Neopharm DEF 14A Definitive proxy

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934 (Amendment No. )

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NEOPHARM, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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Dear Stockholders:

On behalf of the Board of Directors, I invite you to attend the Annual Meeting of Stockholders of NeoPharm, Inc. to be held on August 16, 2007, at 10:00 a.m. local time, at 1850 Lakeside Drive, Waukegan, Illinois.

In the materials accompanying this letter, you will find a Notice of the Meeting, a Proxy Statement relating to the proposals you will be asked to consider and vote upon at the Annual Meeting, and a Proxy Card. The Proxy Statement includes general information regarding NeoPharm as well as additional information relating to the specific proposals to be presented at the Annual Meeting. Also enclosed with the proxy materials is a copy of NeoPharm’s Annual Report to Stockholders.

The formal business to be conducted at the Annual Meeting is described in the Notice of Meeting that follows this letter. In addition, at the Annual Meeting management will review developments at the Company, discuss expectations for the future and be available to answer your questions both during and after the Annual Meeting.

Your vote on the matters that are to come before the Annual Meeting is important. I urge all stockholders to execute and return their proxies promptly. Returning your proxy will not prevent you from voting in person, but will assure that your vote is counted if you are unable to attend the Annual Meeting.

Sincerely,

Laurence P. Birch

Chief Executive Officer and President

July 2, 2007

NeoPharm, Inc.

1850 Lakeside Drive

Waukegan, Illinois 60085

___________

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held August 16, 2007

___________

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of NeoPharm, Inc., a Delaware corporation, will be held at 1850 Lakeside Drive, Waukegan, Illinois on August 16, 2007, at 10:00 a.m., local time, for the following purposes:

To elect five directors to serve until the 2008 Annual Meeting of Stockholders.

To approve proposed amendments to our 2006 Equity Incentive Plan to increase the number of shares of our Common Stock available for issuance under this Plan from 1,000,000 shares to 3,400,000 shares and to increase the maximum number of shares of Common Stock that may be granted to or earned by any Grantee during any calendar year from 500,000 to 750,000 shares.

To ratify the appointment of BDO Seidman, LLP as the Company’s independent registered public accounting firm for 2007.

To transact such other business as may properly come before the meeting.

Only stockholders of record on June 28, 2007 will be entitled to notice of and to vote at the Annual Meeting.

To assure that your interests will be represented, whether or not you plan to attend the Annual Meeting, you are urged to sign and date the enclosed proxy card and promptly return it in the pre-addressed envelope provided, which requires no postage if mailed in the United States. The enclosed proxy is revocable and will not affect your right to vote in person if you attend the Annual Meeting.

	By Order of the Board of Directors,

	Laurence P. Birch
	Secretary

Waukegan, Illinois

July 2, 2007

PROXY STATEMENT

FOR

ANNUAL MEETING OF STOCKHOLDERS

To Be Held August 16, 2007

_________________________

GENERAL INFORMATION

This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of NeoPharm, Inc., a Delaware corporation (the “Company”), to be used at the Annual Meeting of Stockholders of the Company (the “Annual Meeting”) to be held at 1850 Lakeside Drive, Waukegan, Illinois on August 16, 2007 at 10:00 a.m., local time, for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders and in this Proxy Statement. This Proxy Statement and the enclosed form of proxy were first sent or given to stockholders on or about July 2, 2007.

Who Can Vote At The Annual Meeting?

Only stockholders of record at the close of business on June 28, 2007 (the “Record Date”) will be entitled to vote at the Annual Meeting or any adjournment thereof. As of the close of business on the Record Date, there were 28,086,688 shares of the Company’s common stock, par value $.0002145 per share (“Common Stock”), outstanding.

What Constitutes a Quorum for the Meeting?

The presence, either in person or by properly executed proxy, of the holders of a majority of the outstanding shares of Common Stock is necessary to constitute a quorum at the Annual Meeting.

How Many Votes Do I Get To Cast?

In the election of directors, each stockholder is entitled to cast one vote for each director to be elected for each share of stock held; cumulative voting is not permitted. For all matters except the election of directors, each stockholder is entitled to cast one vote for each share of stock held.

What Is The Vote Needed For Approval Of The Various Matter?

Directors are elected by a plurality of the votes cast by the holders of shares of Common Stock at a meeting at which a quorum is present. In all matters other than the election of directors, the affirmative vote of a majority of the outstanding shares of Common Stock present in person or represented by proxy at the Annual Meeting and entitled to vote is required for the adoption of such matters.

How Are Abstentions And Non-Votes Counted?

Assuming the presence of a quorum at the Annual Meeting, each proposal will be voted on separately. With respect to the election of directors, which requires the affirmative vote of a plurality of the shares present in person or represented by proxy, abstentions and non-votes will have no effect. With respect to all other matters to be voted on, the affirmative vote of a majority of the shares present in person or represented by proxy at the Annual Meeting and entitled to vote is required. Abstentions will have the same effect as votes against such proposals, while broker non-votes will have no effect on the result of the vote on such matters.

Can I Revoke My Proxy?

A proxy may be revoked at any time before it is exercised by giving a written notice to the Secretary of the Company bearing a later date than the proxy, by submitting a later dated proxy or by voting the shares represented by the proxy in person at the Annual Meeting. Unless revoked, the shares represented by each duly executed, timely delivered proxy will be voted in accordance with the instructions made.

What Happens If No Voting Instructions Are Given?

If no instructions are provided with respect to any matter, such shares will be voted: FOR Proposal 1 (election of directors), FOR Proposal 2 (approval of amendments to the 2006 Equity Incentive Plan), and FOR Proposal 3 (ratification of the independent registered public accounting firm), as proposed in this Proxy Statement.

Are Any Other Matters Being Presented At The Meeting?

The Board of Directors does not plan on presenting any other matters at the Annual Meeting. However, should any other matters properly come before the Annual Meeting, it is the intention of the proxy holders to vote the proxy in accordance with their best judgment.

Who Pays For Soliciting Proxies?

The expenses of soliciting proxies will be paid by the Company. In addition to solicitation by mail, officers, directors and employees of the Company, who will receive no extra compensation therefor, may solicit proxies personally or by telephone, telecopy or telegram. The Company will reimburse brokerage houses, custodians, nominees and fiduciaries for their expenses in mailing proxy materials to principals.

PROPOSAL NO. 1

ELECTION OF DIRECTORS

In June 2007, the Board adopted a resolution decreasing the size of the Company's Board of Directors from eight to five, effective with the 2007 Annual Meeting of Stockholders. This action followed the decision of directors Ronald G. Eidell, Erick E. Hanson and Kaveh T. Safavi not to stand for re-election and to instead retire from the Board upon the new directors being elected. Accordingly, there are five nominees being presented for election at the Annual Meeting, constituting the entire Board. Each director will hold office until the 2008 Annual Meeting of Stockholders and until his successor has been elected and qualified. The Board believes that all of the present nominees will be available for election at the Annual Meeting and will serve if elected. If, due to circumstances not now foreseen, any of the nominees named below will not be available for election, the proxies will be voted for such other person or persons as the Board of Directors may select.

There follows information as to each nominee for election as a director at the Annual Meeting, including his age, present principal occupation, other business experience, directorships of other publicly-held companies and period of service as a director of the Company.

The persons named in the accompanying form of proxy will vote FOR the election of the nominees unless stockholders specify otherwise in their proxies.

Nominees for Director. The following information has been provided by the respective nominees for election to the Board of Directors.

Laurence P. Birch, age 47, director since March 2007.

Laurence P. Birch joined the Company as President, Chief Executive Officer and as a director in March 2007 and was appointed Acting Chief Financial Officer on April 16, 2007 and Secretary on June 19, 2007. Prior to joining the Company, Mr. Birch was Sr. Vice President and CFO of Ohio Medical Corporation, a supplier of medical air pumping systems from 2006 to March 2007. Before that, Mr. Birch served as Sr. Vice President and CFO, and Interim President and CEO, of AKSYS, Ltd., a hemodialysis developer and manufacturer from 2005 to 2006. Prior to that, Mr. Birch served as co-founder and managing director of Stratego Partners, a cost management consulting firm, from 2003 to 2005, Executive Vice President and CFO of Seurat, Inc., a marketing outsourcing and services company, from 2002 to 2003, Sr. Vice President - Business Development and CFO of Technology Solutions, Inc., a systems integration and consulting company, from 2000 to 2002, and CFO of Brigade, Inc., an internet support company, from 1999 to 2000. Mr. Birch began his career with Baxter Healthcare, a manufacturer and supplier of pharmaceuticals and medical devices, where, over the course of 13 years, he held a variety of positions. Mr. Birch is a director of DataTrak International, Inc., a provider of technology and services to the clinical trial industry. Mr. Birch holds a Bachelor of Science-Finance from the University of Illinois and a MBA from Northwestern University - Kellogg Graduate Business of Management. Mr. Birch is also a Certified Public Accountant.

John N. Kapoor, Ph.D., age 63, director since June 1990.

John N. Kapoor has been a Director of the Company since its formation in 1990 and has served as Chairman from 1990 to 2004 and from June 2006 to the present. Dr. Kapoor is the sole shareholder and President of EJ Financial Enterprises, Inc., a health care consulting and investment company. In addition, Dr. Kapoor serves as a director and Chairman of each of Option Care, Inc., a provider of home health care services, Akorn, Inc., a manufacturer, distributor and marketer of generic ophthalmic products, and Introgen Therapeutics, Inc., a gene therapy company. Dr. Kapoor received a Ph.D. in medicinal chemistry from the State University of New York at Buffalo and a B.S. in pharmacy from Bombay University, India.

Frank C. Becker, age 71, director since November 2004.

Frank C. Becker joined the Board in November 2004. Mr. Becker is currently the President and a partner at Greenfield Chemical, a pharmaceutical consulting and sourcing company, which he founded in January 1998. From 1999 to 2002, Mr. Becker served as President and Chief Operating Officer of Sicor Pharmaceuticals, a maker of injectable pharmaceuticals. Mr. Becker is a partner in Southport Marina Development LLC, a firm operating Southport Marina in Kenosha, Wisconsin. Prior to the foregoing relationships, Mr. Becker spent over 35 years at Abbott Laboratories, most recently as Vice President of Process Research and Chemical Manufacturing. Mr. Becker also serves on the Board of Directors of Regis Technologies, a provider of synthesis and separation services. Mr. Becker received his MBA in Finance from the University of Chicago and a B.S. degree in chemical engineering from Purdue University.

Bernard A. Fox, Ph. D., age 53, director since November 2004.

Bernard A. Fox joined the Board in November 2004. Dr. Fox has been Chief of the Laboratory of Molecular and Tumor Immunology at the Earle Chiles Research Institute at the Providence Portland Medical Center in Portland, Oregon and also Associate Professor in the Departments of Molecular Microbiology and Immunology and Environmental & Biomolecular Systems at Oregon Health and Science University School of Medicine in Portland, Oregon since 1994. Dr. Fox received his post-doctoral training as a Staff Fellow in the Surgery Branch, Division of Cancer Treatment, Clinical Oncology Program at the National Cancer Institute at the National Institutes of Health in Bethesda, Maryland from 1985 to 1987 and was a Senior Staff Fellow there from 1987 to 1990. Dr. Fox is also Vice President of The International Society for the Biological Therapy of Cancer, is a member of the scientific advisory board of the Biological Development Association (Europe), and serves as President and Chief Executive Officer of Ubivac LLC, a development stage biotechnology company.

Paul E. Freiman, age 72, director since November 2004.

Paul E. Freiman joined the Board in November 2004. Mr. Freiman is currently the President, Chief Executive Officer and a director of Neurobiological Technologies, Inc., a biotechnology company, a post he has held since May 1997. Mr. Freiman served as Chairman and Chief Executive Officer of Syntex Corporation, a pharmaceutical company, from 1990-1995. Mr. Freiman currently serves as Chairman of the Board of SciGen Pte. Ltd., and serves on the boards of Penwest Pharmaceutical Co., a pharmaceutical company, Calypte Biomedical Corporation, a developer of in vitro testing solutions, and Otsuka America Pharmaceuticals Inc., a pharmaceutical company. Mr. Freiman has been chairman of the Pharmaceutical Manufacturers Association of America (PhRMA) and has also chaired a number of key PhRMA committees. Mr. Freiman holds a B.S. degree in pharmacy from Fordham University and an honorary doctorate from the Arnold & Marie Schwartz College of Pharmacy.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR”

THE ELECTION OF ALL NOMINEES FOR DIRECTOR.

CORPORATE GOVERNANCE POLICIES AND PRACTICES

Board of Directors and its Committees

The following table provides information regarding the membership of and number of meetings during 2006 of the Company’s Board of Directors and its committees.

Name	Board of Directors	Audit Committee	Compensation Committee	Corporate Governance Committee
Frank C. Becker	X	X	X	X
Ronald G. Eidell	X	X
Bernard A. Fox	X		X	X
Paul E. Freiman	X	X	X*	X
Erick E. Hanson	X	X	X	X*
Guillermo A. Herrera⁽¹⁾	X
John N. Kapoor	X*
Kaveh T. Safavi	X	X*		X

Number of 2006 Meetings	13	8	8	6

* indicates Chairman
(1) Mr. Herrera left the Company in March 2007.

Each Director attended at least 75% of the aggregate of the meetings of the Board and its committees on which he served during 2006. While the Company does not have a written policy requiring directors to attend the Annual Meeting, each of the current directors attended the 2006 Annual Meeting of Stockholders and each nominee for director is expected to attend the Company’s 2007 Annual Meeting of Stockholders.

Board Determination of Independence

Under applicable rules of the NASDAQ Stock Market, a director will only qualify as an “independent director” if, in the opinion of our Board of Directors, that person does not have a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Our board of directors has determined that none of Frank Becker, Ronald Eidell, Bernard Fox, Paul Freiman, Erick Hanson and Kaveh Safavi has a relationship which would interfere with the exercise of his or her independent judgment in carrying out the responsibilities of a director and, therefore, that each of these directors is an “independent director” as defined under NASDAQ Rule 4200(a)(15).

In determining the independence of Mr. Eidell, our Board of Directors took into consideration NASDAQ’s recent interpretation of Rule 4200(a)(15) which no longer considers a director’s service as an interim officer of the Company for a period of less than one year, nor the receipt of cash and equity compensation for such service, as disqualifications from a determination of independence, though his assistance in the preparation of the Company’s financial statements while serving as interim President and CEO from March 2005 until October 2005 does not allow him to be considered as an independent member of the Audit Committee.

The Board of Directors has determined that each of the current members of the Compensation Committee and Corporate Governance Committee meets the independence requirements applicable to those committees prescribed by the NASDAQ. In addition, the Board of Directors has determined that each member of the Audit Committee meets the criteria for independence established by the Securities and Exchange Commission (“SEC”) and that all the members of the Audit Committee are independent directors for NASDAQ purposes, with the exception of Mr. Eidell who has been appointed to the Audit Committee pursuant to a NASDAQ approved exception. See “Committees-Audit Committee,” below.

Committees

The Board of Directors has Audit, Compensation, and Corporate Governance Committees. The principal responsibilities of each of these committees are described generally below, and in detail in their respective Committee Charters, which are each available at www.neopharm.com.

Audit Committee. The Audit Committee operates pursuant to a written charter, which complies with the applicable provisions of the Sarbanes-Oxley Act of 2002 and related rules of the SEC and NASDAQ. As more fully described in its Charter, the Audit Committee is responsible for overseeing the Company’s accounting and financial reporting processes, including the quarterly reviews and the annual audit of the Company’s financial statements by the Company’s independent auditors. In addition, the Audit Committee is responsible for overseeing the work of the independent auditors, including their appointment, reviewing their compensation, and assessing their independence. The Audit Committee is also responsible for monitoring our internal controls and reviewing related party transactions. The Audit Committee serves as the Company’s Qualified Legal Compliance Committee for purposes of Section 307 of the Sarbanes-Oxley Act.

During 2006, the Audit Committee held 8 meetings. The Audit Committee currently consists of Messrs. Safavi, Becker, Eidell, Freiman, and Hanson, with Dr. Safavi serving as chairman.

