable standards from the
                           USP-NF guidelines.

                  (c)      Furnishing vials, stoppers and seals for the Products
                           and conducting the appropriate inspection, testing
                           and release thereof.

                  (d)      Preparation and sterilization of vials and stoppers
                           in accordance with Akorn's Standard Procedures;

                  (e)      Aseptically filling vials within tolerance limits set
                           by NeoPharm and holding filled vials under specified
                           conditions which shall be provided by NeoPharm until
                           loaded in lyophilizer;

                  (f)      Aseptically stopping and sealing lyophilized product
                           vials.

                  (g)      Performance of Quality Control Testing of finished
                           dosage forms in accordance with NeoPharm's
                           specifications.

                  (h)      Inspection of the finished dosage form.

                  (i)      Storage of quarantined vials at mutually agreed upon
                           temperatures until instructed by NeoPharm to ship the
                           Finished Product.

                  (j)      Shipping of the Finished Product in accordance with
                           NeoPharm's specifications.

         Section 2.2. ADDITION OF OTHER PRODUCTS TO THE AGREEMENT. NeoPharm may
add additional pharmaceutical products to be Processed by Akorn. The parties
shall mutually agree upon any Processing Parameters and the Processing Fee for
such additional products.

         Section 2.3. REPRESENTATIONS AND WARRANTIES OF AKORN. Akorn agrees that
in performing the Processing services hereunder, it shall comply with applicable
GMPs and that it shall use its best efforts to maintain the Facility in such a
fashion as to be in compliance with all applicable federal, state and local
rules and regulations. Akorn agrees that it shall maintain all licenses and
permits required by any applicable federal, state or local agency, including but
not limited to the FDA, in order to operate the Facility and provide the
Processing services required hereunder. Without limiting the generality of the
foregoing, Akorn agrees that it will cause its


                                       3


employees and agents to follow all procedures developed and implemented in
connection with the removal of the warning letter sanctions pursuant to Form 483
or current GMP regulations issued or imposed by the FDA with regard to the
Facility. Akorn also agrees to store all manufacturing and laboratory records on
the site where the Processing is performed and to keep such records readily
available. Further, Akorn represents and warrants that it shall use its best
efforts to insure that all filtration, filling and lyophilization of the Product
by Akorn shall be done in an aseptic processing environment and in accordance
with the Processing Parameters.

         Section 2.4. FACILITIES INSPECTION. During the Term of this
Agreement, NeoPharm shall have the right, at its expense, to audit the
Facility for Akorn's compliance with GMPs and any other applicable laws.
NeoPharm agrees to provide Akorn with reasonable prior notice of the date of
such audit. In addition to the foregoing, NeoPharm shall have the right to
designate an individual to be at the Facility to monitor each Processing Run.
NeoPharm agrees that its employees or agents who inspect the Facility or who
are on site at the Facility during a Processing Run will comply with Akorn's
rules, regulations and GMPs.

         Section 2.5. AKORN OBLIGATION TO MEET REQUIREMENTS. Akorn agrees to
fulfill, in each twelve (12) month period during the Term of this Agreement
(as defined herein), all Purchase Orders placed by NeoPharm up to one hundred
percent (100%) of NeoPharm's most recently updated Estimate. Akorn shall use
reasonable efforts to supply any quantity ordered by NeoPharm of Product in
excess of the Estimate subject to Akorn's production scheduling capabilities
and commitments to other customers.

         Section 2.6. SUBCONTRACTING. Akorn shall not pass to a third party
any work entrusted to it under this Agreement without first obtaining
NeoPharm's written approval of such arrangements, which approval shall not be
unreasonably withheld.

         Section 2.7. QUALITY ASSURANCE DEPARTMENT. Akorn agrees that at all
times during the term of this Agreement, it shall maintain a quality
assurance department (the "Quality Assurance Department") for purposes of
monitoring the quality of Akorn's Processing hereunder and for purposes of
approving each Batch Processed hereunder. Akorn agrees that upon NeoPharm's
request, it shall provide NeoPharm with copies of the policies, procedures
and findings of the Quality Assurance Department.

                                  ARTICLE III
                              SHIPMENT AND STORAGE

         Section 3.1. STORAGE. Akorn shall store and handle the Bulk Product
and Finished Product as required by the Processing Parameters. Akorn shall
take such actions as are reasonably necessary to protect the Bulk Product and
Finished Product from damage and deterioration. Vials of Finished Product
will be stored at the recommended controlled temperature until shipped as
instructed by NeoPharm.

                                       4


         Section 3.2. RELEASE OF FINISHED PRODUCT. Upon Akorn's Quality
Assurance Department's written release of a Batch of Finished Product, Akorn
shall promptly ship the Finished Product to NeoPharm or, at NeoPharm's
discretion, warehouse Finished Product, in accordance with FDA and GMP
warehousing procedures, for a maximum of thirty (30) days at no cost, and
thereafter at charges to be mutually agreed upon, to the extent warehousing
space is available. Akorn shall provide NeoPharm with properly completed Batch
Records, prepared in conformance with the Processing Parameters, within five (5)
days following Akorn's written release of such Batch but, in no event more than
four (4) weeks from the date the Processing Run is completed (i.e., the date the
filling or lyophilization is completed).

         Section 3.3. TRANSFER OF FINISHED PRODUCT TO NEOPHARM. Finished Product
shall be shipped to NeoPharm in accordance with NeoPharm's written instructions.
Unless otherwise agreed to in writing by the Parties, there shall be only one
shipment per Batch of Finished Product. NeoPharm shall be responsible for all
costs associated with the shipment of Finished Product

         Section 3.4. REJECTION. NeoPharm may reject any Batch of Finished
Product failing to meet any of the Processing Parameters by providing Akorn with
written notice of such rejection (the "Rejection") within sixty (60) days
following NeoPharm's receipt of the applicable Batch Records and written notice
from Akorn stating that Akorn's Quality Assurance Department has approved the
Batch. Any rejection by NeoPharm pursuant to this Section 3.4 shall be
accompanied by a report of analysis, including a product sample from the Batch
analyzed. NeoPharm's failure to reject a Batch of Finished Product in the manner
set forth above shall constitute acceptance thereof except to the extent that
any defect in the Batch was not discovered by NeoPharm after exercising due
diligence and using customary testing procedures accepted in the industry and
provided that NeoPharm notifies Akorn of any such defect within a reasonable
time after NeoPharm discovers or should have discovered the defect and before
any substantial change in the condition of the Batch which is not caused by such
defect. In the event Akorn accepts NeoPharm's Rejection, NeoPharm shall be
entitled to a credit against the Processing Fee (the "Rejection Credit") equal
to the Processing Fee for such Batch and the cost, not to exceed $25,000, of
NeoPharm's Bulk Product. In the event the Parties can not agree upon whether the
Rejection was justified, the Parties shall mutually agree upon a third party to
test samples of such Batch and to review records and test data and other
relevant information developed by both parties relating thereto to ascertain
whether the Batch was manufactured in accordance with the Processing Parameters.
The findings of such third party shall be binding on both parties. If the third
party determines that the Batch was manufactured in accordance with the
Processing Parameters, NeoPharm shall be deemed to have accepted the affected
Batch. If the third party determines that the Batch was not manufactured in
accordance with the Processing Parameters, NeoPharm shall be entitled to the
Rejection Credit. The Parties shall share the costs of any such third party
testing. In the event a Batch was properly Rejected, Akorn agrees that NeoPharm
shall be entitled to a replacement Processing Run, regardless of whether such
replacement Processing Run will cause NeoPharm to exceed the Processing Maximum.


