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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT of 1934


For the fiscal year ended December 31,
2001

Commission file number: 0-23736



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Guilford Pharmaceuticals Inc.

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                  
|--------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                        |  | 52-1841960                       
|(State or other jurisdiction of incorporation
	or organization) |  | (IRS Employer Identification No.)

6611 Tributary Street

Baltimore, Maryland 21224


(410) 631-6300


(Address and telephone number of principal
executive offices)


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $.01 par value


Title of Class


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

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

As of
March 22, 2002, the aggregate value of the approximately
29,729,000 shares of common stock of the Registrant issued
and outstanding on such date, excluding approximately
1,738,902 shares held by affiliates of the Registrant, was
approximately $228,119,000. This figure is based on the closing
sales price of $8.15 per share of the Registrants
common stock as reported on The Nasdaq® National Market on
March 22, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the
following documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated:

Portions of the
Notice of Annual Meeting and Proxy Statement to be filed no
later than 120 days following December 31, 2001 are
incorporated by reference into Part III.



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PART I

From time to time in this annual report we may
make statements that reflect our current expectations regarding
our future results of operations, economic performance, and
financial condition, as well as other matters that may affect
our business. In general, we try to identify these
forward-looking statements by using words such as
anticipate, believe, expect,
estimate, and similar expressions.

The forward-looking statements contained in
this annual report may cover, but are not necessarily limited
to, the following topics: (1) our efforts to market, sell
and distribute GLIADEL® Wafer in the United States and
internationally; (2) our efforts to expand the labeled uses
for GLIADEL® Wafer in the United States and
internationally; (3) our efforts to develop polymer drug
delivery product line extensions and new polymer drug delivery
products; (4) our research programs related to our FKBP
neuroimmunophilin ligand technology, NAALADase inhibition, PARP
inhibition, polymer drug delivery and other technologies;
(5) our clinical development activities, including the
commencement and conducting of clinical trials, related to our
polymer-based drug delivery products and product candidates
(including GLIADEL® Wafer, PACLIMER® Microspheres and
LIDOMERTMMicrospheres) and our pharmaceutical product candidates
(including GPI 1485,
AQUAVANTMInjection and any future lead compounds in our PARP programs);
(6) our efforts to scale-up product candidates from
laboratory bench quantities to commercial quantities;
(7) our efforts to secure adequate supply of the active
pharmaceutical ingredients for clinical development and
commercialization; (8) our efforts to manufacture drug
candidates for clinical development and eventual commercial
supply; (9) our strategic plans; (10) anticipated
expenditures and the potential need for additional funds; and
(11) specific guidance we give in the section entitled
Outlook, regarding our current expectations of our
future operating results.

All of these items involve significant risks
and uncertainties. Any of the statements we make in this annual
report that are forward-looking are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform
Act of 1995. We wish to caution you that our actual results may
differ significantly from the results we discuss in the
forward-looking statements.

We discuss factors that could cause or
contribute to such differences in the Risk Factors
section of this annual report. In addition, any forward-looking
statements we make in this document speak only as of the date of
this document, and we do not intend to update any such
forward-looking statements to reflect events or circumstances
that occur after that date.

Item 1.     Business

Overview

We are a fully integrated pharmaceutical company
engaged in the research, development and marketing of products
that target the neurological, surgical and critical care markets.

We were incorporated in Delaware in December
1993. Our principal executive offices are located at
6611 Tributary Street, Baltimore, MD 21224. Our telephone
number is (410) 631-6300.

Financial information prepared in accordance with
accounting principles generally accepted in the United States of
America, including information about revenue from external
customers, measures of profit and loss and total assets, can be
found in our consolidated financial statements included
elsewhere in this report.

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Product and Development Programs

The following table summarizes the current status
of our product, product candidates and research programs:

|                                                         |  |                                                                                                                                               |  |                                                                
|-------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------
|Program/Product Candidates                               |  |                                                                                                                                               |  |                                                                
|Drug Delivery Business                                   |  | Disease Indications/Conditions                                                                                                                |  | Status(1)                                                      
|                                                         |  |                                                                                                                                               |  |                                                                
|Drug Delivery Program                                    |  |                                                                                                                                               |  |                                                                
|GLIADEL® Wafer (3.85% BCNU)                              |  | Recurrent glioblastoma multiforme                                                                                                             |  | Market(2)                                                      
|GLIADEL® Wafer (3.85% BCNU)                              |  | Malignant glioma at time of initial surgery                                                                                                   |  | Market in Canada
	Market approval being considered in Europe(3)
|PACLIMER® Microspheres (paclitaxel in PPE
	microspheres) |  | Ovarian cancer                                                                                                                                |  | Phase I/ II                                                    
|PACLIMER® Microspheres (paclitaxel in PPE
	microspheres) |  | Lung, prostate and head & neck cancer                                                                                                         |  | Phase I                                                        
|LIDOMERTMMicrospheres                                    |  | Post-surgical pain                                                                                                                            |  | Phase I                                                        
|Neurological Products Program                            |  |                                                                                                                                               |  |                                                                
|Neurotrophic Drugs                                       |  |                                                                                                                                               |  |                                                                
|GPI 1485                                                 |  | Parkinsons disease                                                                                                                           |  | Phase II                                                       
|Other FKBP neuroimmunophilin ligands                     |  | Alzheimers disease, traumatic brain injury,
	traumatic spinal cord injury, multiple sclerosis, neuropathy,
	stroke and other ischemic damage |  | Pre-clinical                                                   
|Other neurotrophic and cytoprotective small
	molecules   |  | Alzheimers disease, traumatic brain injury,
	traumatic spinal cord injury, multiple sclerosis, neuropathy,
	stroke and other ischemic damage |  | Research                                                       
|Neuroprotective Drugs                                    |  |                                                                                                                                               |  |                                                                
|GPI 5693                                                 |  | Neuropathic pain and disease modification for
	diabetic neuropathy                                                                            |  | Phase I                                                        
|Other NAALADase inhibitors                               |  | Neuropathic pain and disease modification for
	diabetic neuropathy and other neuroprotective indications (such
	as ALS, glaucoma and stroke)  |  | Research                                                       
|PARP inhibitors                                          |  | Stroke, peripheral ischemia, septic shock,
	inflammation                                                                                      |  | Pre-clinical                                                   
|Anesthetic/ Sedation Agent                               |  |                                                                                                                                               |  |                                                                
|AQUAVANTMInjection                                       |  | Surgical anesthesia/ sedation                                                                                                                 |  | Phase I                                                        
|Diagnostic Imaging Agent                                 |  |                                                                                                                                               |  |                                                                
|DOPASCAN® Injection                                      |  | Imaging agent to diagnose and monitor
	Parkinsons disease                                                                                    |  | Phase III(4)                                                   

GLIADEL® Wafer, DOPASCAN® Injection,
and PACLIMER® Microspheres are our registered trademarks.
TAXOL® is a registered trademark of Bristol-Myers Squibb
Company.



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|    |                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Research includes initial research
	related to specific molecular targets, synthesis of new chemical
	entities and assay development for the identification of lead
	compounds. Pre-clinical includes testing of

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|    |                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | lead compounds in vitro and in animal
	models, pharmacology and toxicology testing, product formulation
	and process development prior to the commencement of clinical
	trials. Market means that the product is currently
	being sold.                                                                                                                           
|   
|(2) | Orion Corporation Pharma (formerly Orion
	Corporation Farmos) is our corporate partner for GLIADEL®
	Wafer in Scandinavia.                                                                                                                                                                                                                                          
|   
|(3) | In March 2002, the FDA notified us that our
	supplemental New Drug Application to expand the labelled
	indications for GLIADEL® Wafer in the United States for use
	in connection with primary surgery for malignant glioma was not
	approvable.                                                                                                                    
|   
|(4) | Daiichi Radioisotope Laboratories, Ltd., or DRL,
	is our corporate partner for DOPASCAN® Injection in Japan,
	Korea and Taiwan. DRL has informed us that they commenced
	Phase III clinical investigations in Japan with
	DOPASCAN® Injection during August 2001. MAP Medical
	Technologies Oy, or MAP, is our corporate partner for
	DOPASCAN® Injection in Europe.



| |                       
| | ----------------------
| | Drug Delivery Business

Our drug delivery business focuses on the
targeted and controlled delivery of drugs using biodegradable
polymers. Delivering high drug concentrations locally for a
sustained period of time may increase the efficacy of cancer
chemotherapy in slowing tumor growth and/or reducing tumor mass
and may decrease the side effects associated with systemic
administration. Our marketed product, GLIADEL® Wafer,
delivers the cancer chemotherapeutic BCNU (carmustine) and
is used to treat a type of brain cancer called glioblastoma
multiforme as second line therapy. Until the end of 2000, our
former corporate partner for this product, Aventis
Pharmaceutical Products, Inc., or Aventis, was responsible for
marketing the product in the U.S. and most other countries. In
October 2000, we reacquired rights to GLIADEL® Wafer from
Aventis. In January 2001, we began marketing the product
ourselves in the U.S. and through distributors elsewhere.
PACLIMER® Microspheres, a second-generation polymer product
candidate delivering paclitaxel (also known under the brand name
TAXOL®), is being studied in the clinic against ovarian
cancer and we initiated a Phase I/II clinical trial of
PACLIMER® Microspheres in patients with non-small cell lung
cancer during March 2002. We are also doing preclinical work
with PACLIMER® Microspheres in additional cancer
indications. During the fourth quarter of 2001, we initiated a
Phase I clinical trial investigating LIDOMERTM
Microspheres, a polymer delivering lidocaine, a commonly used
analgesic, for post-operative pain.



| |               
| | --------------
| | GLIADEL® Wafer

GLIADEL® Wafer is a novel treatment for a
type of brain cancer called glioblastoma multiforme or GBM. GBM
grows rapidly, is universally fatal and is the most common form
of primary brain cancer (cancer originating in the brain).
GLIADEL® Wafer is a proprietary biodegradable polymer
product that contains the cancer chemotherapeutic drug BCNU
(carmustine). Up to eight GLIADEL® Wafers are implanted in
the cavity created when a neurosurgeon removes a brain tumor.
The wafers gradually erode from the surface and delivers BCNU
directly to the tumor site in high concentrations for an
extended period of time. By inserting the wafer directly at the
site of the tumor, the rest of the patients body is not
exposed to the toxic side effects of BCNU.

In October 1995, we entered into an agreement
with Orion Corporation Pharma (Orion Pharma), a
major Scandinavian health care company, for the marketing, sale
and distribution of GLIADEL® Wafer in Scandinavia. Under
this agreement, Orion Pharma purchases GLIADEL® Wafer from
us on an exclusive basis for sale in Scandinavia. Orion Pharma
commenced sales of GLIADEL® Wafer in Scandinavia in 1997 on
a named hospital basis.

In 1996, the U.S. Food and Drug
Administration (FDA) approved GLIADEL® Wafer for use
as an adjunct to surgery to prolong survival in patients with
recurrent GBM for whom surgery is indicated. Also in 1996, we
entered into agreements with Aventis (then Rhône-Poulenc
Rorer) granting Aventis marketing rights to GLIADEL® Wafer
in the U.S. and clinical development and marketing rights in the
rest of the world (excluding Scandinavia and later, Japan).
Under these agreements, Aventis paid us $7.5 million as a
one time,

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non-refundable rights payment, $26.5 million
as non-refundable milestone payments, and purchased
$7.5 million of our common stock. Aventis also paid us a
combined transfer price and royalty of approximately 35%.


In October 2000, we reacquired Aventis
rights to GLIADEL®Wafer for 300,000 shares of our
common stock then valued at approximately $8 million.
Aventis continued to market GLIADEL® Wafer for a transition
period ending December 31, 2000. Since January 1,
2001, we have been responsible for the marketing, sale and
distribution of GLIADEL® Wafer except in Scandinavia, where
the product continues to be sold by Orion Pharma. Since the
reacquisition of Aventis rights in GLIADEL® Wafer, we
have built a commercial operations function, consisting of
approximately 22 internal marketing and sales management,
reimbursement and managed care specialists, medical affairs,
professional services and customer service personnel, and an
approximately 27-person field sales force through Cardinal Sales
and Marketing Services, a contract sales organization
(Cardinal Health).

During the time that Aventis owned the
development and marketing rights to GLIADEL® Wafer, Aventis
obtained regulatory approval for the product in over 21
countries, including France, Germany, the United Kingdom, Spain,
Canada, South Korea and Israel.

In November 2000, we announced the results of a
Phase III clinical trial investigating the administration
of GLIADEL® Wafer at the time of initial surgery for the
treatment of malignant glioma. The 240-person trial was a
randomized, double-blind, placebo-controlled study conducted at
38 centers in 14 countries. Based on the results of this study,
we filed a supplemental New Drug Application with the FDA in the
second quarter of 2001, seeking approval to market GLIADEL®
Wafer for first line therapy in patients newly diagnosed with
malignant glioma. In December 2001, FDA asked its Oncological
Drug Advisory Committee (ODAC) to review clinical and other
information related to whether to approve GLIADEL® Wafer
for patients undergoing first surgery for malignant glioma. FDA
asked ODAC several specific questions relating to various
criterion that must be met for approval and votes were taken on
the questions. A majority of ODAC members present at the meeting
voted that the pivotal study was well-controlled, that there was
a clinical benefit (increased survival) and that the benefit of
GLIADEL® Wafer outweighs the risk. By a vote of 7-6,
however, ODAC members voted that the pivotal study was not
adequate. In March 2002, the FDA informed us that the
supplemental New Drug Application was not approvable. We remain
committed to pursuing expanded labeling for GLIADEL® Wafer
and plan to work with the FDA in order to address concerns
raised by the agency resulting from its review of the
supplemental New Drug Application. We are also pursuing
regulatory approval for GLIADEL® Wafer in Europe for use in
patients with newly diagnosed malignant glioma.

The Company pays a royalty to Massachusetts
Institute of Technology, or MIT, on sales of GLIADEL® Wafer
pursuant to the license agreement under which the Company
acquired the underlying technology for this product. During
2001, we expensed approximately $0.8 million in royalties
to MIT.



| |                       
| | ----------------------
| | PACLIMER® Microspheres

PACLIMER® Microspheres are a site specific,
controlled release formulation of paclitaxel (TAXOL®) in a
proprietary biodegradable polymer called a polyphosphoester, or
PPE, developed in collaboration with scientists at Johns
Hopkins. In November 1999, we filed an Investigational New Drug
Application or IND with the FDA for the abdominal administration
of PACLIMER® Microspheres. In collaboration with the
Gynecologic Oncology Group, we are currently conducting a
Phase I/II clinical trial of PACLIMER® Microspheres in
women with advanced ovarian cancer. In October 2001, we filed an
IND with the FDA for the administration of PACLIMER®
Microspheres in connection with the treatment of non-small cell
lung cancer or NSCLC. We expect to begin a Phase I/II
clinical trial with respect to this use of PACLIMER®
Microspheres during the first quarter of 2002. We are also
engaged in research on the suitability of PACLIMER®
Microspheres for other localized cancers, such as tumors of the
head and neck and prostate.



| |                      
| | ---------------------
| | LIDOMERTMMicrospheres

LIDOMERTM Microspheres are a
site-specific, controlled release formulation of the widely used
local anesthetic, lidocaine. During the fourth quarter of 2001,
we began a Phase I clinical trial of LIDOMERTM

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Microspheres in Europe, in healthy volunteers.
During 2002, we expect to begin a Phase I/II clinical trial
of LIDOMERTM Microspheres for use in the treatment of
post-surgical pain.




| |                              
| | -----------------------------
| | Neurological Products Program

Our neurological products program is engaged in
the research and development of small molecules that
regenerate damaged nerves (our neurotrophic program) or
protect nerves from damage (our neuroprotectant program)
for potential treatment of a range of neurodegenerative diseases
and conditions, such as Parkinsons disease,
Alzheimers disease, stroke, Amyotrophic Lateral Sclerosis,
or ALS, multiple sclerosis, spinal cord injury and peripheral
neuropathies. Additionally, we are currently in Phase I
clinical trials with AQUAVANTM Injection, a novel
prodrug of propofol, a widely-used anesthetic. Through our
corporate partners we are continuing to develop our
DOPASCAN® Injection imaging agent for the diagnosis and
monitoring of Parkinsons disease. In addition, we are
investigating small molecule therapeutics for certain other
neurological conditions.



| |                     
| | --------------------
| | Neurotrophic Program

The Companys neurotrophic program
originated from observations first made in the laboratory of
Dr. Solomon Snyder, Director of the Department of
Neuroscience at Johns Hopkins, that certain proteins that exist
within a cell, known as immunophilins, which are
targets of immunosuppressant drugs such as FK 506, are
enriched 10-40 fold in certain areas of the central nervous
system. The Johns Hopkins scientists went on to discover that
commonly used immunosuppressive drugs can promote nerve growth.
We have exclusively licensed rights to patent applications
relating to this research from Johns Hopkins. Our scientists,
together with their academic collaborators, further demonstrated
that the pathway leading to nerve regeneration could be
separated from the immunosuppressant pathway. Our scientists
have synthesized a large number of proprietary small molecules,
called neuroimmunophilin ligands, which are
neurotrophic in animal models of various disease states without
being immunosuppressive, are orally-bioavailable and are able to
cross the blood-brain barrier.

In August 1997, we entered into a collaboration
with Amgen Inc. to develop and commercialize a broad class of
neuroimmunophilin ligands, referred to as FKBP neuroimmunophilin
ligands, as well as any other compounds that may have resulted
from the collaboration, for all human therapeutic and diagnostic
applications. During 1998, Amgen nominated a neuroimmunophilin
ligand, called NIL-A, as the lead compound in the
program, initially targeting Parkinsons disease. During
1999, Amgen filed an Investigational New Drug or IND application
with the U.S. Food and Drug Administration and commenced
human trials with NIL-A, focusing on safety, tolerability and
pharmacokinetic study in healthy subjects. NIL-A entered
Phase II testing in patients with Parkinsons disease
during 2000. In July 2001, we announced results of this
Phase II, randomized, double-blind, placebo-controlled
evaluation of the safety, pharmacokinetics and efficacy of NIL-A
in patients with mild to moderate Parkinsons disease. The
results of the evaluation suggest that NIL-A at doses of up to
1,000 mg taken orally four times a day for six months is
well tolerated, but does not produce a substantial reversal of
the motor symptoms of Parkinsons disease.

In September 2001, Amgen terminated the
collaboration and, thereafter, returned all rights to the
neuroimmunophilin technology to us, including certain clinical
trial supplies for which we paid $0.2 million. We are
currently evaluating the secondary endpoints in the trial to
determine whether NIL-A may provide some benefit for certain of
the non-motor symptoms of Parkinsons disease.

Additionally, we are conducting preclinical
research for the use of neuroimmunophilin compounds for other
clinical indications, including Alzheimers disease, nerve
crush, traumatic brain injury, traumatic spinal cord injury,
multiple sclerosis, neuropathy and stroke.

To date, we have been granted or have obtained
rights to more than 30 U.S. patents relating to our
neuroimmunophilin compounds program, including a broad use
patent claiming the use of compounds having an affinity for FKBP
to stimulate growth of damaged neurons in patients suffering
from Parkinsons disease, Alzheimers disease or
physical damage to the spinal cord.

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Further, we are engaged in preclinical research
and development of other small molecule neurotrophic compounds
in addition to the FKBP neuroimmunophilin ligands.



| |                        
| | -----------------------
| | Neuroprotectant Program

In our neuroprotectant program, our scientists
are developing novel compounds to protect brain cells from
ischemia (the lack of oxygen delivery from reduced blood flow)
and other disorders caused by massive release of excitatory
amino acid neurotransmitters such as glutamate. We have been
exploring distinct intervention points in a biochemical pathway
that can lead to neuronal damage, including:
(i) pre-synaptic inhibition of glutamate release by
inhibiting the enzyme, N-acetylated alpha-linked acidic
dipeptidase, or NAALADase; and (ii) post-synaptic
inhibition of the enzyme, poly(ADP-ribose) polymerase, or PARP.
In the first quarter of 2000, we licensed from
Dr. Snyders laboratory rights to patents related to
Serine Racemase, an enzyme which plays a key role in the
activation of an important post-synaptic glutamate receptor, the
N-Methyl D-Aspartate or NMDA receptor. We are working on the
selective inhibition of NAALADase, PARP, Serine Racemase and
other enzymes in the biochemical pathway to neuronal damage and
death as possible mechanisms for inhibiting the toxic effects of
excess glutamate in neurological diseases and conditions.



| |                     
| | --------------------
| | NAALADase Inhibitors

The initial therapeutic targets of our NAALADase
inhibitor compounds is neuropathic pain and disease modification
of diabetic neuropathy, a debilitating and progressive disorder
involving severe pain, sensitivity, tingling, weakness and
numbness in a patients extremities. It may affect close to
one million Americans, yet there is currently no therapy
approved in the United States to treat this disorder. In animal
models, we have demonstrated that treatment with NAALADase
inhibitors can normalize pain sensitivity, improve nerve
conduction velocity (the speed at which a nerve impulse
travels), and promote re-myelination of peripheral nerves. In
December 2000, we initiated clinical testing of GPI 5693, one of
our NAALADase inhibitor compounds. This Phase I Study,
conducted in Europe, evaluated the safety, tolerability and
pharmacokinetics of the compound in healthy subjects and
suggested that it may be well tolerated at dose levels up to
750 mg per day. Our scientists have also identified
NAALADase inhibitor compounds that appear to be 100 times
more potent than GPI 5693. We are continuing laboratory research
with these compounds in models of diabetic neuropathy as well as
several other neurodegenerative disorders, including chronic
pain, schizophrenia, head trauma, Amyotrophic Lateral Sclerosis
(ALS), glaucoma and Parkinsons disease.

To date, more than 20 U.S. composition of
matter and use patents have been issued relating to our
NAALADase inhibition program, including a broad use patent
claiming the use of NAALADase inhibitors generally for the
treatment of glutamate abnormalities (such as stroke, ALS and
Parkinsons disease), compulsive disorders and prostate
cancer.



| |                
| | ---------------
| | PARP Inhibitors

Our scientists and their academic collaborators
were among the first to investigate the use of PARP inhibitors
for the prevention of glutamate neurotoxicity. Studies by
several academic laboratories using mice that have been
genetically altered to possess no or greatly diminished PARP
activity suggest that the absence of PARP activity may reduce
the area of neuronal damage from stroke by up to 85%-90%, and
the area of heart muscle damage during a heart attack by about
40%. Some of our prototype PARP inhibitors have achieved similar
results in preclinical models of stroke and heart attack in
animals. In addition, our scientists have achieved
neuroprotective results not only in transient ischemia models of
stroke, but also in the more rigorous permanent ischemia models
of stroke.