The Board of Directors has determined that each of the current members of the Audit Committee meets the independence criteria prescribed by the rules of the SEC for audit committee membership and, with the exception of Mr. Eidell’s service on the Audit Committee, is an “independent director” as defined in NASDAQ Rule 4200(a)(15). With respect to Mr. Eidell, the Board has determined that his service on the Audit Committee does not currently qualify as an Audit Committee “independent director” because of his involvement in the preparation of the Company’s financial statements while serving as interim President and CEO from March 2005 through October 2005. Nevertheless, because of Mr. Eidell’s knowledge and experience in the field of public accounting, and his prior service as Chairman of the Audit Committee, the Board elected to utilize an exception to NASDAQ Rule 4200(a)(15) that allows one director, though not qualifying as independent under NASDAQ rules, to be a member of the Audit Committee. The Board determined that the circumstances leading to Mr. Eidell’s no longer being NASDAQ independent, i.e., his willingness to provide the Company with continuity of leadership by assuming the position of President and CEO on an interim basis during the Company’s eight month executive search for a permanent President, were not sufficient to deny the Company and its stockholders the knowledge and breadth of experience that are gained from Mr. Eidell’s presence on the Audit Committee.

Additionally, the Board has determined that Mr. Eidell qualifies as an audit committee financial expert, as defined by the regulations promulgated by the SEC.

Compensation Committee. The Compensation Committee is responsible for conducting an annual review of the Company’s compensation packages for senior executive officers, including the President and Chief Executive Officer. In connection therewith, the Compensation Committee reviews and recommends to the Board the annual base salary level, and the annual cash bonus, and establishes the long-term incentive opportunity for each senior executive officer. The Compensation Committee’s recommendations are submitted to the Board for approval. The Compensation Committee also reviews and makes recommendations to the Board regarding director compensation. In addition, the Compensation Committee administers, reviews and makes recommendations to the Board regarding our incentive compensation and equity-based plans.

During 2006, the Compensation Committee held 8 meetings. The Compensation Committee currently consists of Messrs. Freiman, Becker, Fox, and Hanson, with Mr. Freiman serving as Chairman. Each of the current members of the Compensation Committee qualifies as an “outside director” under Section 162(m) of the Internal Revenue Code (the “Code”), a “non-employee director” as such term is defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and an “independent director” as such term is defined in the rules of the NASDAQ Stock Market. For additional information about the processes and proceedings of the Compensation Committee in making recommendations regarding executive compensation, see “INFORMATION ABOUT EXECUTIVE AND DIRECTOR COMPENSATION.”

Corporate Governance Committee. The Corporate Governance Committee is responsible for developing and implementing policies and procedures that are intended to constitute and organize appropriately the Board of Directors to meet its fiduciary obligations to the Company and its stockholders on an ongoing basis. Among its specific duties, the Corporate Governance Committee makes recommendations to the Board about the Company’s corporate governance processes, assists in identifying and recruiting candidates for the Board, develops and recommends criteria for director nominee qualifications, considers nominations to the Board received from stockholders, makes recommendations to the Board regarding the membership and size of the Board and its’ committees, oversees the annual evaluation of the effectiveness of the organization of the Board and of each of its committees, periodically reviews and recommends to the Board an overall compensation program for directors and develops and recommends to the Board, and annually reviews, the Company’s Code of Business Conduct and Ethics.

During 2006, the Corporate Governance Committee held 6 meetings. The Corporate Governance Committee currently consists of Messrs. Hanson, Becker, Fox, Freiman and Safavi, with Mr. Hanson serving as Chairman. The Board of Directors has determined that each of the members of the committee meets NASDAQ independence requirements.

Recommending Candidates for Board Membership

The Corporate Governance Committee is responsible for identifying, screening, personally interviewing and recommending director nominee candidates to the Board, which then is responsible for nominating directors to the shareholders for election. The Corporate Governance Committee considers nominees on the basis of their integrity, experience, achievements, judgment, intelligence, personal character, ability to make independent analytical inquiries, willingness to devote adequate time to Board duties, and the likelihood that they will be willing to serve on the Board for a sustained period.

The Corporate Governance Committee will consider qualified director candidates who are suggested by stockholders in written submissions addressed to: NeoPharm, Inc., 1850 Lakeside Drive, Waukegan, Illinois 60085, Attention: Corporate Secretary’s Office (fax no. 847-887-9281; email: corporatesecretary@neopharm.com). Any recommendation submitted by a stockholder must include the name of the candidate, a description of the candidate’s educational and professional background, contact information for the candidate, a brief explanation of why the stockholder feels the candidate is suitable for election, and a representation that the individual proposed has consented to be nominated for consideration as a director. The Corporate Governance Committee will apply the same standards in considering director candidates recommended by stockholders as it applies to other candidates.

In addition to recommending director candidates to the Corporate Governance Committee, stockholders may also nominate one or more persons for election as a director of the Company at an annual meeting of stockholders if the stockholder complies with the notice, information and consent provisions contained in the Company’s Amended and Restated Bylaws, including, but not limited to, the Company’s advance notice bylaw provision. Under the advance notice bylaw, in order for the director nomination to be timely, a stockholder’s notice to the Company’s Secretary must be delivered to the Company’s principal executive offices not less than 120 days prior to the anniversary of the date the Company’s proxy statement was mailed to stockholders in connection with the previous year’s annual meeting. In the event that the Company sets an annual meeting date that is not within 30 days before or after the date of the immediately preceding annual stockholders meeting, notice by the stockholder must be received no later than the close of business on the later of 120 days in advance of such annual meeting and the tenth day following the day on which public disclosure of the date of the annual meeting was made.

Nominations, as well as other proposals for the Company’s Annual Meeting of Stockholders to be held in 2008, must be submitted in writing addressed to: Corporate Secretary, NeoPharm, Inc., 1850 Lakeside Drive, Waukegan, Illinois 60085. Nominations must include the name, business and residence address, principal business occupation or employment of the candidate, the class and number of shares of the Company beneficially owned by the candidate, a description of all arrangements or understanding between the nominating stockholder and the nominee pursuant to which the nomination is made and any other information relating to the nominee that is required pursuant to Regulation 14A under the Exchange Act. Nominations for the 2008 Annual Meeting of Stockholders must be received by the Corporate Secretary no later than March 4, 2008. Typically, however, the Company's Annual Meeting of Stockholders has been held in June with proxy materials mailed to stockholders on or about May 1. If the Company were to return to the June date for the 2008 Annual Meeting of Stockholders, the date for submitting nominations would be moved up and notification of the new earlier deadline would be provided by the Company in a 10-Q or other periodic report filed by the Company with the SEC.

NeoPharm Ethics Program.

The Company has adopted a Code of Business Conduct and Ethics for all directors, officers, employees, agents and representatives of the Company and a Code of Conduct Grievance Procedure. Links to these documents, including printable versions, are available on the NeoPharm, Inc. website at www.neopharm.com. The documents are also available in print upon request. Any waivers to the Code of Business Conduct and Ethics will, to the extent required by applicable law or regulation, be disclosed on the Company’s website.

Shareholder Communications

Shareholders may communicate directly with the Board of Directors, any of its committees or any individual director by mailing correspondence (addressed to the attention of the Board, an individual director or a committee, as appropriate), to:

NeoPharm, Inc.

1850 Lakeside Drive

Waukegan, Illinois 60085

USA

Attn: (name of addressee)

INFORMATION ABOUT EXECUTIVE AND DIRECTOR COMPENSATION

Compensation Discussion And Analysis

Overview

The following compensation discussion describes the material elements of compensation awarded to, earned by, or paid to each of our executive officers identified in the Summary Compensation Table below as one of our named executive officers for the fiscal year ending December 31, 2006. This compensation discussion focuses on the information contained in the following tables and related footnotes and narrative for primarily the last completed fiscal year, but we also describe compensation actions taken before or after the last completed fiscal year to the extent it enhances the understanding of our executive compensation disclosure.

Our compensation and benefit program for our named executive officers aims to encourage our executive officers to continually work in the best interests of our stockholders to develop our technology while effectively managing the risks and challenges inherent in a pre-commercialization biotechnology enterprise such as the Company. Specifically, we have created a compensation package that combines short and long-term components, cash and equity, and fixed and contingent payments, in the proportions we believe are prudent, while still allowing us to attract, retain and motivate our senior management to perform with the goal of enhancing stockholder value.

Given our overriding objective to correlate individual and Company success, we seek to foster a performance-oriented culture, where individual performance is aligned with organizational objectives. We evaluate and reward our executive officers in light of the Company’s overall performance based on their achievement of pre-determined financial goals, business goals and personal goals. Performance is reviewed at least annually through processes discussed below with a focus on the Company’s overall research, clinical, regulatory, financial, and operational performance and the individual’s contributions to that performance. For the Company in 2006, the most important overriding corporate goals were to successfully conclude our Phase 3 PRECISE trial for Cintredekin Besudotox, our most advanced drug product candidate, and to advance our preparations for the possible filing of a BLA for that drug in the event the results of the clinical trial warranted such a filing.

Role of Our Compensation Committee

Our Compensation Committee approves, administers and interprets our executive compensation and benefit policies, including administration of our 2006 Equity Incentive Plan and 2006 Employee Stock Purchase Plan. The Compensation Committee provides its recommendations on executive compensation at Board meetings, seeking final approval, and, in-between Board meetings, consults with management, other committees of the Board or other members of the Board, where appropriate. Our Compensation Committee is appointed by our Board of Directors and each member qualifies as an independent director as defined under NASDAQ listing standards. Our Compensation Committee is currently comprised of Mr. Paul Freiman (Chairman), Dr. Bernard Fox, Mr. Frank Becker and Mr. Rick Hanson.

Our Compensation Committee receives significant input on compensation issues from the Company’s President and CEO and the Company’s human resources department, which it then analyzes and reviews and uses to make recommendations to our Board to ensure that our executive compensation and benefit program is consistent with our compensation philosophy and corporate governance guidelines. Our executives' base salaries, target and overachievement annual bonus levels and long-term incentive award values are set at levels believed to be competitive when measured against a peer group of biotechnology companies.

Our Compensation Committee looks to ensure that the compensation of our named executive officers is aligned with the Company's corporate strategies, business objectives and the long-term interests of the Company's stockholders, as well as its corporate governance guidelines by: taking input from management, primarily from the President and CEO, but also reviewing written information from the other members of management on their perception of the Company's goals, their performance and recommended compensation packages; conferring as a group on individual compensation packages and the Company’s goals independent of management; and taking its recommendations to the Company's Board of Directors for approval.

Use of Survey Data

In making compensation decisions, the Compensation Committee receives information that compares our executive compensation against that paid by a peer group of publicly traded companies in the biotechnology and pharmaceutical industry compiled by our human resources personnel and management from the Radford Survey of biotechnology companies. This peer group consists of companies which management believes are generally comparable to us at the time and against which the Company competes for executive talent.

We believe that information regarding pay practices at other companies is useful in two respects: First, we recognize that our compensation practices must be competitive in the marketplace; and second, this marketplace information is one of several factors that we consider in assessing the reasonableness of compensation. Accordingly, at least annually, we compare our compensation packages with those of other companies in the biotechnology and pharmaceutical industry, through reviews of this survey data. However, while such information may be a useful guide for comparative purposes, we believe that a successful compensation program also requires the application of judgment and subjective determinations of individual performance. Our review of this information and these factors forms the basis of our compensation recommendations.

Executive Compensation Program

Components of our Compensation Program

Our performance driven compensation program consists of five components: base salary, annual cash bonuses, long-term incentives, benefits, and severance payments. We have not had any formal or informal policy or target for allocating compensation between long-term and short-term compensation, between cash and non-cash compensation or among the different forms of non-cash compensation. Instead, the Compensation Committee, after reviewing information provided by management, including relevant survey data, determines subjectively what it believes to be the appropriate level and mix of the various compensation components. Ultimately, the Compensation Committee’s objective in allocating between long-term and currently paid compensation is to ensure adequate base compensation to attract and retain personnel, while providing incentives to maximize long-term value for our company and our stockholders.

Short-term Compensation.

Our short-term compensation program consists of base salary and the potential to earn cash bonuses.

Base Salary. Base salary will typically be used to recognize the experience, skills, knowledge and responsibilities required of each of our named executive officers, as well as competitive market conditions. In establishing the 2006 base salaries of the named executive officers who were employed in January 2006, our Compensation Committee took into account a number of factors, including survey data, recommendations of the President and CEO, the executive's seniority, position and functional role, accomplishments against personal and group objectives, and the demand and competitiveness for obtaining such an individual with their specific expertise and experience.

The base salary of our named executive officers is reviewed on an annual basis and, assuming overall corporate performance will permit, adjustments are made to reflect performance-based factors, for the Company as well as the executive, and analyzed in light of competitive conditions. Again, the Compensation Committee receives the recommendations of the President and CEO and analyzes those in light of its assessment of subjective performance criteria, such as an executive's ability to motivate others, to develop the skills necessary to mature with the Company, to set realistic goals to be achieved, and to recognize and pursue new business opportunities that enhance the Company's growth and success. We do not apply specific formulas to determine increases, but instead make an evaluation of each executive's contributions to the long-term success of the Company. We endeavored to have 2006 salaries that would be within the 25^th and 75^th percentiles for our salary levels for the group of peer companies surveyed.

Bonuses. Bonuses generally are based on corporate and individual performance compared to actual Company progress, targeted performance criteria, and various subjective performance criteria. The Compensation Committee works with our President and CEO to develop corporate and individual goals that they believe can be reasonably achieved with an appropriate level of effort over the course of the year. The factors included in our performance goals (financial, business and personal) are assigned specific weights and will vary for each named executive officer. We recognize that the relative importance of these factors may change over time in order to adapt our operations to specific business challenges and to reflect changing economic and market conditions. Based on the review of their performance, particularly with regard to the Company goals established for 2005, and the Compensation Committee’s recommendation to the Board of Directors, cash bonuses totaling $229,879 were paid in January 2006 to those of our named executive officers who were employed at the time, Messrs. Herrera, Ahmad, Sherman and Kenyon, in respect of their performance for the fiscal year ended December 31, 2005. For 2006, our President and CEO’s bonus target was set at 50% of his base salary with the potential to receive up to 100% of his base salary to the extent performance targets were exceeded. The performance targets for the other named executive officers were set at 30% of their salaries, with a potential to receive up to 50% of base salary to the extent performance targets were exceeded. The payment of bonuses is always discretionary, however, and actual amounts paid may be more or less than the targeted amount. As described in more detail below, for 2006, in light of the Company’s performance at year-end, no bonuses were paid to the named executive officers. See “Executive Compensation Decisions for 2006,” below.

Long-term Compensation

Stock Based Awards. Historically, our long-term compensation has consisted of stock options. Our option grants are designed to align management's performance objectives with the interests of our stockholders. Our Compensation Committee grants options to the named executive officers, and other selected employees, in order to enable them to participate in the long term appreciation of our stockholder value. We believe that stock options provide a means of aiding in the retention of key executives as the stock options are subject to vesting over time. We recognize, however, that for companies at NeoPharm’s stage of development, stock options represent a more speculative form of compensation which may not maintain or increase in value unless our drug product candidates ultimately reach the market and generate sales and profits.

In general, stock options are granted once per year, and are subject to vesting based on the executive's continued employment. Options granted to the named executive officers in 2006 vest at an annual rate of twenty-five percent (25%) per year over a four year period on the anniversary of the date of grant if the individual is still providing services to the Company at that time. The vesting provisions and size of the grants are designed to encourage the named executive officers to remain with the Company over a period of time. The exercise price of options is the fair market value, as determined by the terms of the applicable incentive plan, of our common stock on the date of grant. Generally, stock grants are made to our named executives at the year-end Compensation Committee meeting that has been previously calendared, but grants may be made by the Compensation Committee at other times if, for example, a new hire is made, or an equity plan that is low in available shares at the time of a grant is replenished later in the year, making available shares to which the individual would otherwise be entitled.

The factors considered in determining the size of option grants include recommendations from the President and CEO, the executive's position within the Company or the employee’s grade level, the number of shares available under the applicable plan, the grant value and Black-Scholes valuation of the grant when compared to peer group survey data, and the executive's contributions to both the creation of value and the long-term success of the Company.

In January 2006, options to purchase 75,000 shares were granted to our named executive officers employed at that time as a group based on performance in 2005. In December 2006, options to purchase 355,000 shares were granted to our then current named executive officers based on partial 2006 performance.