                                       5


                                   ARTICLE IV
                              PRICE OF MANUFACTURE

         Section 4.1. PRICE. In consideration of the Processing provided by
Akorn hereunder, NeoPharm agrees to pay Akorn a processing fee (the "Processing
Fee"), as modified by the Yield Credit or the Rejection Credit, if applicable.
The Processing Fee shall be mutually agreed upon by the Parties at least thirty
(30) days prior to the Effective Date based upon the Processing Parameters for
each Product, after a trial run if necessary, and shall be attached hereto as
Schedule 4.1.

         Section 4.2. MOST FAVORED PRICING. Akorn agrees that the Processing Fee
charged to NeoPharm hereunder shall be no higher than the lowest fee charged by
Akorn to any customers with similar processing requirements for Processing at
the Facility, regardless of any discounts afforded to such other customers.
NeoPharm shall have the right to audit Akorn's books and records to ascertain
compliance with this Section 4.2.

                                  ARTICLE V
                            TERM AND TERMINATION

         Section 5.1. TERM. This Agreement shall have an initial term (the
"Initial Term") commencing on the date the warning letter sanctions imposed
by the FDA pursuant to Form 483 or current GMP regulations on Akorn and/or
the Facility have been removed (the "Effective Date") and ending on THE LATER
OF (i) the fifth (5th) anniversary of the Effective Date, or (ii) two (2)
years after the date on which Akorn pays all amounts of principal and accrued
interest under that certain Promissory Note (the "Note"), dated December 20,
2001, issued by Akorn to NeoPharm in exchange for a loan in principal amount
of Three Million Two Hundred Fifty Thousand Dollars ($3,250,000) plus
interest. This Agreement will automatically extend for two additional,
five-year terms (each, an "Additional Term") beyond the Initial Term,
provided, however, that either NeoPharm or Akorn may terminate this Agreement
at the end of the Initial Term or an Additional Term, as the case may be, by
sending a termination notice ninety (90) days prior to the end of such
Initial Term or Additional Term. Notwithstanding the foregoing, in the event
the warning letter sanctions pursuant to Form 483 or current GMP regulations
have not been removed by June 30, 2003 or in the event the Akorn has not
received validation from the FDA with respect to Processing NeoPharm's
Products by such date, NeoPharm may terminate this Agreement upon written
notice to Akorn.

         Section 5.2. VOLUNTARY TERMINATION. NeoPharm or Akorn may terminate
this Agreement for any reason, provided that the terminating party first serves
written notice of such termination on the other party no later than one hundred
eighty (180) days prior to the date of such termination. Notwithstanding the
foregoing, Akorn shall not have the right to voluntarily terminate this
Agreement until the Note has been paid in full and for two (2) years thereafter.

         Section 5.3. TERMINATION FOR MATERIAL BREACH. Either party may
terminate this Agreement in the event of a material breach by the other,
provided that the party asserting such


                                       6


breach first serves written notice of the alleged breach on the offending party
and such alleged breach is not cured within thirty (30) days of the offending
party's receipt of such notice.

         Section 5.4. TERMINATION FOR REJECTED FINISHED PRODUCTS. NeoPharm may
terminate this Agreement upon written notice to Akorn in the event NeoPharm
property rejects three (3) consecutive Batches of Finished Product or six (6)
Batches of Finished Product within a two (2) month period.

         Section 5.5. TERMINATION FOR INSOLVENCY. In the event that either party
shall admit in writing that it can not pay its debts, or shall suspend its
business, or shall file a voluntary petition or any answer admitting the
jurisdiction of the court and the material allegations of, or shall consent to,
an involuntary petition pursuant to or purporting to be pursuant to any
reorganization or insolvency law of any jurisdiction, or shall make an
assignment for the benefit of creditors, or shall apply for or consent to the
appointment of a receiver or trustee of all or a substantial part of its
property (such party, upon the occurrence of any such event, a "Bankrupt
Party"), then, to the extent permitted by the law, the other party hereto may
thereafter immediately terminate this Agreement by giving notice of termination
to the Bankrupt Party.

         Section 5.6. EFFECT OF EXPIRATION OR TERMINATION. Upon termination or
expiration of this Agreement, neither party shall have any further obligations
to the other party except for those obligations which accrued prior to the date
of termination or those obligations which are intended to survive the
termination or expiration of this Agreement.

         Section 5.7. AKORN OBLIGATIONS UPON EXPIRATION OR TERMINATION. Upon the
expiration of this Agreement or its earlier termination, Akorn shall, at the
request of NeoPharm and at NeoPharm's expense, return or dispose of all Bulk
Product or Finished Product to NeoPharm or to a third party pursuant to the
instructions of NeoPharm.



                                   ARTICLE VI
                                 INDEMNIFICATION

         Section 6.1. AKORN INDEMNITY. Akorn agrees to indemnify, protect and
defend NeoPharm and hold NeoPharm harmless from and against any claims, damages,
liability, harm, loss, costs, penalties, lawsuits, threats of lawsuit, recalls
or other governmental action, including reasonable attorneys' fees, brought or
claimed by any third party which (i) arise as the result of Akorn's breach of
this Agreement or of any warranty or representation made to NeoPharm under this
Agreement; or (ii) which result from any claim made against NeoPharm in
connection with Akorn's manufacture of defective Finished Product for NeoPharm.
Upon the filing of any such legal claim or lawsuit against NeoPharm, NeoPharm
shall promptly notify Akorn, in writing, of any such claim and Akorn shall, at
its expense, with attorneys reasonably acceptable to NeoPharm, handle, defend
and control such claim or lawsuit. Failure to notify Akorn promptly of the
commencement of any such action, if prejudicial to the ability to defend such
action, shall


                                       7


relieve Akorn of any liability to NeoPharm under this Section 6.1. NeoPharm
shall have the right to participate in the defense of such action at its expense
with counsel of its choosing.

         Section 6.2. NEOPHARM INDEMNITY. NeoPharm agrees to indemnify, protect
and defend Akorn and hold Akorn harmless from and against any claims, damages,
liabilities, harm, loss, costs, penalties, lawsuits, threats of lawsuit, recalls
or other governmental action, including reasonable attorneys' fees, brought or
claimed by any third party, which (i) arise out of NeoPharm's breach of this
Agreement or of any warranty or representation to Akorn under this Agreement; or
(ii) result from the negligent acts or willful malfeasance on the part of
NeoPharm or employees or agents, in connection with NeoPharm's sale, marketing
or distribution of Product manufactured by Akorn or other activities or actions
in connection with the Finished Product. Upon the filing of any such legal claim
or lawsuit against Akorn, Akorn shall promptly notify NeoPharm, in writing, of
any such claim and NeoPharm shall, at its expense, with attorneys reasonably
acceptable to Akorn, handle, defend and control such claim or lawsuit. Failure
to notify NeoPharm promptly of the commencement of any such action, if
prejudicial to the ability to defend such action, shall relieve NeoPharm of any
liability to Akorn under this Section 6.2. Akorn shall have the right to
participate in the defense of such action at its expense with counsel of its
choosing.