We have identified a number of novel PARP
inhibitors with preclinical efficacy. In addition, we have
obtained results in animal experiments suggesting that PARP
inhibitors have potential utility in many therapeutic areas,
including myocardial ischemia, traumatic head injuries,
Parkinsons disease, septic shock, type I diabetes and
arthritis.

We have filed numerous patent applications in the
U.S. and abroad relating to novel compositions of matter and
methods of use with respect to PARP inhibitors. To date, we have
rights to two issued U.S. patents

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in the field, including one generally claiming
the use of PARP inhibitors for the prevention of glutamate
neurotoxicity.




| |                   
| | ------------------
| | AQUAVANTMInjection

In the first quarter of 2000, we licensed from
ProQuest Pharmaceuticals Inc., or ProQuest, rights relating to a
novel prodrug of a widely used anesthetic, propofol. A prodrug
is a compound that is metabolized in the body into a drug. The
prodrug, which we have named AQUAVANTM Injection, is
water-soluble and converts to propofol upon intravenous
administration. In contrast, propofol, which has been approved
for use by the FDA, is itself administered in a lipid emulsion,
which can cause complications, such as short shelf life, clogged
IV tubing, elevated blood lipids and a potentially higher
incidence of bacterial contamination. AQUAVANTM
Injection may offer clinical benefit to patients both as an ICU
sedating agent and an anesthesia-induction drug.

Since we licensed AQUAVANTM Injection
from ProQuest, we have conducted three Phase I clinical
studies in Europe in healthy volunteers and in December 2001,
commenced an additional Phase I study in Europe, which is a
bolus dose escalation study. We are working with
anesthesiologists and regulatory consultants to explore
recommendations for further clinical studies.

We have exclusive rights to a composition of
matter patent covering AQUAVANTM Injection.

Diagnostic
Imaging Agent Program 
DOPASCAN®Injection

DOPASCAN® Injection, our product candidate
for the diagnosis and monitoring of Parkinsons disease is
administered intravenously in trace quantities and allows
physicians to obtain images and measure the degeneration of
dopamine neurons in the brain. Dopamine neurons are highly
concentrated in a specialized area of the brain that degenerates
in patients with Parkinsons disease. Parkinsons
disease is a common neurodegenerative disorder affecting more
than 900,000 patients in the United States.

In its early stages, Parkinsons disease can
be very difficult to distinguish clinically from other diseases
with similar symptoms but which do not respond well or at all to
specific therapy for Parkinsons disease. Unfortunately,
there are no diagnostic tests in the United States currently
marketed or commercially available that can reliably detect the
degeneration of Dopamine neurons, and the typical delay between
the onset of symptoms of Parkinsons disease and clinical
diagnosis is more than two years. The primary way to establish
the diagnosis at present is through repeated physician visits
and the use of therapeutic trials of drugs such as L-Dopa, which
carry with them the risk of unnecessary and sometimes severe
side effects.

Following intravenous injections with
DOPASCAN® Injection, images of a subjects brain are
obtained with a SPECT camera and can identify the loss of
dopamine neurons in the brain. To date, over 2,000 patients have
been imaged in the United States and Europe using DOPASCAN®
Injection. In a multi-center Phase IIb clinical trial
conducted by the Parkinsons Study Group in the United
States and completed in 1997, DOPASCAN® Injection
accurately differentiated patients clinically diagnosed with a
Parkinsonian disorder (i.e., Parkinsons disease and
progressive supranuclear palsy) from subjects without a
Parkinsonian disorder (e.g., essential tremor and healthy
controls) with a high sensitivity (98%) and specificity (97%).
In addition, no serious adverse events were attributed to
DOPASCAN® Injection in this study.

There can be no assurance, however, that similar
results will be seen in any other clinical trials for
DOPASCAN® Injection that may be conducted in the future or
that DOPASCAN® Injection will be approved as a safe and
effective FDA-approved diagnostic.

We have entered into an agreement with Daiichi
Radioisotope Laboratories, Ltd., or DRL, a leading Japanese
radiopharmaceutical company, to develop and commercialize
DOPASCAN® Injection in Japan, Korea and Taiwan. DRL has
informed us that it commenced a Phase III clinical trial
with the product in August 2001.

In January 2002, we announced that we had
licensed the exclusive European development and
commercialization rights for DOPASCAN® Injection to
MAP Medical Technologies Oy of Finland. Under

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the terms of the agreement, MAP and its
affiliated companies received exclusive development, marketing,
sales and distribution rights to DOPASCAN® Injection for
all European Union member states and other select European
markets. Under the agreement, MAP will be responsible for
seeking regulatory approvals, and for manufacturing, marketing
and selling DOPASCAN® Injection in these countries.


Manufacturing and Raw Materials

We currently manufacture GLIADEL® Wafer
using a proprietary process at our 18,000 square foot
manufacturing facility in Baltimore, Maryland, which includes
areas designated for packaging, quality assurance, laboratory,
and warehousing. The manufacturing facility has been in
operation since April 1995. It was initially inspected by the
FDA in October 1995, and was re-inspected by the FDA in February
1999. Also, in October 1999, we were inspected by the Medicines
Control Agency, the United Kingdoms regulatory authority.
The facilities we are currently using for manufacturing enable
us to produce up to 8,000 GLIADEL® Wafer treatments
(each consisting of eight wafers) annually.

In January 1998, we completed construction of an
expansion of our manufacturing facilities to allow for the
additional synthesis of the polyanhydride co-polymer used in the
manufacture of GLIADEL® Wafer. We also will be able to use
this facility to produce our newest proprietary biodegradable
polymers, the PPEs, in connection with the development of other
polymer-based products. In addition, we completed construction
of a second clean room facility in 1998, which we expect could
allow us to increase our GLIADEL® Wafer manufacturing
capacity to 20,000 treatments annually. We further expect
this second clean room facility will provide sufficient capacity
to produce our clinical supply of PPE-based oncology product
candidates (including PACLIMER® Microspheres) needed in the
future.

We believe that the various materials used in
GLIADEL® Wafer are readily available and will continue to
be available at reasonable prices. Nevertheless, while we
believe that we have an adequate supply of BCNU, the active
chemotherapeutic ingredient in GLIADEL® Wafer, to meet
current demand, any interruption in the ability of our two
current suppliers to deliver this ingredient could prevent us
from delivering the product on a timely basis. Failure of any
supplier to provide sufficient quantities of raw material for
GLIADEL® Wafer or any of our product candidates in
accordance with the FDAs current Good Manufacturing
Practice, or cGMP, regulations could cause delays in clinical
trials and the commercialization of our products.

Marketing, Sales and Distribution

Prior to 2000, our strategy had been to establish
collaborations with larger pharmaceutical companies where
possible, to develop and promote products that require extensive
development, sales and marketing resources.

However, during 2000, we began the transformation
into a fully-integrated pharmaceutical company through our
reacquisition of Aventis rights to GLIADEL® Wafer. In
November 2000, David P. Wright joined us as our Executive
Vice President, Commercial Operations. In February 2002,
Mr. Wright was promoted to President and Chief Business
Officer. Mr. Wright has extensive experience in the
marketing, sale and distribution of pharmaceutical products. He
has assembled a sales and marketing department consisting of
marketing, sales management, medical affairs, reimbursement and
other relevant functions to manage a 27-member sales force
provided through Cardinal Health. In addition, our GLIADEL®
Wafer product is distributed through Cord Logistics, Inc., which
handles fulfillment of customer orders.

During 2001, we established our own sales and
marketing subsidiary in Canada. This subsidiary will be
responsible for all aspects of the sales and marketing of
GLIADEL® Wafer throughout Canada, including receiving
pricing and reimbursement approvals from the Canadian National
Healthcare System. GLIADEL® Wafer will be supplied to our
Canadian customers through a third-party logistical distributor.
In Europe, we have an arrangement with IDIS Limited, based in
the U.K., for the distribution of GLIADEL® Wafer on a named
hospital basis, while we establish a network of regional
distributors to market, sell and distribute the product
throughout the continent. We have also established arrangements
for the marketing, sale and distribution of GLIADEL® Wafer
in Israel, Hong Kong and the Peoples Republic of China.

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The establishment of our Commercial Operations
function provides us with the opportunity and flexibility to
market and sell other products we are developing, such as
AQUAVAN® Injection, PACLIMER® Microspheres and
LIDOMERTM Microspheres, in the U.S., while seeking
development and/or commercialization partners elsewhere in the
world.

Government Regulation and Product
Testing

All domestic prescription pharmaceutical
manufacturers are subject to extensive regulation by the federal
government, principally the FDA and, to a lesser extent, by
state and local governments as well as foreign governments if
products are marketed abroad. Biologics and controlled drug
products, such as vaccines and narcotics, and radiolabeled
drugs, are often regulated more stringently than are other
drugs. The Federal Food, Drug, and Cosmetic Act and other
federal statutes and regulations govern or influence the
development, testing, manufacture, labeling, storage, approval,
advertising, promotion, sale and distribution of prescription
pharmaceutical products. Pharmaceutical manufacturers are also
subject to certain inspection, registration, recordkeeping and
reporting requirements. Noncompliance with applicable
requirements can result in warning letters, fines, recall or
seizure of products, total or partial suspension of production
and/or distribution, refusal of the government to enter into
supply contracts or to approve marketing applications and
criminal prosecution.

Upon FDA approval, a drug may only be marketed in
the United States for the approved indications in the approved
dosage forms and at the approved dosage levels. The FDA also may
require post-marketing testing and surveillance to monitor a
drug in larger and more diverse patient populations.
Manufacturers of approved drug products are subject to ongoing
compliance with FDA regulations. For example, the FDA
mandates that drugs be manufactured in conformity with the
FDAs applicable cGMP regulations. In complying with the
cGMP regulations, manufacturers must continue to spend time,
money and effort in production, recordkeeping and quality
control to ensure that the product meets applicable
specifications and other requirements. The FDA periodically
inspects drug manufacturing facilities to ensure compliance with
its cGMP regulations. Adverse experiences with the
commercialized product must be reported to the FDA. The FDA also
may require the submission of any lot of the product for
inspection and may restrict the release of any lot that does not
comply with FDA regulations, or may otherwise order the
suspension of manufacture, voluntary recall or seizure. Product
approvals may be withdrawn if compliance with regulatory
requirements is not maintained or if problems concerning safety
or efficacy of the product occur following approval.



| |                                    
| | -----------------------------------
| | Full Clinical Testing
	Requirements

The steps required before a drug may be
commercially distributed in the United States include:
(i) conducting appropriate preclinical laboratory and
animal tests; (ii) submitting to the FDA an application for
an IND, which must become effective before clinical trials may
commence; (iii) conducting well-controlled human clinical
trials that establish the safety and efficacy of the drug
product; (iv) filing with the FDA a New Drug Application
(NDA) for non-biological drugs; and (v) obtaining FDA
approval of the NDA prior to any commercial sale or shipment of
the non-biological drug. NDAs also must include a
description of the manufacturing processes, including quality
control procedures and validation requirements.

With respect to a drug product with an active
ingredient not previously approved by the FDA, the manufacturer
must usually submit a full NDA, including complete reports of
preclinical, clinical and laboratory studies, to prove that the
product is safe and effective. A full NDA may also need to be
submitted for a drug product with a previously approved active
ingredient if studies are required to demonstrate safety and
efficacy, such as when the drug will be used to treat an
indication for which the drug was not previously approved, or
where the dose or method of drug delivery is changed. In
addition, the manufacturer of an approved drug may be required
to submit for the FDAs review and approval a supplemental
NDA, including reports of appropriate clinical testing, prior to
marketing the drug with additional indications or making other
significant changes to the product or its manufacture. A
manufacturer intending to conduct clinical trials ordinarily
will be required first to submit an IND to the FDA containing
information relating to previously conducted preclinical studies.

9



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Preclinical testing includes formulation
development, laboratory evaluation of product chemistry and
animal studies to assess the potential safety and efficacy of
the product formulation. Preclinical tests to support an FDA
application must be conducted in accordance with the FDA
regulations concerning Good Laboratory Practices (GLPs). The
results of the preclinical tests are submitted to the FDA as
part of the IND and are reviewed by the FDA prior to authorizing
the sponsor to conduct clinical trials in human subjects. Unless
the FDA issues a clinical hold on an IND, the IND becomes
effective 30 days following its receipt by the FDA. There
is no certainty that submission of an IND will result in the
commencement of clinical trials or that the commencement of one
phase of a clinical trial will result in commencement of other
phases or that the performance of any clinical trials will
result in FDA approval.

Clinical trials for new drugs typically are
conducted in three phases, are subject to detailed protocols and
must be conducted in accordance with the FDAs regulations
concerning good clinical practices (GCPs). Clinical trials
involve the administration of the investigational drug product
to human subjects. Each protocol indicating how the clinical
trial will be conducted in the United States must be submitted
for review to the FDA as part of the IND. The FDAs review
of a study protocol does not necessarily mean that, if the study
is successful, it will constitute proof of efficacy or safety.
Further, each clinical study must be conducted under the
auspices of an independent institutional review board
(IRB) established pursuant to FDA regulations. The
IRB considers, among other factors, ethical concerns and
informed consent requirements. The FDA or the IRB may require
changes in a protocol both prior to and after the commencement
of a trial. There is no assurance that the IRB or the FDA will
permit a study to go forward or, once started, to be completed.
Clinical trials may be placed on hold at any time for a variety
of reasons, particularly if safety concerns arise, or regulatory
requirements are not met.

The three phases of clinical trials are generally
conducted sequentially, but they may overlap. In Phase I,
the initial introduction of the drug into humans, the drug is
tested for safety, side effects, dosage tolerance, metabolism
and clinical pharmacology. Phase II involves controlled
tests in a larger but still limited patient population to
determine the efficacy of the drug for specific indications, to
determine optimal dosage and to identify possible side effects
and safety risks. Phase II testing for an indication
typically takes at least from one and one-half to two and
one-half years to complete. If preliminary evidence suggesting
effectiveness has been obtained during Phase II
evaluations, expanded Phase III trials are undertaken to
gather additional information about effectiveness and safety
that is needed to evaluate the overall benefit-risk relationship
of the drug and to provide an adequate basis for physician
labeling. Phase III studies for a specific indication
generally take from two and one-half to five years to complete.
There can be no assurance that Phase I, Phase II or
Phase III testing will be completed successfully within any
specified time period, if at all, with respect to any of our
product candidates.

Reports of results of the preclinical studies and
clinical trials for non-biological drugs are submitted to the
FDA in the form of an NDA for approval of marketing and
commercial shipment. The NDA typically includes information
pertaining to the preparation of drug substances, analytical
methods, drug product formulation, and details on the
manufacture of finished product as well as proposed product
packaging and labeling. Submission of an NDA does not assure FDA
approval for marketing. Approval of a non-biological drug is
dependent on a variety of factors, particularly on evidence
consisting of adequate and well-controlled investigations. FDA
will often use advisory committees to help decide whether a new
product or new uses should be approved. Committee
recommendations are purely advisory, however; FDA may not use
the Committees recommendations in determining whether to
approve a new drug, although FDA frequently follows the
Committees advice.

User fee legislation now requires the submission
in federal fiscal year 2002 of $313,320 to cover the costs of
FDA review of a full NDA. Annual fees are also required for
certain approved prescription drugs and for their manufacturers.
The current user fee legislation expires at the end of
September, 2002. The failure to reauthorize PDUFA could have a
serious impact on the review times and approval rates for all
drugs, including Guilfords candidate drugs.

The median FDA approval time is currently about
12 months for new drugs subject to user fee legislation,
although clinical development, reviews, or approvals of
treatments for cancer and other serious or life-

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threatening diseases may be accelerated,
expedited or fast-tracked. In addition, approval times can vary
widely among the various reviewing branches of the FDA. The
approval process may take substantially longer if, among other
things, the FDA has questions or concerns about the safety
and/or efficacy of a product. In general, the FDA requires at
least two properly conducted, adequate and well-controlled
clinical studies demonstrating safety and efficacy with
sufficient levels of statistical assurance. In certain limited
cases the FDA may consider one clinical study sufficient. The
FDA also may request long-term toxicity studies or other studies
relating to product safety or efficacy. For example, the FDA may
require additional clinical tests following NDA approval to
confirm product safety and efficacy (Phase IV clinical
tests) or require other conditions for approval. Notwithstanding
the submission of such data, the FDA ultimately may decide that
the application does not satisfy its regulatory criteria for
approval.


Confirmatory studies similar to Phase III
clinical studies may be conducted after, rather than before, FDA
approval under certain circumstances. The FDA may determine
under its expedited, accelerated, or fast-track provisions that
previous limited studies establish an adequate basis for drug
product approval, provided that the sponsor agrees to conduct
additional studies after approval to verify safety and
effectiveness. Treatment of patients not in clinical trials with
an experimental drug may also be allowed under a Treatment IND
before general marketing begins. Charging for an investigational
drug also may be allowed under a Treatment IND to recover
certain costs of development if various requirements are met.
These cost-recovery, Treatment IND, and expedited, accelerated
or fast-track approval provisions are limited, for example, to
drug products (i) intended to treat AIDS or other serious
severely debilitating or life-threatening diseases especially
and that provide meaningful therapeutic benefit to patients over
existing treatments, (ii) that are for diseases for which
no satisfactory alternative therapy exists, or (iii) that
address an unmet medical need. No assurances exist that our
product candidates will qualify for cost-recovery, expedited,
accelerated, or fast-track approvals or for treatment use under
the FDAs regulations or the current statutory provisions.

The full NDA process for newly marketed
non-biological drugs, such as those being developed by us,
including FKBP neuroimmunophilin ligand products and inhibitors
of NAALADase and PARP, can take a number of years and involves
the expenditure of substantial resources. There can be no
assurance that any approval will be granted on a timely basis,
or at all, or that we will have sufficient resources to carry
such potential products through the regulatory approval process.



| |                                  
| | ---------------------------------
| | Abbreviated Testing
	Requirements

The Drug Price Competition and Patent Term
Restoration Act of 1984 (DPC-PTR Act) established
abbreviated procedures for obtaining FDA approval for many
non-biological drugs which are off-patent and whose marketing
exclusivity has expired. Applicability of the DPC-PTR Act means
that a full NDA is not required for approval of a competitive
product. Abbreviated requirements are applicable to drugs which
are, for example, either bioequivalent to brand-name drugs, or
otherwise similar to brand-name drugs, such that all the safety
and efficacy studies previously done on the innovator product
need not be repeated for approval. Changes in approved drug
products, such as in the delivery system, dosage form, or
strength, can be the subject of abbreviated application
requirements. There can be no assurance that abbreviated
applications will be available or suitable for our
non-biological drug products, including our efforts to develop a
controlled-release formulation of the chemotherapeutic agent,
paclitaxel (TAXOL®) using our PPEs, or that FDA approval of
such applications can be obtained.

A five-year period of market exclusivity is
provided for newly marketed active ingredients of drug products
not previously approved and a three-year period of market
exclusivity is provided for certain changes in approved drug
products for which reports of new clinical investigations are
essential for approval (other than bioequivalence studies). A
period of three years is available for changes in approved
products, such as in delivery systems of previously approved
products. These periods of marketing exclusivity mean that
products that are the subject of abbreviated applications, which
generally rely to some degree on approvals or on some data
submitted by previous applicants for comparable innovator drug
products, cannot be marketed during the period of exclusivity.
The market exclusivity provisions of the DPC-PTR Act bar only
the marketing of competitive products that are the subject of
abbreviated applications, not products that are the subject of
full NDAs. The DPC-PTR Act also may provide a maximum time of
five years to be restored to the life of any

11



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one patent for the period it takes to obtain FDA
approval of a drug product, including biological drugs. No
assurances exist that the exclusivity or patent restoration
benefits of the DPC-PTR Act will apply to any of our product
candidates.




| |                 
| | ----------------
| | Other Regulation

Products marketed outside the United States which
are manufactured in the United States are subject to certain FDA
export regulations, as well as regulation by the country in
which the products are to be sold. U.S. law can prohibit
the export of unapproved drugs to certain countries abroad. We
also would be subject to foreign regulatory requirements
governing clinical trials and pharmaceutical sales, if products
are marketed abroad. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory
authorities of foreign countries must usually be obtained prior
to the commencement of marketing of the product in those
countries. The approval process varies from country to country
and the time required may be longer or shorter than that
required for FDA approval.

In addition to the requirements for product
approval, before a pharmaceutical product may be marketed and
sold in certain foreign countries the proposed pricing for the
product must be approved as well. Products may be subject to
price controls and/or limits on reimbursement. The requirements
governing product pricing and reimbursement vary widely from
country to country and can be implemented disparately at the
national level. The European Union generally provides options
for its fifteen Member States to restrict the range of medicinal
products for which their national health insurance systems
provide reimbursement. Member States in the European Union can
opt to have a positive or a negative
list. A positive list is a listing of all medicinal products
covered under the national health insurance system, whereas a
negative list designates which medicinal products are excluded
from coverage. In the European Union, the United Kingdom and
Spain use a negative list approach, while France uses a positive
list approach. In Canada, each province decides on reimbursement
measures.

The European Union also generally provides
options for its Member States to control the prices of medicinal
products for human use. A Member State may approve a specific
price for the medicinal product or it may instead adopt a system
of direct or indirect controls on the profitability of the
company placing the medicinal product on the market. For
example, the regulation of prices of pharmaceuticals in the
United Kingdom (U.K.) is generally designed to provide controls
on the overall profits that pharmaceutical companies may derive
from their sales to the U.K. National Health Service. The
U.K. system is generally based on profitability targets or
limits for individual companies which are normally assessed as a
return on capital employed by the company in servicing the
National Health Service market, comparing capital employed and
profits.

In comparison, Italy generally establishes prices
for pharmaceuticals based on a price monitoring system. The
reference price is the European average price calculated on the
basis of the prices in four reference markets: France, Spain,
Germany and the U.K. Italy typically levels the price of
medicines belonging to the same therapeutic class on the lowest
price for a medicine belonging to that category (i.e., same
active principle, same pharmaceutical form, same route of
administration). Spain generally establishes the selling price
for new pharmaceuticals based on the prime cost, plus a profit
margin within a range established each year by the Spanish
Commission for Economic Affairs. Promotional and advertising
costs are limited.

In Canada, prices for most new drugs are
generally limited such that the cost of therapy for the new drug
is in the range of the cost of therapy for existing drugs used
to treat the same disease in Canada. Prices of breakthrough
drugs and those which bring a substantial improvement are
generally limited to the median of the prices charged for those
drugs in other industrialized countries, such as France,
Germany, Italy, Sweden, Switzerland, the U K and the United
States.