In addition to equity stock awards, our executive officers are eligible to participate in our 2006 Employee Stock Purchase Plan (the “ESPP”). The ESPP is available to all employees of the Company and generally permits participants to purchase shares at a discount of approximately 15% from the fair market value at the beginning or end of the applicable purchase period. In 2006, our named executive officers purchased 6,957 shares pursuant to the ESPP.

Benefits. We provide the following benefits to our executives on the same basis as the benefits provided to all employees:

401(k) Plan;

Health, vision and dental insurance;

Term life insurance; and

Short-and long-term disability.

Under our 401(k) plan, we provide an employer matching contribution in an amount equal to 3% of each participant’s compensation (up to a maximum in 2006 of $6,600 per year). The Company’s matching contribution is fully and immediately vested when made. In general, we believe these benefits are consistent with those offered by other companies and specifically with those companies with which we compete for employees.

Each of our named executive officers received an automobile allowance in 2006 that ranged from $300 to $1,000 per month. In certain circumstances, we will provide cash signing bonuses and pay relocation expenses when executives join us. Whether a signing bonus and relocation expenses are paid and the amount thereof is determined on a case-by-case basis under the specific hiring circumstances. For example, we will consider paying signing bonuses to compensate for amounts forfeited by an executive upon terminating prior employment or to create additional incentive for an executive to join our Company in a position for which there is high market demand. In 2006, we paid each of Mr. Walbert and Mr. Pauli a signing bonus of $50,000.

Severance and Change-in-Control Arrangements. Compensation for named executive officers also includes severance and change-in-control arrangements, which are reflected in the employment agreements for our President and CEO, which is the only executive officer position for which we have had formal written employment agreements, or in the term sheets pursuant to which offers are made to other executive officers. These arrangements, like other elements of executive compensation, are structured with regard to practices at comparable companies for similarly-situated officers and in a manner we believe is likely to attract and retain high quality executive talent. Changes to existing severance arrangements are also sometimes negotiated with departing executives in exchange for transition services and/or general releases. The severance and change-in-control arrangements currently in place with our current executive officers, and the severance arrangement entered into with one of our executive officers who departed in 2006, are described in greater detail below under the headings “Employment Agreements,” “Separation Agreements” and “Payments Upon Termination or Change in Control.”

Executive Compensation Decisions for 2006.

For fiscal 2006, the Compensation Committee initially recommended, and our Board initially approved, incentive compensation bonus awards to our named executive officers who were employed in December 2006 which totaled $395,700 and represented from 21% to 50% of base salary. Additionally, the Compensation Committee also initially recommended, and the Board of Directors initially approved, increases in base salaries for the named executive officers who were then employed, which increases ranged from 4% to 15.2% over the applicable prior base salaries. However, the awarding of bonuses and stock awards is always subject to the Company’s overall performance for the entire year and, shortly after the Compensation Committee and the Board met in early December 2006 with respect to bonus and salary increases, the Company learned that the Phase 3 PRECISE trial for the Company’s lead drug product candidate, Cintredekin Besudotox, had failed to meet its statistical end point. In light of this set-back to the Company’s lead drug product candidate, the Board requested that the Compensation Committee reassess its recommendations regarding bonus and salary increases. With the newly presented information regarding the PRECISE results available to it, the Compensation Committee recommended, and the Board approved, a suspension, which was later changed to a cancellation, of payment of all bonuses and salary increases for the named executive officers and other employees at the director level and above, with the result that no bonuses for 2006 or pay raises for 2007 for this group of employees, which includes the Company’s named executive officers employed at that time, were made.

Other Influences on Executive Compensation

Role of Executive Officers in Determining or Recommending Executive and Director Compensation. Management plays a significant role in the process of setting executive compensation. The most significant aspects of management’s role are:

evaluating employee performance;

determining and assembling the survey data for the peer group of companies to which comparisons will be made;

establishing business performance targets and objectives; and

recommending salary and bonus levels and stock-based awards.

Management, and in particular the President and CEO, prepares meeting information for each Compensation Committee meeting. Our President and CEO also participates in Compensation Committee meetings at the Compensation Committee’s request to provide:

background information regarding each named executive officer’s strategic objectives and progress toward the attainment of those objectives;

his evaluation of the performance of the named executive officers, including himself; and

compensation recommendations as to senior executive officers, including himself.

Ultimately, however, all compensation recommendations with respect to the Company’s executive officers are made by the Compensation Committee after considering management’s recommendations, survey data, the members’ own experience in the industry, and engaging in deliberations in executive session without the presence of members of management.

Management does not play any role in setting non-employee director compensation. Recommendations with respect to non-employee director compensation are made by the Corporate Governance Committee and then approved by the Board. See “Compensation of Directors” below.

Impact of Tax Treatment on Compensation Decisions. Section 162(m) of the Code generally disallows a tax deduction for compensation in excess of $1 million paid to our named executive officers. Certain compensation is specifically exempt from the deduction limit to the extent that it does not exceed $1 million during any fiscal year or is “performance based” as defined in Section 162(m) of the Code. The Compensation Committee considers the net cost to the Company, and its ability to effectively administer executive compensation in the long-term interests of stockholders. To the extent that awards under the 2006 Equity Incentive Plan constitute performance-based awards, the awards should qualify as “performance-based compensation” for purposes of Section 162(m).

Security Ownership Requirements or Guidelines. While we believe it is important for our executives to have an equity stake in our company in order to help align their interest with those of our stockholders, we do not currently have any equity ownership guidelines for our executive officers.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management. Based on this review and discussion, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included our Annual Report on Form 10-K , as amended by our filing on Form 10-K/A, for the year ended December 31, 2006, and in our proxy statement for the 2007 annual meeting of shareholders.

Submitted by the Compensation Committee of the Board of Directors

Paul E. Freiman, Chairman,

Frank C. Becker,

Bernard A. Fox and

Erick E. Hanson

Executive Compensation

Summary of Compensation.

The following table sets forth certain summary compensation information for the fiscal year ended December 31, 2006, for services rendered by each person who served as the principal executive officer or principal financial officer of the Company at any time during 2006, for the executive officers of the Company who were serving as executive officers on December 31, 2006, and for one additional former executive officer who would have been among our most highly compensated executive officers if he had been serving as an executive officer on December 31, 2006. We refer to these individuals as our “named executive officers.”

2006 SUMMARY COMPENSATION TABLE

Name and Principal Position	Salary($)		Bonus($)⁽⁷⁾		Stock Awards($)		Options Awards⁽⁸⁾		Non-Equity Incentive Plan Compensation		All Other Compensation⁽⁹⁾		Total

Guillermo A. Herrera,⁽¹⁾	$	425,000	$	—-		$ —-	$	773,671		$ —-	$	19,290	$	1,217,961
Former Chief Executive Officer and President

Jeffrey W. Sherman, M.D.,⁽²⁾	$	275,000	$	—-		$ —-	$	94,400		$ —-	$	10,824	$	380,224
Chief Medical Officer and Executive Vice-President

Tim Walbert,⁽³⁾	$	230,154	$	50,000		$ —-	$	153,419		$ —-	$	12,088	$	445,661
Executive Vice President, Commercial Operations

Ronald Pauli,⁽⁴⁾	$	83,692	$	50,000		$ —-	$	24,817		$ —-	$	3,959	$	162,468
Former Chief Financial Officer and Secretary

Imran Ahmad, Ph.D.,⁽⁵⁾	$	99,240	$	—-		$ —-	$	15,121		$ —-	$	260,958	$	375,319
Former Chief Scientific Officer and Executive Vice President

Lawrence A. Kenyon,⁽⁶⁾	$	160,192	$	—-		$ —-	$	69,246		$ —-	$	191,870	$	421,308
Former Chief Financial Officer and Secretary

(1)	Mr. Herrera is the former President and Chief Executive Officer; Mr. Herrera’s employment with the Company ended March 23, 2007.
(2)	Dr. Sherman is the former Chief Medical Officer and Executive Vice President of the Company. Dr. Sherman’s employment with the Company ended June 18, 2007.
(3)	Mr. Walbert is the former Executive Vice President-Commercial Operations. He was hired on January 17, 2006 and served in that position until May 31, 2007.
(4)	Mr. Pauli is the former Chief Financial Officer; Mr. Pauli was hired on August 4, 2006 and left the Company’s employ on March 21, 2007.
(5)	Dr. Ahmad is the former Chief Scientific Officer and Executive Vice President; Dr. Ahmad resigned as of May 3, 2006; all unvested stock options were cancelled as of that date.
(6)	Mr. Kenyon is the former Chief Financial Officer; Mr. Kenyon separated from service as an employee as of August 31, 2006 and provided consulting services to the Company until May 31, 2007.
(7)	In light of the Company’s performance in 2006, bonuses for 2006 were not paid. See “Executive Compensation Decisions for 2006,” above. The amounts reported under this column for Messrs. Pauli and Walbert represent signing bonuses paid each executive upon his hire.
(8)	Amounts reported reflect FAS 123R expense related to option awards for 2006; no forfeiture rate assumption is applied.
(9)	The amount reported for Mr. Herrera represents the Company’s contribution to his 401K account ($6,600), life insurance premiums paid by the Company ($690), and a monthly car allowance ($12,000); the amount reported for Mr. Pauli represents the Company’s contribution to his 401K account ($1,845), a monthly car allowance ($2,000) and life insurance premiums paid by the Company ($114); the amount reported for Mr. Kenyon represent the Company’s contributions to his 401K account ($6,117), payments made due to his separation as an employee of the Company ($183,353), and a monthly car allowance ($2,400); the amount reported for Dr. Sherman reflects the Company’s contribution to his 401K account ($6,600), a monthly car allowance ($3,600), and life insurance premiums paid by the Company ($624); the amount reported for Mr. Walbert reflects the Company’s contributions to his 401K account ($6,150), a monthly car allowance ($5,750), and life insurance premiums paid by the Company ($188); the amount reported for Dr. Ahmad represents the Company’s contributions to his 401K account ($4,362), payments made due to his termination from the Company ($255,381), including salary continuation, and a monthly care allowance ($1,215).

GRANTS OF PLAN-BASED AWARDS IN 2006

The following table sets forth information with respect to each grant of an award made to a named executive officer during the fiscal year ended December 31, 2006, under any plan, contract, authorization or arrangement pursuant to which cash, securities, similar instruments or other property may be received.

			Estimated Future Payouts Under Non-Equity Incentive Plan Awards⁽¹⁾					Estimated Future Payout Under Equity Incentive Plan Awards			All Other Stock Awards; No. of Shares of Stock or Units	All Other Option Awards; No. of Securities Underlying Option		Aggregate Grant Date Fair Value of Stock or Option Award⁽³⁾		Exercise or Base Price Option Awards


Name	Grant Date⁽²⁾		Threshold	Target		Maximum		Threshold	Target	Maximum

Guillermo Herrera⁽⁴⁾		12/5/06 1/1/06		$	212,500	$	425,000						150,000	$	699,000	$	7.11

Jeffrey Sherman⁽⁵⁾		1/25/06 12/5/06											25,000 80,000	$ $	210,500 372,800	$ $	12.46 7.11
		1/1/06		$	82,500	$	137,500

Ronald Pauli⁽⁶⁾		8/28/06 12/5/06											75,000 25,000	$ $	263,250 116,500	$ $	5.17 7.11
		8/28/06		$	72,000	$	120,000

Tim Walbert⁽⁷⁾		1/17/06 12/5/06											75,000 100,000	$ $	607,500 466,000	$ $	12.02 7.11
		1/17/06		$	72,000	$	120,000

Imran Ahmad⁽⁸⁾		1/1/06 1/25/06		$	68,100	$	113,500						25,000	$	210,500	$	12.46

Lawrence Kenyon⁽⁹⁾		1/25/06		$	63,000	$	105,000						25,000	$	210,500	$	12.46

(1)	The Company does not define a threshold award level; awards reflect non-equity incentive opportunities granted at the beginning of the year or at the time of employment; an executive must be an employee of the Company at the end of the fiscal year to receive an incentive payout.
(2)	Grant dates of January 1, 2006 reflect timing of incentive plan awards as provided by Mr. Herrera’s employment agreement or employment terms as established in writing for Dr. Sherman and Dr. Ahmad.
(3)	Aggregate grant date fair value for option grants to the named executive officers are based on the Black-Scholes option values at the time of the original grant.
(4)	Mr. Herrera’s employment with the Company ended March 23, 2007; the vested portion of his options expired June 21, 2007, 90 days afer the date of his separation from service.
(5)	Dr. Sherman’s employment with the Company ended as of June 18, 2007; the vested portion of his options will expire September 16, 2007, 90 days after the date of his separation from service.
(6)	Mr. Pauli resigned on March 21, 2007; none of his options were vested and therefore all options were cancelled as of that date.
(7)	Mr. Walbert’s employment with the Company ended as of May 31, 2007; the vested portion of his options will expire August 29, 2007, 90 days after the date of his separation from service.
(8)	Dr. Ahmad resigned as of May 3, 2006; all unvested stock options were cancelled as of that date.
(9)	Mr. Kenyon separated from service as an employee as of August 31, 2006; per the terms of his separation agreement, his option grants continued to vest as a consultant until May 31, 2007; the vested portion of his options will expire on August 29, 2007, 90 days after the termination of his consulting services.

Outstanding Equity Awards at December 31, 2006

The following table shows for the fiscal year ended December 31, 2006, certain information regarding outstanding equity awards at fiscal year end for the named executive officers. There were no Stock Awards made to any of the named executive officer for the fiscal year ended December 31, 2006.

			Option Awards⁽¹⁾

Name	Grant Date		Number of Securities Underlying Unexercised Options (Exercisable)		Number of Securities Underlying Unexercised Options (Unexercisable)		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options	Option Exercise Price		Option Expiration Date

Guillermo A. Herrera(2)		10/28/2005		125,000		375,000			$9.06		10/28/2015
		12/5/2006				150,000			7.11		12/5/2016

Jeffrey W. Sherman(3)		8/28/2000		164,450					$19.17		8/28/2010
		2/2/2001		88,550					22.83		2/2/2011
		2/1/2002		37,375					13.78		2/1/2012
		5/8/2003		23,000					13.13		5/8/2013
		2/17/2004		30,000					19.91		2/17/2014
		4/28/2005		7,275		21,825			7.95		4/28/2015
		1/25/2006				25,000			12.46		1/25/2016
		12/5/2006				80,000			7.11		12/5/2016

Imran Ahmad(4)

Lawrence A. Kenyon(5)		8/21/2000		37,950					$15.42		8/29/2007
		2/2/2001		31,625					22.83		8/29/2007
		2/1/2002		8,625					13.78		8/29/2007
		10/24/2002		46,000					12.17		8/29/2007
		2/17/2004		20,000					19.91		8/29/2007
		4/28/2005		10,775		10,775			7.95		8/29/2007
		1/25/2006				6,250			12.46		8/29/2007

Ronald Pauli(6)		8/28/2006				75,000			$5.17		8/28/2016
		12/5/2006				25,000			7.11		12/5/2016

Tim Walbert(7)		1/17/2006				75,000			$12.02		1/17/2016
		12/5/2006				100,000			7.11		12/5/2016

(1)	All outstanding options were underwater as of December 31, 2006.
(2)	As a result of the termination of Mr. Herrera’s employment, the vested portion of his options expired June 21, 2007, 90 days after the date of his separation from service.
(3)	Dr. Sherman's employment with the Company ended June 18, 2007, with the result that the vested portion of his options will expire September 16, 2007, 90 days after the date of his separation from service.
(4)	All outstanding grants expired August 1, 2006, 90 days after Dr. Ahmad’s termination of employment.
(5)	Mr. Kenyon’s consulting services to the Company ended May 31, 2007, with the result that the vested portion of his options will expire August 29, 2007, 90 days after the termination of his consulting services.
(6)	Mr. Pauli’s employment with the Company terminated on March 21, 2007. None of his options were vested and therefore all options were canceled as of his termination date.
(7)	Mr. Walbert's employment with the Company ended on May 31, 2007, with the result that the vested portion of his options will expire August 29, 2007, 90 days after the date of his separation from service.

Option Exercises and Stock Vested in 2006

For the fiscal year ended December 31, 2006, there were no options exercised nor any vesting of stock awards for any of the named executive officers.