                                  ARTICLE VII
                             RIGHT OF FIRST REFUSAL

         Section 7.1. GRANT OF RIGHTS. Akorn agrees that in the event it
receives a bona fide third party offer (an "Offer") to acquire the Facility from
an unrelated third party (exclusive of an offer to acquire a controlling
interest in the outstanding shares of stock or substantially all of the assets
of Akorn), it shall provide NeoPharm with written notice of the terms and
conditions of such Offer.

         Section 7.2. RIGHT OF FIRST REFUSAL. Upon its receipt of the notice
contemplated by Section 7.1, NeoPharm shall have the right to acquire the
Facility on the same terms and conditions as are set forth in the Offer (or
their cash equivalent in the event the Offer contains consideration other than
cash). In order to exercise the foregoing right, NeoPharm must provide Akorn
written notice of its exercise within thirty (30) days of its receipt of the
written notice from Akorn.


                                  ARTICLE VIII
                                 CONFIDENTIALITY

         Section 8.1. CONFIDENTIAL INFORMATION. Each party (the "Receiving
Party") shall maintain in confidence all information heretofore or hereafter
disclosed by the other party (the "Disclosing Party") which such party knows or
has reason to know is a trade secret, and other proprietary information owned by
or licensed to the other party, including, but not limited to,


                                       8


information relating to the Product (including without limitation, information
developed in preclinical and clinical studies) and licenses, patents, patent
applications, technology or processes and business plans of the other party,
including, without limitation, information designated as confidential in writing
from one party to the other (all of the foregoing hereinafter referred to as
"Confidential Information") and shall not use such Confidential Information
except as permitted by this Agreement or disclose the same to anyone other than
those of its officers, directors or employees as are necessary in connection
with such party's activities as contemplated by this Agreement. Each party shall
use the same efforts as such party would use to protect its own information and
to ensure that its officers, directors and employees do not disclose or make any
unauthorized use of such Confidential Information. Each party shall notify the
other promptly upon discovery of any unauthorized use or disclosure of the other
party's Confidential Information.

         Section 8.2. LIMITATIONS ON CONFIDENTIALITY. The obligation of
confidentiality contained in this Article VIII shall not apply to the extent
that: i) the Receiving Party is required to disclose Confidential Information by
applicable law, regulation or order of a governmental agency or a court of
competent jurisdiction; ii) the Receiving Party can demonstrate that the
disclosed Confidential Information was, at the time of disclosure, already in
the public domain other than as a result of actions or failure to act of the
Receiving Party, its officers, directors or employees, in violation hereof; iii)
the disclosed Confidential Information was rightfully known by the Receiving
Party (as shown by its written records) prior to the date of disclosure to the
Receiving Party in connection with this Agreement; or iv) the disclosed
Confidential Information was received by the Receiving Party on an unrestricted
basis from a source which is not under a duty of confidentiality to the other
Party.

         Section 8.3. DISCLOSURE REQUIRED BY LAW. In the event that the
Receiving Party shall be required to make disclosure pursuant to the provisions
of Section 8.2 (i) as a result of the issuance of a court order or other
government process, the Receiving Party shall promptly, but in no event more
than forty-eight (48) hours after learning of such court order or other
government process, notify, by personal delivery or facsimile, all pursuant to
Section 9.4 hereof, the Disclosing Party and, at the Disclosing Party's expense,
the Receiving Party shall: a) take all reasonably necessary steps requested by
the Disclosing Party to defend against the enforcement of such court order or
other government process, and b) permit the Disclosing Party to intervene and
participate with counsel of its choice in any proceeding relating to the
enforcement thereof.

         Section 8.4. EQUITABLE REMEDIES FOR BREACH OF CONFIDENTIALITY. The
parties acknowledge that their failure to comply with the provisions of Section
8.1 may cause irreparable harm and damage to the name and reputation of the
other party for which no adequate remedy may be available at law. Accordingly,
the parties agree that upon a breach by a party of such provisions, the
non-breaching party may, at its option, enforce the obligations of the breaching
party under those provisions by seeking equitable remedies in a court of
competent jurisdiction.


                                       9


                                   ARTICLE IX
                                  MISCELLANEOUS

         Section 9.1. FORCE MAJEURE. Neither of the parties to this Agreement
shall be liable to the other party for any loss, injury, delay, damage or other
casualty suffered or incurred by such other party due to strikes, lockouts,
accidents, fire, delays in manufacture, transportation or delivery of material,
embargoes, inability to ship, explosions, floods, war, governmental action or
any other cause similar thereto which is beyond the reasonable control of such
other party and any failure or delay by a party in the performance of any of its
obligations under this Agreement shall not be considered a breach of this
Agreement due to, but only so long as there exists, one or more of the foregoing
causes; provided, however, that if Akorn cannot complete a Processing Run within
ninety (90) days of the stated completion date due to any such cause, NeoPharm
may cancel the order without liability to Akorn.

         Section 9.2. STATUS OF THE PARTIES. This Agreement shall not be
construed to create between the parties hereto or their respective successors or
permitted assignees the relationship of principal and agent, joint venturers,
copartners or any other similar relationship, the existence of which is hereby
expressly denied by each party. Neither party shall be liable to any third party
in any way for engagement, obligation, contract, representation or transaction
or for any negligent act or omission to act of the other except as expressly
provided.

         Section 9.3. GOVERNING LAW. The provisions of this Agreement shall be
governed in all respects by the laws of the State of Illinois.

         Section 9.4. NOTICE. All notices, proposals, submissions, offers,
approvals, agreements, elections, consents, acceptances, waivers, reports,
plans, requests, instructions and other communications required or permitted to
be made or given hereunder (all of the foregoing hereinafter collectively
referred to as "Communications") shall be in writing and shall be deemed to have
been duly made or given when: a) delivered personally with receipt acknowledged;
b) sent by registered or certified mail or equivalent, return receipt requested;
c) sent by facsimile, cable or telex (which shall promptly be confirmed by a
writing sent by registered or certified mail or equivalent, return receipt
requested); or d) sent by recognized overnight courier for delivery within
twenty-four (24) hours, in each case addressed or sent to the parties at the
following addresses and facsimile numbers or to such other or additional address
or facsimile as any party shall hereafter specify by Communication to the other
parties:


                  To Akorn:         Akorn, Inc.
                                    2500 Millbrook Drive
                                    Buffalo Grove, Illinois 60089-4694
                                    Facsimile No. (847) 279-6123
                                    Attn: Antonio Pera

                  With a Copy to:   Tressler, Soderstrom, Maloney & Priess
                                    2100 Manchester Road, Suite 950


                                       10


                                    Wheaton, Illinois 60187
                                    Facsimile No.: (630) 668-3003
                                    Attn:  William A. Kindorf, III

                  To NeoPharm:      Neopharm, Inc.
                                    150 Field Drive, Illinois 60045
                                    Facsimile No.: (847) 295-8854
                                    Attn: James Hussey

                  With a Copy to:   Ross & Hardies
                                    150 North Michigan Avenue
                                    Chicago, Illinois 60601-7567
                                    Facsimile No.: (312) 750-8600
                                    Attn: Scott Becker

Notice of change of address shall be deemed given when actually received, all
other Communications shall be deemed to have been given, received and dated on
the earlier of: (i) when actually received or on the date when delivered
personally; (ii) one (1) day after being sent by facsimile, cable, telex (each
promptly confirmed by a writing as aforesaid) or overnight courier; or (iii)
four (4) business days after mailing (except that in the case of any
communication given to a person with an address outside the United States, then
ten (10) business days after mailing).