There can be no assurance that any country which
has price controls or reimbursement limitations for
pharmaceuticals will allow favorable reimbursement and pricing
arrangements with respect to our applications for GLIADEL®
Wafer outside of the United States.

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We are also governed by other federal, state and
local laws. These laws include, but are not limited to, those
regulating working conditions enforced by the Occupational
Safety and Health Administration and regulating environmental
hazards under such statutes as the Toxic Substances Control Act,
the Resource Conservation and Recovery Act and other
environmental laws enforced by the United States Environmental
Protection Agency (USEPA). The Drug Enforcement
Agency (DEA) regulates controlled substances, such as
narcotics. A precursor compound to DOPASCAN® Injection is a
tropane-derivative similar to cocaine and thus is subject to DEA
regulations. Establishments handling controlled substances must,
for example, be licensed and inspected by the DEA, and may be
subject to export, import, security and production quota
requirements. Radiolabeled products, including drugs, are also
subject to regulation by the Department of Transportation and to
state and federal licensing requirements. Various states often
have comparable health and environmental laws, such as those
governing the use and disposal of controlled and radiolabeled
products.

Intellectual Property Rights

As of December 31, 2001, we owned or had
licensed rights to more than 100 U.S. patents and
700 U.S. and foreign patent applications protecting our key
technologies. We also own certain trademarks.

The value of our intellectual property rights is
subject to various uncertainties and contingencies. The scope of
intellectual property protection afforded to pharmaceutical and
biotechnological inventions is uncertain, and our product
candidates are subject to this uncertainty. We cannot be certain
that any of our patent applications will be granted, that
additional products or processes we develop will be patentable,
or that any of our patents will provide us with any competitive
advantages. In addition, any existing or future patents or
intellectual property owned by us may be challenged, invalidated
or circumvented by others.

Further, other companies have been issued patents
and have filed patent applications relating to our key
technologies. While we do not believe that we are infringing any
valid patents of which we are aware, we cannot be certain that
our products or product candidates will not infringe or be
dominated by patents that have issued or may issue to third
parties.

We control the disclosure and use of our
proprietary information through confidentiality agreements with
employees, consultants and other third parties. However, our
confidentiality agreements may not be honored, disclosure of our
proprietary information may occur, and disputes may arise
concerning the ownership of intellectual property or the
applicability of confidentiality obligations.

We support and collaborate in research conducted
by other companies, universities and governmental research
organizations. We may not be able to acquire exclusive rights to
the intellectual property derived from such collaborations and
disputes may arise as to rights in derivative or related
research programs that we conduct. To the extent that
consultants or other research collaborators use third
parties intellectual property in their work with us,
disputes may also arise as to the rights to resulting
intellectual property. In addition, in the event we breach any
of our collaborative research contracts, such a breach may cause
us to lose certain licensed intellectual property rights.

If we are required to defend against charges of
infringement of intellectual property rights of third parties or
assert our own intellectual property rights against third
parties, we may incur substantial costs and could be enjoined
from commercializing certain products. We may also be required
to pay monetary damages. To avoid or settle litigation, we may
seek licenses from third parties or attempt to redesign our
products or processes to avoid infringement. However, we may not
be successful in obtaining licenses or successfully redesigning
our products or processes.

We could also be required to participate in
U.S. interference proceedings or international patent
oppositions. In fact, in order to protect our intellectual
property position with respect to our neuroimmunophilin ligands,
we filed a European opposition in 1998 to revoke another
companys European patent. In 2000, we won this opposition,
and the subject patent was revoked. However, the patentee has
appealed the initial determination, and the patent could be
reinstated. If the patent is reinstated, litigation could result.

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Technology Licensing Agreements

In March 1994, we entered into an agreement (the
GLIADEL® Wafer Agreement) with Scios Inc.
pursuant to which we licensed from Scios exclusive worldwide
rights to numerous U.S. patents and patent applications and
corresponding international patents and patent applications for
polyanhydride biodegradable polymer technology for use in the
field of tumors of the central nervous system and cerebral
edema. GLIADEL® Wafer is covered under this license by two
U.S. patents and certain related international patents and
patent applications. The patent rights in the U.S. will
expire in 2005. In April 1994, Scios assigned all of its rights
and obligations under the GLIADEL® Wafer Agreement
to MIT.

Under the GLIADEL® Wafer Agreement, we are
obligated to pay a royalty on all net sales of products
incorporating such technology as well as a percentage of all
royalties received by us from sublicensees and certain advance
and minimum annual royalty payments. We have exclusive worldwide
rights to the technology for brain cancer therapeutics, subject
to certain conditions, including a requirement to perform
appropriate preclinical tests and file an IND with the FDA
within 24 months of the identification of a drug-polymer
product having greater efficacy than GLIADEL® Wafer. In
addition, we are obligated to meet certain development
milestones. Although we believe that we can comply with such
obligations, our failure to perform these obligations could
result in losing our rights to new polymer-based products.

In June 1996, we entered into a license agreement
with MIT and Johns Hopkins regarding a patent application
covering certain biodegradable polymers for use in connection
with the controlled local delivery of certain chemotherapeutic
agents (including paclitaxel (TAXOL®) and camptothecin) for
treating solid tumors. Under this agreement, we are obligated to
make certain annual and milestone payments to MIT and to pay
royalties based on any sales of products incorporating the
technology licensed to us. Furthermore, under the terms of the
agreement, we have committed to spend minimum amounts to develop
the technology and to meet certain development milestones.
Although we believe that we can comply with such obligations,
our failure to perform these obligations could result in losing
our rights to such technology.

In July 1996, we entered into a license agreement
with Johns Hopkins that currently covers several
U.S. patents respecting certain PPEs developed at Johns
Hopkins and patent applications for additional PPEs. This
agreement, among other things, requires us to pay certain
processing, maintenance and/or up-front fees, milestone payments
and royalties, a portion of proceeds from sublicenses, and fees
and costs related to patent prosecution and maintenance and to
spend minimum amounts for, and meet deadlines regarding,
development of this technology. In the event of termination of
these licenses, we could lose our rights to the use of the
licensed technology.

We and Johns Hopkins are parties to exclusive
license agreements covering the neurotrophic use of
neuroimmunophilin ligands, which were jointly discovered by
scientists at, and are jointly owned by, Johns Hopkins and us,
and the inhibition of PARP for neuroprotective uses and certain
other technologies. These agreements require us to pay, among
other things, certain processing, maintenance, and/or up-front
fees, milestone payments and royalties, a portion of proceeds
from sublicenses, and fees and costs related to patent
prosecution and maintenance and to spend minimum amounts for,
and meet deadlines regarding, development of the technologies.
In the event of termination of these licenses, we could lose our
rights to use the licensed technology (or in the case of joint
inventions, exclusive use of such technology).

We obtained exclusive worldwide rights to
DOPASCAN® Injection pursuant to a March 1994 license
agreement (the RTI Agreement) with Research Triangle
Institute (RTI), which grants us rights to various
U.S. and international patents and patent applications relating
to binding ligands for certain receptors in the brain which are
or may be useful as dopamine neuron imaging agents.
DOPASCAN® Injection and certain related precursors and
analogues are covered by U.S. patents which start expiring
in 2009, as well as certain related international patents and
patent applications.

Under the RTI Agreement, we reimbursed RTI for
certain past patent-related expenses and agreed to make annual
payments to RTI to support mutually agreed-upon research that
was conducted at RTI through March 1999. In addition, we are
obligated to pay RTI a royalty on gross revenues we receive from
products derived from the licensed technology and from
sublicensee proceeds and to make certain minimum royalty

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payments following the first commercial sale of
such products. We must use commercially reasonable efforts to
develop products related to the licensed technology and to meet
certain performance milestones. Our failure to perform our
obligations under the RTI Agreement in the future could result
in termination of the license.


In March 2000, we entered into a license
agreement with ProQuest Pharmaceuticals Inc., or ProQuest, which
granted us exclusive worldwide development and commercialization
rights to a prodrug of propofol, which we later named
AQUAVANTM Injection. Under the terms of the license
agreement, we made an upfront payment to ProQuest in exchange
for an equity position in the company and we are required to
make additional payments to ProQuest based on the achievement of
certain development milestones. We will also pay ProQuest
royalties on AQUAVANTM Injection sales.



| |                                 
| | --------------------------------
| | United States Government
	Rights

Aspects of the technology licensed by us under
agreements with third party licensors may be subject to certain
government rights. Government rights in inventions conceived or
reduced to practice under a government-funded program
(subject inventions) may include a non-exclusive,
royalty-free worldwide license to practice or have practiced
such inventions for any governmental purpose. In addition, the
U.S. government has the right to require us to grant
licenses which shall be exclusive under any of such inventions
to a third party if they determine that: (i) adequate steps
have not been taken to commercialize such inventions;
(ii) such action is necessary to meet public health or
safety needs; or (iii) such action is necessary to meet
requirements for public use under federal regulations. The
U.S. government also has the right to take title to a
subject invention if there is a failure to disclose the
invention and elect title within specified time limits. In
addition, the U.S. government may acquire title in any
country in which a patent application is not filed within
specified time limits. Federal law requires any licensor of an
invention that was partially funded by the federal government to
obtain a covenant from any exclusive licensee to manufacture
products using the invention substantially in the United States.
Further, the government rights include the right to use and
disclose, without limitation, technical data relating to
licensed technology that was developed in whole or in part at
government expense. Our principal technology license agreements
contain provisions recognizing these government rights.

Competition

We are involved in technological fields in which
developments are expected to continue at a rapid pace. Our
success depends upon our ability to compete effectively in the
research, development and commercialization of products and
technologies in our areas of focus. Competition from
pharmaceutical, chemical and biotechnology companies,
universities and research institutes is intense and expected to
increase. Many of these competitors have substantially greater
research and development capabilities and experience and greater
manufacturing, marketing, financial and managerial resources
than we do and represent significant competition for us.
Acquisitions of competing companies by large pharmaceutical or
other companies could enhance the financial, marketing and other
resources available to these competitors. These competitors may
develop products which are superior to those that we have under
development.

We are aware of several competing approaches
under development for the treatment of malignant glioma
including using radioactive seeds for interstitial radiotherapy,
increasing the permeability of the blood-brain barrier to
chemotherapeutic agents, sensitizing cancer cells to
chemotherapeutic agents using gene therapy and developing
chemotherapeutics directed to specific receptors in brain
tumors. Furthermore, our patent protection for GLIADEL®
Wafer ends in 2005. At that time, others may try to copy the
wafer and enter the market as a generic drug through applicable
FDA procedures.

A number of companies have shown interest in
trying to develop neurotrophic agents to promote nerve growth
and repair in neurodegenerative disorders and traumatic central
nervous system injuries. Most of these activities have focused
on naturally occurring growth factors. These factors contain
large molecules that generally cannot cross the blood-brain
barrier and thus present problems in administration and
delivery. We are aware of several companies that are
investigating small molecule neurotrophic compounds for
peripheral neuropathy in the clinic.

15



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##### 



There is intense competition to develop an
effective and safe neuroprotective drug or biological agent.
Calcium channel antagonists, calpain inhibitors, adenosine
receptor antagonists, free radical scavengers, superoxide
dismutase inducers, proteoloytic enzyme inhibitors,
phospholipase inhibitors and a variety of other agents are under
active development by others. Glutamate or NMDA receptor
antagonists are under development by several other companies.

The anesthesia/sedation field is concentrated in
the United States mainly among four major companies, with
several other companies doing research in the field. There are
numerous products currently on the market that are accepted as
relatively safe and effective anesthetic agents and sedation
agents. In addition, we are aware of several companies that are
seeking to develop water soluble formulations of propofol. We
cannot be sure that we can successfully develop
AQUAVANTM Injection into a safe and effective drug or
that it will be cleared for marketing. Even if we are able to
market AQUAVANTM Injection, the commercial prospects
for it will depend heavily on its safety and efficacy profile
relative to alternatives then available in the market.

Although our PACLIMER® Microspheres and
LIDOMER® Microspheres are based on a proprietary polymer
system, this technology competes with other developing and
existing drug delivery technologies. We are aware of several
other companies that are seeking to develop sustained release
injectable products for pain, including post-surgical pain.
Additionally, other companies are engaged in the development of
improved formulations of paclitaxel.

We believe that two other companies are
clinically evaluating imaging agents for dopamine neurons. In
addition, a variety of radiolabeled compounds for use with
Positron Emission Tomography (PET) scanners have
been used to image dopamine neurons successfully in patients
with Parkinsons disease. PET scanning is currently only
available in a limited number of hospitals in the United States
and Europe.

Any product candidate that we develop and for
which we gain regulatory approval, including GLIADEL®
Wafer, must then compete for market acceptance and market share.
For certain of our product candidates, an important factor will
be the timing of market introduction of competitive products.
Accordingly, the relative speed with which we and competing
companies can develop products, complete the clinical testing
and approval processes, and supply commercial quantities of the
products to the market is expected to be an important
determinant of market success. Other competitive factors include
the capabilities of our collaborators, product efficacy and
safety, timing and scope of regulatory approval, product
availability, marketing and sales capabilities, reimbursement
coverage, the amount of clinical benefit of our product
candidates relative to their cost, method of administration,
price and patent protection. Our competitors may develop more
effective or more affordable products or achieve earlier product
development completion, patent protection, regulatory approval
or product commercialization than us. The achievement of any of
these goals by our competitors could have a material adverse
effect on our business, financial condition and results of
operations.

Research and Development Expenses

Our research and development expenses were
$54.3 million, $46.9 million, and $41.9 million for
the years ended December 31, 2001, 2000, and 1999,
respectively. These expenses were divided among our various
technology platforms in the following manner:

|                             |  |                          |        |      |  |      |        |  |  |   |        | 
|---------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                             |  |                         
|                             |  | Years ended December 31,
|                             |  |                         
|                             |  | 2001                     |        | 2000 |  | 1999
|                             |  |                          |        |      |  |     
|                             |  |                         
|                             |  | (in thousands)          
|Biopolymer technologies      |  | $                        | 8,563  |      |  | $    | 8,648  |  |  | $ | 10,532 | 
|Pharmaceuticals & other      |  |                          | 24,512 |      |  |      | 21,087 |  |  |   | 16,724 | 
|Shared expenses              |  |                          | 21,197 |      |  |      | 17,165 |  |  |   | 14,666 | 
|                             |  |                          |        |      |  |      |        |  |  |   |        | 
|Total research & development |  | $                        | 54,272 |      |  | $    | 46,900 |  |  | $ | 41,922 | 
|                             |  |                          |        |      |  |      |        |  |  |   |        | 

16



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| |                        
| | -----------------------
| | Biopolymer Technologies

With respect to our biopolymer technologies, the
modest decrease in 2001 compared to 2000 reflects less
development expenses incurred related to PACLIMER®
Microspheres offset by an increase in expenses related to
LIDOMERTM Microspheres as it advanced into the
clinic. The decrease in 2000 compared to 1999 is a result of
advancing PACLIMER® Microspheres into the clinic offsetting
a reduction in spending on research to select an appropriate
product candidate.



| |                        
| | -----------------------
| | Pharmaceuticals & Other

Research and development expenses related to our
pharmaceutical and related technologies increased in 2001
compared to 2000. This increase is the result of advancing
AQUAVANTM Injection and GPI 5693 into clinical
trials and was offset by a reduction in expenses associated with
our FKBP neuroimmunophilin program, as Amgen, Inc., our former
corporate partner, completed its research funding to us. The
increase in 2000 compared to 1999 is a result of our acquisition
of the rights to, and beginning the development of,
AQUAVANTM Injection.



| |                
| | ---------------
| | Shared Expenses

Shared expenses include the costs of operating
and maintaining our facilities, property and equipment used in
the research and development processes, and management effort
allocable to research and development projects. The increases
from year to year resulted from increased costs to operate our
facilities as we occupied our new research and development
facility during the second half of 1999, and increased expenses
associated with our project management efforts as the number and
magnitude of our projects have increased.

Product Liability and Insurance

Product liability risk is inherent in the
testing, manufacture, marketing and sale of our product and
product candidates, and there can be no assurance that we will
be able to avoid significant product liability exposure. While
we currently maintain product liability insurance covering
clinical trials and product sales, there can be no assurance
that this or any future insurance coverage obtained by us will
be adequate or that claims will be covered by our insurance. Our
insurance policies provide coverage on a claims-made basis and
are subject to annual renewal. Product liability insurance
varies in cost, can be difficult to obtain and may not be
available to us in the future on acceptable terms, or
at all.

Employees

At December 31, 2001, we employed 289
individuals. Of these 289 employees, 221 were employed in the
areas of research and product development and in the
manufacturing and quality control of GLIADEL® Wafer. The
remaining 68 employees performed selling, general and
administrative functions, including sales and marketing,
executive, finance and administration, legal and business
development. None of our employees are currently represented by
a labor union. Additionally, through Cardinal Health, we have
engaged 27 field sales representatives and national account
managers dedicated to the sale of GLIADEL® Wafer. To date,
we have not experienced work stoppages related to labor issues
and we believe our relations with our employees are good.

Hiring and retaining qualified personnel are
important factors for our future success. We are likely to
continue to add personnel particularly in the areas of sales and
marketing, research, clinical research and operations, including
manufacturing. Intense competition exists for these qualified
personnel from other biotechnology and biopharmaceutical
companies as well as academic, research and governmental
organizations. There can be no assurance that we will be able to
continue to hire qualified personnel and, if hired, that we will
be able to retain these individuals.

17



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Item 1A.     Executive
Officers and Other Significant Employees of
Registrant

Craig R. Smith, M.D., Chairman of the
Board of Directors and Chief Executive
Officer,age 56, joined the
Company as a Director at the Companys inception in July
1993. Dr. Smith was elected President and Chief Executive
Officer in August 1993 and was elected Chairman of the Board in
January 1994. Dr. Smith stepped down as President of the
Company in February 2002, when David Wright was appointed
to that position as a result of a Company reorganization. Prior
to joining the Company, Dr. Smith was Senior Vice President
for Business and Market Development at Centocor, Inc., a
biotechnology corporation. Before joining Centocor,
Dr. Smith served on the Faculty of the Department of
Medicine at Johns Hopkins Medical School. Dr. Smith
received his M.D. from the State University of New York at
Buffalo in 1972 and received training in Internal Medicine at
Johns Hopkins Hospital from 1972 to 1975. Dr. Smith is a
member of the board of directors of CellGate, Inc. and Molecular
Neuroimaging LLC.

David P. Wright, President and Chief Business
Officer,age 54, joined the
Company as Executive Vice President, Commercial Operations in
November 2000. In February 2002, Mr. Wright was promoted to
President and Chief Business Officer. From 1990 through 1999,
Mr. Wright was employed by MedImmune, Inc., most recently
as Executive Vice President Sales and Marketing. Prior to
joining MedImmune, Mr. Wright was Vice President,
Gastrointestinal Business Group, for Smith, Kline and French
Laboratories, and held various marketing and sales posts with
G.D. Searle, Glaxo, Hoffmann-LaRoche and Pfizer.
Mr. Wright received a Master of Arts in Speech Pathology
and Audiology from the University of South Florida in 1969.

John P. Brennan, Senior Vice President,
Technical Operations,age 59,
joined the Company as Vice President, Operations in January 1994
and became Senior Vice President, Operations in January 1997. In
February 1999, Mr. Brennan was promoted to Senior Vice
President, Technical Operations and General Manager, Drug
Delivery Business. From 1980 to 1993, he was Vice President,
Technical Operations and Manufacturing for G.D. Searle and
Co., where he was responsible for the operation of manufacturing
plants in North America, Latin America and Europe and the
worldwide pharmaceutical and process technology.
Mr. Brennan received his B.S. in Chemistry from the
Philadelphia College of Pharmacy and Science in 1968 and
attended the Wharton Graduate Management Program in 1976.

Andrew R. Jordan, Senior Vice President,
Finance and Administration, Chief Financial Officer and
Treasurer,age 54, joined the
Company as Vice President, Secretary, Treasurer and Chief
Financial Officer in September 1993. In January 1997, he became
Senior Vice President, Finance and Administration, Chief
Financial Officer and Treasurer. Prior to joining the Company,
Mr. Jordan held various positions with KPMG LLP, a public
accounting firm, including partner since 1983.
Mr. Jordans experience at KPMG LLP included advising
early-stage and emerging technology companies and initial and
secondary public equity and debt offerings. He received his B.A.
from Rutgers College in 1969 and his MBA from Rutgers Graduate
School of Business in 1973 and is a Certified Public Accountant.

Thomas C. Seoh, Senior Vice President,
Corporate and Commercial Development and Strategic
Planning,age 44, joined the
Company in April 1995, as Vice President, General Counsel and
Secretary. In August 1999, he was promoted to Senior Vice
President. In February 2001, he became Senior Vice President,
Corporate Development, General Counsel and Secretary and in
February 2002 he became Senior Vice President, Corporate and
Commercial Development and Strategic Planning. Mr. Seoh
previously held legal management positions with
ICN Pharmaceuticals, Inc. group, including Vice President
and Associate General Counsel, and with Consolidated Press U.S.,
Inc., and was associated with the New York and London
offices of Lord Day & Lord, Barrett Smith.
Mr. Seoh received his J.D. and A.B. from Harvard University.

Nancy J. Linck, Ph.D., J.D., Senior
Vice President, General Counsel and
Secretary,age 60, joined the
Company as Vice President, Intellectual Property in November
1998. In February 2001, Dr. Linck was promoted to Senior
Vice President, Intellectual Property and Deputy General
Counsel. Dr. Linck became Senior Vice President, General
Counsel and Secretary in February 2002. From 1994 to 1998,
Dr. Linck was Solicitor for the U.S. Patent and
Trademark Office, where she acted as general counsel for the
Commissioner of Patents and Trademarks. From 1987 to 1994,
Dr. Linck worked as a patent and trademark litigator at the
intellectual property law firm of Cushman, Darby &
Cushman, first as an associate from 1987 to 1990, and

18



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##### 



later as a partner from 1991 to 1994. Since 1995,
Dr. Linck has been engaged as an Adjunct Professor of Law,
first at George Washington University School of Law and
presently at Georgetown University Law Center. Dr. Linck
received her B.S. in Chemistry from the University of
California, Berkeley, her M.S. and Ph.D. in Inorganic Chemistry
from the University of California, San Diego, and her J.D.
from Western New England College School of Law.