Pension Benefits

We do not provide pension arrangements or post-retirement health coverage for our executive employees. Our executive officers are eligible to participate in our 401(k) defined contribution plan. At our discretion, we may contribute to each participant a matching contribution equal to 3% of the participant’s compensation that has been contributed to the plan, up to a maximum matching contribution in 2006 of $6,600. All of the named executive officers participated in our 401(k) plan during 2006 and received matching contributions.

Employment Agreements

Mr. Herrera. On October 28, 2005, the Company entered into an employment agreement (the “Herrera Employment Agreement”) with Mr. Guillermo A. Herrera in connection with Mr. Herrera’s appointment as President and Chief Executive Officer of the Company. Under the terms of the Herrera Employment Agreement, Mr. Herrera was provided with a base salary of $425,000 and a stock grant of 22,075 shares of the Company’s Common Stock (the “Stock Grant”) under the Company’s 1998 Equity Incentive Plan (the “Plan”), which had a fair market value as of the date of grant of $200,000. The shares included in the Stock Grant became fully vested upon issuance and are non-forfeitable. Additionally, upon commencing his employment, Mr. Herrera was granted an option to acquire 500,000 shares of the Company’s Common Stock at an exercise price of $9.06 per share, which was the closing price of the Company’s Common Stock on the date of grant. Mr. Herrera’s stock option was scheduled to vest in four equal annual installments of 125,000 shares on each of the first four anniversaries of the stock option grant date provided Mr. Herrera was providing services to the Company on each such date. Beginning in 2006, Mr. Herrera became eligible to receive a target bonus of up to 50% of base salary and an overachievement bonus of up to 100% of the base salary, in each case based on the achievement by the Company and Mr. Herrera of certain specific plans and goals established annually by the Compensation Committee in consultation with Mr. Herrera.

The Herrera Employment Agreement provided for automatic termination in the event of Mr. Herrera’s death or in the event that he suffered a Disability (as defined in the Herrera Employment Agreement). In the event Mr. Herrera’s employment terminated on account of his death or Disability, Mr. Herrera (or his estate) would have been entitled to receive his accrued base salary through the date of termination. Additionally, the Company could terminate Mr. Herrera’s employment at any time, with or without Cause (as defined in the Herrera Employment Agreement), effective upon written notice and Mr. Herrera could terminate his employment at anytime upon 30 days prior written notice. In the event of a termination for Cause or upon Mr. Herrera’s termination of his employment, Mr. Herrera would be entitled to receive accrued base salary through the date of termination. In the event of termination without Cause, Mr. Herrera would be entitled to receive a continuation of his then current base salary for 12 months, subject, however, to set-off for any other earned income and cessation of the salary continuance upon his accepting another full-time position or upon his providing services to a competing business or breach of the restrictive covenants set forth in the Herrera Employment Agreement. In addition, following a change of control (as defined in the Herrera Employment Agreement), if Mr. Herrera’s employment was terminated within one (1) year, or he terminated his employment for “Good Reason” (as defined in the Herrera Employment Agreement) within one year after a change in control, in addition to a continuation of his base salary for 12 months, Mr. Herrera would also have been entitled to a lump sum payment equal to the prior year’s bonus, if any, plus all of his unvested options would have immediately vested and been exercisable. Mr. Herrera’s employment was initially terminated without Cause in March 2007. and as a result, Mr. Herrera’s salary was to be continued for twelve months from the date of his termination on March 23, 2007. However, subsequent to his termination, the Company determined that Mr. Herrera’s termination should have been for Cause with the result that no salary continuance is now being paid to Mr. Herrera.

Mr. Birch. On March 23, 2007, the Company entered into an employment agreement (the “Birch Employment Agreement”) with Mr. Laurence P. Birch in connection with Mr. Birch’s appointment as President and Chief Executive Officer of the Company. Under the terms of the Birch Employment Agreement, Mr. Birch was provided with a base salary of $275,000. Additionally, upon commencing his employment, Mr. Birch was granted an option to acquire 300,000 shares of the Company’s Common Stock at an exercise price of $1.90 per share, which was the average of the high and low price of the Company’s Common Stock on the date of grant. Mr. Birch’s stock option is scheduled to vest in four equal annual installments of 75,000 shares on each of the first four anniversaries of the stock option grant date provided Mr. Birch is still providing services to the Company on each such date. Additionally, the Company committed to provide an award of 180,665 shares of restricted stock (which would vest over four years) to Mr. Birch upon sufficient shares becoming available under the 2006 Equity Incentive Plan as a result of the cancellation or termination of prior awards made to others becoming available under the plan or the stockholders approving an increase in the number of shares available under the plan. These restricted shares were awarded to Mr. Birch in June 2007. Mr. Birch is eligible to receive a target bonus of up to 50% of base salary and an overachievement bonus of up to 100% of the base salary, in each case based on the achievement by the Company and Mr. Birch of certain specific plans and goals established annually by the Compensation Committee in consultation with Mr. Birch.

The Birch Employment Agreement provides for automatic termination in the event of Mr. Birch’s death or in the event that he suffers a Disability (as defined in the Birch Employment Agreement). In the event Mr. Birch’s employment terminates on account of his death or Disability, Mr. Birch (or his estate) would be entitled to receive his accrued base salary through the date of termination. Additionally, the Company may terminate Mr. Birch’s employment at any time, with or without Cause (as defined in the Birch Employment Agreement), effective upon written notice and Mr. Birch may terminate his employment at anytime upon 30 days prior written notice. In the event of a termination for Cause or upon Mr. Birch’s election to terminate his employment, Mr. Birch would be entitled to receive accrued base salary through the date of termination. In the event of termination by the Company without Cause after Mr. Birch has been with the Company for six months, Mr. Birch would be entitled to receive a continuation of his then current base salary for 12 months, subject, however, to cessation of the salary continuance upon his accepting another full-time position or breach of the restrictive covenants set forth in the Birch Employment Agreement. In addition, following a change of control (as defined in the Birch Employment Agreement), if Mr. Birch’s employment was terminated within one (1) year, or he terminated his employment for “Good Reason” (as defined in the Birch Employment Agreement) within one year after a change in control, in addition to the 12 month’s of salary continuance, Mr. Birch would also be entitled to a lump sum payment equal to the prior year’s bonus, if any, plus all of his unvested options and restricted stock would become immediately vested and exercisable.

Other Named Executive Officers. Each of the named executive officers, other than Mr. Herrera, accepted employment with the Company on the basis of a term sheet which set forth the salary and benefits to be provided by the Company, including, but not limited to, an undertaking by the Company to provide salary continuation payments, under certain circumstances, upon a termination of the individual’s employment with the Company as a result of termination or a change of control, at the salary level in existence at the date of termination.

Pursuant to the terms of employment for Mr. Ron Pauli, our former Chief Financial Officer, he received a base salary of $240,000, a sign-on bonus of $50,000 when he was hired in 2006, and eligibility for a target bonus of up to 30% of base salary and an overachievement bonus of up to 50% of base salary. Upon a termination of employment by the Company without cause, at any time after six months of employment, or within twelve months of a change of control (as defined in the 2006 Equity Incentive Plan), Mr. Pauli would have been entitled to receive a continuation of his then current salary for six months.

Dr. Jeffrey Sherman, our former Executive Vice President and Chief Medical Officer had a base salary in 2006 of $275,000 and, in accordance with the terms of his employment, was eligible for discretionary stock options and a bonus of up to a maximum of 50% of base salary. Dr. Sherman left the Company's employ in June 2007, and, pursuant to a separation and mutual release of claims entered into with Dr. Sherman, he is receiving six months of salary continuance. See “Separation Agreements.”

Dr. Imran Ahmad, our former Executive Vice President and Chief Scientific Officer, had a base salary in 2006 of $227,000 and would have been eligible for stock options and a bonus of up to a maximum of 50% of his base salary. Upon severance of employment by either party Dr. Ahmad was eligible for continuation of salary for 12 months. See “Payments Upon Termination or Change in Control - Summary of Actual Payments Upon Termination of Employment in 2006.”

Mr. Timothy Walbert, our former Executive Vice President - Commercial Operations, was hired in 2006 at a base salary of $240,000 and a sign-on bonus of $50,000, with eligibility for stock options and a bonus of up to a maximum of 50% of base salary. Mr. Walbert left the Company’s employ in May 2007 and, pursuant to a separation and mutual release of all claims entered into with Mr. Walbert, he is receiving six months of salary continuance. See “Separation Agreements.”

Lawrence Kenyon, our former Chief Financial Officer, was paid a base salary in 2006 of $210,000 and, as provided in his employment term sheet, would have received salary continuation for six months if his employment were terminated by the Company. Upon Mr. Kenyon’s departure, the Company entered into a separation agreement and mutual release of claims which provided for nine months severance in exchange for on-going consulting services. See “Separation Agreements,” and “Payments Upon Termination or Change in Control - Summary of Actual Payments Upon Termination of Employment in 2006.”

For each of the named executive officers, our equity incentive plans provide for vesting of all unvested options upon the occurrence of a change of control as defined in the applicable plan. Each of our named executive officers was also eligible to receive the benefits generally made available to our employees and officers.

Separation Agreements.

On June 13, 2006, the Company entered into a separation agreement and release of all claims (the “Kenyon Separation Agreement”) with Mr. Lawrence A. Kenyon, our former Chief Financial Officer and Secretary of the Company. Pursuant to the Separation Agreement, which took effect upon Mr. Kenyon’s termination of employment with the Company on August 31, 2006, for a period of nine (9) months after August 31, 2006, Mr. Kenyon received salary continuation based upon his last monthly salary of $17,500, payment or reimbursement for medical and dental coverage for Mr. Kenyon and his family, and options previously granted to Mr. Kenyon continued to vest. In exchange for those benefits, and again for a period of nine (9) months after his resignation became effective, Mr. Kenyon provided on-going consulting services to the Company and has agreed to abide by certain non-compete, non-solicitation and confidentiality provisions. The Separation Agreement also contains a mutual release of all claims by the parties. All salary continuance and benefits provided to Mr. Kenyon ended on May 31, 2007.

On May 10, 2007, the Company entered into a separation agreement and release of all claims (the “Walbert Separation Agreement”) with Timothy Walbert, our former Executive Vice President - Commercial Operations. Pursuant to the Walbert Separation Agreement, which took effect upon Mr. Walbert’s termination of employment with the Company on May 31, 2007, for a period of six (6) months after May 31, 2007, Mr. Walbert receives a salary continuation based upon his last monthly salary of $20,000, plus reimbursement for two months of COBRA medical insurance coverage. The Walbert Separation Agreement also contains a mutual release of all claims by the parties.

On May 24, 2007, the Company entered into a separation agreement and release of all claim (the “Sherman Separation Agreement”) with Dr. Jeffrey W. Sherman, our former Executive Vice President and Chief Medical Officer. Pursuant to the Sherman Separation Agreement, which took effect upon Dr. Sherman’s termination of employment with the Company on June 18, 2007, for a period of six (6) months after June 18, 2007, Dr. Sherman receives a salary continuation based upon his last month salary of $22,917, plus reimbursement for two months of COBRA medical insurance coverage. The Sherman Separation Agreement also contains a mutual release of all claims by the parties.

Payments Upon Termination or Change in Control

The following tables set forth information regarding potential payments and benefits that each named executive officer who was serving as an executive officer on December 31, 2006 would receive upon termination of employment or a change of control of NeoPharm under specified circumstances, assuming that the triggering event in question occurred on December 29, 2006, the last business day of the fiscal year.

Summary of Potential Payments Upon Termination or Change of Control

Name⁽¹⁾	Termination For Cause⁽²⁾		Voluntary Termination for Good Reason by Executive⁽³⁾		Retirement		Death		Disability		Termination w/o Cause by NeoPharm⁽⁴⁾		Voluntary Termination w/o Good Reason by Executive		Change of Control⁽⁵⁾

Guillermo A. Herrera	$	—	$	850,000	$	—	$	—	$	—	$	425,000	$	—	$	850,000

Jeffrey W. Sherman	$	137,500	$	—	$	—	$	—	$	—	$	137,500	$	—	$	137,500

Timothy Walbert	$	—	$	—	$	—	$	—	$	—	$	120,000	$	—	$	120,000

Ronald Pauli⁽⁶⁾	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

(1)	Mr. Kenyon and Dr. Ahmad are not reported due to their separation from service with the Company during 2006; the amount paid to each individual as a result of his separation is reported in the “Summary of Actual Payments Upon Termination of Employment in 2006” table below. Each of the other named executive officers has left the Company's employ subsequent to December 31, 2006.
(2)	Dr. Sherman's employment term sheet provided for the payment of six (6) months salary continuance if the Company terminated his employment.
(3)	The amount reported for Mr. Herrera reflects one year of full salary and 100% of his maximum bonus opportunity per the terms of his employment agreement.
(4)	The amounts for Messrs. Herrera, Sherman and Walbert reflect one year, six months and six months, respectively, of salary per the terms of their employment agreement/term sheets.
(5)	The amount reported for Mr. Herrera reflects one year of full salary and 100% of his maximum bonus opportunity per the terms of his employment agreement; the amounts reported for Messrs. Walbert and Sherman reflect six months of salary per their respective term sheets; all executives would be paid their severance only if terminated following a change of control.
(6)	Mr. Pauli, who joined the Company on August 4, 2006, was required to be employed for six months before he could qualify for any severance payment from the Company.

The following table sets forth for each named executive officer whose employment with us terminated during the last fiscal year, information regarding actual payments and benefits received by such named executive officer in connection with termination of employment.

Summary of Actual Payments Upon Termination of Employment in 2006

Name	Cash Payments	Value of Benefits	Non-Employee Options Expense ⁽¹⁾

Dr. Imran Ahmad	$255,381

Lawrence Kenyon	$165,209	$14,011	$4,133

(1)	The amount in this column for Mr. Kenyon represents the amount of compensation expense booked for FAS 123R purposes for options which have continued to vest under the terms of Mr. Kenyon's consulting agreement.

Future Performance Bonus Eligibility

In accordance with the terms of his employment, the maximum annual cash bonus for 2007, as a percentage of 2007 annual base salary, is set at 100% of base salary for Mr. Birch, based upon performance criteria established by the Compensation Committee and the Company’s overall performance. It is to be expected that if other executive officers are hired during 2007, they would also have eligibility to obtain a performance bonus, however, none of the executive officers is guaranteed a bonus. The Compensation Committee may make actual cash bonus awards that may be greater or less than the maximum annual cash bonus based on overall corporate performance and individual performance.

Retention Bonus Arrangements

On April 16, 2007, the Board of Directors, acting on the recommendation of management, modified the bonus program with respect to all employees, including, but not limited to, the then currently employed executive officers of the Company. Under the revised bonus plan, each employee employed as of April 1, 2007, who is still employed by the Company at December 31, 2007, will be entitled to receive one-third (1/3rd) of their target bonus award (the “Retention Bonus”) as a result of remaining with the Company without reference to individual or Company performance. Any employee leaving the employ of the Company prior to that date for any reason, including, but not limited to, resignation or termination, will not be eligible for any part of the Retention Bonus. The remaining two-thirds (2/3rds) of the target bonus, as well as any overachievement bonus, would continue to be subject to the Company’s performance and the individual’s attaining their personal performance goals.

Stock Option Grants

As reported in the “Grants of Plan-Based Awards in 2006” table above, we have granted stock options to our executive officers at various times during 2006 in connection either with an annual review or upon their initial employment by the Company. All stock options granted during 2006 to our executive officers vest as to 25% of the shares on each of the first four anniversaries of the grant date, provided the individual is still providing services to the Company at the applicable vesting date. Unless otherwise noted, all stock options are granted at the closing price of the Company’s stock on the date of grant, with the exception that options granted under the 2006 Equity Incentive Plan are granted with an exercise price equal to the average of the high and low price per share of our common stock reported by NASDAQ on the grant date.

Compensation of Directors

General

The compensation paid to non-employee directors of the Board is determined by the Board of Directors based upon the recommendation of the Corporate Governance Committee, all the members of which are independent directors. Under the Board Compensation Plan recommended by the Corporate Governance Committee and approved by the Board for the 2006-2007 Board term, compensation is paid to non-employee directors as follows:

Board Membership. A restricted stock grant having a value of $50,000 is awarded upon each non-employee Director’s election to the Board of Directors at the Annual Meeting. For the 2006-2007 Board Term, the non-employee Directors were Messrs. Becker, Eidell, Fox, Freiman, Hanson, Kapoor and Safavi. The shares of Restricted Stock do not vest until one year after the date of grant. Non-employee directors elected during the year to fill vacancies receive pro rata grants.