         Section 9.5. LEGAL CONSTRUCTION. In case any one or more of the
provisions contained in this Agreement shall be invalid or unenforceable in any
respect, the validity and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby, and the parties
will attempt to agree upon a valid and enforceable provision which shall be a
reasonable substitute for such invalid and unenforceable provision in light of
the tenor of this Agreement, and, upon so agreeing, shall incorporate such
substitute provision in this Agreement.

         Section 9.6. ENTIRE AGREEMENT, MODIFICATIONS, CONSENTS, WAIVERS. This
Agreement, together with the Schedules hereto, contains the entire agreement of
the parties with respect to the subject matter hereof. This Agreement may not be
modified or amended except by an instrument or instruments in writing signed by
the party against whom enforcement of any such modification or amendment is
sought. Each party hereto may, by an instrument in writing, waive compliance by
the other party hereto with any term or provision of this Agreement to be
performed or complied with by such other party. The waiver by either party
hereto of a breach of any term or provision of this Agreement shall not be
construed as a waiver of any subsequent breach. Neither anything in this
Agreement nor the execution or performance hereof shall be deemed to prejudice
in any way, and each party hereto expressly reserves, any and all rights,
remedies and claims which each party may now or hereafter have against or with
respect to the other party or any of such other party's Affiliates, relating to
any matter which is not expressly covered by this Agreement.


                                       11


         Section 9.7. SECTION HEADINGS; CONSTRUCTION. The section headings and
titles contained herein are each for reference only and shall not be deemed to
affect the meaning or interpretation of this agreement. The words "hereby",
"herein", "herein above", "hereinafter", "hereof" and "hereunder", when used
anywhere in this Agreement, refer to this Agreement as a whole and not merely to
a subdivision in which such words appear, unless the context otherwise requires.
The singular shall include the plural, the conjunctive shall include the
disjunctive and the masculine gender shall include the feminine and neuter, and
vice versa, unless the context otherwise requires.

         Section 9.8. EXECUTION COUNTERPARTS. This Agreement may be executed in
any number of counterparts and each such duplicate counterpart shall constitute
an original, any one of which may be introduced in evidence or used for any
other purpose without the production of its duplicate counterpart. Moreover,
notwithstanding that any of the parties did not execute the same counterpart,
each counterpart shall be deemed for all purposes to be an original, and all
such counterparts shall constitute one and the same instrument, binding on all
of the parties hereto.

         Section 9.9. BINDING EFFECT, ASSIGNMENT. Neither party may directly or
indirectly assign, delegate, encumber or in any other manner transfer any of its
rights, remedies, obligations, liabilities or interests in or arising under this
Agreement, without the prior consent of the other party, which consent shall not
be unreasonably withheld or delayed. Any attempted assignment, delegation,
encumbrance or other transfer in violation of this Agreement shall be void and
of no effect and shall be a material breach hereof. In the event Akorn sells the
Facility to a third party, Akorn agrees that it shall cause such third party to
agree in writing to assume Akorn's responsibilities hereunder.



                                 * * * * * * * *


         IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the day and year first written above.


AKORN, INC.                                          NEOPHARM, INC.

By:_______________________                  By:___________________________

Its:______________________                  Its:__________________________


                                       12

EX-10.04

                                                                EXHIBIT 10.04

                    SUBORDINATION AND INTERCREDITOR AGREEMENT


                  THIS SUBORDINATION AND INTERCREDITOR AGREEMENT (this
"Agreement") is made and entered into as of this 20th day of December, 2001, by
John N. Kapoor, as Trustee under THE JOHN N. KAPOOR TRUST, dated September 20,
1989 (the "Junior Party") and NEOPHARM, INC., a Delaware corporation (the
"Lender").

                                R E C I T A L S:

         A. The Lender and Akorn, Inc., a Louisiana corporation (the
"Borrower"), have entered into that certain Processing Agreement, of even date
herewith (the "Processing Agreement"), and, in connection therewith, Borrower
executed and delivered that certain Promissory Note, of even date herewith (the
"Promissory Note"), evidencing a loan made by Lender to Borrower, as of the date
hereof, in aggregate principal amount of THREE MILLION TWO HUNDRED FIFTY
THOUSAND DOLLARS (US$3,250,000.00), plus accrued but unpaid interest (the
"Lender Debt").

         B. On July 13, 2001, the Borrower and the Junior Party entered into
that certain Convertible Bridge Loan and Warrant Agreement (the "Junior
Agreement"), pursuant to which the Junior Party made certain loans to Borrower
in aggregate principal amount of FIVE MILLION AND 00/100 DOLLARS
($5,000,000.00), plus accrued interest thereon (the aforementioned loans,
accrued interest thereon and any other loans made by the Junior Party to the
Borrower (excluding any consulting fee, chairman's fee and expense
reimbursement, whether or not deferred, owed by Borrower to the Junior Party or
any entity controlled by the Junior Party), presently outstanding or made in the
future, to be collectively referred to as the "Junior Debt"). In connection with
the consummation of the Junior Agreement, the Junior Party entered into a
Subordination Agreement, of even date therewith, whereby the Junior Party agreed
to subordinate the Junior Debt to all outstanding debt owed by Borrower to The
Northern Trust Company ("Northern Trust"), Borrower's senior lender, under the
terms of an Amended and Restated Credit Agreement, as most recently amended by
that certain Forbearance Agreement, dated July 13, 2001, by and among Northern
Trust, the Borrower and the Borrower's wholly-owned subsidiary, Akorn (New
Jersey), Inc, an Illinois corporation.

         C. Lender was unwilling to enter into the Processing Agreement or
provide Borrower with the Lender Debt unless the Junior Party entered into this
Subordination and Intercreditor Agreement.

         NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, it is hereby agreed as follows:

         1. RECITALS. The Recitals of this Agreement are incorporated herein and
made a part hereof by this reference thereto.

         2. JUNIOR DEBT SUBORDINATE TO LENDER DEBT. The Junior Debt is hereby,
and shall continue to be, subject and subordinate in lien and in payment to the
lien and payment of the Lender Debt and any other document evidencing, securing
or guaranteeing the Lender Debt without regard to the application of such
proceeds together with all interest, late fees, default interest, future
principal advances and all other sums due under the Promissory Note. The


foregoing shall apply notwithstanding the actual date and time of execution,
delivery, recordation, filing or perfection of the Lender Debt or the Junior
Debt, or the lien or priority of payment thereof.