William C. Vincek, Ph.D., Senior Vice
President, Pharmaceutical and Chemical
Development,age 54, joined the
Company as Vice President, Corporate Quality in August 1997. In
August 1999, he became Vice President, Pharmaceutical &
Chemical Development. In February 2002, Dr. Vincek was
promoted to Senior Vice President, Pharmaceutical and Chemical
Development. From November 1993 until Dr. Vincek joined the
Company, he was Group Director, CMC & Preclinical
Regulatory Affairs and Global Research and Development
GMP Quality Assurance at Glaxo Wellcome, Inc. Prior to that
time, Dr. Vincek held various positions at SmithKline
Beecham Pharmaceuticals and related entities. Dr. Vincek
received his Ph.D. in Medicinal Chemistry from the University of
Kansas, where he also received an M.S. in Medicinal Chemistry.
Dr. Vincek received a B.S. in Chemistry from Colorado State
University.

Margaret M. Contessa, Senior Vice President,
Human Resources,age 53, joined
Guilford as Vice President of Human Resources in November 2000.
In February 2002, Ms. Contessa was promoted to Senior Vice
President, Human Resources. Prior to joining Guilford, from
March 1998 to January 1999, Ms. Contessa was Vice
President, Human Resources of Witco Corporation, a 6,000-person,
multibillion-dollar manufacturer of specialty chemicals located
in Greenwich, Connecticut. From 1986 through 1998, she was
employed by Engelhard Corporation as Director, Human Resources,
and prior to that held various human resources positions with
Schering Plough and BASF. Ms. Contessa received her B.S. in
Management Science at Fairleigh Dickinson University in 1977 and
received training at Harvard and Columbia University.

Item 2.     Properties

In August 1994, we entered into a master lease
for an approximately 83,000 square foot building in
Baltimore, Maryland that currently serves as our headquarters.
We currently occupy 23,000 square feet for office space,
18,000 square feet for manufacturing space for
GLIADEL® Wafer and potentially other polymer-based
products, and 42,000 square feet of research and
development laboratories. The master lease expires in June 2005.
Two five-year renewal options are available to us or we may
exercise a purchase option any time after the ninth year of the
lease for the then-current fair market value.

In February 1998, we entered into an operating
lease with a trust affiliated with First Union National Bank
respecting the construction and occupancy of a new laboratory
and office facility, consisting of approximately
73,000 square feet. We began moving personnel into this
facility in June 1999 and consolidated all of our operations
into our current headquarters and the new facility during the
third quarter of 1999. The lease expires in February 2005, at
which time we have an option (i) to purchase the property
or (ii) to sell the property on behalf of the trust
(subject to certain limitations and related obligations). In
addition, we may, with the consent of First Union, enter into a
new lease arrangement.

See Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources for
a more complete description of the Companys arrangements
with First Union.

Item 3.     Legal
Proceedings

We are not a party to any material legal
proceedings.

Item 4.     Submission
of Matters to a Vote of Security Holders

No matters were submitted to a vote of the
Companys security holders during the last quarter of its
fiscal year ended December 31, 2001.

19



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Item 4A.     Risk
Factors

An investment in our stock is very speculative
and involves a high degree of risk. You should consider the
following important factors, as well as the other information in
this report and our SEC filings, carefully before purchasing our
stock.

We have a history of losses and our future
profitability is uncertain.

We may not be able to achieve or sustain
significant revenues or earn a profit in the future. We founded
Guilford in July 1993, and since that time, with the sole
exception of 1996, we have not earned a profit in any year. Our
losses result mainly from the significant amount of money that
we have spent on research and development. As of
December 31, 2001, we had an accumulated deficit of
approximately $190.3 million. We expect to have significant
additional losses over the next several years.

Most of our product candidates are in research or
early stages of preclinical and clinical development. Except for
GLIADEL® Wafer, none of our products or product candidates
has been sold to the public. Up to this time, nearly all of our
revenues have come from:



| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | payments from Aventis and Amgen under now
	terminated agreements with each of them, supporting the
	research, development and commercialization of our product
	candidates,
|
| |  | research funding from Amgen,                                                                                                                                               
|
| |  | royalty payments from Aventis sale and
	distribution of GLIADEL® Wafer, and                                                                                               
|
| |  | our sale and distribution of GLIADEL® Wafer.                                                                                                                               

Our agreements with both Aventis and Amgen have
terminated and we do not expect revenues from GLIADEL®
Wafer to be sufficient to support all our anticipated future
activities. In addition, we do not expect to generate revenues
from the sale of our product candidates for the next several
years, if ever, because of significant risks.

These risks are part of each of the following
activities:



| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | new product development,                                                                                                                                                                                                                                
|
| |  | the conduct of preclinical animal studies and
	human clinical trials,                                                                                                                                                                                   
|
| |  | applying for and obtaining regulatory approval to
	market and sell product candidates,                                                                                                                                                                  
|
| |  | expanding the processes for making product
	candidates from the relatively small quantities and qualities
	needed for research and development purposes to the commercial
	scale manufacture needed to support marketing and sales of new
	products, and
|
| |  | commercialization of new products.                                                                                                                                                                                                                      

Many factors will dictate our ability to achieve
sustained profitability in the future, including:



| |   |                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to successfully market, sell and
	distribute our products, including GLIADEL® Wafer,                                                                                                                                                                                                         
|
| |  | receipt of regulatory clearance to market and
	sell GLIADEL® Wafer for patients undergoing initial surgery
	for malignant glioma in the United States as well as in Europe
	and other countries,                                                                                                         
|
| |  | the successful development and commercialization
	of product candidates on our own, and                                                                                                                                                                                                                  
|
| |  | our ability to enter into additional
	collaborative arrangements and license agreements with other
	corporate partners for our product candidates and earlier stage
	technologies as we develop them and the successful development
	and commercialization of those product candidates and
	technologies.

We will need to conduct substantial additional
research, development and clinical trials. We will also need to
receive necessary regulatory clearances both in the United
States and foreign countries and to obtain meaningful patent
protection for and establish freedom to commercialize each of
our product candidates. We

20



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expect that these research, development and
clinical trial activities, and regulatory clearances, together
with future general and administrative activities, will result
in significant expenses for the foreseeable future.


We depend on a single product, GLIADEL®
Wafer, for revenues.

Our short-term prospects depend to a large extent
on sales of GLIADEL® Wafer, our only commercial product. We
commercially launched GLIADEL® Wafer in the United States
in February 1997. We currently do not know whether the product
will ever gain broad market acceptance or the extent of the
marketing efforts necessary to achieve broad market acceptance.
If GLIADEL® Wafer fails to gain market acceptance, the
revenues we receive from sales of GLIADEL® Wafer would be
unlikely to increase.

On October 23, 2000, we reacquired from
Aventis the right to market, sell and distribute GLIADEL®
Wafer. Until then, Aventis held exclusive worldwide (excluding
Scandinavia and Japan) marketing, sales and distribution rights
for GLIADEL® Wafer. Under that arrangement, Aventis paid us
royalties and also made designated milestone payments upon
achieving specified domestic and international regulatory
approvals. After the reacquisition, Aventis is no longer
obligated to make any payments to us.

We have approval from the FDA to market
GLIADEL® Wafer in the United States for only a limited
subset of patients who suffer from brain cancer. Our approval is
for those patients for whom surgical tumor removal, commonly
referred to as resection, is called for and who have
recurrent forms of a type of brain cancer called
glioblastoma multiforme. A recurrent form of glioblastoma
multiforme is one in which the cancer has returned after initial
surgery to remove a brain tumor. The number of patients
undergoing recurrent surgery for glioblastoma multiforme is very
limited, and we believe the total number of patients on an
annual basis who have glioblastoma multiforme in the United
States is approximately 10,000.

In March 2002, the FDA informed us that our
supplemental New Drug Application for GLIADEL® Wafer for
patients undergoing initial surgery for malignant glioma was not
approvable. The FDAs action means that we continue to be
unable to market GLIADEL® Wafer in the United States for
use in patients beyond the current narrow indication and reduces
the likelihood of increasing the revenues that we receive from
sales of GLIADEL® Wafer.

In addition, in January  2002 we submitted
applications for approval to market GLIADEL® Wafer in
Europe for patients undergoing first surgery for malignant
glioma. Presently, GLIADEL® Wafer is approved for the
market for recurrent GBM in only 21 countries, including
France, Spain, Germany and the U.K. GLIADEL® Wafer is only
currently approved for first-line therapy in Canada. If we are
not able to obtain additional approvals, the market for
GLIADEL® Wafer would remain limited both geographically and
with regard to approved uses, which reduces the likelihood of
increasing the revenues that we receive from sales of
GLIADEL® Wafer. Regardless of the number of foreign
regulatory approvals that we have received, international sales
to date comprise a small percentage of worldwide sales of
GLIADEL® Wafer.

GLIADEL® Wafer is also a very fragile
product and can easily break into many pieces if it is not
handled with great care. Product recalls or returns due to
excessive breakage of the GLIADEL® Wafers or for other
reasons could also have a negative effect on our business,
financial condition and results of operations.

We have limited experience selling our
products directly and we may not be successful in our efforts to
market, sell and distribute GLIADEL® Wafer. Additionally,
we expect to incur significant expense in marketing, selling and
distributing GLIADEL® Wafer.

From GLIADEL® Wafers commercial launch
until December 31, 2000, Aventis marketed, sold and
distributed GLIADEL® Wafer. Our reacquisition of the right
to market, sell and distribute GLIADEL® Wafer in October
2000 marks an important change in our business. We acquired
direct sales capability during the first quarter of 2001, and
therefore, we have limited experience in engaging in marketing
and sales efforts. This limited experience may limit our success
in selling GLIADEL® Wafer. Additionally, our marketing and
sales efforts may use resources and require attention from
management that would otherwise be provided to the drug
development business.

21



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Our operating results are likely to fluctuate
from quarter to quarter, which could cause the price of our
common stock to fluctuate.

Our revenues and expenses have fluctuated
significantly in the past. This fluctuation has in turn caused
our operating results to vary significantly from quarter to
quarter and year to year. We expect the fluctuations in our
revenues and expenses to continue and thus our operating results
should also continue to vary significantly. These fluctuations
are due to a variety of factors, including:



| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the timing and amount of sales of GLIADEL®
	Wafer,                                                                                                                                            
|
| |  | the timing and realization of milestone and other
	payments from future corporate partners,                                                                                                   
|
| |  | the timing and amount of expenses relating to our
	research and development, product development, and manufacturing
	activities, and                                                          
|
| |  | the extent and timing of costs related to our
	activities to obtain patents on our inventions and to extend,
	enforce and/or defend our patent and other rights to our
	intellectual property.

Because of these fluctuations, it is possible
that our operating results for a particular quarter or quarters
will not meet the expectations of public market analysts and
investors, causing the market price of our common stock to
fluctuate.

The market price of our stock may be
negatively affected by market volatility.

The market price of our stock has been and is
likely to continue to be highly volatile. Furthermore, the stock
market generally and the market for stocks of companies with
lower market capitalizations and small biopharmaceutical
companies, like us, have from time to time experienced and
likely will again experience significant price and volume
fluctuations that are unrelated to the operating performance of
a particular company.

From time to time, stock market professionals
publish research reports covering our business and our future
prospects. For a number of factors, we may be unable to meet the
expectations of securities analysts or investors and our stock
price may decline. These factors include:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | announcements by us or our competitors of
	clinical results, technological innovations, product sales, new
	products or product candidates,
|
| |  | developments or disputes concerning patent or
	proprietary rights,                                                                         
|
| |  | regulatory developments affecting our products,                                                                                            
|
| |  | period-to-period fluctuations in the results of
	our operations,                                                                           
|
| |  | market conditions for emerging growth companies
	and biopharmaceutical companies,                                                          
|
| |  | revenues received from GLIADEL®
	Wafer, and                                                                                                
|
| |  | our expenditures.                                                                                                                          

In the past, following periods of volatility in
the market price of the securities of companies in our industry,
securities class action litigation has often been instituted
against those companies. If we face such litigation in the
future, it would result in substantial costs and a diversion of
managements attention and resources, which would
negatively impact our business.

Our manufacturing capabilities are limited by
the size of our facilities, our inexperience in manufacturing
large quantities of product and the potential inability to
locate a third party manufacturer for our product
candidates.

To commercialize GLIADEL® Wafer, we must be
able to manufacture it in sufficient quantities, in compliance
with regulatory requirements, and at acceptable costs. We
manufacture GLIADEL® Wafer at one of our two manufacturing
facilities in Baltimore, Maryland, which consists of production
laboratories and

22



---



##### 



redundant cleanrooms. We estimate that the
facility currently being used has the capacity to manufacture
approximately 8,000 GLIADEL® Wafer treatments per year.


We have manufactured only limited quantities of
GLIADEL®Wafer in our facilities. We cannot be sure that we
will be able to continue to satisfy applicable regulatory
standards, including FDA requirements, and other requirements
relating to the manufacture of GLIADEL® Wafer in the
facilities.

We also face risks inherent in the operation of a
facility for manufacture of GLIADEL® Wafer. These risks
include:



| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | unforeseen plant shutdowns due to personnel,
	equipment or other factors, and                                
|
| |  | the possible inability of the facilities to
	produce GLIADEL® Wafer in quantities sufficient to meet
	demand.

Any delay in the manufacture of GLIADEL®
Wafer could result in delays in product shipment. Delays in
product shipment would have a negative effect on our business
and operating results.

Currently, we have no manufacturing capabilities
for commercial quantities of any of our product candidates.
Consequently, in order to complete the commercialization process
of any of our product candidates, we must either acquire, build
or expand our internal manufacturing capabilities or rely on
third parties to manufacture these product candidates. We cannot
be sure that we will be able to (1) acquire, build or
expand facilities that will meet quality, quantity and timing
requirements or (2) enter into manufacturing contracts with
others on acceptable terms. If we are unable to accomplish these
tasks, it would impede our efforts to bring our product
candidates to market, which would adversely affect our business.
Moreover, if we decide to manufacture one or more of our product
candidates ourselves (rather than engage a contract
manufacturer), we would incur substantial start-up expenses and
would need to expand our facilities and hire additional
personnel.

Third-party manufacturers must also comply with
FDA, Drug Enforcement Administration, and other regulatory
requirements for their facilities. In addition, the manufacture
of product candidates on a limited basis for investigational use
in animal studies or human clinical trials does not guarantee
that large-scale, commercial production is viable. Small changes
in methods of manufacture can affect the safety, efficacy,
controlled release or other characteristics of a product.
Changes in methods of manufacture, including commercial
scale-up, can, among other things, require the performance of
new clinical studies.

Revenues from our products, specifically
GLIADEL® Wafer, depend in part on reimbursement from health
care payors, which is uncertain.

The continuing efforts of government and
insurance companies, health maintenance organizations and other
payors of health care costs to contain or reduce costs of health
care may affect our future revenues and profitability. These
efforts may also affect the future revenues and profitability of
our potential customers, suppliers and collaborative partners,
in turn affecting demand for our products. For example, in
certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to government control.
In the United States, given recent federal and state government
initiatives directed at lowering the total cost of health care,
the U.S. Congress and state legislatures will likely
continue to focus on health care reform, the cost of
prescription pharmaceuticals and on the reform of the Medicare
and Medicaid systems. While we cannot predict whether any such
legislative or regulatory proposals will be adopted, the
announcement or adoption of such proposals could have a negative
effect on our business and operating results.

Our ability to commercialize our products
successfully will depend in part on the extent to which private
health insurers, organizations such as HMOs and governmental
authorities reimburse the cost of our products and related
treatments. Third-party payors are increasingly challenging the
prices charged for medical products and services. Also, the
trend toward managed health care in the United States and the
concurrent growth of organizations such as HMOs, which could
control or significantly influence the purchase of health care
services and products, as well as legislative proposals to
reform health care or reduce government insurance programs, may
all result in lower prices for or rejection of our products. The
cost containment

23



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##### 



measures that health care payors and providers
are instituting and the effect of any health care reform could
materially and adversely affect our ability to operate
profitably.


Furthermore, even if reimbursement is available
for our products, we cannot be sure that it will be available at
price levels sufficient to cover the cost of our products to
customers and this may have the effect of reducing the demand
for our products, or may prohibit us from charging customers a
price for our products that would result in an appropriate
return on our investment in those products.

We face technological uncertainties in
connection with the research, development and commercialization
of new products.

The research, development and commercialization
of pharmaceutical drugs involve significant risk. Before we or
our corporate partners can be in a position to market, sell and
distribute a new product, each of us will have to:



| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expend substantial capital and effort to develop
	our product candidates further, which includes conducting
	extensive and expensive preclinical animal studies and human
	clinical trials,
|
| |  | apply for and obtain regulatory approval to
	market and sell such product candidates, and                                                                                                  
|
| |  | conduct other costly activities related to
	preparation for product launch, among many other activities.                                                                                   

In some of our research programs, we are using
compounds that we consider to be prototype compounds
in the research phase of our work. By prototype compounds we
mean compounds that we are using primarily to establish that a
relevant scientific mechanism of biological or chemical action
could have commercial application in diagnosing, treating or
preventing disease. We generally do not consider our prototype
compounds to be lead compounds acceptable for further
development into a product(s) because of factors that render
them unsuitable as drug candidates. These factors include the
ability for the compound to be absorbed, metabolized,
distributed and excreted from the body. In order to develop
commercial products, we will need to conduct research using
other compounds that share the key aspects of the prototype
compounds but do not have the unsuitable characteristics. This
may not always be possible.

In addition, our product candidates are subject
to the risks of failure inherent in the development of products
based on new and unsubstantiated technologies. These risks
include the possibility that:



| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our new approaches will not result in any
	products that gain market acceptance,                                                                                                          
|
| |  | a product candidate will prove to be unsafe or
	ineffective, or will otherwise fail to receive and maintain
	regulatory clearances necessary for marketing,                               
|
| |  | a product, even if found to be safe and
	effective, could still be difficult to manufacture on the large
	scale necessary for commercialization or otherwise not be
	economical to market,
|
| |  | a product will unfavorably interact with other
	types of commonly used medications, thus restricting the
	circumstances in which it may be used,                                          
|
| |  | third parties may successfully challenge our
	proprietary rights protecting a product,                                                                                                    
|
| |  | proprietary rights of third parties will preclude
	us from manufacturing or marketing a new product, or                                                                                   
|
| |  | third parties will market superior or more
	cost-effective products.                                                                                                                      

As a result, our activities, either directly or
through corporate partners, may not result in any commercially
viable products.

24



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##### 



We depend on collaborations with third parties
for the development and commercialization of our
products.

Our resources are limited, particularly because
we are developing our technologies for a variety of different
diseases. Our business strategy requires that we enter into
various arrangements with:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | corporate partners,                                                       
|
| |  | academic investigators at universities, such as
	Johns Hopkins and others,
|
| |  | licensors of technologies, such as Johns Hopkins,
	MIT and RTI, and       
|
| |  | licensees of our technologies, such as DRL, MAP
	and others.              

Our success depends in large part upon the
efforts of our third party collaborators.

Our business strategy includes finding larger
pharmaceutical companies to collaborate with us to support the
research, development and commercialization of our product
candidates. In trying to attract these corporate partners, we
face serious competition from other small pharmaceutical
companies and the in-house research and development staffs of
the larger pharmaceutical companies. If we are unable to enter
into such arrangements with corporate partners, our ability to
proceed with the research, development, manufacture or sale of
product candidates may be severely limited. For example, we are
actively seeking corporate partners to assist in the development
of our NAALADase and PARP inhibitor neuroprotective drug
programs, but we may not find suitable corporate partners for
these programs. It is common practice in many corporate
partnerships in our industry for the larger partner to have
responsibility for conducting preclinical studies and human
clinical trials and/or preparing and submitting applications for
regulatory approval of potential pharmaceutical products. It is
possible that this will be the case with future arrangements
into which we may enter. If one of our collaborative partners
fails to develop or commercialize successfully any of our
product candidates, we may not be able to remedy this failure
and it could negatively affect our business.

Furthermore, larger pharmaceutical companies
often explore multiple technologies and products for the same
medical conditions. Therefore, they are likely to enter into
collaborations with our competitors for products addressing the
same medical conditions targeted by our technologies. Thus our
collaborators may be pursuing alternative technologies or
product candidates in order to develop treatments for the
diseases or disorders targeted by our collaborative
arrangements. Our collaborators may pursue these alternatives
either on their own or in collaboration with others, including
our competitors. Depending on how other product candidates
advance, a corporate partner may slow down or abandon its work
on our product candidates or terminate its collaborative
arrangement with us in order to focus on these other prospects.

We may be unable to obtain the additional
capital needed to operate and grow our business.

We will require substantial funds in order to
cover the costs related to our commercial operations function,
continue our research and development programs and preclinical
and clinical testing, and to manufacture our products. We may be
unable to obtain any future funds that we may require on
acceptable terms, or at all.

Under our operating lease with a trust affiliated
with a commercial bank for our new research and development
facility and other financial obligations, we are required to
hold, in the aggregate, unrestricted cash, cash equivalents and
investments of $40 million at all times. In addition, we
are required to maintain specified amounts of cash or
investments as collateral under certain financial obligations.
As of December 31, 2001, we maintained $16.5 million
in restricted investments pursuant to these financial
obligations.

Our capital requirements depend on numerous
factors, including:



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | the progress of our research and development
	programs,        
|
| |  | the progress of preclinical and clinical testing,              
|
| |  | the time and costs involved in obtaining
	regulatory approvals,

25



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##### 





| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | the extent of intellectual property protection
	obtained for our products and product candidates,                   
|
| |  | the cost of filing, prosecuting, defending and
	enforcing any patent claims and other intellectual property
	rights,
|
| |  | competing technological and market developments,                                                                    
|
| |  | changes in our existing research relationships
	with universities and others,                                       
|
| |  | our ability to establish collaborative
	arrangements with large pharmaceutical companies and others,                
|
| |  | the requirements and timing of entering into
	technology licensing agreements and other similar
	arrangements, and  
|
| |  | the progress of efforts to scale-up manufacturing
	processes.                                                       

We may use our existing resources before we may
otherwise expect because of changes in our research and
development and commercialization plans or other factors
affecting our operating expenses or capital expenditures,
including potential acquisitions of other businesses, assets or
technologies.

Our ability to raise future capital on acceptable
terms depends on conditions in the public and private equity
markets and our performance, as well as the overall performance
of other companies in the pharmaceutical and biotechnology
sectors.

We may be unable to obtain proprietary rights
to protect our products and services, permitting competitors to
duplicate them.