Board Chairman. In addition to the restricted stock grant for Board membership, the individual serving as Chairman of the Board, currently Dr. Kapoor, receives an additional restricted stock grant with a value at the time of grant of $20,000. These shares also vest one year after the date of the grant. In addition, the individual serving as the Chairman of the Board receives a cash payment of $48,000 per year (payable in four installments of $12,000 per quarter).

Corporate Governance Committee Members. Directors serving as members of the Corporate Governance Committee (currently Becker, Fox, Freiman, and Safavi) receive cash compensation of $20,000 per year (payable in four installments of $5,000 per quarter). The individual serving as the Chairman of the Corporate Governance Committee, currently Mr. Hanson, receives cash compensation of $45,000 per year (payable in four installments of $11,250 per quarter).

Audit Committee Members. Directors serving as members of the Audit Committee (currently Backer, Eidell, Freiman, and Hanson) receive cash compensation of $20,000 per year (payable in four installments of $5,000 per quarter). The individual serving as Chairman of the Audit Committee, currently Dr. Safavi, receives cash compensation of $40,000 per year (payable in four installments of $10,000 per quarter).

Compensation Committee Members. Directors serving as members of the Compensation Committee (currently Becker, Fox, and Hanson) receive cash compensation of $8,000 (payable in four installments of $2,000 per quarter). The individual serving as Chairman of the Compensation Committee, currently Mr. Freiman, receives annual cash compensation of $20,000 (payable in four installments of $5,000 per quarter).

The following table sets forth the compensation paid to our non−employee directors, including annual board and committee retainer fees for the fiscal year ended December 31, 2006:

Director Compensation
Name⁽¹⁾	Fees Earned or Paid in Cash		Restricted Stock Awards		Option Awards		Non-Equity Incentive Plan Compensation		Change in Pension Value and Nonqualified Deferred Comp Earnings		All Other Compensation		Total

Frank C. Becker^(2)(3)(4)		$48,000		$58,872		-		-		-		-		$106,872
Ronald G. Eidell ⁽²⁾		$20,000		$49,622		-		-		-		-		$69,622
Bernard A. Fox ⁽³⁾⁽⁴⁾		$28,000		$49,724		-		-		-		-		$77,724
Paul E. Freiman ^(2)(3)4)(5)		$60,000		$49,724		-		-		-		-		$109,724
Erick E. Hanson ^(2)(3)(4)(6)		$53,000		$49,724		-		-		-		-		$102,724
John N. Kapoor⁽⁷⁾		$48,000		$60,464		-		-		-		-		$108,464
Kaveh T. Safavi ^(2)(4)(8)		$60,000		$49,724		-		-		-		-		$109,724

(1)	Does not include Mr. Herrera, our former President and CEO, because, as an employee of the Company, he did not receive separate compensation for his services as a director. Mr. Herrera’s compensation is set forth in the Summary Compensation Table above.
(2)	Messrs. Becker, Eidell, Freiman, Hanson, and Safavi serve as members of the Audit Committee of the Board of Directors.
(3)	Messrs. Becker, Fox, Freiman, and Hanson serve as members of the Compensation Committee of the Board of Directors.
(4)	Messrs. Becker, Fox, Freiman, Hanson and Safavi serve as members of the Corporate Governance Committee of the Board of Directors.
(5)	Mr. Freiman serves as the Chairman of the Compensation Committee of the Board of Directors.
(6)	Mr. Hanson serves as the Chairman of the Corporate Governance Committee of the Board of Directors.
(7)	Dr. Kapoor serves as the Chairman of the Board of Directors.
(8)	Dr. Safavi serves as the Chairman of the Audit Committee of the Board of Directors.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee currently consists of Messrs. Becker, Fox, Freiman, and Hanson. No member of the Compensation Committee was at any time during the fiscal year ended December 31, 2006, or formerly, an officer or employee of NeoPharm, Inc. or any subsidiary of NeoPharm, Inc., nor has any member of the Compensation Committee had any relationship with NeoPharm, Inc. during the fiscal year ended December 31, 2006 requiring disclosure under Item 404 of the Regulation S-K under the Securities Exchange Act of 1934.

None of our executive officers has served as a director or member of the compensation committee (or other committee serving an equivalent function) of any other entity, one of whose executive officers served as a director or member of the Compensation Committee of NeoPharm, Inc.

SECURITY OWNERSHIP

Except as otherwise noted, the following table sets forth certain information regarding beneficial ownership of shares of the Common Stock as of June 12, 2007 (unless otherwise noted) by (i) all those known by the Company to be beneficial owners of more than 5% of its outstanding Common Stock, (ii) each director of the Company, (iii) each of the named executive officers, and (iv) all executives and directors as a group. Unless otherwise noted, each person’s address is in care of NeoPharm, Inc., 1850 Lakeside Drive, Waukegan, Illinois 60085.

Name	Amount and Nature of Beneficial Ownership⁽¹⁾			Percent of Class

John N. Kapoor, Ph.D.		5,403,738	⁽²⁾		19.22%
John N. Kapoor 1994A Annuity Trust		1,955,935	⁽³⁾		6.96
Nikos Hecht		2,525,110	⁽⁴⁾		8.99
GAM Holding AG		1,706,797	⁽⁵⁾		6.08
Jeffrey W. Sherman, M.D.		367,456	⁽⁶⁾		1.29
Timothy Walbert		19,750	⁽⁷⁾		*
Frank C. Becker		50,462			*
Ronald G. Eidell		101,841	⁽⁸⁾		*
Bernard A. Fox		16,030			*
Paul E. Freiman		15,430			*
Erick E. Hanson		36,405	⁽⁹⁾		*
Kaveh T. Safavi, M.D.		52,284	⁽¹⁰⁾		*
Laurence P. Birch		-0-			*
Guillermo Herrera		191,751	⁽¹¹⁾		*
Imran Ahmad, Ph.D.		-0-			*
Lawrence A. Kenyon		172,000	⁽¹²⁾		*
Ronald Pauli		2,000			*
All executive officers and directors as a group (14 persons)		6,429,147	⁽¹³⁾		22.22

__________

* Indicates ownership of less than 1%.

(1)	Based on 28,086,688 shares of Common Stock outstanding as of June 12, 2007. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the “Commission”) and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options or warrants exercisable or convertible within 60 days are deemed outstanding for purposes of computing the percentage of the person or group holding such options.
(2)	Includes 21,412 shares that may be acquired pursuant to vested options, 1,509,085 shares held by the John N. Kapoor Trust, dated 9/20/89 (the “JNK Trust”), of which Dr. Kapoor is the sole trustee and sole beneficiary, and 1,144,586 shares held by EJ Financial/NEO Management, L.P. (the “Limited Partnership”) of which John N. Kapoor is Managing General Partner. The amount shown also includes: 379,500 shares which are held by the John and Editha Kapoor Charitable Foundation (the “Charitable Trust”), of which Dr. Kapoor is the sole trustee; 1,955,935 shares which are owned by the John N. Kapoor 1994-A Annuity Trust (the “Annuity Trust”) of which the sole trustee is Mr. Rao Akella, who is an employee of EJ Financial Enterprises, Inc., of which Dr. Kapoor is the sole shareholder and President; and 393,220 shares which are owned by four trusts which have been established for Dr. Kapoor’s children (the “Children’s Trusts”) of which the sole trustee is Mr. Akella. Dr. Kapoor does not have or share voting, investment or dispositive power with respect to the shares owned by the Annuity Trust (the shares held by the Annuity Trust are also reported separately as the Annuity Trust is the owner of 5% or more of the Common Stock) or the Children’s Trusts and Dr. Kapoor disclaims beneficial ownership of these shares as well as the shares held by the Charitable Trust.
(3)	The sole trustee of the John N. Kapoor 1994-A Annuity Trust (the “Annuity Trust”) is Mr. Rao Akella, who also serves as trustee for four trusts which have been established for the children of Dr. Kapoor (the “Childrens’ Trusts”) and which collectively own 393,220 shares. Mr. Akella is an employee of EJ Financial Enterprises, Inc., of which Dr. Kapoor is the sole shareholder and President. The shares held by the Children’s Trusts are not included in the shares reported by the Annuity Trust.

(4)	Beneficial ownership of the shares has been reported on a Schedule 13G filed January 19, 2007 by Mr. Nikos Hecht as the managing member of each of Aspen Advisors (which reports beneficial ownership of 262,890 shares) and Sporis Advisors (which reports beneficial ownership of 1,322,100 shares) and as the sole member of the managing member of Sporis Capital (which reports beneficial ownership with Sportis Partners, of 940,110 shares) and as the owner of a majority of the membership interests in each of Sporis Capital, Aspen Advisors and Sporis Advisors. The principal address for Mr. Hecht and Aspen Advisors is 152 W. 57th Street, New York, NY 10019. The principal address of each of Sporis Advisors, Sporis Partners and Sporis Capital is 314 S. Galena Street, Suite 300, Aspen, CO 816111.
(5)	The address for GAM Holding AG (“GAM”) is Klaustrasse 10, 8008 Zurich, Switzerland. Ownership is as reported by GAM on a Schedule 13G filed on January 12, 2007. GAM states in its Schedule 13G filing that, as of December 31, 2006, the Company’s shares are held by its subsidiaries, GAM International Management Limited and GAM London Ltd., and that: “No subsidiary of GAM holds more than 5% of the outstanding voting securities.”
(6)	Includes 364,175 shares that may be acquired pursuant to options exercisable as of June 12, 2007 or that will become exercisable within 60 days of June 12, 2007.
(7)	Includes 18,750 shares that may be acquired pursuant to options exercisable as of June 12, 2007 or that will become exercisable within 60 days of June 12, 2007.
(8)	Includes 80,000 shares that may be acquired pursuant to options exercisable as of June 12, 2007 or that will become exercisable within 60 days of June 12, 2007.
(9)	Includes 33,637 shares that may be acquired pursuant to options exercisable as of June 12, 2007 or that will become exercisable within 60 days of June 12, 2007.
(10)	Includes 27,312 shares that may be acquired pursuant to options exercisable as of June 12, 2007 or that will become exercisable within 60 days of June 12, 2007.
(11)	Includes 125,000 shares that may be acquired pursuant to options exercisable as of June 12, 2007 or that will become exercisable within 60 days of June 12, 2007.
(12)	Includes 172,000 shares that may be acquired pursuant to options exercisable as of June 12, 2007 or that will become exercisable within 60 days of June 12, 2007.
(13)	Includes 842,286 shares that may be acquired pursuant to options exercisable as of June 12, 2007 or that become exercisable within 60 days of June 12, 2007.

Equity Compensation Plans

The following table sets forth certain information as of December 31, 2006, with respect to compensation plans under which shares of NeoPharm, Inc.’s Common Stock may be issued.

Equity Compensation Plan Information

Plan category	Number of securities to be issued upon exercise of outstanding options		Weighted-average exercise price of outstanding options		Number of securities remaining available for future issuance(2)

Equity compensation plans approved by stockholders(1)		2,765,808		$15.00		360,593

Equity compensation plans not approved by stockholders		-		-		-
Total		2,765,808		$15.00		360,593

__________

(1)

Includes the 1998 Equity Incentive Plan (the “1998 Plan”) and the 2006 Equity Incentive Plan (the “2006 Plan”). The 1998 Plan was replaced in June 2006 by the 2006 Plan. Accordingly, no further equity derivative securities can be issued under the 1998 Plan. The 1998 Plan and the 2006 Plan are described in more detail in Note 6 in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

(2)

Under the terms of the 2006 Plan, securities will again become available for issuance under the 2006 Plan if the previously granted options or other awards expire without being exercised or are cancelled or terminated for any reason other than expiration or termination of the 2006 Plan.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

There were no transactions since January 1, 2006 through the date of this report, or any currently proposed transactions, in which the Company was or is to be a participant and the amount involved exceeds $120,000, and in which any related person had or will have a direct or indirect material interest except for the compensation matters described elsewhere in this report.

The Company has not yet adopted a written related-person transactions policy. However, our Audit Committee has been delegated the authority to review all related party transactions for potential conflict of interest situations and, as appropriate, approves or disapproves such related party transactions. No member of the Audit Committee who has any interest in a specific related party transaction may participate in the review of such transaction. During the upcoming year, the Audit Committee will give full consideration to the adoption of a formal policy regarding related-person transactions and, if adopted, promptly post it on the Company’s website.

During 2006, the Company paid $80,000 to The Thomson Corporation for investor relations services and technical literature. In August 2006, The Thomson Corporation acquired Solucient, LLC, a healthcare information and business intelligence company at which Dr. Kaveh T. Safavi, a director of the Company, has been employed since 2002, currently as its Senior Vice President and Chief Medical Officer. The Company’s transactions with The Thomson Corporation were conducted without any involvement by Dr. Safavi and the Company believes that such transactions were conducted at arms’ length and upon the same terms that would have been obtained absent any relationship with Dr. Safavi.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based solely on the Company’s review of the copies of all forms it has received, and any written representations made by the reporting persons to the Company, the Company believes that its directors, executive officers and 10% holders complied with the filing requirements of Section 16(a).

REPORT OF THE AUDIT COMMITTEE

The Audit Committee of the Board of Directors is responsible for assisting the Board of Directors in its general oversight of the Company’s financial reporting, its system of internal control and the independence and performance of its independent registered public accounting firm. The Audit Committee is currently composed of five non-employee directors and operates under a written charter adopted and approved by the Board of Directors.

Responsibility for the preparation, presentation and integrity of the Company’s financial statements, the Company’s accounting and financial reporting process, including the system of internal control, and procedures to assure compliance with applicable accounting standards and applicable laws and regulations, rests with the Company’s management. The Company’s independent registered public accountants are responsible for auditing those financial statements and expressing an opinion as to their conformity with generally accepted accounting principles. It is the Audit Committee’s responsibility, on behalf of the Board of Directors, to provide independent oversight and review of the actions of management and the independent registered public accounting firm. The Audit Committee members, however, are not professional accountants or auditors, and their functions are not intended to duplicate or certify the activities of management and the independent registered public accounting firm.

The Audit Committee relies, without independent verification, on the information provided to it and on the representations made by management that the financial statements have been properly prepared in conformity with U.S. generally accepted accounting principles and on the representations of the Company’s independent registered public accounting firm included in their report on the Company’s financial statements. Accordingly, although the Audit Committee members consult with and discuss these matters and their questions and concerns with management and the independent registered public accounting firm, such oversight cannot assure that management has maintained appropriate accounting and financial reporting principles or appropriate internal control and procedures consistent with accounting standards and applicable laws and regulations. Furthermore, the Audit Committee’s considerations and discussions with management and the independent registered public accounting firm cannot assure that the audit of the Company’s financial statements has been carried out in accordance with U. S. generally accepted auditing standards, that the financial statements are presented in accordance with U. S. generally accepted accounting principles or that the Company’s independent registered public accounting firm are in fact “independent.”

During the year ended December 31, 2006, the Audit Committee held 8 meetings. The meetings were designed, among other things, to facilitate and encourage communication among the Audit Committee, management, and the Company’s independent registered public accounting firm, KPMG LLP. The Audit Committee discussed with the Company’s independent registered public accounting firm, with and without management present, the results of their audit of the consolidated financial statements and their reviews of interim financial information.

The Audit Committee has reviewed and discussed the consolidated audited financial statements for the fiscal year ended December 31, 2006 with management and KPMG LLP.

The Audit Committee also discussed with KPMG LLP matters required to be discussed with audit committees under generally accepted auditing standards, including, among other things, matters related to the conduct of the audit of the Company’s financial statements and the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (Communication with Audit Committees) by Statements of Auditing Standards Nos. 89 and 90.

KPMG LLP also provided to the Audit Committee the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Audit Committee discussed with KPMG LLP their independence from the Company. When considering KPMG LLP’s independence, the Audit Committee considered whether their provision of services to the Company beyond those rendered in connection with their audit and review of the Company’s financial statements was compatible with maintaining their independence. The Audit Committee also reviewed, among other things, the nature of the non-audit services provided and the amount of fees paid to KPMG LLP for their audit and non-audit services, both separately and in the aggregate.