         Until all Lender Debt shall have been paid in full, the Junior Party
shall not, directly or indirectly, demand or accept from the Borrower nor cancel
or otherwise discharge all or any part of the Junior Debt, and the Junior Party
shall not otherwise take or permit any action prejudicial to or inconsistent
with the Lender's priority position over the Junior Party created by this
Agreement. Excluded from the provisions of this paragraph 2 are the conversion
rights under the Junior Debt of principal and interest to an equity interest in
Borrower.

         3. ALLOCATION OF COLLATERAL DURING BANKRUPTCY, ETC. In the event of (a)
any proceeding under the Bankruptcy Code or other applicable federal or state
insolvency law relative to the Borrower, or (b) any liquidation, dissolution or
other winding up of the Borrower, whether voluntary or involuntary and whether
or not involving insolvency or bankruptcy, or (c) any assignment for the benefit
of creditors or any other marshaling of assets and liabilities of the Borrower,
then and in any such event, the Lender shall be entitled to receive payment in
full in cash of all amounts due or to become due on or in respect of the Lender
Debt, and to that end the Lender shall be entitled to receive as collateral
therefor, any payment or distribution of any kind or character, whether in cash,
property or securities which may be payable or deliverable to the Junior Party
in such proceeding, dissolution, liquidation or other winding up or event until
the Lender Debt is fully repaid and discharged.

         In the event that, notwithstanding the foregoing provisions of this
Section 3, the Junior Party shall have received any cash or assets of any kind
from Borrower as payment for the Junior Debt or to secure, guarantee or
discharge all or any part of the Junior Debt before all Lender Debt is paid in
full, then and in such event such cash or assets shall be delivered forthwith to
the Lender or, if required by law, the trustee in bankruptcy, receiver,
custodian, assignee, agent or other person making payment or distribution of
assets of the Borrower as collateral for the Lender Debt remaining unpaid, to
the extent necessary to pay all the Lender Debt in full, after giving effect to
any concurrent payment or distribution to or for the Lender.

         4. CERTAIN MATTERS RELATING TO BANKRUPTCY. The Junior Party hereby
waives any objection it may have to the use of cash collateral or the financing
of the Borrower pursuant to either Section 363 or Section 364, including,
without limitation, Section 364(d), of the Bankruptcy Code. Notice of a proposed
financing or use of cash collateral shall be deemed given upon the sending of
such notice by telegraph, telecopy or hand delivery to the Junior Party at
address indicated on the signature page attached hereto. All allocations of
payments between the Lender and the Junior Party, subject to any court order,
continue to be made after the filing of a petition under the Bankruptcy Code on
the same basis that the payments were to be allocated prior to the date of such
filing. To the extent that the Lender receives payments on the Lender Debt which
are subsequently invalidated, declared to be fraudulent or preferential, set
aside and/or required to be repaid to a trustee, receiver or any other party
under any bankruptcy law, state or federal law, common law, or equitable cause,
then, to the extent of such payment or proceeds received, the Lender Debt, or
part thereof, intended to be satisfied shall be reinstated and continue in full
force and effect as if such payments or proceeds had not been received by the
Lender.


                                       2


         5. CONTINUING NATURE OF SUBORDINATION. This Agreement shall be
effective and may not be terminated or otherwise revoked by the Junior Party
until the Lender Debt shall have been fully repaid and discharged and all
financing arrangements between the Borrower and the Lender under the Promissory
Note as amended from time to time, have been terminated. If the Junior Party
shall have any right under applicable law to terminate or revoke this Agreement
which right cannot be waived, such termination or revocation shall not be
effective until written notice of such termination or revocation, signed by the
Junior Party, is delivered to the Lender pursuant to the provisions of Section
10, PROVIDED, HOWEVER, that no such notice of termination or revocation shall
affect or impair any of the agreements and obligations of the Junior Party
hereunder with respect to any and all Lender Debt existing prior to the time of
receipt of such notice by the Lender, any and all Lender Debt created or
acquired thereafter pursuant to any previous commitments made by the Lender
under the Promissory Note, any and all extensions or renewals of any of the
foregoing, any and all interest accruing on any of the foregoing, and any and
all expenses paid or incurred by the Lender in endeavoring to collect or realize
upon any of the foregoing; and all of the agreements and obligations of the
Junior Party under this Agreement shall, notwithstanding any such notice of
termination or revocation, remain fully in effect until such Lender Debt
(including any extensions or renewals thereof and all such interest and
expenses) shall have been paid in full.

         The Junior Party agrees that the Lender shall be entitled to manage and
supervise the Lender's loans to the Borrower in accordance with applicable law,
the terms of the Promissory Note and the Lender's usual practices, modified from
time to time as the Lender deems appropriate under the circumstances, without
regard to the existence of any rights that the Junior Party may now or hereafter
have and that the Lender shall have no liability to the Junior Party for, and
Junior Party hereby waives any claim which the Junior Party may now or hereafter
have against, the Lender arising out of any and all actions which the Lender, in
good faith, takes or omits to take with respect to the Promissory Note or any
other agreement related thereto or to the collection of the Lender Debt.

         6. INFORMATION CONCERNING FINANCIAL CONDITION OF THE BORROWER. The
Junior Party hereby assumes responsibility for keeping itself informed of the
financial condition of Borrower and of all other circumstances bearing upon the
risk of nonpayment of the Lender Debt that diligent inquiry would reveal, and
the Junior Party hereby agrees that the Lender shall have no duty to advise the
Junior Party of information known to the Lender regarding such condition or any
such circumstances except as set forth below.

         7. ASSIGNMENT; REFINANCING. The Junior Agreement and the rights and
obligations therein may be sold, assigned or transferred by the Junior Party to
an entity controlled by the Junior Party, to members of the immediate family of
the Junior Party, or to trusts, partnerships, S-corporations or other
beneficiaries of the Junior Party. In the event of such transfer, the assignee
shall become subject to the terms of this Agreement. Except for such transfers
described above, the Junior Party shall not sell, assign or otherwise transfer
any interest in the Junior Agreement without the prior written consent of the
Lender, which consent shall not be unreasonably withheld.

         8. COVENANTS AND ASSURANCES. The Junior Party shall (a) provide the
Lender with a copy of any and all notices of default, event of default or
acceleration which the Junior Party gives Borrower under or in connection with
the Junior Agreement or Junior Debt, which notices to the Lender shall be given
at the same time as the Junior Party gives such notices to the


                                       3


Borrower, and (b) upon the request of Lender, execute and deliver to the Lender
such other documents and assurances and do or cause to be done all such other
acts and things as may be reasonably required by the Lender in order to give
effect to this Agreement.

         The Lender shall provide the Junior Party with a copy of any and all
notices of default, events of default or acceleration which the Lender gives
Borrower under or in connection with the Lender Debt, which notices to the
Junior Party shall be given at the same time Lender gives such notices to the
Borrower.