Any success that we have will depend in large
part on our ability to:



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | obtain, maintain and enforce intellectual
	property protection for our products and processes,
|
| |  | license patent rights from third parties,                                                     
|
| |  | maintain trade secret protection, and                                                         
|
| |  | operate without infringing upon the proprietary
	rights of others.                            

Intellectual property for our technologies and
products will be a crucial factor in our ability to develop and
commercialize our products. Large pharmaceutical companies
consider a strong patent estate critical when they evaluate
whether to enter into a collaborative arrangement to support the
research, development and commercialization of a technology.
Without the prospect of reasonable intellectual property
protection, it would be difficult for a corporate partner to
justify the time and money that is necessary to complete the
development of a product.

The rules and criteria for receiving and
enforcing a patent for pharmaceutical and biotechnological
inventions are in flux and are unclear in many respects. The
range of protection given these types of patents is uncertain,
and a number of our product candidates are subject to this
uncertainty.

Many others, including companies, universities
and other research organizations, work in our business areas,
and we cannot be sure that the claims contained in our issued
patents will be interpreted as broadly as we would like in light
of the inventions of these other parties. In addition, we cannot
be sure that the claims set forth in our pending patent
applications will issue in the form submitted. These claims may
be narrowed or stricken, and the applications may not ever
ultimately result in valid and enforceable patents. Thus, we
cannot be sure that our patents and patent applications will
adequately protect our product candidates.

We are aware of at least one company, which has
asserted publicly that it has submitted patent applications
claiming the use of certain of its immunosuppressive compounds
and multidrug resistance compounds for nerve growth
applications. That company has also stated that it has issued
U.S. patents and pending U.S. applications which claim
compounds that are useful in nerve growth applications. We
cannot give any assurance as to the ability of our patents and
patent applications to adequately protect our

26



---



##### 



neurotrophic product candidates. Also, our
neurotrophic product candidates may infringe or be dominated by
patents that have issued or may issue in the future to third
parties.


In order to protect our intellectual property
position with respect to our neuroimmunophilin ligands, we filed
an opposition in 1998 in an effort to prevent the final issuance
of a European patent to the company we discuss in the above
paragraph. In 2000, we won the opposition and the subject patent
was revoked. However, the patentee has appealed the initial
determination and the patent could be reinstated. If the patent
is reinstated, litigation could result.

Furthermore, any or all of the patent
applications assigned or licensed to us from third parties may
not be granted. We may not develop additional products or
processes that are patentable. Any patents issued to us, or
licensed by us, may not provide us with any competitive
advantages or adequate protection for our products. Others may
successfully challenge, circumvent or invalidate any of our
existing or future patents or intellectual property.

Our policy is to control the disclosure and use
of our know-how and trade secrets by entering into
confidentiality agreements with our employees, consultants and
third parties. There is a risk, however, that:



| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | these parties will not honor our confidentiality
	agreements,                                                                  
|
| |  | disputes will arise concerning the ownership of
	intellectual property or the applicability of confidentiality
	obligations, or
|
| |  | disclosure of our trade secrets will occur
	regardless of these contractual protections.                                       

In our business, we often work with consultants
and research collaborators at universities and other research
organizations. To the extent that any of these consultants or
research collaborators use intellectual property owned by others
as part of their work with us, disputes may arise between us and
these other parties as to which one of us has the rights to
intellectual property related to or resulting from the work done.

We support and collaborate in research conducted
in universities, such as Johns Hopkins, and in governmental
research organizations, such as the National Institutes of
Health. We may not be able to acquire exclusive rights to the
inventions or technical information that result from work
performed by personnel at these organizations. Also, disputes
may arise as to which party should have rights in research
programs that we conduct on our own or in collaboration with
others that are derived from or related to the work performed at
a university or governmental research organization. In addition,
in the event of a contractual breach by us, some of our
collaborative research contracts provide that we must return the
technology rights, including any patents or patent applications,
to the contracting university or governmental research
organization.

Questions of infringement of intellectual
property rights, including patent rights, may involve highly
technical and subjective analyses. Some or all of our existing
or future products or technologies may now or in the future
infringe the rights of other parties. These other parties might
initiate legal action against us to enforce their claims, and
our defense of the claims might not be successful.

We may incur substantial costs if we must defend
against charges of infringement of patent or proprietary rights
of third parties. We may also incur substantial costs if we find
it necessary to protect our own patent or proprietary rights by
bringing suit against third parties. We could also lose rights
to develop or market products or be required to pay monetary
damages or royalties to license proprietary rights from third
parties. In response to actual or threatened litigation, we may
seek licenses from third parties or attempt to redesign our
products or processes to avoid infringement. We may not be able
to obtain licenses on acceptable terms, or at all, or
successfully redesign our products or processes.

In addition to the risk that we could be a party
to patent infringement litigation, the U.S. Patent and
Trademark Office could require us to participate in patent
interference proceedings. These proceedings are often expensive
and time-consuming, even if we were to prevail in such
proceedings.

27



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##### 



We rely on licensed intellectual property for
GLIADEL® Wafer and our other product candidates.

We have licensed intellectual property, including
patents, patent applications and know-how, from universities and
others, including intellectual property underlying GLIADEL®
Wafer, DOPASCAN® Injection, AQUAVANTM Injection
and the neuroimmunophilin ligand technology. Some of our product
development programs depend on our ability to maintain rights
under these licenses. Under the terms of our license agreements,
we are generally obligated to:



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | exercise diligence in the research and
	development of these technologies,                                 
|
| |  | achieve specified development and regulatory
	milestones,                                                  
|
| |  | expend minimum amounts of resources in bringing
	potential products to market,                             
|
| |  | make specified royalty and milestone payments to
	the party from which we have licensed the technology, and
|
| |  | reimburse patent costs to these parties.                                                                   

In addition, these license agreements require us
to abide by record-keeping and periodic reporting obligations.
Each licensor has the power to terminate its agreement if we
fail to meet our obligations under our license with it. We may
not be able to meet our obligations under these license
agreements, which could deprive us of access to key technology.
Furthermore, these obligations may conflict with our obligations
under other agreements that we have.

If we default under any of these license
agreements, we may lose our right to market and sell any
products based on the licensed technology. Losing our marketing
and sales rights would have a significant negative effect on our
business, financial condition and results of operations. Our
license agreements require that we pay a royalty on sales of
GLIADEL® Wafer to the university that licensed us the
technology underlying that product. In addition, we will have to
pay milestone and/or royalty payments in connection with the
successful development and commercialization of DOPASCAN®
Injection, AQUAVANTM Injection and any products that
result from the PPE, NIL and PARP technologies.

In addition, our U.S. patent protection for
GLIADEL® Wafer expires in 2005. From and after that time,
there can be no assurance that others will not enter the market
with a generic copy of GLIADEL® Wafer.

We depend on a single source of supply for
several of our key product components.

Currently, we can only purchase some of the key
components for GLIADEL® Wafer and our product candidates
from single source suppliers. These vendors are subject to many
regulatory requirements regarding the supply of these
components. We cannot be sure that these suppliers will comply,
or have complied, with applicable regulatory requirements or
that they will otherwise continue to supply us with the key
components we require. If suppliers are unable or refuse to
supply us, or will supply us only at a prohibitive cost, we may
not be able to access additional sources at acceptable prices,
on a timely basis, if ever.

The current formulation of GLIADEL® Wafer
utilizes the chemotherapeutic agent BCNU, which is also known as
carmustine. Currently we have the option to procure
BCNU from only two sources in the United States, and we are not
aware of any supplier outside of the United States. We currently
obtain BCNU from one of these two U.S. suppliers on a
purchase order basis and not through any long-term supply
agreement. If we fail to receive key supplies necessary for the
manufacture of GLIADEL on a timely basis at a reasonable cost,
delays in product shipment could result. Delays of this type
would have a negative effect on our business.

The manufacture of DOPASCAN® Injection
requires that the precursor compound be labeled with a
radioactive isotope of iodine, Iodine-123, to produce
DOPASCAN® Injection. Worldwide, a limited number of
companies are capable of performing both the necessary
transformation of the precursor into DOPACAN and of distributing
it to diagnostic centers.

Based on our assessment of United States
companies capable of DOPASCAN® Injection manufacture and
distribution, we believe a significant risk exists in our
ability to produce DOPASCAN® Injection in

28



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##### 



sufficient quantities and at an acceptable cost
to conduct the Phase III clinical trials necessary to
support NDA approval and successful commercialization of the
product. Currently, we have neither the internal capability
nondomestic external (third party) arrangements to manufacture
and supply DOPASCAN® Injection. Our inability to locate a
suitable domestic third-party manufacturer and distributor of
DOPASCAN® Injection on acceptable terms will prevent us
from further development of this product candidate in the United
States.


The U.S. government holds rights which
may permit it to license to third parties technology we
currently hold the exclusive right to use.

The U.S. government holds rights that govern
aspects of specific technologies licensed to us by third party
licensors. These government rights in inventions conceived or
reduced to practice under a government-funded program may
include a non-exclusive, royalty-free, worldwide license for the
government to practice or have practiced resulting inventions
for any governmental purpose. In addition, the
U.S. government has the right to grant to others licenses
that may be exclusive under any of these inventions if the
government determines that:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | adequate steps have not been taken to
	commercialize such inventions,                 
|
| |  | the grant is necessary to meet public health or
	safety needs, or                     
|
| |  | the grant is necessary to meet requirements for
	public use under federal regulations.

The U.S. government also has the right to
take title to a subject invention if we fail to disclose the
invention, and may elect to take title within specified time
limits. The U.S. government may acquire title in any
country in which we do not file a patent application within
specified time limits.

Federal law requires any licensor of an invention
partially funded by the federal government to obtain a
commitment from any exclusive licensee, such as us, to
manufacture products using the invention substantially in the
United States. Further, these rights include the right of the
government to use and disclose technical data relating to
licensed technology that was developed in whole or in part at
government expense. Our principal technology license agreements
contain provisions recognizing these rights.

Preclinical and clinical trial results for our
products may not be favorable.

In order to obtain regulatory approval for the
commercial sale of any of our product candidates, we must
conduct both preclinical studies and human clinical trials.
These studies and trials must demonstrate that the product is
safe and effective for the clinical use for which we are seeking
approval. The results of clinical trials we conduct may not be
successful. Adverse results from any clinical trials would have
a negative effect on our business.

We also face the risk that we will not be
permitted to undertake or continue clinical trials for any of
our product candidates in the future. Even if we are able to
conduct such trials, we may not be able to demonstrate
satisfactorily that the products are safe and effective and thus
qualify for the regulatory approvals needed to market and sell
them. Results from preclinical studies and early clinical trials
are often not accurate indicators of results of later-stage
clinical trials that involve larger human populations.

We are subject to extensive governmental
regulation, which may change and harm our business.

Our research, preclinical development and
clinical trials, and the manufacturing and marketing of our
product candidates, are subject to extensive regulation by
numerous governmental authorities in the United States and other
countries, including the FDA and the DEA. Except for
GLIADEL® Wafer for recurrent GBM, none of our product
candidates has received marketing clearance from the FDA. In
addition, none of our product candidates has received clearance
from any foreign regulatory authority for commercial sale,
except for GLIADEL® Wafer for recurrent GBM, which has
received marketing clearance in a limited number of foreign
countries.

As a condition to approval of our product
candidates under development or GLIADEL® Wafer for initial
surgery, the FDA could require additional pre-clinical, clinical
or other studies. Any requirement that we

29



---



##### 



perform additional pre-clinical, clinical or
other studies, or purchase clinical or other data from other
companies could delay, or increase the expense of, approval of
our product candidates, which could have a negative effect on
our business.


We must also demonstrate that the product is
capable of being manufactured in accordance with applicable
regulatory standards. Significant risks exist that:



| |   |                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we will not be able to satisfy the FDAs
	requirements with respect to any of our drug product candidates
	or with respect to any expanded labeling for GLIADEL® Wafer
	that we may receive in the future related to patients undergoing
	initial surgery for malignant glioma, or
|
| |  | even if the FDA does approve our product
	candidates or expanded labeling, the FDA will approve less than
	the full scope of uses or labeling that we seek.                                                                                                                       

Failure to obtain regulatory drug approvals on a
timely basis could have a material adverse effect on our
business.

Even if we are able to obtain necessary FDA
approval, the FDA may nevertheless require post-marketing
testing and surveillance to monitor the approved product and
continued compliance with regulatory requirements. The FDA may
withdraw product approvals if we or our corporate partners do
not maintain compliance with regulatory requirements. The FDA
may also withdraw product approvals if problems concerning
safety or efficacy of the product occur following approval.

The process of obtaining FDA and other required
approvals or licenses and of meeting other regulatory
requirements to test and market drugs, including controlled
substances and radiolabeled drugs, is rigorous and lengthy. We
have expended, and will continue to expend, substantial
resources. We will need to conduct clinical trials and other
studies on all of our product candidates before we are in a
position to file a new drug application for marketing and sales
approval. Unsatisfactory clinical trial results and other delays
in obtaining regulatory approvals or licenses would prevent the
marketing of the products we are developing. Until we receive
the necessary approvals or licenses and meet other regulatory
requirements, we will not receive revenues or royalties related
to product sales.

In addition to the requirements for product
approval, before a pharmaceutical product may be marketed and
sold in some foreign countries, the proposed pricing for the
product must be approved as well. Products may be subject to
price controls or limits on reimbursement. The requirements
governing product pricing and reimbursement vary widely from
country to country and can be implemented disparately at the
national level. We cannot guarantee that any country which has
price controls or reimbursement limitations for pharmaceuticals
will allow favorable reimbursement and pricing arrangements for
our products or those of our corporate partners.

Where applicable, we hope to capitalize on
current FDA regulations and provisions of the FDA Modernization
Act of 1997. These regulations or provisions permit fast
track, expedited or accelerated approval or more limited
treatment use of, and cost recovery for, certain
experimental drugs under limited circumstances. The fast track
and treatment provisions, and FDAs accelerated, expedited
and treatment regulations apply generally only to:



| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | drug products intended to treat severely
	debilitating or serious or life-threatening diseases, and                                                                                                                                
|
| |  | drug products that provide meaningful therapeutic
	benefit to patients over existing treatments, that potentially
	address an unmet medical need, or that are for diseases for
	which no satisfactory or comparable therapy exists.

The FDA Modernization Act contains provisions
patterned after the accelerated approval regulations and other
provisions pertaining to expanded access, i.e., treatment uses.
Our drug candidates may not qualify for fast track, accelerated
or expedited approvals or for treatment use and cost recovery.

Because controlled drug products and radiolabeled
drugs are subject to special regulations in addition to those
applicable to other drugs, the DEA and the Nuclear Regulatory
Commission may regulate some of our products and product
candidates, including DOPASCAN® Injection, as controlled
substances and as

30



---



##### 



radiolabeled drugs. The NRC licenses persons who
use nuclear materials and establishes standards for radiological
health and safety. The DEA is responsible for compliance
activities for companies engaged in the manufacture,
distribution and dispensing of controlled substances, including
the equipment and raw materials used in their manufacture and
packaging in order to prevent such articles from being diverted
into illicit channels of commerce. Registration is required and
other activities involving controlled substances are subject to
a variety of record keeping and security requirements, and to
permits and authorizations and other requirements. States often
have requirements for controlled substances as well. The DEA
grants certain exceptions from the requirements for permits and
authorizations to export or import materials related to or
involving controlled substances. Our potential future inability
to obtain exceptions from the DEA for shipment abroad or other
activities could have a negative effect on us.


We cannot be sure that we will be able to meet
applicable requirements to test, manufacture and market
controlled substances or radiolabeled drugs, or that we will be
able to obtain additional necessary approvals, permits,
authorizations, registrations or licenses to meet state, federal
and international regulatory requirements to manufacture and
distribute such products.

Prescription Drug User Fee Act of 1992 (PDUFA),
as amended by the Food and Drug Administration Modernization Act
of 1997, authorizes FDA to collect user fees for certain
applications for approval of drug and biological products, on
establishments where products are made and on such products.
These fees generate funds that allow, among other things, FDA to
hire a significant number of new scientists to assist in the
product review process. Certain performance goals were
established under PDUFA that include improved time frames for
reviewing and acting upon drug applications. Management goals
were also specified pertaining to meetings and dispute
resolution.

PDUFA expires on September 30, 2002.
Reauthorization is necessary to achieve the improved drug
application review times and other goals of PDUFA. If new
legislation is not signed prior to September 30, the
current review times and approval rates for all drugs, including
Guilfords candidate drugs, likely will be adversely
affected.

Our competitors are pursuing alternative
approaches to the same conditions we are working on. Our
products use novel alternative technologies and therapeutic
approaches which have not been widely studied.

Many of our product development efforts focus on
novel alternative therapeutic approaches and new technologies
that have not been widely studied. Applications for these
approaches and technologies include, among other things, the
treatment of brain cancer, the diagnosis and monitoring of
Parkinsons disease, the promotion of nerve growth and the
prevention of neuronal damage. These approaches and technologies
may not be successful. We are applying these approaches and
technologies in our attempt to discover new treatments for
conditions that are also the subject of research and development
efforts of many other companies. Our competitors may succeed in
developing technologies or products that are more effective or
economical than those we are developing. Rapid technological
change or developments by others may result in our technology or
product candidates becoming obsolete or noncompetitive.

Our business is dependent on our ability to
keep pace with the latest technological changes.

The technological areas in which we work continue
to evolve at a rapid pace. Our future success depends upon
maintaining our ability to compete in the research, development
and commercialization of products and technologies in our areas
of focus. Competition from pharmaceutical, chemical and
biotechnology companies, universities and research institutions
is intense and expected to increase. Many of these competitors
have substantially greater research and development capabilities
and experience and manufacturing, marketing, financial and
managerial resources than we do.

Acquisitions of competing companies by large
pharmaceutical companies or other companies could enhance the
financial, marketing and other resources available to these
competitors. These competitors may

31



---



##### 



develop products that are superior to those we
are developing. We are aware of the development by other
companies and research scientists of alternative approaches to:




| |   |                                                 
| | - | ------------------------------------------------
| |  | the treatment of malignant glioma,              
|
| |  | the diagnosis of Parkinsons disease,           
|
| |  | the promotion of nerve growth and repair, and   
|
| |  | the treatment and prevention of neuronal damage.

Our competitors may develop products that render
our products or technologies noncompetitive or obsolete. In
addition, we may not be able to keep pace with technological
developments.

Our products must compete with others to gain
market acceptance.

Any product candidate that we develop and for
which we gain regulatory approval, including GLIADEL®
Wafer, must then compete for market acceptance and market share.
An important factor will be the timing of market introduction of
competitive products. Accordingly, the relative speed with which
we and competing companies can develop products, complete the
clinical testing and approval processes, and supply commercial
quantities of the products to the market will be an important
element of market success.

Significant competitive factors include:



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | capabilities of our collaborators,                                               
|
| |  | product efficacy and safety,                                                     
|
| |  | timing and scope of regulatory approval,                                         
|
| |  | product availability,                                                            
|
| |  | marketing and sale capabilities,                                                 
|
| |  | reimbursement coverage from insurance companies
	and others,                     
|
| |  | the amount of clinical benefit of our product
	candidates relative to their cost,
|
| |  | the method of administering a product,                                           
|
| |  | price, and                                                                       
|
| |  | patent protection.                                                               

Our competitors may develop more effective or
more affordable products or achieve earlier product development
completion, patent protection, regulatory approval or product
commercialization than we do. Our competitors achievement
of any of these goals could have a material adverse effect on
our business.

We have limited resources in the areas of product
testing and regulatory compliance. Consequently, in order to
carry our products through the necessary regulatory approvals
and prepare our product candidates for commercialization and
marketing, we will have to:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | expend capital to acquire and expand such
	capabilities,                              
|
| |  | reach collaborative arrangements with third
	parties to provide these capabilities, or
|
| |  | contract with third parties to provide these
	capabilities.                           

We are subject to risks of product liability
both because of our product line and our limited insurance
coverage.

We may potentially become subject to large
liability claims and significant defense costs as a result of
the design, manufacture or marketing of our products, including
GLIADEL® Wafer, or the conduct of clinical trials involving
these products. A product liability-related claim or recall
could have a negative effect on us. We currently maintain only
$15 million of product liability insurance covering
clinical trials and product sales.

32



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##### 



This existing coverage or any future insurance
coverage we obtain may not be adequate. Furthermore, our
insurance may not cover a claim made against us.


Product liability insurance varies in cost. It
can be difficult to obtain, and we may not be able to purchase
it in the future on terms acceptable to us, or at all. We also
may not be able to otherwise protect against potential product
liability claims. If this occurs, it could prevent or inhibit
the clinical development and/or commercialization of any
products we are developing.

We depend on qualified personnel and
consultants, especially Craig R. Smith, M.D. and
Solomon H. Snyder, M.D.

We depend heavily on the principal members of our
management and scientific staff, including Craig R.
Smith, M.D., our Chairman and Chief Executive Officer, and
Solomon H. Snyder, M.D., who is a member of our Board of
Directors and a consultant to our company. Both Dr. Smith
and Dr. Snyder have extensive experience in the
biotechnology industry and provide us with unique access to
their contacts in the scientific community. The loss of the
services of either of these individuals or other members of our
senior management team could have a negative effect on our
business.

We have entered into a consulting agreement with
Dr. Snyder and an employment agreement with Dr. Smith,
each of which provides protection for our proprietary rights.
Nevertheless, either Dr. Snyder or Dr. Smith may
terminate his relationship with us at any time. Accordingly, we
cannot be sure that either of these individuals or any of our
other employees or consultants will remain with us. In the
future they may take jobs or consulting positions with our
competitors. These employees or consultants may also choose to
organize competing companies or ventures.

Our planned activities will require individuals
with expertise in many areas including:



| |   |                                                     
| | - | ----------------------------------------------------
| |  | medicinal chemistry and other research
	specialties,
|
| |  | preclinical testing,                                
|
| |  | clinical trial management,                          
|
| |  | regulatory affairs,                                 
|
| |  | intellectual property,                              
|
| |  | sales and marketing,                                
|
| |  | manufacturing, and                                  
|
| |  | business development.                               

These planned activities will require additional
personnel, including management personnel, and will also require
existing management personnel to develop added expertise.
Recruiting and retaining qualified personnel, collaborators,
advisors and consultants will be critical to our activities. We
may not be able to attract and retain the personnel necessary
for the development of our business. Furthermore, many
pharmaceutical, biotechnology and health care companies and
academic and other research institutions compete intensely for
experienced scientists. If we are not able to hire the necessary
experienced scientists or develop the necessary expertise, this
inability could have a negative effect on us. In addition, we
also depend on the support of our collaborators at research
institutions and our consultants.