Based on its review and these meetings, discussions and reports, and subject to the limitations on our role and responsibilities referred to above and in the Audit Committee Charter, the Audit Committee recommended to the Board of Directors that the Company’s audited financial statements for the year ended December 31, 2006, be included in the Company’s Annual Report on Form 10-K.

Submitted by the Audit Committee of the Board of Directors

Kaveh T. Safavi, Chairman,

Frank C. Becker

Ronald G. Eidell

Paul E. Freiman and

Erick E. Hanson

The foregoing report of the Audit Committee shall not be deemed to be incorporated by reference by any general statement incorporating all or any portion of this Proxy Statement into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate this information by reference.

PROPOSAL NO. 2

APPROVAL OF AMENDMENTS TO THE 2006 EQUITY INCENTIVE PLAN

TO INCREASE AUTHORIZED SHARES AND MAXIMUM AWARD OF SHARES TO

ANY INDIVIDUAL IN A YEAR

General

In October 2005, our Board of Directors adopted, and our stockholders subsequently approved, our 2006 Equity Incentive Plan (the “Plan”). There were 1,000,000 shares of our common stock initially reserved for issuance under the Plan. On June 19, 2007, our Board of Directors approved amendments to the Plan, subject to stockholder approval, to (i) increase the number of shares authorized for issuance under the Plan from 1,000,000 to an aggregate total of 3,400,000 shares and (ii) increase the maximum number of shares of Common Stock that may be granted to any Grantee during any calendar year, or earned by any Grantee under any performance based award during any calendar year, from 500,000 to 750,000 shares (the “Amendments”).

The Plan is the only equity incentive plan currently maintained by the Company for the awarding of stock options, restricted stock and performance based awards. During the 2006 fiscal year, we granted options to purchase 430,000 shares of Common Stock under the Plan to our executive officers at exercise prices ranging from $5.17 to $7.11 per share, and we granted to all other employees (excluding executive officers and directors) as a group options to purchase 212,000 shares of Common Stock at exercise prices ranging from $6.51 to $7.11 per share. In 2006, we also issued 58,083 shares of restricted stock under the Plan to our non-employee directors as part of their annual compensation. In March 2007, we granted options to purchase 300,000 shares of Common Stock under the Plan to Mr. Laurence Birch upon his employment as President and CEO at an exercise price of $1.90 per share. In addition, as part of the terms of his employment, the Company committed to issue to Mr. Birch 180,665 shares of restricted stock under the Plan upon shares for such an award becoming available either through the expiration or cancellation of awards previously granted to others or stockholder approval of an increase in the number of shares available under the Plan. These shares of restricted stock were issued to Mr. Birch on June 19, 2007. As of June 19, 2007, there are 370,752 shares available for issuance under the Plan.

The purpose of the Plan is to provide a means whereby employees, directors and consultants develop a sense of proprietorship and personal involvement in the development and financial success of the Company and to encourage them to devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its stockholders. In addition, the Plan seeks to advance the interests of the Company and enable the Company to attract able individuals to become employees or serve as directors or consultants and to provide a means whereby those individuals upon whom the responsibilities of the successful administration and management of the Company are dependent can acquire and maintain ownership of shares of the Company's Common Stock, thereby strengthening their concern for the welfare of the Company.

The Company previously maintained the 1995 Equity Incentive Plan (the “1995 Plan”) and the 1998 Equity Incentive Plan, as amended and restated (the “1998 Plan” and with the 1995 Plan, the “Prior Plans”). As of June 19, 2007, there were no options outstanding and exercisable under the 1995 Plan. No awards have been made under the 1995 Plan since January 16, 1998. As of June 19, 2007, options covering 1,442,325 shares of Common Stock remained outstanding under the 1998 Plan, and no shares of Common Stock were subject to outstanding awards of restricted stock. No awards have been made under the 1998 Plan since June 20, 2006.

The Board of Directors believes it is desirable to continue to have equity-based awards, as well as to have cash-based awards, available under a long-term incentive plan to be used to recruit new individuals to become employees or serve as directors or consultants, to advance the interests of the Company and its stockholders, and for incentive purposes, where necessary. The Amendments to the Plan will ensure that shares of Common Stock continue to be available for a variety of awards, allowing the Company to choose the incentives most appropriate to individual circumstances and most likely to benefit the Company and its stockholders. In addition, by increasing the maximum number of shares that can be granted to an individual, the Compensation Committee of the Board of Directors will have increased flexibility in designing compensation packages that will meet the competitive demands of the marketplace in retaining, recruiting and hiring new senior management for the Company, while helping to conserve the Company's cash reserves.

Stockholders are being requested in this Proposal 2 to approve the Amendments to the Plan to increase the total number of shares available under the Plan, as so amended, to 3,400,000 and to increase the maximum number of shares of Common Stock that may be granted to or earned by any Grantee during any calendar year to 750,000 shares. The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the 2007 Annual Meeting of Stockholders will be required to approve the Amendments to the Plan. Abstentions will be counted towards the tabulation of votes cast on proposals presented to the stockholders and will have the same effect as negative votes. Broker non-votes are counted towards a quorum, but are not counted for any purpose in determination whether this matter has been approved. A copy of the Plan, as amended, is appended to this proxy statement as Appendix A.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE

"FOR" PROPOSAL NO. 2

The following is a brief summary of the material features of the Plan, as amended. This summary is qualified in its entirety by reference to the full text of the Plan, a copy of which is attached to this Proxy Statement as Appendix A. All capitalized terms which are not defined herein are defined in the Plan.

Summary of Operation of the Plan

Eligibility and Participation

All employees, directors and consultants are eligible to participate in the Plan. For purposes of the Plan, an “employee” means any person, including officers and directors employed by the Company or any subsidiary; a “director” means any individual who is a member of the Board of Directors of the Company; and a “consultant” means any person who is engaged by the Company or any subsidiary to render consulting or advisory services and is compensated for such services and also includes any director of the Company whether compensated for his services or not.

As of the date of this Proxy Statement, approximately 19 employees of the Company are eligible to receive 2006 Plan Awards, including the currently employed named executive officers of the Company set forth in the "2006 SUMMARY COMPENSATION TABLE". In addition, seven currently serving non-employee directors of the Company are eligible to receive Plan Awards, though this number will be reduced to four following the 2007 Annual Meeting of Stockholders as a result of decreasing the number of directors from eight to five. The Company is unable to reasonably estimate the number of other consultants who will be eligible to receive Plan Awards.

The table included in this Proxy Statement under the caption “INFORMATION ABOUT EXECUTIVE AND DIRECTOR COMPENSATION - Grants of Plan-Based Awards in 2006” shows the options granted under the 2006 Plan to the named executive officers during the 2006 fiscal year. During the 2006 fiscal year, options covering an aggregate of 580,000 common shares were granted to all executive officers of the Company as a group; while awards of restricted stock covering an aggregate of 58,083 shares of Common Stock were granted to all non-employee Directors as a group. Of the total executive officer options awarded in 2006, 430,000 shares were awarded under the Plan. As discussed under the heading “INFORMATION ABOUT EXECUTIVE AND DIRECTOR COMPENSATION - Compensation of Directors,” in 2006 each non-employee director received grants of restricted stock under the Plan having a value at the time of grant of $50,000. In addition, upon entering into an employment agreement with Laurence Birch in March 2007 to serve as President and CEO of the Company, the Company granted Mr. Birch 300,000 options under the Plan. The Company also committed to issue Mr. Birch 180,665 shares of Restricted Stock, which vest at the rate of 25% per year beginning on the first anniversary of the date of grant, when sufficient shares became available either through the cancellation or termination of shares subject to awards or the stockholders approving more shares. The restricted shares were issued to Mr. Birch on June 19, 2007.

Because Plan Awards are granted by the Compensation Committee to participants based on a subjective determination of the relative current and future contribution that each individual has made or may make to the long-term welfare of the Company, past awards may not be reflective of future Plan Awards.

Common Stock Available under the Plan

Subject to certain adjustments as described below under the heading “Adjustments,” the maximum number of shares of Common Stock of the Company available for grant to participants under the Plan (the “Share Authorization”) is currently 1,000,000. The Amendments would increase this amount to 3,400,000 shares.

The Amendments will not affect any awards outstanding under the Plan or the Prior Plans, all of which will remain in effect in accordance with their respective terms.

Shares of Common Stock available for issuance under the Plan may be authorized and unissued shares of Common Stock or treasury shares. Shares of Common Stock covered by a Plan Award will be counted as used to the extent they are actually issued. If, and to the extent, an Award shall expire or terminate for any reason without having been exercised in full or shall be forfeited, without, in either case, the holder of such Award having enjoyed the benefits of stock ownership (other than dividends that are likewise forfeited or voting rights), the shares of Common Stock (including Restricted Stock) associated with such an Award becomes available for other Awards; provided; however, that to the extent that the benefit in connection with a 2006 Plan Award is paid in cash, there shall be deducted from the shares of Common Stock available under the Plan a number of shares equal to the amount of cash paid divided by the Fair Market Value (as hereinafter defined) of a share of the Common Stock on the date of such payment.

Maximum Grant

The Plan is intended to comply with Section 162(m) of the Code with respect to Plan Awards granted to employees who are or who may become a “covered employee” as defined in Section l62(m). For purposes of complying with Section 162(m), the Plan currently provides that no more than 500,000 shares of Common Stock may be granted to any Grantee during any calendar year or earned by any Grantee under any performance based award during any calendar year and also limits the amount of compensation that will qualify as performance based compensation under any performance units or performance shares. If approved by the stockholders, the Amendments will increase the maximum number of shares of Common Stock that may be granted to or earned by any Grantee during any calendar year to 750,000 shares.

Administration

As determined by the Board, the Plan is administered by the Compensation Committee of the Board (the “Committee”). The Committee has, among other rights, the full and exclusive discretionary power: to grant Awards and determine the terms and conditions of such Awards; to determine when and to whom Awards will be made; to determine the amount of consideration to be paid for Restricted Stock and the forfeiture and other restrictions to be imposed on such Restricted Stock; to interpret the Plan and make all determinations necessary or advisable for the administration of the Plan; to prescribe, amend, and rescind rules relating to the Plan; to determine the restrictions or conditions of Awards (including the performance criteria and Measuring Period for performance-based Awards) and of Common Stock acquired under an Award; to cancel, with the consent of the Grantee, outstanding Awards and grant new Awards in substitution therefor (but only as permitted by the specific provisions of the Plan); to accelerate the exercisability of, and to accelerate or waive any or all restrictions and conditions applicable to, Awards; to extend, as permitted by the Plan, the time during which Awards may be exercised; to amend Awards with the consent of the Grantee or to amend Awards without the consent of a Grantee if the rights of the Grantee are not adversely affected or as necessary or desirable to carry out the purpose of the Award in light of changes to applicable laws or regulations; to certify that, with respect to any performance based Award, that the underlying performance goals and conditions have been satisfied; to permit an eligible participant to receive Options in lieu of compensation; to approve the manner of payment for Awards and the terms of any loans or guarantees made pursuant to the Plan; to prohibit a Grantee from making an election under Section 83(b) of the Internal Revenue Code; to require written investment representations from Grantees; to make equitable adjustments to Awards as permitted by the Plan; and, to take any other action with respect to any matters relating to the Plan for which it is responsible. Notwithstanding the foregoing, the Committee may not “reprice” Awards without stockholder approval.

Except to the extent prohibited by applicable law or the applicable rules of a stock exchange (including, for this purpose, the rules promulgated by NASDAQ), the Committee may delegate all or any part of its responsibilities and powers to any person or persons selected by it. Any such allocation or delegation may be revoked or modified by the Committee at any time, but such revocation or modification shall not invalidate any prior actions of the Committee's delegate or delegates that were consistent with the terms of the Plan. Notwithstanding any other provision of Plan, unless the Board determines otherwise, the Committee shall not allocate any portion of its responsibilities and powers to any other person or persons with respect to grants to (i) any executive officer, directors or 10% Owners of any class of the Company’s equity securities that are registered pursuant to the Exchange Act, as more fully described under Section 16 of the Exchange Act or (ii) a Named Executive Officer of the Company (acting in such capacity).

Description of Plan Awards

The Plan authorizes the grant or award of (i) ISOs; (ii) NSOs; (iii) SARs; (iv) Restricted Stock; (v) performance units; (vi) performance shares, and (vii) bonuses paid in shares of Common Stock.

Employees may be granted ISOs. Employees, directors and consultants may be granted or awarded NSOs, SARs, Restricted Stock, performance units, performance shares, or Common Stock bonuses.

The “Grant Date” of an Award is the date on which the Committee grants the Award or such later date as specified in advance by the Committee. The term of each Award (subject to restrictions applicable to ISOs) may not be for more than 10 years from the Grant Date, and is subject to earlier termination as permitted by the terms of the Plan. If otherwise eligible, a Grantee may be granted additional Awards in any combination. Finally, to the extent not set forth in the Plan, the terms and conditions of each Award shall be set forth in an Award Agreement.

Options

NSOs may be granted to any eligible participant under the Plan. However, ISOs may be granted only to eligible employees of the Company or any designated subsidiary as permitted under the applicable provisions of the Internal Revenue Code.

No later than the Grant Date of any Option, the Committee is required to determine the Option Price of such Option; provided, however, that the Committee may elect to determine the Option Price as of the date the Grantee is hired or promoted (or similar event), if the Grant Date occurs not more than 90 days after the date of hiring, promotion or other event. The Option Price of an Option (other than an ISO) shall not be less than 85% of the “Fair Market Value” (as defined in the Plan) of the Stock on the Grant Date. The Award Agreement may provide that the Option shall be exercisable for Restricted Stock or that it will be awarded in tandem with a SAR.

If, and to the extent deemed necessary by the Committee with respect to a NSO granted to a Named Executive Officer, the price to be paid for each share of Common Stock upon exercise of the Option shall be less than 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted, the exercisability of such Option must be subject to one or more of the performance goals set forth in the Plan that will enable such Option to qualify as “performance-based compensation” under Treasury Regulations promulgated under Section 162(m) of the Code.

The Committee may, in its discretion, permit an employee, director or consultant eligible to receive Awards under the Plan to elect, prior to earning compensation, to be granted an Option or Options under the Plan in lieu of receiving such compensation. Subject to the express terms of the Plan, such Options shall have such terms and conditions as the Committee in its discretion specifies; provided that, in the judgment of the Committee, the value of such Options on the Grant Date equals the amount of compensation foregone by such employee, director or consultant; and provided, further, that except to the extent such condition may be waived by counsel to the Company, a person who is subject to potential liability under Section 16 of the Exchange Act (a “Section 16 Person”) must irrevocably elect to forego such compensation and acquire such Option at least six months prior to the Grant Date of such Option.

The exercise price of any Option must be paid in full at the time of exercise (i) in cash or by check; (ii) by tendering shares of Common Stock having a Fair Market Value equal to the exercise price; (iii) with the Committee’s approval, surrender of shares of Restricted Stock held by the Grantee for at least six (6) months prior to exercise of the Option and valued at the Fair Market Value (as defined in the Plan) of a share of Common Stock on the date of exercise of the Option; (iv) by a cashless (broker-assisted) exercise; or (v) by a combination of (i), (ii), (iii) and/or (iv). If the exercise price is paid through the tender of previously acquired shares of Common Stock, such shares must have either been purchased on the open market or been held by the participant for at least six months prior to their tender if acquired under the Plan or any other compensation plan maintained by the Company.

If Restricted Stock is used to pay for Stock subject to an Option, the Committee may, but need not, specify that (i) all the shares of Common Stock acquired on exercise of the Option will be subject to the same restrictions as the tendered Restricted Stock, determined as of the date of exercise of the Option, or (ii) a number of shares of Common Stock acquired on exercise of the Option equal to the number of shares of tendered Restricted Stock shall, unless the Committee provides otherwise, be subject to the same restrictions as the tendered Restricted Stock, determined as of the date of exercise of the Option.