         9. WAIVERS, ETC. No delay on the part of the Lender in its respective
exercise of any right or remedy shall operate as a waiver thereof, and no single
or partial exercise by the Lender of any right or remedy shall preclude other or
further exercise thereof or the exercise of any other right or remedy; nor shall
any modification or waiver of any of the provisions of this Agreement be binding
upon the Lender or Junior Party except as expressly set forth in a writing duly
signed and delivered on behalf of the Lender.

         10. NOTICES. Any notice or other communication to any party in
connection with this Agreement shall be in writing and shall be sent by manual
delivery, facsimile transmission, overnight courier or United States mail
certified mail, return receipt requested (postage prepaid) addressed to such
party at the address specified on the signature page hereof, or at such other
address as such party shall have specified to the other party hereto in writing.
All periods of notice shall be measured from the date of delivery thereof if
manually delivered, from the date of sending thereof if sent by facsimile
transmission, from the first business day after the date of sending if sent by
overnight courier, or from four days after the date of mailing if mailed;
provided, however, that any notice to the Lender shall be deemed to have been
given only when received by the Lender.

         11. GOVERNING LAW AND CONSTRUCTION. The validity, construction and
enforceability of this Agreement shall be governed by the internal laws of the
State of Illinois, without giving effect to conflict of laws principles thereof.

         12. CONSENT TO JURISDICTION. AT THE OPTION OF THE LENDER, THIS
AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR ILLINOIS STATE COURT SITTING
IN COOK COUNTY, ILLINOIS; AND THE BORROWER AND JUNIOR PARTY EACH CONSENT TO THE
JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVE ANY ARGUMENT THAT VENUE IN
SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE BORROWER OR JUNIOR PARTY
COMMENCE ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT
THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS
AGREEMENT, THE LENDER AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE
TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH
TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE
DISMISSED WITHOUT PREJUDICE.

         13. WAIVER OF JURY TRIAL. BORROWER AND JUNIOR PARTY IRREVOCABLY WAIVE
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT AND ANY


                                       4


OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

         14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the successors and assigns of Borrower, the Junior Party
and the Lender.

         15. MULTIPLE COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original and all of
which shall constitute one and the same instrument.


                                       5


         IN WITNESS WHEREOF, the parties hereto have executed, or caused this
agreement to be executed by the respective officers thereunto duly authorized,
as of the day and year first above written.

                       John N. Kapoor, as Trustee under
                       THE JOHN N. KAPOOR TRUST,
                       Dated September 20, 1989

                       By:
                          ----------------------------
                       Its:
                           ---------------------------

                       Address:
                               -----------------------

                       Fax No.:
                               -----------------------
                       Attn:             John Kapoor



                       NEOPHARM, INC., a Delaware corporation

                       By:
                          ----------------------------
                       Its:     President and Chief Executive Officer

                       Address: 150 Field Drive, Suite 195
                                Lake Forest, Illinois  60045
                                Attn:  President and Chief Executive Officer
                       Fax No.: (847) 295-8854

Acknowledged and Agreed by:

AKORN, INC., a Louisiana corporation

By:
   -----------------------
Its:

Address:          Akorn, Inc.
                  2500 Millbrook Drive
                  Buffalo Grove, IL 60089-4694
                  Facsimile No. (847) 279-6123
                  Attn:  Ben Pothast


                                       6

EX-10.05

                                                   EXHIBIT 10.05


          SUBORDINATION, STANDBY AND INTERCREDITOR AGREEMENT

      WHEREAS, AKORN, INC., a Louisiana corporation (hereinafter, together
with its successors and assigns, called "AKORN"), and AKORN (NEW JERSEY),
INC., an Illinois corporation ("AKORN NJ"; together with Akorn, the
"BORROWERS" and each individually a "BORROWER") may from time to time
hereafter become indebted to the undersigned NEOPHARM, INC., a Delaware
corporation (the "JUNIOR LENDER"), including, without limitation,
indebtedness under the Promissory Note referred to below, and the Borrowers
have requested, and may from time to time hereafter request, THE NORTHERN
TRUST COMPANY, an Illinois banking corporation (hereinafter, together with
its successors and assigns, called the "BANK"), 50 South LaSalle Street,
Chicago, Illinois 60675, to make or agree to make loans, advances or other
financial accommodations to the Borrowers pursuant to the terms of the Credit
Agreement (as hereinafter defined); and

      WHEREAS, the Borrowers and the Bank are party to that certain Amended and
Restated Credit Agreement dated as of September 15, 1999 (as amended, restated
or supplemented from time to time, the "CREDIT AGREEMENT"; capitalized terms not
otherwise defined herein shall have the same meanings herein as in the Credit
Agreement); and


      WHEREAS, Akorn intends to incur an indebtedness to the Junior Lender in
the principal amount of $3,250,000 pursuant to a Promissory Note (the
"SUBORDINATED NOTE"), in the form attached hereto as SCHEDULE A; and


      WHEREAS, the Junior Lender is a customer of Akorn and as such will benefit
from the continued making of loans, advances and other financial accommodations
from the Bank to the Borrowers;


      NOW, THEREFORE, to induce the Bank, from time to time, at its option, to
make or agree to make loans, advances or other financial accommodations
(including, without limitation, renewals or extensions of, or forbearances with
respect to, any loans or advances heretofore or hereafter made) to Borrowers,
and for other valuable consideration, receipt whereof is hereby acknowledged,
the Junior Lender agrees as follows:


      1. All obligations of each of the Borrowers, howsoever created, arising or
evidenced, whether direct or indirect, absolute or contingent or now or
hereafter existing, or due or to become due, are hereinafter called
"LIABILITIES". All Liabilities to the Bank (other than any arising solely by
reason of any pledge or assignment made to the Bank pursuant to paragraph 2(c)
hereof) are hereinafter called "SENIOR LIABILITIES"; and all Liabilities to the
Junior Lender, including under the Subordinated Note (including any that may be
pledged or assigned to the Bank pursuant to paragraph 2(c) hereof), other than
trade payables arising in the usual and ordinary course of business between the
Borrowers and the Junior Lender, are hereinafter called "JUNIOR LIABILITIES"; it
being expressly understood and agreed that



the term "Senior Liabilities", as used herein, shall include, without
limitation, any and all interest accruing on any of the Senior Liabilities after
the commencement of any proceedings referred to in paragraph 4 hereof,
notwithstanding any provision or rule of law which might restrict the rights of
the Bank, as against the Borrowers or anyone else, to collect such interest.


      2. The Junior Lender will, from time to time, (a) promptly notify the Bank
of the creation of any Junior Liabilities, and of the issuance of any promissory
note or other instrument to evidence any Junior Liabilities, (b) upon request by
the Bank, cause any Junior Liabilities which are not evidenced by a promissory
note or other instrument of either of the Borrowers to be so evidenced, and (c)
if an event of default on any of the Senior Liabilities has occurred and is
continuing beyond any applicable grace period, and if there is no written
forbearance agreement in effect between Akorn and the Bank relating to such
event of default, upon request by the Bank, and as collateral security for all
Senior Liabilities, indorse without recourse, deliver and pledge to the Bank any
or all promissory notes or other instruments evidencing Junior Liabilities, and
otherwise assign to the Bank any or all Junior Liabilities and any or all
security therefor and guaranties thereof, all in a manner satisfactory to the
Bank.