Our business involves using hazardous and
radioactive materials and animal testing, all of which may
result in environmental liability.

Our research and development processes involve
the controlled use of hazardous and radioactive materials. We
and our collaborative partners are subject to extensive laws
governing the use, manufacture, storage, handling and disposal
of hazardous and radioactive materials. There is a risk of
accidental contamination or injury from these materials. Also,
we cannot control whether our collaborative partners comply with
the governing standards. If we or our collaborative partners do
not comply with the governing

33



---



##### 



laws and regulations, we could face significant
fines and penalties that could have a negative effect on our
business, operations or finances. In addition, we and/or our
collaborative partners could be held liable for damages, fines
or other liabilities, which could exceed our resources.


However, we may have to incur significant costs
to comply with environmental laws and regulations in the future.
In addition, future environmental laws or regulations may have a
negative effect on our operations, business or assets.

Many of the research and development efforts we
sponsor involve the use of laboratory animals. Changes in laws,
regulations or accepted clinical procedures may adversely affect
these research and development efforts. Social pressures that
would restrict the use of animals in testing or actions against
us or our collaborators by groups or individuals opposed to
testing using animals could also adversely affect these research
and development efforts.

Effecting a change of control of Guilford
would be difficult, which may discourage offers for shares of
our common stock.

Our certificate of incorporation and the Delaware
General Corporation Law contain provisions that may delay or
prevent an attempt by a third party to acquire control of us.
These provisions include the requirements of Section 203 of
the Delaware General Corporation Law. In general,
Section 203 prohibits designated types of business
combinations, including mergers, for a period of three years
between us and any third party who owns 15% or more of our
common stock. This provision does not apply if:



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | our Board of Directors approves of the
	transaction before the third party acquires 15% of our stock,                                  
|
| |  | the third party acquires at least 85% of our
	stock at the time its ownership goes past the 15% level, or                              
|
| |  | our Board of Directors and two-thirds of the
	shares of our common stock not held by the third party vote in
	favor of the transaction.

We have also adopted a stockholder rights plan
intended to deter hostile or coercive attempts to acquire us.
Under the plan, if any person or group acquires more than 20% of
our common stock without approval of the Board of Directors
under specified circumstances, our other stockholders have the
right to purchase shares of our common stock, or shares of the
acquiring company, at a substantial discount to the public
market price. The plan makes an acquisition much more costly to
a potential acquirer.

Our certificate of incorporation also authorizes
us to issue up to 4,700,000 shares of preferred stock in
one or more different series with terms fixed by the Board of
Directors. Stockholder approval is not necessary to issue
preferred stock in this manner. Issuance of these shares of
preferred stock could have the effect of making it more
difficult for a person or group to acquire control of us. No
shares of our preferred stock are currently outstanding. While
our Board of Directors has no current intentions or plans to
issue any preferred stock, issuance of these shares could also
be used as an anti-takeover device.

PART II



|        |                                                                       
|------- | ----------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
	and Related Stockholder Matters

Our common stock trades on The Nasdaq®
National Market System under the symbol GLFD. As of
March 22, 2002, there were approximately 194 holders
of record of our common stock and more than
8,500 beneficial holders. We have never declared or paid
any cash dividends and do not intend to do so for the
foreseeable future. Under our various loan and lease agreements
with certain financial institutions, we may not declare, during
the term of those agreements, any cash dividends on our common
stock without the prior written consent of these financial
institutions and, in certain cases, the Maryland Industrial
Development Financing Authority.

34



---



##### 



The following table sets forth, for the fiscal
periods indicated, the range of high and low closing sales
prices of our common stock as quoted on The Nasdaq®
National Market System:

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|1999           |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 15.13 |     |  | $ | 9.75  | 
|Second Quarter |  |      | 13.00 |     |  |   | 9.63  | 
|Third Quarter  |  |      | 17.50 |     |  |   | 12.00 | 
|Fourth Quarter |  |      | 17.50 |     |  |   | 13.13 | 
|2000           |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 38.25 |     |  | $ | 16.25 | 
|Second Quarter |  |      | 23.25 |     |  |   | 13.31 | 
|Third Quarter  |  |      | 29.25 |     |  |   | 14.69 | 
|Fourth Quarter |  |      | 29.13 |     |  |   | 15.75 | 
|2001           |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 22.88 |     |  | $ | 12.38 | 
|Second Quarter |  |      | 35.99 |     |  |   | 15.06 | 
|Third Quarter  |  |      | 28.79 |     |  |   | 6.72  | 
|Fourth Quarter |  |      | 15.20 |     |  |   | 7.92  | 



| |                                         
| | ----------------------------------------
| | Recent Sales of Unregistered
	Securities

On June 12, 2001, we issued
3,000,000 shares of common stock to certain institutional
investors, in consideration for which we received approximately
$59.1 million (before deduction of related fees and
expenses including placement agent fees of approximately
$2.6 million which were paid to CIBC World Markets Corp.),
which we will use to expand our commercial activities and to
expand our internal resources to support our increased clinical
development and other activities. We may also use these proceeds
to acquire additional products or technologies through licensing
arrangements or otherwise and, to the extent available, to fund
other working capital needs. In connection with these issuances,
we relied on the exemption from registration under the
Securities Act of 1933 provided in Section 4(2) of
the Act.

Item 6.     Selected
Consolidated Financial Data

The following selected consolidated financial
data for each of the years in the five-year period ended
December 31, 2001 have been derived from our consolidated
financial statements, which have been audited by KPMG LLP, our
independent auditors. Our consolidated financial statements as
of December 31, 2001 and 2000, and for each of the years in
the three-year period ended December 31, 2001, including
the footnotes to these financial statements, are included
elsewhere in this annual report, beginning on page F-2. The
information set forth below should be read in conjunction with
our consolidated financial statements and the

35



---



##### 



related footnotes, as well as
Managements Discussion and Analysis of Financial
Condition and Results of Operations, beginning on
page 36 of this annual report.


|                                                           |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                           |  |                                      
|                                                           |  | Years Ended December 31              
|                                                           |  |                                      
|                                                           |  | 1997                                  |         | 1998 |  | 1999 |         | 2000 |  | 2001
|                                                           |  |                                       |         |      |  |      |         |      |  |     
|                                                           |  |                                      
|                                                           |  | (In thousands, except per share data)
|STATEMENT OF OPERATIONS DATA:                              |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total revenues                                             |  | $                                     | 23,828  |      |  | $    | 12,483  |      |  | $    | 21,561  |   |  | $ | 18,056  |   |  | $ | 20,534  |  
|Costs and expenses:                                        |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cost of sales                                              |  |                                       | 2,585   |      |  |      | 2,036   |      |  |      | 2,308   |   |  |   | 1,358   |   |  |   | 2,836   |  
|Research and development                                   |  |                                       | 30,293  |      |  |      | 37,722  |      |  |      | 41,922  |   |  |   | 46,900  |   |  |   | 54,272  |  
|Selling, general and administrative                        |  |                                       | 9,076   |      |  |      | 10,546  |      |  |      | 11,281  |   |  |   | 14,144  |   |  |   | 30,113  |  
|Merger costs                                               |  |                                       |        |      |  |      |        |      |  |      |        |   |  |   | 1,403   |   |  |   |        |  
|                                                           |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total costs and expenses                                   |  |                                       | 41,954  |      |  |      | 50,304  |      |  |      | 55,511  |   |  |   | 63,805  |   |  |   | 87,221  |  
|                                                           |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Operating loss                                             |  |                                       | (18,126 | )    |  |      | (37,821 | )    |  |      | (33,950 | ) |  |   | (45,749 | ) |  |   | (66,687 | )
|Other income, net                                          |  |                                       | 6,689   |      |  |      | 8,123   |      |  |      | 7,082   |   |  |   | 7,247   |   |  |   | 6,370   |  
|                                                           |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Loss before the cumulative effect of an
	accounting change |  |                                       | (11,437 | )    |  |      | (29,698 | )    |  |      | (26,868 | ) |  |   | (38,502 | ) |  |   | (60,317 | )
|Cumulative effect of an accounting change                  |  |                                       |        |      |  |      |        |      |  |      |        |   |  |   | (8,625  | ) |  |   |        |  
|                                                           |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net loss                                                   |  | $                                     | (11,437 | )    |  | $    | (29,698 | )    |  | $    | (26,868 | ) |  | $ | (47,127 | ) |  | $ | (60,317 | )
|                                                           |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Basic and diluted loss per common
	share(1):               |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Loss before the cumulative effect of an
	accounting change |  | $                                     | (0.65   | )    |  | $    | (1.52   | )    |  | $    | (1.31   | ) |  | $ | (1.64   | ) |  | $ | (2.14   | )
|Cumulative effect of an accounting change                  |  |                                       |        |      |  |      |        |      |  |      |        |   |  |   | (0.36   | ) |  |   |        |  
|                                                           |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net loss                                                   |  | $                                     | (0.65   | )    |  | $    | (1.52   | )    |  | $    | (1.31   | ) |  | $ | (2.00   | ) |  | $ | (2.14   | )
|                                                           |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Basic and dilutive equivalent shares
	outstanding(1)       |  |                                       | 17,570  |      |  |      | 19,479  |      |  |      | 20,475  |   |  |   | 23,517  |   |  |   | 28,249  |  
|BALANCE SHEET DATA:                                        |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash, cash equivalents and investments(2)                  |  | $                                     | 160,219 |      |  | $    | 128,261 |      |  | $    | 144,718 |   |  | $ | 109,450 |   |  | $ | 154,738 |  
|Total assets(2)                                            |  |                                       | 180,081 |      |  |      | 150,959 |      |  |      | 164,242 |   |  |   | 135,633 |   |  |   | 181,841 |  
|Long-term debt                                             |  |                                       | 10,926  |      |  |      | 8,766   |      |  |      | 7,152   |   |  |   | 5,130   |   |  |   | 4,137   |  
|Total stockholders equity                                 |  |                                       | 158,294 |      |  |      | 130,379 |      |  |      | 144,980 |   |  |   | 116,829 |   |  |   | 157,629 |  



---



|    |                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For information concerning the calculation of
	loss per share, see Note 18, to the footnotes to our
	consolidated financial statements.                                                                                                                             
|   
|(2) | Includes restricted investments of
	$12.1 million, $16.5 million, $21.4 million,
	$18.3 million, and $16.5 million at December 31,
	1997, 1998, 1999, 2000, and 2001, respectively. See Notes 8
	and 10, to the footnotes to our consolidated financial
	statements.



|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
	of Financial Condition and Results
	of Operations

Introduction

This Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Managements Discussion and Analysis),
explains the general financial condition and the results of
operations for Guilford and its subsidiaries, including:



| |   |                                                             
| | - | ------------------------------------------------------------
| |  | where our revenues came from;                               
|
| |  | what our revenues and expenses were in 2001, 2000
	and 1999;

36



---



##### 





| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | why revenues and expenses changed from the year
	before;                                                               
|
| |  | what factors affect our business;                                                                                      
|
| |  | how all of the foregoing affect our overall
	financial condition; and                                                  
|
| |  | what our expenditures for capital projects were
	in 2001, 2000 and 1999 and a description of our capital
	requirements.

As you read this Managements Discussion and
Analysis, you may find it helpful to refer to our consolidated
financial statements beginning on page F-2 of this annual
report. These consolidated financial statements present the
results of our operations for 2001, 2000 and 1999 as well as our
financial position at December 31, 2001 and 2000. We
analyze and explain the annual changes in the specific line
items set forth in our consolidated statements of operations.
Our analysis may be important to you in making decisions about
your investment in Guilford.

Critical Accounting Policies and
Practices

In Cautionary Advice Regarding Disclosures
about Critical Accounting Policies (SEC Release
No. 33-8040, December 12, 2001), the SEC advised
registrants to provide more information about a companys
most critical accounting policies, i.e., the specific accounting
policies that have the most impact on a companys results
and require the most difficult, subjective or complex judgments
by management. We have identified two of our accounting policies
that may constitute critical accounting policies,
under the guidance provided by this Release. First, is our
decision to apply Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees, to account for our stock option plans rather
than Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation (SFAS
No. 123). Had we applied SFAS No. 123, our net
loss in 2001, 2000 and 1999 would have been increased by
approximately $16.0 million, $6.8 million and
$6.0 million, respectively (see Note 14 to the
footnotes to our consolidated financial statements). Second, is
our estimate for product returns in connection with our sales of
GLIADEL® Wafer. We have applied a historical return rate to
our unit sales to provide an allowance for future product
returns under our product return policy. This historical return
rate is calculated by blending the significant product return
experience of our previous marketing, sales and distribution
partner, Aventis, with our own product return experience. The
product return rate is periodically updated to reflect actual
experience.

Results of Operations

In this section we discuss our 2001, 2000, and
1999 revenues, costs and expenses, and other income and
expenses, as well as the factors affecting each of them.

Revenues

During 2001, our revenues primarily came from our
net product sales of GLIADEL® Wafer to hospitals,
wholesalers and specialty distributors. During 2000 and 1999 our
revenues primarily came from the following sources:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | net product sales of GLIADEL® Wafer to our
	marketing, sales and distribution partners, Aventis
	Pharmaceuticals Products, Inc., or Aventis;
|
| |  | milestone payments from Aventis and Amgen, Inc.,
	or Amgen, under corporate collaboration agreements;                                       
|
| |  | non-cash contract revenues under the agreements
	with Aventis or Amgen pursuant to the implementation of
	SAB 101;                          
|
| |  | quarterly research funding from Amgen; and                                                                                                  
|
| |  | royalty payments from Aventis on its sales of
	GLIADEL® Wafer to others, primarily hospitals.                                               

37



---



##### 



During 2001, 2000, and 1999, we recognized net
revenues of $20.5 million, $18.1 million, and
$21.6 million, respectively. These revenues consisted of
the following:

|                                     |                                                                                    |               |      |      |  |      |      |     |  |   |      |     | 
|------------------------------------ | ---------------------------------------------------------------------------------- | ------------- | ---- | ---- |  | ---- | ---- | --- |  | - | ---- | --- | 
|                                     |                                                                                    | 2001          |      | 2000 |  | 1999
|                                     |                                                                                    |               |      |      |  |     
|                                     |                                                                                    |              
|                                     |                                                                                    | (In millions)
|REVENUES RELATED TO
	GLIADEL® WAFER: |                                                                                    |               |      |      |  |      |      |     |  |   |      |    
|                                     | Net product sales                                                                  |               | $    | 20.4 |  |      | $    | 1.5 |  |   | $    | 4.4 | 
|                                     | License fees and royalties                                                         |               |      |     |  |      |      | 2.4 |  |   |      | 2.4 | 
|                                     | Non-recurring milestone payments                                                   |               |      |     |  |      |      | 2.0 |  |   |      | 4.5 | 
|                                     | Non-recurring rights and milestone payments
	pursuant to implementation of SAB 101 |               |      |     |  |      |      | 4.9 |  |   |      |    | 
|REVENUES FROM AMGEN:                 |                                                                                    |               |      |      |  |      |      |     |  |   |      |    
|                                     | Non-recurring milestone payments                                                   |               |      |     |  |      |      |    |  |   |      | 5.0 | 
|                                     | Non-recurring rights and milestone payments
	pursuant to implementation of SAB 101 |               |      |     |  |      |      | 3.7 |  |   |      |    | 
|                                     | Research funding under collaborative agreements                                    |               |      |     |  |      |      | 3.4 |  |   |      | 4.5 | 
|OTHER                                |                                                                                    |               | 0.1  |      |  |      | 0.2  |     |  |   | 0.8  |    
|                                     |                                                                                    |               |      |      |  |      |      |     |  |   |      |    
|TOTAL                                |                                                                                    | $             | 20.5 |      |  | $    | 18.1 |     |  | $ | 21.6 |    
|                                     |                                                                                    |               |      |      |  |      |      |     |  |   |      |    

GLIADEL® Wafer

In June 1996, we entered into a Marketing, Sales
and Distribution Agreement, together with related agreements
with Rhone-Poulenc Rorer, predecessor-in-interest to Aventis
Pharmaceuticals Products Inc., or Aventis. Under these
agreements (the Aventis Agreements) we granted
Aventis the worldwide (other than Scandinavian, and later
Japanese) marketing rights to GLIADEL® Wafer, a
biodegradable polymer used for the treatment of brain cancer. At
the time that we entered into the Aventis Agreements, we
received $15.0 million from Aventis ($7.5 million as
an equity investment and $7.5 million as a one-time
non-refundable rights payment). In September 1996, the FDA
cleared GLIADEL® Wafer to be marketed for use in connection
with surgery for recurrent glioblastoma multiforme, a certain
type of primary brain cancer. From the commercial launch of
GLIADEL® Wafer in February 1997, until December 31,
2000, we manufactured the product for marketing, sale and
distribution by Aventis and Orion Corporation Pharma (our
Scandinavian marketing partner for the product). In exchange we
received milestone payments from Aventis upon the occurrence of
certain events, such as the receipt of marketing approval both
in the United States and internationally and royalties in
respect of Aventis sales. In October 2000, we reacquired
Aventis rights in GLIADEL® Wafer for
300,000 shares of our common stock at an approximate value
of $8.0 million and the assumption of obligations for
product returns occurring after December 31, 2000. After a
transition period which ended on December 31, 2000, we
began marketing, selling and distributing GLIADEL® Wafer
ourselves on January 1, 2001.

Revenue from GLIADEL® Wafer 
Net Product Sales

For the year ended December 31, 2001, we
earned $20.4 million from net product sales of
GLIADEL® Wafer to hospitals, wholesalers and specialty
distributors. For the years ended December 31, 2000 and
1999, we earned $1.5 million and $4.4 million,
respectively, from net product sales to our marketing, sales and
distribution partners, Aventis (for the entire world, except
Scandinavia and Japan) and Orion Corporation Pharma (for
Scandinavia only). For the year ended December 31, 2001,
our financial statements record the entire selling price of
GLIADEL® Wafer as net product sales, due to our
reacquisition of the product effective January 1, 2001. For
the years ended December 31, 2000, and 1999, we recognized
revenue on our sale of GLIADEL® Wafer to Aventis in
accordance with our contractual arrangements, at approximately
20% of the net product sales price established by Aventis. The
decrease in revenues attributable to sales of GLIADEL®
Wafer to Aventis in 2000 when compared to 1999 we believe is due
to Aventis managing its existing inventory to meet demand for
the product.

38



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During the year ended December 31, 2001, we
sold GLIADEL® Wafer (i) directly to hospitals,
(ii) by drop shipment to hospitals pursuant to purchase
orders from wholesalers, and (iii) to specialty
distributors, who stock our product and provide us with
additional marketing and distribution capabilities. It is our
policy to recognize net product sales revenue only after
(i) we have persuasive evidence that an arrangement exists,
(ii) the price is fixed and determinable, (iii) title
has passed, and (iv) collection is reasonable assured.
Normal payment terms include discounts for early payment with
payment being due in 91 days. The Companys credit and
exchange policy includes provisions for exchange of a product
that (i) has expired, or (ii) was damaged in shipment.

We sold 2,101 units during the year ended
December 31, 2001, recognizing approximately
$20.4 million in net product sales. Over 98% of unit sales
of GLIADEL® Wafer for the year ended December 31,
2001, were sold to customers within the United States. The
remaining units were sold outside the United States, including
Europe, Canada and South America, either through distributors or
direct to hospitals.

Approximately $13.1 million, or 64% of total
net product sales resulted from sales directly to hospitals or
drop shipped to hospitals pursuant to purchase orders from
wholesalers. As noted in the following paragraph, as we expand
the utilization of specialty distributors in the future we
expect sales directly to hospitals or through wholesalers, as a
percentage of total units sold, to decrease significantly.
Substantially all of these sales to hospitals and wholesalers
included our normal payment terms including discounts for early
payment.

Approximately $4.2 million, or 21% of total
net product sales during the year ended December 31, 2001
were sold to specialty distributors to capitalize on their
marketing and distribution strengths and to reduce our cost of
distributing the product directly to hospitals. One specialty
distributor accounted for approximately $2.5 million in net
product sales (representing 12% of total units sales) during the
year ended December 31, 2001. As we continue to utilize the
services of these specialty distributors in the future, we
expect the units sold to these specialty distributors, as a
percentage of the total units sold, to increase significantly.
With the exception of the initial order where the specialty
distributors were offered extended payment terms up to
120 days, the Companys normal payment terms apply.

During 2001, to increase the awareness and
availability of GLIADEL® Wafer among neurosurgeons, and to
ensure our product was available to the neurosurgeon when
needed, we sold GLIADEL® Wafer under our Ensured
Availability marketing program which provided our customers with
extended payment terms. Of the approximately $20.4 million
in revenue on the units sold during the year ended
December 31, 2001, approximately $2.8 million (14%)
included payment terms of up to 180 days pursuant to this
program. As of December 31, 2001, of the approximately
$1.9 million unpaid, $0.6 million was paid during
January and February 2002, and the remaining balances are not
due until the quarter ending June 30, 2002.

Our international sales for the year ended
December 31, 2001 amounted to less than $0.3 million,
or 1% of total revenue from sales of GLIADEL® Wafer.

Royalties from GLIADEL® Wafer 
Royalties on Sales by Aventis

Prior to our reacquisition of the rights to
market, sell and distribute GLIADEL® Wafer effective
January 1, 2001, in addition to recognizing net product
sales revenue on our sale of GLIADEL®Wafer to Aventis, we
also recognized royalty revenue based on Aventis sales of
the product to third parties, such as hospitals. For the years
ended December 31, 2000 and 1999, royalty revenue on
Aventis sales of GLIADEL®Wafer to third parties was
$2.4 million for each year.

Contract Revenues

Contract revenues were $10.6 million and
$9.5 million for the years ended December 31, 2000 and
1999, respectively. As a result of the reacquisition of
GLIADEL® Wafer from Aventis and the termination of our
collaboration with Amgen, no contract revenues were recognized
from these or any other partners during the year ended
December 31, 2001. Prior to the reacquisition of
GLIADEL® Wafer, we received certain non-refundable upfront
fees and milestone payments from Aventis. We earned
non-refundable milestone payments from Aventis of
$2.0 million and $4.5 million during the years ended
December 31, 2000 and 1999,

39



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respectively, upon receipt of approval to market
and sell GLIADEL® Wafer in certain countries. Pursuant to
our agreement with Amgen to research, develop, and commercialize
our FKBP neuroimmunophilin ligand technology, Amgen was required
to make milestone payments to us if Amgen achieved specified
regulatory and product development milestones. During the year
ended December 31, 1999, we recognized $5.0 million in
milestone payments from Amgen.