Stock Appreciation Rights

The Committee may, in its discretion, grant SARs to eligible participants and, in such case, the Award Agreement will specify the grant price, the term of the SAR and such other provisions as the Committee determines. SARs may be awarded in conjunction with an Option Award (“Tandem SARs”) or independent of any Option Award (“Stand-Alone SARs”). A Tandem SAR may be awarded either at or after the time the related Option Award is granted, provided that a Tandem SAR awarded in conjunction with an ISO may only be awarded at the time the ISO is granted. Notwithstanding any other provision of the Plan, the base price per share of Common Stock covered by a SAR granted under the Plan may not be less than the Fair Market Value of a share of Common Stock on the Grant Date of the SAR, provided, however, that, in the case of a Tandem SAR awarded in conjunction with an ISO granted to a “10% Owner,” (as defined in the Plan) the base price may not be less than 110% of the Fair Market Value of a share of Stock on the Grant Date of the SAR. Unless sooner terminated in accordance with its terms, a Stand-Alone SAR will automatically expire on the tenth anniversary of the Grant Date and a Tandem SAR will expire upon the expiration of the related Option.

Upon the exercise of a SAR, a participant will be entitled to receive payment from the Company in an amount, in cash and/or shares of Common Stock, determined by multiplying (i) the excess of the Fair Market Value of a share of Common Stock on the exercise date over the grant price by (ii) the number of shares of Common Stock with respect to which the SAR is exercised. Except as otherwise specifically provided in the Plan or the Award Agreement, a Tandem SAR will be exercisable only at the same time and to the same extent and subject to the same conditions as the related Option is exercisable. The exercise of a Tandem SAR will terminate the related Option to the extent of the shares of Common Stock with respect to which the SAR is exercised, and vice versa. The Committee may establish such rules and procedures as it deems appropriate for the exercise of SARs under the Plan.

Restricted Stock

The Committee may, in its discretion, grant Restricted Stock to eligible participants. The Committee, in accordance with the terms of the Plan, is required to determine the amount that an individual who has been granted an Award (a “Grantee”) shall pay for shares of Restricted Stock. Such payment shall be made in full by the Grantee before the delivery of the shares and in any event no later than 10 days after the Grant Date for such shares. In the discretion of the Committee, and to the extent permitted by law, payment by Grantees other than a Grantee who is a Section 16 Person, may also be made through loans or guarantees permitted under the Plan. The Committee may, but need not, provide that all or any portion of a Grantee’s Award of Restricted Stock, or Restricted Stock acquired upon exercise of an Option, shall be forfeited, except as otherwise specified in the Award Agreement, upon the Grantee’s termination of Continuous Status as an Employee or Consultant for reasons other than death, Disability (as defined in the Plan) or any other reason specified in the Award Agreement within a specified time period after the Grant Date, or if the Company or the Grantee does not achieve specified performance goals (if any) within a specified time period after the Grant Date and before the Grantee’s termination of Continuous Status as an Employee or Consultant, or upon failure to satisfy such other restrictions as the Committee may specify in the Award Agreement.

Performance Units and Performance Shares

The Committee may also grant performance units and/or performance shares to eligible participants, as evidenced by an Award Agreement. In any such case, the Committee shall establish performance goals for a participant for a particular performance (a “Measuring Period”) period based upon various performance measures as described below under the heading “Performance Measures.” Each performance unit will have an initial value that is established by the Committee at the time of the grant. Each performance share will have an initial value equal to not less than the Fair Market Value of a share of Common Stock on the grant date. The Committee will set performance goals which will, depending on the extent to which they are met, determine the value and/or number of performance units or performance shares that will be paid out to the participant. Performance units will be paid in cash unless payment in shares of Common Stock is provided for in the Award Agreement, in which case the number of shares of Common Stock payable in lieu of cash will be determined by valuing the Common Stock at its Fair Market Value on the date of payment. Performance shares will be paid in shares of Common Stock except to the extent that the Committee determines to pay cash in lieu of Common Stock, in which case the amount of cash will be based on the Fair Market Value of the Common Stock on the business day next preceding the date the cash is to be paid.

Stock Bonuses

The Committee may grant shares of Common Stock as a bonus to any eligible participant in such amount and subject to such terms and conditions as the Committee, in its sole discretion, shall determine.

Performance Measures

The performance goals upon which the payment or vesting of a Plan Award to any eligible participant may be made subject, will be limited to the following performance measures: It must be (1) objective, so that a third party having knowledge of the relevant facts could determine whether the performance goal is met, (2) prescribed in writing by the Committee before the beginning of the applicable Measuring Period or at such later date not later than 90 days after the commencement of the Measuring Period when fulfillment is substantially uncertain and in any event before completion of 25% of the Measuring Period, and (3) based on any one or more of the following performance goals (“performance goals”) (which may be applied to an individual, a Subsidiary, a business unit or division, or the Company and any one or more of its Subsidiaries, business units or divisions as a group, as determined by the Committee): (i) total stockholder return; (ii) the achievement of a specified closing or average closing price of the Stock; (iii) the price of a share of Common Stock or the absolute or percentage increase in the closing or average closing price of the Stock; (iv) Fair Market Value of the Company or any Subsidiary or shares of Common Stock or stock of any Subsidiary, (v) the absolute or percentage increase in market share; (vi) one or more of the following measures of the Company’s net income for the specified Measuring Period determined in accordance with generally accepted accounting principles as consistently applied by the Company: absolute net income (before or after taxes) or operating income or a percentage or absolute dollar increase in net income (before or after taxes) or operating income; earnings per share or a percentage or absolute dollar increase in earnings per share; return on assets employed, equity, capital or investment or a percentage or absolute dollar increase in return on assets employed, equity, capital or investment; absolute gross (or net or operating) margins or percentage increase in gross (or net or operating) margins; absolute cash flow from operations or a percentage in absolute dollar increase in cash flow; or the Company’s absolute gross revenues or a percentage or absolute dollar increase in gross revenues for the specified Measuring Period determined in accordance with generally accepted accounting principles as consistently applied by the Company; and/or (vii) achievement of advances in research; implementation or completion of projects or processes; new product development; development of products to pre-clinical phase; commencement, advancement or completion of clinical trials for a product; FDA or other regulatory body approval for commercialization of products; commercial launch of new products; the formation of joint ventures or collaborations; increase in customer base; measures of customer satisfaction or economic value added. The awards may be based on the Company’s performance alone, or the Company’s performance may be measured against variously weighted published benchmark indices, including, but not limited to, various stock market indices with respect to the price of a share of Common Stock, that the Committee determines are representative of the Company’s peer group.

If and to the extent permitted for Awards intended to qualify as “performance-based” under Section 162(m) of the Code, the Committee may provide for the adjustment of such performance goals to reflect changes in accounting methods, corporate transactions (including, without limitation, dispositions and acquisitions) and other similar types of events or circumstances occurring during the applicable Measuring Period.

Tax Withholding

Whenever under the Plan, cash or shares of Common Stock are to be delivered upon exercise or payment of an Award or upon a share of Restricted Stock becoming nonforfeitable, or any other event with respect to rights and benefits under the Plan, the Company has the right to require as a condition of payment or delivery: (i) that the Grantee remit an amount sufficient to satisfy all federal, state, and local tax withholding requirements related thereto, (ii) the withholding of such sums from compensation otherwise due to the Grantee or from any shares of Common Stock due to the Grantee under the Plan or (iii) any combination of the foregoing.

Additionally, if any disqualifying disposition is made with respect to shares of Common Stock acquired under an ISO granted pursuant to the Plan or any election under Section 83(b) of the Internal Revenue Code is made, the person making such disqualifying disposition or election is required to remit to the Company an amount sufficient to satisfy all federal, state, and local tax withholding requirements thereby incurred; provided that, in lieu of or in addition to the foregoing, the Company shall have the right to withhold such sums from compensation otherwise due to the Grantee or from any shares of Common Stock due to the Grantee under the Plan.

In making any Award, the Committee may elect to pay, as a cash bonus, the amount of the tax owed by Grantee up to a maximum of thirty (30%) percent of the Fair Market Value of the Award.

Change in Control

Under the Plan, a “Change in Control” will be deemed to occur if:

(i) the acquisition or holding by any person, entity or “group” within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (other than by the Company or any of its Subsidiaries or any employee benefit plan of the Company or its Subsidiaries) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either the then-outstanding Common Stock or the combined voting power of the Company's then-outstanding voting securities entitled to vote generally in the election of directors (“Voting Power”); except that no such person, entity or group shall be deemed to own beneficially: (A) any securities held by the Company or a Subsidiary or any employee benefit plan (or any related trust) of the Company or a Subsidiary; (B) any securities acquired pursuant to a benefit plan of the Company or a Subsidiary; (C) any securities issuable pursuant to an option, warrant or right owned by such person, entity or group as of the close of business on the business day immediately preceding the Effective Date; (D) any security that would otherwise be beneficially owned by such person, entity or group as of the close of business on the business day immediately preceding the Effective Date; and (E) any securities issued in connection with a stock split, stock dividend or similar recapitalization or reorganization with respect to shares covered by the foregoing exceptions; or

(ii) individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided that any individual who becomes a director after the Effective Date whose election or nomination for election by the Company's stockholders was approved by at least a majority of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company (as such terms are used in Rule 14a-11 under the Exchange Act)) shall be deemed to be members of the Incumbent Board; or

(iii) approval by the stockholders of the Company of (A) a merger, reorganization or consolidation with respect to which persons who were the respective beneficial owners of the Stock and Voting Power of the Company immediately before such merger, reorganization or consolidation do not, immediately thereafter, beneficially own, directly or indirectly, more than 60%, respectively, of the then-outstanding common shares and the Voting Power of the corporation resulting from such merger, reorganization or consolidation, (B) a liquidation or dissolution of the Company or (C) the sale or other disposition of all or substantially all of the assets of the Company; provided, however, that for the purposes of determining whether a Change of Control has occurred the votes of all Section 16 Persons shall be disregarded in determining whether stockholder approval has been obtained.

Notwithstanding the foregoing, a Change of Control shall be deemed not to have occurred with respect to any Section 16 Person if such Section 16 Person is, by agreement (written or otherwise), a participant on such Section 16 Person's own behalf in a transaction which causes the Change of Control to occur.

Except as otherwise provided in the applicable Award Agreement, in the event of a Change of Control, all unvested Awards become immediately vested and exercisable; provided, however, that the benefit payable with respect to any performance unit or performance share with respect to which the Measuring Period has not ended as of the date of such Change of Control shall be equal to the product of the Unit Value (as defined in the Plan) multiplied successively by each of the following:

(i) a fraction, the numerator of which is the number of months (including as a whole month any partial month) that have elapsed since the beginning of such Measuring Period until the date of such Change of Control and the denominator of which is the number of months (including as a whole month any partial month) in the Measuring Period; and

(ii) a percentage equal to the greater of the target percentage, if any, specified in the applicable Award Agreement or the maximum percentage, if any, that would be earned under the terms of the applicable Award Agreement assuming that the rate at which the performance goals have been achieved as of the date of such Change of Control would continue until the end of the Measuring Period.

Adjustments

The aggregate number of shares of Common Stock issuable pursuant to the Plan and the exercise of ISOs, the maximum number of shares of Common Stock with respect to which Options, SARs or other equity Awards may be granted to or earned by any Grantee in any calendar year, the number of shares of Common Stock and the exercise price per share covered by each outstanding Option, the number of shares of Common Stock and the base price per share covered by each outstanding SAR, the number of shares of Common Stock covered by each outstanding performance unit or performance share, and any per-share base or purchase price or target market price included in the terms of any such Award and all related terms shall all be adjusted proportionately or as otherwise appropriate to reflect any increase or decrease in the number of issued shares of Common Stock resulting from any split-up or consolidation of shares or any like capital adjustment, or the payment of any stock dividend, and/or to reflect a change in the character or class of shares covered by the Plan arising from a readjustment or recapitalization of the Company’s capital stock.

If the stockholders of the Company receive capital stock of another corporation (“Exchange Stock”) in exchange for their shares of Common Stock in any transaction involving a merger (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation or reorganization (other than a mere reincorporation or the creation of a holding company) (an “Exchange Transaction”), all outstanding Options shall be converted into Options to purchase shares of Exchange Stock and all outstanding SARs shall be converted into SARs relating to shares of Exchange Stock unless the Board, in its sole discretion, determines that all such Options and/or SARs shall instead terminate, in which case the Company shall notify the Option holders and SAR holders in writing or electronically, at least fifteen (15) days prior to the consummation of the Exchange Transaction, that each holder of Options and SARs shall have the right, contingent upon the occurrence of the Exchange Transaction, to exercise all of his or her outstanding Options and SARs in full (whether or not the vesting conditions, if any, set forth in the related Option and SAR Award Agreements have been satisfied) for the period specified in the notice (but in any case not less than fifteen days from the date of such notice); provided that, if the Exchange Transaction does not take place within the specified period in the notice for any reason whatsoever, the notice and any exercise pursuant thereto shall be null and void. The amount and exercise or base price of converted Options and SARs shall be determined by adjusting the amount and price of the Options and SARs granted hereunder in the same proportion as used for determining the number of shares of Exchange Stock the holders of the Stock receive in such merger, consolidation, acquisition or property or stock, separation or reorganization. To the extent provided with respect to a Change of Control, the converted Options and SARs shall be fully vested whether or not the vesting requirements set forth in the Option or SAR Agreement have been satisfied.

The Board, acting in its discretion, but subject to the provisions of the Plan dealing with a Change of Control, may provide for cash settlement and/or make such other adjustments to the terms of any other outstanding Award as it deems appropriate in the context of an Exchange Transaction, taking into account the manner in which outstanding Options and SARs are being treated.

Loans and Loan Guarantees

The Committee may allow a Grantee, other than a Section 16 Person, to defer payment to the Company of all or part of the exercise price of an Option, the purchase price of Restricted Stock or any taxes associated with any non-cash benefit under the Plan. The Committee may also cause the Company to guarantee a third-party loan to a Grantee, other than a Section 16 Person, to cover such amounts. The terms of any such deferral or guarantee must be part of a binding agreement which shall include an interest rate not more favorable to the Grantee than the terms applicable to funds borrowed by the Company from time to time. The Committee may require the immediate repayment of any deferred amount or the immediate release of any guaranteed amount upon the Grantee’s termination of employment or upon sale or transfer of the shares of Common Stock purchased pursuant to the deferral or guarantee. In its discretion, the Committee may forgive the repayment of any or all of the principal of or interest on any such deferred payment obligation.

Exercise After Termination of Continuous Status as an Employee or Consultant

If a Grantee’s continuing status as an employee, director or consultant is terminated for Cause (as defined in the Plan), all unvested or unexercised Awards, and forfeitable shares of Restricted Stock, will terminate or be forfeited, as applicable. In the event of death or Disability of a Grantee, any Restricted Stock will become vested, any unexercised Option or SAR may be exercised for twelve months following the date of termination, and any unexercised performance share or performance units may be exercised for 180 days following such date, provided that if an applicable Measuring Period has not ended, the benefit will be pro-rated on the basis of the elapsed portion of the Measuring Period and the actual or extrapolated performance, as determined by the Committee, over the full measuring period. If a Grantee's continuing status as an employee, director or consultant terminates for any other reason, any Restricted Stock, to the extent forfeitable, will be forfeited, the then-exercisable portion of any unexercised Option or SAR may be exercised for 90 days and any unexercised performance shares or performance units shall become non-forfeitable and may be exercised in whole or in part within 90 days of such event, but only if and to the extent determined by the Committee or as set forth in the Award Agreement. The Committee has the discretion to extend such post-termination exercisability.

Limited Transferability of Plan Awards

During a Grantee’s lifetime, a Grantee's 2006 Plan Awards are exercisable only by the Grantee. Except as noted hereafter, Plan Awards are not transferable other than by will or the laws of descent and distribution. Notwithstanding the foregoing, and subject to certain exceptions, the Committee may, in its discretion, authorize Options (other than ISOs), granted to a Grantee to be on terms which permit Options, once such Options have vested, to be transferred by the Grantee to immediate family members, trusts for the exclusive benefit of immediate family members, or to a partnership in which only immediate family members are partners, in each case, however, provided that the transfer is without consideration and was specifically authorized in the Award Agreement.

U.S. Federal Income Tax Consequences

The following is a brief summary of the general U.S. federal income and employment tax consequences relating to the 2006 Plan. This summary is based on U.S. federal tax laws and regulations in effect on the date of this Proxy Statement and does not purport to be a complete description of the U.S. federal income or employment tax laws. Individuals should not rely on this summary as applicable to them but should instead consult their own tax advisors.