      3. Except as the Bank may hereafter otherwise expressly consent in
writing, which consent may be given or withheld by the Bank in its sole and
absolute discretion, the payment of all Junior Liabilities shall be postponed
and subordinated to the payment in full of all Senior Liabilities, and no
payments or other distributions whatsoever in respect of any Junior Liabilities
shall be made by either of the Borrowers, or accepted by the Junior Lender, nor
shall any property or assets of either of the Borrowers be applied by them, or
accepted by the Junior Lender, to or for the purchase or other acquisition or
retirement of any Junior Liabilities.


      4. In the event of any dissolution, winding up, liquidation, readjustment,
reorganization or other similar proceedings relating to any Borrower or its
creditors, as such, or to their property (whether voluntary or involuntary,
partial or complete, and whether in bankruptcy, insolvency or receivership, or
upon an assignment for the benefit of creditors, or any other marshalling of the
assets and liabilities of any Borrower, or any sale of all or substantially all
of the assets of any Borrower, or otherwise), the Senior Liabilities shall first
be paid in full before the Junior Lender shall be entitled to receive and to
retain any payment or distribution in respect of the Junior Liabilities, and, in
order to implement the foregoing, (a) all payments and distributions of any kind
or character in respect of the Junior Liabilities to which the Junior Lender
would be entitled if the Junior Liabilities were not subordinated, or
subordinated and pledged or assigned, pursuant to this Agreement shall be made
directly to the Bank, (b) the Junior Lender shall promptly file a claim or
claims, in the form required in such proceedings, for the full outstanding
amount of the Junior Liabilities, and shall cause said claim or claims to be
approved and all payments and other distributions in respect thereof to be made
directly to the Bank, and (c) the Junior Lender hereby irrevocably agrees that
the Bank may, at its sole discretion, in the name of the Junior Lender or
otherwise, demand, sue for, collect, receive and receipt for any and all such
payments

                                      - 2 -





or distributions, and file, prove, and vote or consent in any such proceedings
with respect to, any and all claims of the Junior Lender relating to the Junior
Liabilities.


      5. In the event that the Junior Lender receives any payment or other
distribution of any kind or character from any Borrower or from any other source
whatsoever in respect of any of the Junior Liabilities, other than as expressly
permitted by the terms of this Agreement, such payment or other distribution
shall be received in trust for the Bank and promptly turned over by the Junior
Lender to the Bank. The Junior Lender will mark its books and records, and cause
the applicable Borrower to mark its books and records, so as to clearly indicate
that the Junior Liabilities are subordinated in accordance with the terms of
this Agreement, and will cause to be clearly inserted in any promissory note or
other instrument which at any time evidences any of the Junior Liabilities a
statement to the effect that the payment thereof is subordinated in accordance
with the terms of this Agreement. The Junior Lender will execute such further
documents or instruments and take such further action as the Bank may reasonably
from time to time request to carry out the intent of this Agreement.


      6. All payments and distributions received by the Bank in respect of the
Junior Liabilities, to the extent received in or converted into cash, may be
applied by the Bank first to the payment of any and all expenses (including
attorneys fees and legal expenses) paid or incurred by the Bank in enforcing
this Agreement or in endeavoring to collect or realize upon any of the Junior
Liabilities or any security therefor, and any balance thereof shall, solely as
between the Junior Lender and the Bank, be applied by the Bank, in such order of
application as the Bank may from time to time select, toward the payment of the
Senior Liabilities remaining unpaid; but, as between any Borrower and its
respective creditors, no such payments or distributions of any kind or character
shall be deemed to be payments or distributions in respect of the Senior
Liabilities; and, notwithstanding any such payments or distributions received by
the Bank in respect of the Junior Liabilities and so applied by the Bank toward
the payment of the Senior Liabilities, the Junior Lender shall be subrogated to
the then existing rights of the Bank, if any, in respect of the Senior
Liabilities only at such time as this Agreement shall have been discontinued and
the Bank shall have received payment of the full amount of the Senior
Liabilities, as provided for in paragraph 11 hereof.


      7. Notwithstanding anything to the contrary contained in the Subordinated
Note, until such time as this Agreement shall have been discontinued and the
Bank shall have received payment of the full amount of the Senior Liabilities,
as provided for in paragraph 11 hereof, no action or inaction by either of the
Borrowers shall be deemed to be in violation of the provisions contained in
Article 5 of the Subordinate Note if such action or inaction either (i) is not
in violation of any of the provisions of the Credit Agreement, or (ii) has been
consented to in writing by the Bank.


      8. The Junior Lender hereby waives: (a) notice of acceptance by the Bank
of this Agreement; (b) notice of the existence or creation or non-payment of all
or any of the Senior Liabilities; and (c) all

                                      - 3 -





diligence in collection or protection of or realization upon the Senior
Liabilities or any thereof or any security therefor.


      9. The Junior Lender will not without the prior written consent of the
Bank: (a) cancel, waive, forgive, transfer or assign, or attempt to enforce or
collect, or subordinate to any Liabilities other than the Senior Liabilities,
any Junior Liabilities or any rights in respect thereof; (b) take any collateral
security for any Junior Liabilities; or (c) commence, or join with any other
creditor in commencing, any bankruptcy, reorganization or insolvency proceedings
with respect to any Borrower.


      10. This Agreement shall in all respects be a continuing agreement and
shall remain in full force and effect (notwithstanding, without limitation, the
dissolution of the Junior Lender or that at any time or from time to time all
Senior Liabilities may have been paid in full), subject to discontinuance only
upon receipt by the Bank of payment in full of all Senior Liabilities and
termination of any and all commitments by the Bank to extend credit to either of
the Borrowers.


      11. The Bank may, from time to time, whether before or after any
discontinuance of this Agreement, at its sole discretion and without notice to
the Junior Lender, take any or all of the following actions: (a) retain or
obtain a security interest in any property to secure any of the Senior
Liabilities, (b) retain or obtain the primary or secondary obligation of any
other obligor or obligors with respect to any of the Senior Liabilities, (c)
extend or renew or forbear for one or more periods (whether or not longer than
the original period), alter or exchange any of the Senior Liabilities, or
release or compromise any obligation of any nature of any obligor with respect
to any of the Senior Liabilities, and (d) release its security interest in, or
surrender, release or permit any substitution or exchange for, all or any part
of any property securing any of the Senior Liabilities, or extend or renew or
forbear for one or more periods (whether or not longer than the original period)
or release, compromise, alter or exchange any obligations of any nature of any
obligor with respect to any such property.