The remaining contract revenue in 2000 is the
result of our adoption of SAB 101, in the fourth quarter of
2000, effective January 1, 2000. Our previous accounting
policy was to recognize as revenue certain non-refundable
upfront fees at the inception of the arrangement. Under
SAB 101, collaborative arrangements that include a
non-refundable upfront fee and contain an element of continuing
involvement must be deferred and recognized as revenue over the
period of continuing involvement. For the year ended
December 31, 2000, we recognized $8.6 million of
contract revenues upon adoption of SAB 101.

Revenues Under Collaborative
Agreements

As part of our collaboration with Amgen, Amgen
agreed to fund up to a total of $13.5 million to support
our research relating to the FKBP neuroimmunophilin ligand
technology. This research funding began on October 1, 1997
and was payable quarterly over three years. The last quarterly
payment was made on July 1, 2000.

Cost of Sales and Gross Margin

Our cost of sales for the years ended
December 31, 2001, 2000 and 1999 were $2.8 million,
$1.4 million and $2.3 million, respectively, including
unabsorbed manufacturing overhead of $0.6 million for the
year ended December 31, 2000. Cost of sales for the years
ended December 31, 2001, 2000 and 1999, includes the cost
of materials, labor and overhead.

The cost to manufacture GLIADEL® Wafer at
current market levels can vary materially with production
volume. To the extent that GLIADEL® Wafer production levels
increase or decrease in the future, we anticipate that the unit
cost to manufacture GLIADEL®Wafer may decrease or increase,
respectively. Based on our experience to date, we would expect
the cost of net product sales of GLIADEL® Wafer to
fluctuate from quarter to quarter.

Research and Development Expenses

We engage in numerous research and development
projects in order to expand and develop our portfolio of
proprietary technologies and product candidates, primarily in
two areas  biopolymer technology for drug
delivery and pharmaceutical research and development. The status
of the major projects comprising our portfolio is:

|                                         |                                       |        |  |                       | 
|---------------------------------------- | ------------------------------------- | ------ |  | --------------------- | 
|                                         |                                       | Status
|                                         |                                       |       
|Biopolymer technologies:                 |                                       |        |  |                      
|                                         | GLIADEL® Wafer                        |        |  | Marketed              | 
|                                         | PACLIMER® Microspheres Ovarian Cancer |        |  | Phase I/II            | 
|                                         | LIDOMER® Microspheres                 |        |  | Phase I               | 
|                                         | PACLIMER® Microspheres Lung Cancer    |        |  | Phase I               | 
|                                         | Other biopolymer products             |        |  | Research/Pre-clinical | 
|Pharmaceuticals and other
	technologies: |                                       |        |  |                      
|                                         | GPI 1485, neuroimmunophilin ligand    |        |  | Phase II              | 
|                                         | AQUAVAN® Injection                    |        |  | Phase I               | 
|                                         | GPI 5693, NAALADase inhibitor         |        |  | Phase I               | 
|                                         | PARP inhibitors                       |        |  | Research              | 
|                                         | Other CNS products                    |        |  | Research              | 

40



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For each project, we may incur direct expenses
such as salaries and other costs of personnel, raw materials and
supplies utilized, and third-party contracted research costs,
consulting and other clinical development costs. Shared
expenses, such as facility and equipment costs, utilities,
project management and other administrative overhead, are
allocated to research and development projects based on
occupancy percentages, infrastructure requirements and personnel
effort.

Our research and development expenses were
$54.3 million, $46.9 million, and $41.9 million for
the years ended December 31, 2001, 2000, and 1999,
respectively. These expenses were divided among our technology
platforms in the following manner (in thousands):

|                             |  |                          |        |      |  |      |        |  |  |   |        | 
|---------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                             |  |                         
|                             |  | Years ended December 31,
|                             |  |                         
|                             |  | 2001                     |        | 2000 |  | 1999
|                             |  |                          |        |      |  |     
|Biopolymer technologies      |  | $                        | 8,563  |      |  | $    | 8,648  |  |  | $ | 10,532 | 
|Pharmaceuticals & other      |  |                          | 24,512 |      |  |      | 21,087 |  |  |   | 16,724 | 
|Shared expenses              |  |                          | 21,197 |      |  |      | 17,165 |  |  |   | 14,666 | 
|                             |  |                          |        |      |  |      |        |  |  |   |        | 
|Total research & development |  | $                        | 54,272 |      |  | $    | 46,900 |  |  | $ | 41,922 | 
|                             |  |                          |        |      |  |      |        |  |  |   |        | 



| |                        
| | -----------------------
| | Biopolymer Technologies

With respect to our biopolymer technologies, the
modest decrease in 2001 compared to 2000 reflects less
development expenses incurred related to PACLIMER®
Microspheres offset by an increase in expenses related to
LIDOMERTM Microspheres as it advanced into the
clinic. The decrease in 2000 compared to 1999 is a result of
advancing PACLIMER® Microspheres into the clinic offsetting
a reduction in spending on research to select an appropriate
product candidate.



| |                        
| | -----------------------
| | Pharmaceuticals & Other

Research and development expenses related to our
pharmaceutical and related technologies increased in 2001
compared to 2000. This increase is the result of advancing
AQUAVANTM Injection and GPI 5693 into clinical trials
and was offset by a reduction in expenses associated with our
FKBP neuroimmunophilin program, as Amgen, Inc., our former
corporate partner, completed its research funding to us. The
increase in 2000 compared to 1999 is a result of our acquisition
of the rights to, and beginning the development of,
AQUAVANTM Injection.



| |                
| | ---------------
| | Shared Expenses

Shared expenses include the costs of operating
and maintaining our facilities, property and equipment used in
the research and development processes, and management effort
allocable to research and development projects. The increases
from year to year result from increased costs to operate our
facilities as we occupied our new research and development
facility during the second half of 1999, and increased expenses
associated with our project management efforts as the number and
magnitude of our projects have increased.

The projects we currently have in process are at
various stages of development. For example, AQUAVANTM
Injection, GPI 5693, one of our NAALADASE inhibitor compounds,
PACLIMER® Microspheres and LIDOMERTM
Microspheres are currently in human clinical trials. Several
other projects, such as our PARP program, are in earlier stages
of research. The scope and magnitude of future research and
development expenses are difficult to predict given the purpose,
number and timing of studies that will need to be conducted for
any of our product candidates. In general, pharmaceutical
development involves a series of stages-beginning with the
identification of a potential target, development of a suitable
drug, proof of concept in pre-clinical models and several phases
of testing in humans  each of which is typically
more costly than the previous stage. Also, product candidates
that appear promising at earlier stages of development may not
reach the market for a number of reasons. Product candidates may
be found ineffective or cause harmful side effects during
clinical trials, may take longer to pass through clinical trials
than had been anticipated, may fail to receive necessary
regulatory approvals and may prove impracticable to manufacture
in commercial

41



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quantities at reasonable costs and with
acceptable quality. Furthermore, as part of our corporate
development strategy, we may enter into collaborative
arrangements with third parties to complete the development and
commercialization of our product candidates and it is uncertain
which of our product candidates would be subject to future
collaborative arrangements. The participation of a collaborative
partner may accelerate the time to completion and reduce our
costs or it may delay the time and increase the cost to us due
to the alteration of existing development strategy. Because of
these risks and uncertainties, we cannot predict when or whether
we will successfully complete the development of our product
candidates or the ultimate development cost.


For a complete discussion of the risks and
uncertainties associated with developing our product candidates,
see the section in this annual report titled Risk
Factors.

At December 31, 2001, we employed 221
individuals on a full-time basis in the areas of research and
development, including individuals responsible for manufacturing
GLIADEL® Wafer and other product candidates currently under
development. We employed 211 individuals and 193 individuals in
these areas at December 31, 2000 and 1999, respectively.

Selling, General and Administrative
Expenses

Our selling, general and administrative
(SG&A) expenses were $30.1 million,
$14.1 million, and $11.3 million for the years ended
December 31, 2001, 2000, and 1999, respectively. For the
year ended December 31, 2001, the costs incurred to market,
sell and distribute GLIADEL® Wafer were $16.1 million.
We incurred $1.8 million in costs associated with the
reacquisition and re-launch of GLIADEL® Wafer during the
fourth quarter of 2000. Prior to the fourth quarter of 2000, we
did not have a marketing, sales and distribution function within
the Company.

During October 2000, the Company entered into a
three-year agreement (the Cardinal Agreement) with
Cardinal Health Sales and Marketing Services
(Cardinal) to provide Guilford with sales
representatives for its GLIADEL® Wafer product. Included in
our costs to market, sell and distribute GLIADEL® Wafer is
$5.9 million and $0.9 million for the years ended
December 31, 2001 and 2000, respectively, for services
provided by Cardinal under the Cardinal Agreement.

Costs and expenses associated with our general
and administrative functions were $14.0 million,
$12.3 million and $11.3 million for the years ended
December 31, 2001, 2000 and 1999, respectively. Our general
and administrative functions include the areas of executive
management, finance, investor and public relations, corporate
development, and legal. Additionally, we include the costs to
prepare, file, and prosecute domestic and international patent
applications and for other activities to establish and preserve
our intellectual property rights in our general and
administrative expenses. For each function, we may incur direct
expenses such as salaries, supplies, and third-party consulting
and other external costs. Indirect costs such as facilities,
utilities and other administrative overhead are also allocated
to these functions. As we continued to expand our corporate
development activities, our costs and expenses associated with
this function have increased from year to year.

At December 31, 2001, we employed 68
individuals on a full-time basis in selling, general and
administrative areas, of which 22 were in the marketing, sales
and distribution function. The remaining 46 individuals
were in the general and administrative functions, which compares
to 43 and 35 at December 31, 2000 and 1999, respectively.
In addition to the 22 individuals in the marketing, sales
and distribution function, a total of 27 field sales
representatives and managers sold GLIADEL® Wafer on our
behalf under the Cardinal Agreement.

Merger Costs

On August 28, 2000, we terminated the
Agreement and Plan of Merger previously entered into on
May 29, 2000 with Gliatech, Inc. We incurred costs related
to this proposed merger transaction of $1.4 million for the
year ended December 31, 2000.

42



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Other Income and Expense

Other income and expense consists primarily of
investment income on our investments and interest expense on our
debt and other financial obligations. Our investment income was
$6.9 million, $7.7 million, and $7.7 million for
the years ended December 31, 2001, 2000, and 1999,
respectively. The decrease in investment income in 2001 compared
to 2000 was primarily due to lower interest rates earned on
moderately larger investment balances maintained during the
year. Investment income in 2000 compared with 1999 remained the
same as average investment balances and interest rates earned on
those balances during 2000 were comparable to 1999.

We incurred interest expense of
$0.5 million, $0.5 million and $0.6 million for
the years ended December 31, 2001, 2000, and 1999,
respectively. These expenses resulted primarily from
(i) loans from a commercial bank that helped fund the
construction of our manufacturing, administrative, and research
and development facilities and the purchase of certain furniture
and equipment, (ii) capital leases entered into for the
purchase of computer equipment, and (iii) a note payable
pursuant to an agreement to provide us with sales
representatives to market and sell GLIADEL® Wafer. We
describe these obligations in Notes 8, 9 and 10 to the
footnotes to our consolidated financial statements.

Cumulative Effect of a Change in Accounting
Principle

We recorded a non-cash charge to 2000 earnings of
$8.6 million as the cumulative effect of a change in
accounting principle for the implementation of SAB 101. Our
previous accounting policy was to recognize as revenue certain
non-refundable upfront fees at the inception of a collaborative
arrangement. Under SAB 101, non-refundable upfront fee
arrangements that contain an element of continuing involvement
must be deferred and recognized as revenue over the period of
involvement. As of December 31, 2000, the Company has
recognized as revenue the full amount of non-refundable upfront
fee payments subject to deferral under SAB 101.

Liquidity and Capital Resources

We have financed our operations primarily through
the issuance of equity securities, revenues from the sale of
GLIADEL® Wafer, funding pursuant to collaborative
agreements and proceeds from loans and other borrowing
arrangements. For the three year-period ended December 31,
2001, we received $154.6 million from issuance of common
stock, $31.0 million from net product sales and royalties
from GLIADEL® Wafer, $19.4 million in non-recurring
payments under our collaborative agreements and
$4.3 million as proceeds from borrowing arrangements.

Our cash, cash equivalents, and investments were
approximately $154.7 million at December 31, 2001. Of
this amount, we pledged $16.5 million as collateral for
certain of our loans and other financial lease obligations. In
addition to these restricted investments, the Company is
required to maintain, in the aggregate, unrestricted cash, cash
equivalents, and investments of $40 million at all times
under the terms of certain of its financial obligations.

During 2001, to increase the awareness and
availability of GLIADEL® Wafer among neurosurgeons, and to
ensure our product was available to the neurosurgeon when
needed, we sold GLIADEL® Wafer under our Ensured
Availability marketing program which provided our customers with
extended payment terms. Approximately $2.8 million of net
product sales were recognized pursuant to this marketing
program. At December 31, 2001, of the approximately
$1.9 million unpaid, $0.6 million was paid during
January and February 2002 and the remaining $1.3 million is
not due until the quarter ending June 30, 2002.

Our long-term total debt increased a net
$1.2 million to $8.8 million at December 31,
2001, compared to $7.6 million at December 31, 2000.
This increase is primarily due to a $3.4 million note
payable, pursuant to an agreement for the supply of sales
representatives for our GLIADEL® Wafer marketing, sales and
distribution effort. During October 2000, the Company entered
into a three-year agreement (the Cardinal Agreement)
with Cardinal Health Sales and Marketing Services
(Cardinal) to provide Guilford with sales
representatives for its GLIADEL® Wafer product. In
accordance with the terms of the Cardinal Agreement,

43



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during the first year of the Cardinal Agreement,
the Company was obligated to pay Cardinal only $2.0 million
of total costs charged by Cardinal. Amounts charged in excess of
$2.0 million were converted to a note payable on
October 24, 2001 (in the amount of $3.4 million).
Principal and interest on the note are paid monthly and the note
is due September 2003. During the year ended December 31,
2001, the Company repaid $0.4 million in principal.


Additionally, we entered into $0.5 million
in capital leases in connection with our acquisition of computer
equipment and financed certain insurance premiums of
$0.4 million during the year ended December 31, 2001.
These increases in long-term debt were offset by
$0.5 million in repayments. We also made principal
repayments on our existing bond, term and other loans of
$2.2 million.

We have funded our capital expenditures by either
leasing the equipment pursuant to our equipment lease
arrangements or purchasing the equipment utilizing our existing
cash. We funded capital expenditures of $2.4 million,
$3.5 million and $4.1 million for the years ended
December 31, 2001, 2000 and 1999, respectively. Of the
capital expenditures funded during the year ended
December 31, 2001, $2.1 million were funded pursuant
to equipment lease arrangements and $0.3 million were
acquired through the use of our cash.

In order to meet our anticipated future
facilities needs, we initiated a project to design, construct,
and lease a research and development facility. To accomplish
this task, in February 1998, we entered into a real estate
development agreement and operating lease with a special purpose
entity, or SPE, sponsored by a commercial bank. The SPE is not
consolidated in our consolidated financial statements and we
have accounted for this arrangement as an operating lease in
accordance with SFAS No. 13, Accounting for
Leases, as amended. This facility, which was substantially
completed in June 1999 for a total cost of approximately
$19.5 million, was constructed adjacent to our current
headquarters in Baltimore, Maryland and provides approximately
73,000 square feet of research and development capacity.
The initial lease term is for a period of 84 months
(including the construction period) and expires in February
2005. We have the option to either purchase the facility on the
remaining anniversary dates during the initial lease term, or
sell the facility to a third party at the expiration of the
initial lease term. In the event the facility is sold to a third
party, we will be obligated to pay the lessor any shortfall
between the sales price and 83% of the lessors net
investment in the facility. The lessors net investment in
the facility was approximately $19.0 million at
December 31, 2001 and we anticipate that it will be further
reduced to approximately $18.2 million by the expiration of
the initial lease term in February 2005. We are required to
maintain collateral equal to approximately 83% of the remaining
balance of the lessors net investment in the facility. We
had cash collateral of $14.3 million as of
December 31, 2001 and 2000, which is included in the
accompanying consolidated balance sheets as
Investments  restricted. In addition to
this cash collateral requirement, we are subject to various
other affirmative and negative covenants, the most restrictive
of which requires us to maintain unrestricted cash, cash
equivalents, and investments in the aggregate equal to
$40 million.

Pursuant to the terms of the operating lease
agreement, we are obligated to make monthly lease payments equal
to the interest, based on monthly LIBOR plus 0.625%, calculated
on the lessors net investment in the facility plus
principal of $20,000. As a result of the interest rate swap
agreements entered into during 1998 and 1999 with a commercial
bank, we effectively fixed the interest rates on these variable
interest rate-based lease payments at approximately 6% in the
aggregate. These interest rate swap agreements provide the
commercial bank with a call provision exercisable during 2003.
Assuming the commercial bank exercises its call provision, we
would be exposed to market risk related to the underlying
interest rates of the operating lease. We describe these
interest rate swap transactions with the commercial bank in
Note 9 to the footnotes to our consolidated financial
statements.

We anticipate that this research and development
facility, along with our headquarters, will support our research
and development activities through at least the end of 2002. We
may be required to seek additional office space to support
commercial and administrative activities. Should this be
required, we would expect to lease such facilities at market
rates for a period not to exceed three years.

During 1998 and 1999, we entered into a series of
interest rate swap transactions with a commercial bank covering
$10 million of our bond and term loans. As a result, we
fixed the interest rates on our debt at approximately 6% in the
aggregate. The notional amounts of these interest rate swap
agreements amortize at

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the same rate as the underlying bond and term
loans. We describe these interest rate swap transactions with
the commercial bank in Note 9 to the footnotes to our
consolidated financial statements.


During 1998, we established an unsecured,
revolving line of credit for $5 million with a commercial
bank. Borrowings under this line of credit are payable on demand
at an interest rate of LIBOR plus 0.55%. No amounts were drawn
under this line of credit in 2001, 2000 or 1999.

In 1998, our Board of Directors approved a
program to purchase up to 1,000,000 shares of our common
stock in the open market from time to time at our discretion. In
August 1999, the Company terminated this share repurchase
program. We repurchased a total of 252,500 of our shares under
this program for an aggregate cash outlay of approximately
$2.7 million.

We expect to need significantly greater capital
to continue our research and product development programs and
pre-clinical and clinical testing and to manufacture and market,
sell and distribute our products. We will also need additional
funds to meet our future facility expansion needs if necessary.
Our capital requirements depend on a number of factors,
including:



| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | the progress of our research and development
	programs;                                                             
|
| |  | the progress of pre-clinical and clinical testing;                                                                  
|
| |  | the time and costs involved in obtaining
	regulatory approvals;                                                     
|
| |  | the cost of filing, prosecuting, defending and
	enforcing any patent claims and other intellectual property
	rights;
|
| |  | changes in our existing research relationships;                                                                     
|
| |  | competing technological and market developments;                                                                    
|
| |  | our ability to establish collaborative
	arrangements;                                                               
|
| |  | our ability to enter into licensing agreements
	and contractual arrangements with others; and                       
|
| |  | the progress of efforts to scale-up manufacturing
	processes.                                                       

We believe that our existing resources will be
sufficient to fund our activities through at least
December 31, 2002. However, we may need significantly
greater capital in the near future to increase pre-clinical and
clinical development activities for product candidates,
such as:



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | GPI 1485 (our lead FKBP neuroimmunophilin ligand);                                                                    
|
| |  | PACLIMER® Microspheres;                                                                                               
|
| |  | GPI 5693 (our lead NAALADase inhibitor);                                                                              
|
| |  | AQUAVANTM Injection (our propofol
	prodrug);                                                                          
|
| |  | LIDOMERTM Microspheres (our delayed
	release lidocaine analgesic product candidate targeting
	post-surgical pain); and
|
| |  | PARP inhibitors.                                                                                                      

Additionally, in order to leverage the
capabilities of our commercial operations group, we are
investigating the possibility of in-licensing additional
hospital-based products within our targeted markets. In order to
acquire one or more of these products, we may require
significant additional capital.

45



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##### 



The following are contractual commitments at
December 31, 2001 associated with debt obligations, lease
obligations and our research and development projects (in
thousands):

|                                           |  |                        |        |        |  |           |        |           |  |            |        |  |  |   |     |  |  |   |     | 
|------------------------------------------ |  | ---------------------- | ------ | ------ |  | --------- | ------ | --------- |  | ---------- | ------ |  |  | - | --- |  |  | - | --- | 
|                                           |  |                       
|                                           |  | Payments Due by Period
|                                           |  |                       
|Contractual Commitment(1)                  |  | Total                  |        | 1 Year |  | 2-3 Years |        | 4-5 Years |  | Thereafter
|                                           |  |                        |        |        |  |           |        |           |  |           
|Long-term debt                             |  | $                      | 8,186  |        |  | $         | 4,161  |           |  | $          | 3,710  |  |  | $ | 122 |  |  | $ | 193 | 
|Capital lease obligations                  |  |                        | 566    |        |  |           | 454    |           |  |            | 112    |  |  |   |    |  |  |   |    | 
|Operating leases                           |  |                        | 6,906  |        |  |           | 2,947  |           |  |            | 3,592  |  |  |   | 367 |  |  |   |    | 
|Research and development facility lease(2) |  |                        | 4,294  |        |  |           | 1,356  |           |  |            | 2,712  |  |  |   | 226 |  |  |   |    | 
|Research and development arrangements(3)   |  |                        | 5,558  |        |  |           | 4,117  |           |  |            | 1,260  |  |  |   | 181 |  |  |   |    | 
|                                           |  |                        |        |        |  |           |        |           |  |            |        |  |  |   |     |  |  |   |     | 
|Total Contractual Commitments              |  | $                      | 25,510 |        |  | $         | 13,035 |           |  | $          | 11,386 |  |  | $ | 896 |  |  | $ | 193 | 
|                                           |  |                        |        |        |  |           |        |           |  |            |        |  |  |   |     |  |  |   |     | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This table does not include any milestone
	payments under agreements we have entered into in relation to
	our in-licensed technology, as the timing and likelihood of such
	payments are not known. Also, minimum annual research
	expenditures pursuant to such license agreements have been
	excluded from this table as we expect to spend those amounts as
	we progress the development of the underlying technologies. In
	the aggregate these minimum annual research expenditures are
	approximately $1.0 million and typically apply to all years
	prior to regulatory approval of a product incorporating the
	licensed technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | In February 1998, we entered into a real estate
	development agreement and operating lease with a special purpose
	entity sponsored by a commercial bank (which we will refer to as
	lessor in this section) to acquire construct and
	lease a research and development facility. Construction was
	completed in 1999 at a total cost covered by this lease of
	approximately $19.5 million. We account for this lease as
	an operating lease and, as a result, record neither an asset nor
	a liability on our balance sheet. The amounts included in the
	table above include only our annual lease payments of
	approximately $1.4 million for the remainder of the initial
	lease term ending February 2005. Our lease payments represent
	variable-rate interest payments (indexed to the London interbank
	offered rate) on the lessors net investment in the
	facility plus principal of $20,000 per month. As a result
	of certain interest rate swap agreements entered into by us, we
	have effectively fixed the interest rate on this variable
	interest-rate based lease at approximately 6%.
|   
|    | At the expiration of the initial lease term, we
	may either purchase the facility or sell the facility to a third
	party. The lease provides a residual value guarantee from us to
	the lessor in the event the facility is sold to a third party
	for less than 83% of the lessors net investment in the
	facility. We do not believe that our facility has experienced a
	property value decline since it was constructed. However, we
	have no assurance that the property value will not decline
	between now and the termination of the initial lease on or
	before February 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(3) | Includes commitments that we have entered into at
	December 31, 2001 to engage third parties to perform
	various aspects of our research and development efforts
	subsequent to December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Recently Issued Accounting
Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 142 (SFAS 142),
Goodwill and Other Intangible Assets. SFAS 142 requires
goodwill and other intangible assets with indefinite lives to no
longer be amortized; but instead tested for impairment at least
annually. In addition, the standard includes provisions for the
reclassification of certain existing intangibles as goodwill and
reassessment of the useful lives of existing recognized
intangibles. The standard is effective for fiscal years
beginning after December 15, 2001. We do not believe that
the adoption of SFAS 142 will have an initial impact on our
consolidated financial statements since we have determined that
our intangible asset of the rights to market, sell and
distribute GLIADEL® Wafer, has a finite life, which is
consistent with our current accounting treatment.