Section 409A of the Internal Revenue Code. In 2004, the Code was amended to add Section 409A, which creates new rules for amounts deferred under “non-qualified deferred compensation plans.” Section 409A includes a broad definition of non-qualified deferred compensation plans which may apply to various types of Awards granted under the Plan. The proceeds of any grant that is subject to Section 409A may be subject to a 20 percent excise tax if those proceeds are distributed before the recipient separates from service or before the occurrence of other specified events, such as death, disability or a change of control, all as defined in Section 409A. On April 17, 2007, the Internal Revenue Service (the “IRS”) finalized regulations describing the effect of Section 409A on the types of Awards issuable pursuant to the 2006 Plan. The Committee intends to administer the Plan to avoid or minimize the effect of Section 409A and, if necessary, will amend the Plan to comply with Section 409A before December 31, 2007, as required by the final regulations.

The Plan provides that no deferral of compensation (as defined under Section 409A or the guidance thereto) is intended under the Plan. If any Plan Award would be considered deferred compensation and if the Plan fails to meet the requirement of Section 409A with respect to such Plan Award, then such Plan Award will be null and void. The Committee may permit deferrals of compensation pursuant to the terms of a participant’s Award Agreement, a separate plan or a subplan which meets the requirements of Section 409A. Additionally, to the extent any Plan Award is subject to Section 409A, the Plan does not permit any distribution pursuant to such Award, or any acceleration or delay of the time or schedule of any distribution related to such Plan Award, except as permitted by Section 409A, the regulations thereunder and/or the Secretary of the United States Treasury.

ISOs. ISOs are intended to qualify for special treatment available under Section 422 of the Code. A participant generally will not recognize any income when an ISO is granted or exercised and the Company generally will not receive a deduction at either of those times. Also, ISOs are not subject to employment taxes.

If a participant acquires shares of Common Stock by exercising an ISO and continues to hold those shares of Common Stock for one year or, if longer, until the second anniversary of the grant date (each of these periods is called an “ISO Holding Period”), the amount the participant receives when the participant disposes of the shares of Common Stock minus the exercise price will be taxable at long-term capital gain or loss rates (this is referred to as a “qualifying disposition”), depending on whether the amount the participant receives when the participant disposes of the shares of Common Stock is larger or smaller than the exercise price the participant paid. Upon a qualifying disposition, the Company is not entitled to a deduction.

If a participant disposes of the shares of Common Stock before the end of either ISO Holding Period (this is referred to as a “disqualifying disposition”), the participant will recognize compensation income equal to the excess, if any, of (i) the Fair Market Value of the shares of Common Stock on the date the ISO was exercised, or, if less, the amount received on the disposition, over (ii) the exercise price. The Company will be entitled to a deduction equal to the income that the participant recognizes. The participant's additional gain will be taxable at long-term or short-term capital gain rates (depending on whether the participant held the shares of Common Stock for more than one year).

If a participant uses shares of Common Stock acquired by exercising an ISO (“Delivered Shares”) to pay the exercise price of another ISO, the participant's payment will be treated as a disqualifying disposition of the Delivered Shares if the Delivered Shares are used to exercise an ISO before the end of their ISO Holding Periods. This type of disposition generally will cause the participant to recognize ordinary income on the Delivered Shares equal to the difference between the exercise price of the Delivered Shares and the fair market value of the Delivered Shares at exercise. The Company will be entitled to a deduction equal to the ordinary income that the participant recognizes. If a participant exercises the participant’s ISO using (i) shares of Common Stock that were not purchased pursuant to an ISO or (ii) Delivered Shares that were purchased by exercising an ISO and that satisfied their ISO Holding Periods, the participant generally will not recognize income, gain or loss in connection with the exercise.

If a participant exercises the participant’s ISO using only Delivered Shares to pay the exercise price, the participant’s basis in the same number of new shares of Common Stock will be the same as the participant's basis in the Delivered Shares plus the taxable income, if any, that the participant recognized on the delivery of the Delivered Shares. Any additional new shares of Common Stock will have a zero basis.

The rules that generally apply to ISOs do not apply when calculating any alternative minimum tax liability. When an ISO is exercised, a participant must treat the excess, if any, of the fair market value of the shares of Common Stock on the date of exercise over the exercise price as an item of adjustment for purposes of the alternative minimum tax. Under some circumstances the exercise of an ISO may subject the participant to alternative minimum tax liability. The rules affecting the application of the alternative minimum tax are complex and their effect depends on individual circumstances, including whether a participant has items of adjustment other than those derived from ISOs.

NSOs. NSOs do not receive the special tax treatment afforded to ISOs under the Internal Revenue Code. A participant will not recognize any income when an NSO is granted and the Company will not receive a deduction at that time. However, unlike an ISO, when an NSO is exercised, a participant will recognize ordinary income equal to the excess, if any, of the fair market value of the shares of Common Stock that the participant purchased on the date of exercise over the exercise price. Also, unlike an ISO, this same amount will be subject to employment taxes, including social security and Medicare taxes. If a participant uses shares of Common Stock or a combination of shares of Common Stock and cash to pay the exercise price of an NSO, he or she will have ordinary income equal to the value of the excess of the number of shares of Common Stock that the participant purchases over the number the participant surrenders, less any cash the participant uses to pay the exercise price. This same amount will be subject to employment taxes, including social security and Medicare taxes. When an NSO is exercised, and subject to compliance with the restrictions imposed by Section 162(m) of the Code with respect to certain executive officers, the Company will be entitled to a deduction equal to the ordinary income that the participant recognizes.

If the amount a participant receives when the participant disposes of the shares of Common Stock that the participant acquired by exercising an NSO is larger than the exercise price the participant paid, the excess will be treated as a long-term or short-term capital gain, depending on whether the participant held the shares of Common Stock for more than one year after the participant acquired them by exercising the NSO. But, if the amount a participant receives when the participant disposes of the shares of Common Stock that the participant acquired by exercising an NSO is less than the exercise price the participant paid, the difference will be treated as a long-term or short-term capital loss, depending on whether the participant held the shares of Common Stock for more than one year after the participant acquired them by exercising the NSO.

Restricted Stock. Unless a participant makes an election under Section 83(b) of the Code, the participant will not recognize taxable income when Restricted Stock is granted and the Company will not receive a deduction at that time. Instead, a participant will recognize ordinary income when the Restricted Stock vests (i.e., when the participant can no longer lose them) equal to the fair market value of the shares of Common Stock the participant receives when the restrictions lapse, less any consideration paid for the Restricted Stock, and the Company generally will be entitled to a deduction equal to the income that the participant recognizes. Also, the same amount will be subject to employment taxes, including social security and Medicare taxes.

If the amount a participant receives when the participant disposes of these shares of Common Stock is larger than the value of the shares of Common Stock when the Restricted Stock vested, the excess will be treated as a long-term or short-term capital gain, depending on whether the participant held the shares of Common Stock for more than one year after the Restricted Stock vested. But, if the amount the participant receives when the participant disposes of these shares of Common Stock is less than the value of the shares of Common Stock when the Restricted Stock vested, the difference will be treated as a long-term or short-term capital loss, depending on whether the participant held the shares of Common Stock for more than one year after the Restricted Stock vested.

The Plan permits the Committee, on the grant date, or any later date, to prohibit a participant from making an election under Section 83(b). If the Committee has not prohibited the participant from making a Section 83(b) election, and the participant makes a Section 83(b) election, the participant will recognize ordinary income on the grant date equal to the fair market value of the shares of Restricted Stock on the grant date, less any consideration paid for the Restricted Stock, and the Company will be entitled to a deduction equal to the income that the participant recognizes at that time. Also, the same amount will be subject to employment taxes, including social security and Medicare taxes. However, the participant will not recognize income when the restrictions lapse. If a participant earns the shares of Common Stock, any appreciation between the grant date and the date the participant disposes of the shares of Common Stock will be treated as a long-term or short-term capital gain, depending on whether the participant held the shares of Common Stock for more than one year after the grant date. But, if the amount the participant receives when the participant disposes of these shares of Common Stock is less than the value of the shares of Common Stock on the grant date, the difference will be treated as a long-term or short-term capital loss, depending on whether the participant held the shares of Common Stock for more than one year after the grant date. If a participant forfeits the participant's Restricted Stock (i.e., the restrictions on such stock do not lapse), the participant cannot take a tax deduction in connection with that forfeiture.

SARs. A participant will not recognize any income when a SAR is granted and the Company will not receive a deduction at that time. When a SAR is exercised, a participant will recognize ordinary income equal to the cash and/or fair market value of the shares of Common Stock the participant received upon exercise. The Company will be entitled to a deduction equal to the ordinary income that the participant recognizes. Also, the same amount will be subject to employment taxes, including social security and Medicare taxes. If the amount a participant receives when the participant disposes of any shares of Common Stock acquired upon the exercise of a SAR is larger than the value of the shares of Common Stock when the SAR was exercised, the excess will be treated as a long-term or short-term capital gain, depending on whether the participant held the shares of Common Stock for more than one year after the SAR was exercised. But, if the amount the participant receives when the participant disposes of these shares of Common Stock is less than the value of the shares of Common Stock when the SAR was exercised, the difference will be treated as a long-term or short-term capital loss, depending on whether the participant held the shares of Common Stock for more than one year after the SAR was exercised.

Performance Units and Performance Shares. A participant will not recognize taxable income when the Company grants the participant performance units or performance shares and the Company will not receive a deduction at that time. However, if the participant satisfies the conditions imposed on the Plan Award, the participant will recognize ordinary income equal to the cash or the fair market value of the shares of Common Stock the participant receives at the time of delivery. Also, the same amount will be subject to employment taxes, including social security and Medicare taxes. The Company generally will be entitled to a deduction equal to the income that the participant recognizes.

If the amount a participant receives when the participant disposes of the shares of Common Stock acquired upon the settlement of a performance unit or performance share is larger than the value of the shares of Common Stock when the participant received them, the excess will be treated as a long-term or short-term capital gain, depending on whether the participant held the shares of Common Stock for more than one year after they were issued. But, if the amount the participant receives when the participant disposes of these shares of Common Stock is less than the value of the shares of Common Stock when they were issued, the difference will be treated as a long-term or short-term capital loss, depending on whether the participant held the shares of Common Stock for more than one year after they were issued.

ANY U.S. FEDERAL TAX ADVICE CONTAINED IN THE FOREGOING IS NOT INTENDED OR WRITTEN BY THE PREPARER OF SUCH ADVICE TO BE USED, AND IT CANNOT BE USED BY THE RECIPIENT, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE RECIPIENT. THIS DISCLOSURE IS INTENDED TO SATISFY U.S. TREASURY DEPARTMENT REGULATIONS.

Other Matters

The Company obtained stockholder approval of the Plan, and is seeking approval of the Amendments, in order to satisfy the shareholder approval requirements of the rules of the NASD as well as those under Section 162(m) of the Code. If stockholder approval of the Amendments is not obtained, the Amendments and any Awards made under the Plan prior to the 2007 Annual Meeting of Stockholders beyond the number of shares of Common Stock previously authorized under the Plan will be null and void.

Recommendation and Vote

The affirmative vote of holders of a majority of the Company's shares of Common Stock that are voted on the proposal to approve the Amendment to the Plan is necessary to approve the Amendment. Under applicable NASDAQ Rules, broker non-votes will not be treated as votes cast. Abstentions will be treated as votes cast and will have the effect of a vote “AGAINST” the proposal.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE

“FOR” PROPOSAL NO. 2

PROPOSAL NO. 3

RATIFICATION OF APPOINTMENT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTANTS

The Audit Committee of the Board of Directors has appointed BDO Seidman, LLP as the Company’s independent registered public accountants to conduct the annual audit of the Company’s accounts for the fiscal year ending December 31, 2007 and the Audit Committee has further directed that management submit the appointment of the Company’s independent registered public accounting firm for ratification by the stockholders. Although action by the stockholders in this matter is not required by the Company’s Bylaws or otherwise, the Audit Committee believes that it is appropriate to seek stockholder ratification of this appointment in light of the important role played by the independent registered public accountants in maintaining the integrity of the Company’s financial controls and reporting. If the stockholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain that firm.

BDO Seidman, LLP has advised the Company that no member of its firm has any direct or indirect material financial interest in the Company. Representatives of BDO Seidman, LLP, our independent registered public accountants for the current year, and representatives of KPMG LLP, our independent registered public accountants for the year ending December 31, 2006, are expected to be present at the Meeting and will have the opportunity to make a statement if they wish to do so, and are expected to be available to respond to appropriate questions.

THE BOARD OF DIRECTORS AND THE

AUDIT COMMITTEE UNANIMOUSLY RECOMMEND

A VOTE "FOR" PROPOSAL NO. 3

Principal Accounting Fees and Services

In 2006 and 2005, KPMG LLP served as the Company's independent registered public accountants. The aggregate fees billed for professional services rendered by KPMG LLP for fiscal years 2006 and 2005 were as follows:

	2006		2005
Audit fees⁽¹⁾	$	457,505	$	420,255
Audit related fees⁽²⁾		91,200		163,200
Tax fees⁽³⁾				16,400
All other fees		---		---
Total	$	548,705	$	599,855

(1)	Audit fees consisted of fees for the audit of our financial statements for fiscal years 2006 and 2005, respectively, and reviews of our quarterly financial statements.
(2)	Audit related fees include fees paid to KPMG during fiscal years 2006 and 2005 for services that are reasonably related to the performance of the audit or review of the financial statements. Such fees are not included in Audit fees and consist of the review of registration statements and the issuance of comfort letters and consents. Also included in audit related fees are fees for accounting advice provided by KPMG.
(3)	Tax fees consisted of tax fees for preparation of tax returns. We did not pay any tax fees in the fiscal year ended December 31, 2006.

Audit Committee Pre-Approval Policies and Procedures

The Audit Committee has adopted policies and procedures that require pre-approval of all audit, audit-related, tax and other services rendered by the Company’s independent registered public accounting firm. Under the policy, an auditor services schedule is prepared at the beginning of each year that describes each type of service to be provided by the independent registered public accounting firm and the projected fees for each such service. The Audit Committee reviews and approves in advance, as appropriate, each service listed on the auditor services schedule and the projected fees for each such service. Projected fee amounts listed on the auditor services schedule may be updated, as appropriate in the Audit Committee’s discretion, at each regularly scheduled meeting of the Audit Committee. The Audit Committee may also pre-approve particular services on a case-by-case basis. The policy allows the Audit Committee to delegate pre-approval authority to one or more members of the Audit Committee. Any decisions made by the designated pre-approval member are reported, for informational purposes only, to the full Audit Committee at its next meeting.

STOCKHOLDER PROPOSALS AND OTHER MATTERS FOR THE 2008 ANNUAL MEETING

Proposals of stockholders intended to be presented at the next Annual Meeting of Stockholders to be held in 2008 must be received by the Company on or before March 4, 2008 for inclusion in the Company’s Proxy Statement and form of proxy relating to that Annual Meeting. In addition, the Company’s Bylaws contain advance notice procedures for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations for election to the Board, that must be complied with. A stockholder proposal or nomination intended to be brought before the 2008 Annual Meeting must be delivered to the Secretary no later than March 4, 2008. Typically, however, the Company’s Annual Meeting of Stockholders has been held in June, with proxy materials mailed to stockholders on or about May 1. If the Company were to return to the June date for the 2008 Annual Meeting of Stockholders, the date for submitting proposals and nominations would be moved up and notification of the new earlier deadline would be provided by the Company in a 10-Q or other periodic report filed by the Company with the SEC. All proposals and nominations should be directed to Corporate Secretary, NeoPharm, Inc., 1850 Lakeside Drive, Waukegan, Illinois 60085 (fax no. 847-887-9281; email corporatesecretary@neopharm.com).

OTHER MATTERS

The only matters which management intends to present to the meeting are set forth in the Notice of Annual Meeting. Management knows of no other matters that will be brought before the meeting by any other person. However, if any other matters are properly brought before the meeting, the persons named on the enclosed form of proxy intend to vote on such matters in accordance with their best judgment on such matters.

2006 ANNUAL REPORT ON FORM 10-K and 10-K/A

A copy of the Company’s 2006 Annual Report on Form 10-K, as amended by our filing on Form 10-K/A (collectively, the “Form 10-K”) accompanies this Proxy Statement as part of the Company’s 2006 Annual Report. Additional copies of the Form 10-K are available to stockholders without charge on request made in writing to the following address: Office of the Secretary, NeoPharm, Inc., 1850 Lakeside Drive, Waukegan, Illinois 60085.