      12. The Bank may, from time to time, whether before or after any
discontinuance of this Agreement, without notice to the Junior Lender, assign or
transfer any or all of the Senior Liabilities or any interest therein; and,
notwithstanding any such assignment or transfer or any subsequent assignment or
transfer thereof, such Senior Liabilities shall be and remain Senior Liabilities
for the purposes of this Agreement, and every immediate and successive assignee
or transferee of any of the Senior Liabilities or of any interest therein shall,
to the extent of the interest of such assignee or transferee in the Senior
Liabilities, be entitled to the benefits of this Agreement to the same extent as
if such assignee or transferee were the Bank; provided, however, that, unless
the Bank shall otherwise consent in writing, the Bank shall have an unimpaired
right, prior and superior to that of any such assignee or transferee, to enforce
this Agreement, for the benefit of the Bank, as to those of the Senior
Liabilities which the Bank has not assigned or transferred.

                                      - 4 -


      13. The Bank shall not be prejudiced in its rights under this Agreement by
any act or failure to act of any Borrower or the Junior Lender, or any
noncompliance of any Borrower or the Junior Lender with any agreement or
obligation, regardless of any knowledge thereof which the Bank may have or with
which the Bank may be charged; and no action of the Bank permitted hereunder
shall in any way affect or impair the rights of the Bank and the obligations of
the Junior Lender under this Agreement.


      14. No delay on the part of the Bank in the exercise of any right or
remedy shall operate as a waiver thereof, and no single or partial exercise by
the Bank of any right or remedy shall preclude other or further exercise thereof
or the exercise of any other right or remedy; nor shall any modification or
waiver of any of the provisions of this Agreement be binding upon the Bank
except as expressly set forth in a writing duly signed and delivered on behalf
of the Bank. For the purposes of this Agreement, Senior Liabilities shall
include all obligations of each of the Borrowers to the Bank, notwithstanding
any right or power of either Borrower or anyone else to assert any claim or
defense as to the invalidity or unenforceability of any such obligation, and no
such claim or defense shall affect or impair the agreements and obligations of
the Junior Lender hereunder.


      15. This Agreement shall be binding upon the Junior Lender and upon the
heirs, legal representatives, successors and assigns of the Junior Lender; and,
to the extent that either Borrower or the Junior Lender is either a partnership
or a corporation, all references herein to such Borrower and to the Junior
Lender, respectively, shall be deemed to include any successor or successors,
whether immediate or remote, to such partnership or corporation. If more than
one party shall execute this Agreement, the term "undersigned" as used herein
shall mean all parties executing this Agreement and each of them, and all such
parties shall be jointly and severally obligated hereunder.


      16. This Agreement shall be construed in accordance with and governed by
the laws of the State of Illinois. Wherever possible each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under such law, such provision shall be ineffective to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.


      17. THE JUNIOR LENDER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY. THE JUNIOR LENDER HEREBY ABSOLUTELY AND IRREVOCABLY CONSENTS AND SUBMITS
TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS HAVING SITUS IN COOK
COUNTY, ILLINOIS OR THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF
ILLINOIS IN CONNECTION WITH ANY SUITS, ACTIONS OR PROCEEDINGS BROUGHT AGAINST
THE JUNIOR LENDER BY THE BANK ARISING OUT OF OR RELATING TO


                                      - 5 -



THIS AGREEMENT, AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH
SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. THE
JUNIOR LENDER HEREBY WAIVES AND AGREES NOT TO ASSERT IN SUCH SUIT, ACTION OR
PROCEEDING, IN EACH CASE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY
CLAIM THAT (A) THE JUNIOR LENDER IS NOT PERSONALLY SUBJECT TO THE JURISDICTION
OF ANY SUCH COURT; (B) THE JUNIOR LENDER IS IMMUNE FROM SUIT OR ANY LEGAL
PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT,
ATTACHMENT IN AID OF EXECUTION, EXECUTION OR OTHERWISE) WITH RESPECT TO IT OR
ITS PROPERTY; (C) ANY SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN
INCONVENIENT FORUM; (D) THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING IS
IMPROPER; OR (E) THIS AGREEMENT MAY NOT BE ENFORCED IN OR BY ANY SUCH COURT.
NOTHING CONTAINED HEREIN SHALL AFFECT ANY RIGHT THAT THE BANK MAY HAVE TO BRING
ANY SUIT, ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AGAINST THE JUNIOR
LENDER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.

                       [SIGNATURE PAGE(S) AND EXHIBIT(S),
                           IF ANY, FOLLOW THIS PAGE]

                                      - 6 -



      IN WITNESS WHEREOF, this Agreement has been made and delivered at Chicago,
Illinois as of the _________ day of December, 2001.




                                      NEOPHARM, INC.



                                      By_______________________________________
                                        Name:
                                        Title:




ACCEPTED December _____, 2001


THE NORTHERN TRUST COMPANY





By_________________________________
  Title:

                                      - 7 -



                         ACKNOWLEDGMENT OF SUBORDINATION

      The Borrowers each hereby acknowledge receipt of a copy of the foregoing
Subordination, Standby and Intercreditor Agreement, waive notice of acceptance
thereof by the Bank, and agree to be bound by the terms and provisions thereof,
to make no payments or distributions contrary to the terms and provisions
thereof, and to do every other act and thing necessary or appropriate to carry
out such terms and provisions. In the event of any violation of any of the terms
and provisions of the foregoing Subordination and Standby Agreement, then, at
the election of the Bank, any and all obligations of each of the Borrowers to
the Bank shall forthwith become due and payable and any and all agreements of
the Bank to make loans, advances or other financial accommodations to the
Borrowers, or to forbear from exercising remedies, shall forthwith terminate,
notwithstanding any provisions thereof to the contrary.


Dated as of December ______, 2001     AKORN, INC.



                                      By_______________________________________
                                        Name:
                                        Title:




Dated as of December ______, 2001     AKORN (NEW JERSEY), INC.



                                      By_______________________________________
                                        Name:
                                        Title:


                                      - 8 -





                                   SCHEDULE A

                                 PROMISSORY NOTE

EX-99.01

                                                              EXHIBIT 99.01


                                 NeoPharm, Inc.
                           150 Field Drive, Suite 195
                              Lake Forest, IL 60045




April 1, 2002



Securities and Exchange Commission
450 5th Street NW
Washington, DC  20549

Ladies and Gentlemen:

Pursuant to Securities and Exchange Commission Release Nos. 33-8070; 34-45590;
35-27503; 39-2395; IA-2018; IC-25464; FR-62; File No. S7-03-02, this letter is
to confirm that NeoPharm, Inc. has received assurance from its independent
public accountants, Arthur Andersen LLP ("Andersen"), that Andersen's audit of
our consolidated financial statements as of December 31, 2001 and for the year
then ended (the "Audit") was subject to Andersen's quality control system for
the U.S. accounting and auditing practice to provide reasonable assurance that
the engagement was conducted in compliance with professional standards, that
there was appropriate continuity of Andersen personnel working on the Audit,
availability of national office consultation, and availability of personnel at
foreign affiliates of Andersen to conduct the relevant portions of the Audit.

NeoPharm, Inc.

/s/ Lawrence A. Kenyon

Lawrence A. Kenyon
Chief Financial Officer