In July 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations
(SFAS 143). SFAS 143 required the
recognition of a liability for an asset retirement in the period
in which it is incurred. A retirement obligation is defined as
one in which a legal obligation exists in the future resulting

46



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##### 



from existing laws, statutes or contracts. The
standard is effective for fiscal years beginning after
June 15, 2002. We do not believe the adoption of
SFAS 143 will have any immediate impact on our consolidated
financial statements.


In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), which supercedes
both SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS 121), and the accounting and reporting
provisions of Accounting Principles Board (APB)
Opinion No. 30, Reporting the Results of Operations-
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB 30), for the disposal of a
business segment (as previously defined in that Opinion).
SFAS 144 retains the fundamental provisions in
SFAS 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant
implementation issues associated with SFAS 121. For
example, SFAS 144 provides guidance on how long-lived
assets that are used as part of a group should be evaluated for
impairment, establishes criteria for when a long-lived asset is
held for sale, and prescribed the accounting for a long-lived
asset that will be disposed of other than by sale. SFAS 144
retains the basic provisions of APB 30 on how to present
discontinued operations in the income statement but broadens
that presentation to include a component of an entity (rather
than a segment of a business). Unlike SFAS 121, an
impairment assessment under SFAS 144 will never result in a
write-down of goodwill. Rather, goodwill is evaluated for
impairment under SFAS 142, Goodwill and Other Intangible
Assets.

We are required to adopt SFAS 144 no later
than the year beginning after December 15, 2001, and plan
to adopt its provisions for the quarter ending March 31,
2002. We do not expect the adoption of SFAS 144 for assets
held for use to have a material impact on our consolidated
financial statements because the requirement for the assessment
of impairment under SFAS 144 is largely unchanged from
SFAS 121. The provisions of the new standard for assets
held for sale or disposal generally are required to be applied
prospectively after the adoption date to newly initiated
disposal activities. Therefore, we cannot determine the
potential effects that the adoption of these provisions of
SFAS 144 will have on our consolidated financial statements.

Outlook

During the year ending December 31, 2002, we
expect sales of GLIADEL® Wafer to be between
$19.0 million and $21.0 million. Previously, we had
disclosed that we expected GLIADEL® Wafer sales to be
between $26.0 and $29.0 million. This previous guidance
assumed that we would receive an approval prior to the end of
the first quarter of 2002 from the FDA regarding our
supplemental New Drug Application for the use of GLIADEL®
Wafer during initial surgery. In March 2002, we received
notification from the FDA that our supplemental New Drug
Application was not approvable. Although we plan to address with
the FDA issues the agency raised regarding this application, we
cannot be certain that we will be successful in our attempt to
receive an expanded label for GLIADEL® Wafer in the United
States during 2002, or at all. Accordingly, we have reduced our
projections for GLIADEL® Wafer sales for 2002 to be
consistent with sales we achieved during 2001 because we expect
the market to be the same. During 2002, we also plan to expand
our presence globally, and expect to sign agreements with
international distributors to expand the use of GLIADEL®
Wafer in markets outside the United States.

In order to leverage the capabilities of our
commercial operations group, we are investigating the
possibility of in-licensing additional hospital-based products
within our target markets.

We are seeking new corporate collaborations
during 2002. We are continuously in discussions with potential
partners regarding rights to our products, product candidates
and research programs. As a result of SAB 101, we are
currently not able to define the extent to which any payments
received in 2002 from partnering activities would be recorded as
revenue.

We currently anticipate research and development
expenses in 2002 to be approximately $58.0 million to
$63.0 million. Almost all of the increase in research and
development expenses over these expenses in 2001, will be
related to increased clinical development costs. We anticipate
that general and administrative costs will be consistent with
2001. We expect marketing, sales and distribution costs to
increase modestly from the levels

47



---



##### 



incurred in 2001. Cost of sales as a percentage
of net sales are expected to be in the range of 10% to 15% of
net product sales, although increases or decreases in quarterly
production levels may cause volatility in the cost of sales
percentages.


Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

A substantial portion of our assets are
investment grade debt instruments such as direct obligations of
the U.S. Treasury, securities of federal agencies which
carry the direct or implied guarantee of the
U.S. government, bank certificates of deposit and corporate
securities, including commercial paper and corporate debt
instruments. The market value of such investments fluctuates
with current market interest rates. In general, as rates
increase, the market value of a debt instrument would be
expected to decrease. The opposite is also true. To minimize
such market risk, we have in the past and, to the extent
possible, will continue in the future to hold such debt
instruments to maturity at which time the debt instrument will
be redeemed at its stated or face value. Due to the short
duration and nature of these instruments, we do not believe that
we have a material exposure to interest rate risk related to our
investment portfolio. The investment portfolio at
December 31, 2001 was $151.9 million and yield to
maturity was approximately 3.0%. The weighted-average return on
our investments during the year ended December 31, 2001 was
approximately 4.4%.

Substantially all of our financial obligations
were established with interest rates which fluctuate with market
conditions. As a hedge against such fluctuations in interest
rates, we have entered into certain interest rate swap
agreements with a commercial bank (counter party),
to exchange substantially all of our variable rates of interest
on certain financial obligations for fixed rates. Our borrowings
under our bond and term loans and financial obligations under
certain lease arrangements are approximately $23.5 million.
Pursuant to these borrowing arrangements, we are obligated to
pay variable interest rates on substantially all of these
obligations of LIBOR plus between  5/8% and  3/4%. The
interest rate swap agreements have a total notional principal
amount of approximately $24.4 million as of
December 31, 2001. Pursuant to these interest rate swap
agreements, we pay a fixed rate of interest to the counter party
of approximately 6% and receive from the counter party a
variable rate of interest of LIBOR plus  5/8%. The
differential to be paid or received as interest rates change is
charged or credited, as appropriate, to operations. Accordingly,
we have effectively swapped or exchanged floating
interest rates for fixed interest rates on our
financial obligations at a blended annual rate of approximately
6% in the aggregate. These interest rate swap agreements have
approximately the same maturity dates as the financial
obligations and expire on various dates through February 2005.
The commercial bank has the right to terminate certain of the
agreements having a total notional principal amount of
$20.0 million during February 2003. We do not speculate on
the future direction of interest rates nor do we use these
derivative financial instruments for trading purposes. In the
event of non-performance by the counter party, we could be
exposed to market risk related to interest rates.

The aggregate fair value of these interest rate
swap agreements was a liability of approximately
$1.1 million at December 31, 2001. Current market
pricing models were used to estimate these fair values.

Item 8.     Financial
Statements and Supplementary Data

The information required by this item is
incorporated by reference to the financial statements listed in
Items 14(a) of Part IV of this Form 10-K.

48



---



##### 



Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

PART III

Item 10.     Directors
and Executive Officers of the Registrant

Information concerning our directors is
incorporated by reference from the information to be contained
under the captions Board of Directors and
Section 16(a) Beneficial Ownership Reporting
Compliance, in our 2002 Proxy Statement, which will be
filed no later than 120 days following December 31,
2001. Information concerning our executive officers is contained
in Item 1.A. of Part I.

Item 11.     Executive
Compensation

The information required by this item is hereby
incorporated by reference from the information to be contained
under the caption Executive Compensation in our 2002
Proxy Statement, which will be filed no later than 120 days
following December 31, 2001.

Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required by this item is hereby
incorporated by reference from the information to be contained
under the caption Beneficial Ownership of Common
Stock in our 2002 Proxy Statement, which will be filed no
later than 120 days following December 31, 2001.

Item 13.     Certain
Relationships and Related Transactions

The information required by this item is hereby
incorporated by reference from the information to be contained
under the caption Beneficial Ownership of Common
Stock and Certain Relationships and Related Party
Transactions in our 2002 Proxy Statement, which will be
filed no later than 120 days following December 31,
2001.

PART IV



|         |                                                                  
|-------- | -----------------------------------------------------------------
|Item 14. | Exhibits, Financial Statement Schedules,
	and Reports on Form 8-K

(a)(1) Financial Statements

The following Financial Statements are included
in this report:

|                                                                                                                  |  |        |     | 
|----------------------------------------------------------------------------------------------------------------- |  | ------ | --- | 
|                                                                                                                  |  | Page #
|                                                                                                                  |  |       
|Independent Auditors Report                                                                                      |  |        | F-1 | 
|Consolidated Balance Sheets as of
	December 31, 2001 and 2000                                                     |  |        | F-2 | 
|Consolidated Statements of Operations for the
	Years Ended December 31, 2001, 2000 and 1999                       |  |        | F-3 | 
|Consolidated Statements of Changes in
	Stockholders Equity for the Years Ended December 31,
	2001, 2000 and 1999 |  |        | F-4 | 
|Consolidated Statements of Cash Flows for the
	Years Ended December 31, 2001, 2000, and 1999                      |  |        | F-5 | 
|Notes to Consolidated Financial Statements                                                                        |  |        | F-6 | 

(a)(2) Financial Statements Schedules

The following Schedules are filed as part of this
report:

|                                                 |  |  |      | 
|------------------------------------------------ |  |  | ---- | 
|Independent Auditors Report                     |  |  | F-26 | 
|Schedule II  Valuation and
	Qualifying Accounts |  |  | F-27 | 

49



---



##### 



(a)(3)Exhibits

Except where noted below, the following exhibits
are incorporated by reference to the Registrants Annual
Report on Form 10-K for the year ended December 31,
1997:

|        |         |             |  |                                                                                                                                                                                                   
|------- | ------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 3.01A   |             |  | Amended and Restated Certificate of Incorporation
	of the Company.                                                                                                                                
|        | 3.01B   |             |  | Certificate of Amendment to Amended and Restated
	Certificate of Incorporation.                                                                                                                   
|        | 3.02    |             |  | Amended and Restated By-laws of the Company.                                                                                                                                                      
|        | 4.01    |             |  | Specimen Stock Certificate.                                                                                                                                                                       
|        | 4.02A   |             |  | Stockholder Rights Agreement dated
	September 26, 1995.                                                                                                                                           
|        | 4.02B   |             |  | Form of Amendment No. 1 to Stockholder
	Rights Agreement (incorporated by reference to Form 8-K,
	filed October 20, 1998)                                                                         
|        | 10.01A  |             |  | 1993 Employee Share Option and Restricted Share
	Plan (1993 Option Plan).                                                                                                                       
|        | 10.01B  |             |  | Amendments to 1993 Option Plan.                                                                                                                                                                   
|        | 10.01C  |             |  | 1998 Employee Share Option and Restricted Share
	Plan (1998 Option Plan) (incorporated by reference
	to Form S-8, filed on February 12, 1999).                                                  
|        | 10.01D  |             |  | Amendment to 1998 Option Plan (incorporated by
	reference to Form 10-K filed on March 30, 1999).                                                                                                  
|        | 10.02A  |             |  | Series A Preferred Stock Purchase Agreement,
	dated September 30, 1993, as amended between the Company
	and holders of its Series A Preferred Stock
	(Series A Agreement).                      
|        | 10.02B  |             |  | Amendment, dated August 25, 1994, to
	Series A Agreement.                                                                                                                                         
|        | 10.02C  |             |  | Amendment, dated February 15, 1995, to
	Series A Agreement.                                                                                                                                       
|        | 10.03A |             |  | License Agreement, effective March 18, 1994,
	between the Company and Research Triangle Institute, a
	not-for-profit Corporation existing under the laws of North
	Carolina.                      
|        | 10.03B  |             |  | Appendix A to Exhibit 10.04.                                                                                                                                                                      
|        | 10.04  |             |  | License Agreement, dated March 15, 1994,
	between the Company and Scios Nova.                                                                                                                     
|        | 10.05   |             |  | Employment Agreement between the Company and
	Craig R. Smith, M.D.                                                                                                                                
|        | 10.06   |             |  | Employment Agreement between the Company and
	Andrew R. Jordan.                                                                                                                                   
|        | 10.07   |             |  | Employment Agreement between the Company and John
	P. Brennan.                                                                                                                                    
|        | 10.08   |             |  | (Intentionally Omitted)                                                                                                                                                                           
|        | 10.09   |             |  | Employment Agreement between the Company and
	William C. Vincek, Ph.D.                                                                                                                            
|        | 10.10   |             |  | Employment Agreement between the Company and
	Peter D. Suzdak.                                                                                                                                    
|        | 10.11   |             |  | (Intentionally Omitted)                                                                                                                                                                           
|        | 10.12   |             |  | Employment Agreement between the Company and
	Thomas C. Seoh.                                                                                                                                     
|        | 10.13A  |             |  | Amendments to certain executive officer
	employment letter Agreements.                                                                                                                            
|        | 10.13B  |             |  | Form of Change in Control Severance Agreement
	(incorporated be reference to the Form 10-Q for the quarter
	ended September 30, 1998).                                                            
|        | 10.13C  |             |  | Severance Provisions from Employment Letter
	Agreement, effective September 21, 1998, with Nancy J.
	Linck (incorporated by reference to the Form 10-Q for the
	quarter ended September 30, 1998).
|        | 10.14   |             |  | (Intentionally Omitted)                                                                                                                                                                           

50



---



##### 



|        |          |             |  |                                                                                                                                                                                                                                                         
|------- | -------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 10.15A   |             |  | Consulting Agreement, dated August 1, 1993,
	as amended on February 28, 1994, between the Company and
	Solomon H. Snyder, M.D. (the Snyder Consulting
	Agreement).                                                                                    
|        | 10.15B   |             |  | September 1, 1995 amendment to Snyder
	Consulting Agreement.                                                                                                                                                                                            
|        | 10.15C   |             |  | November 19, 1997 amendment to Snyder
	Consulting Agreement.                                                                                                                                                                                            
|        | 10.15D   |             |  | September 1, 1998 and January 1, 1999
	amendments to Snyder Consulting Agreement (incorporated by
	reference to Form 10-K filed March 30, 1999).                                                                                                        
|        | 10.16A  |             |  | License Agreement, dated December 20, 1993,
	between the Company and The Johns Hopkins University (JHU
	Agreement).                                                                                                                                   
|        | 10.16B   |             |  | Appendix B to JHU Agreement.                                                                                                                                                                                                                            
|        | 10.16C  |             |  | Amended and Restated License Agreement, effective
	November 25, 1998, between the Company and Johns Hopkins
	(incorporated by reference to Form 10-K filed
	March 30, 1999).                                                                            
|        | 10.17    |             |  | Form of Director and Officer Indemnification
	Agreement.                                                                                                                                                                                                
|        | 10.18    |             |  | Form of Tax Indemnity Agreement.                                                                                                                                                                                                                        
|        | 10.19A   |             |  | Guilford Pharmaceuticals Inc. Directors
	Stock Option Plan.                                                                                                                                                                                            
|        | 10.19B   |             |  | Amendments to Directors Stock Option Plan
	(incorporated by reference to Form 10-K filed on
	March 30, 1999).                                                                                                                                          
|        | 10.19C   |             |  | Amendment to Form of Directors Stock Option
	Agreement (incorporated by reference to Form 10-K filed
	March 30, 1999).                                                                                                                                 
|        | 10.20    |             |  | Lease Agreement, dated August 30, 1994,
	between Crown Royal, L.P. and the Company.                                                                                                                                                                     
|        | 10.21A   |             |  | Lease Agreement, dated June 9, 1997 between
	SN Properties, Inc. and the Company (Freeport Lease).                                                                                                                                                    
|        | 10.21B   |             |  | Amendment, dated February 10, 1998, to
	Freeport Lease.                                                                                                                                                                                                 
|        | 10.22(1) |             |  | (Intentionally Omitted).                                                                                                                                                                                                                                
|        | 10.23(1) |             |  | Employment Letter Agreement, effective
	January 27, 1998, between the Company and Dana C.
	Hilt, M.D.                                                                                                                                                   
|        | 10.24    |             |  | Exchange and Registration Rights Agreement, dated
	February 17, 1995, among the Company and the Abell
	Foundation, Inc., and the several holders named in
	Appendix I.                                                                                  
|        | 10.25A   |             |  | Loan and Financing Agreement between the Maryland
	Economic Development Corporation (MEDCO), the
	Company and Signet Bank/ Maryland (Signet)
	(L&F Agreement).                                                                                    
|        | 10.25B   |             |  | Amendment No. 1, dated June 30, 1998,
	to L&F Agreement (incorporated by reference to the
	Form 10-Q for the quarter ended June, 1998).                                                                                                                 
|        | 10.26    |             |  | Leasehold Deed of Trust by and between the
	Company and Janice E. Godwin and Ross Chaffin (as trustees) for
	the benefit of MEDCO and Signet.                                                                                                           
|        | 10.27A   |             |  | Insurance Agreement between the Maryland
	Industrial Development Financing Authority and Signet
	(Insurance Agreement).                                                                                                                               
|        | 10.27B   |             |  | Letter, dated April 2, 1996, amending
	Insurance Agreement.                                                                                                                                                                                             
|        | 10.27C   |             |  | Amendment No. 2, dated June 29, 1998,
	to Insurance Agreement (incorporated by reference to the
	Form 10-Q for the quarter ended June 30, 1998).                                                                                                        
|        | 10.28   |             |  | License Agreement, dated December 9, 1995,
	by and between the Company and Daiichi Radioisotope
	Laboratories, Ltd.                                                                                                                                     
|        | 10.29   |             |  | License and Distribution Agreement, dated
	October 13, 1995, by and between the Company and Orion
	Corporation Farmos.                                                                                                                                  
|        | 10.30    |             |  | (Intentionally Omitted).                                                                                                                                                                                                                                
|        | 10.31    |             |  | Master Lease Agreement, dated March 19,
	1998, by and between Comdisco Laboratory and Scientific Group, a
	Division of Comdisco Healthcare Group, Inc., and the Company
	(incorporated by reference to Form 10-Q for the quarter
	ended March 31, 1998).
|        | 10.32   |             |  | Bulk Pharmaceutical Sales Contract, dated
	September 23, 1994, between the Company and Aerojet-General
	Corporation.                                                                                                                                    

51



---



##### 



|        |         |             |  |                                                                                                                                                                                                                                                                                                                 
|------- | ------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 10.33   |             |  | Equipment Lease, dated September 18, 1996,
	between the Company and General Electric Capital Corporation.                                                                                                                                                                                                       
|        | 10.34   |             |  | Term Loan, dated April 30, 1996, as amended
	on December 6, 1996, by and between the Company and Signet
	Bank.                                                                                                                                                                                                  
|        | 10.35A  |             |  | Marketing, Sales and Distribution Rights
	Agreement between Aventis S.A. (formerly known as
	Rhône-Poulenc Rorer Pharmaceuticals Inc.)
	(Aventis), the Company and GPI Holdings, Inc., dated
	June 13, 1996 (MSDA).                                                                                         
|        | 10.35B |             |  | Amendment No. 1 to MDSA, dated
	September 25, 1998 (incorporated by reference to
	Form 8-K, filed October 2, 1998).                                                                                                                                                                                             
|        | 10.36   |             |  | Manufacturing and Supply Agreement between
	Aventis and the Company, dated June 13, 1996.                                                                                                                                                                                                                       
|        | 10.37A  |             |  | Stock Purchase Agreement between the Company and
	Aventis, dated June 13, 1996 (Aventis Stock Purchase
	Agreement).                                                                                                                                                                                           
|        | 10.37B  |             |  | Amendment No. 1 to Aventis Stock Purchase
	Agreement, dated September 25, 1998 (incorporated by
	reference to Form 8-K, filed October 2, 1998).                                                                                                                                                                 
|        | 10.38   |             |  | Loan Agreement between the Company and Aventis
	Inc., dated June 13, 1996.                                                                                                                                                                                                                                      
|        | 10.39   |             |  | (Intentionally Omitted)                                                                                                                                                                                                                                                                                         
|        | 10.40  |             |  | Collaboration and License Agreement, dated
	December 15, 1997 and effective as of August 20, 1997,
	between Amgen Inc. (Amgen), GPI NIL Holdings, Inc.
	and the Company.                                                                                                                                      
|        | 10.41   |             |  | Stock and Warrant Purchase Agreement, dated
	October 1, 1997, between Amgen and the Company.                                                                                                                                                                                                                    
|        | 10.42   |             |  | Registration Rights Agreement, dated
	October 1, 1997, between Amgen and the Company.                                                                                                                                                                                                                           
|        | 10.43   |             |  | Warrant, dated October 1, 1997 issued to
	Amgen.                                                                                                                                                                                                                                                                
|        | 10.44   |             |  | Security Agreement, dated as of February 5,
	1998, between First Security Bank, National Association
	(First Security), not individually, but solely as
	the Owner Trustee under the Guilford Real Estate Trust 1998-1
	(the Trust) and First Union.                                                        
|        | 10.45   |             |  | Amended and Restated Trust Agreement, dated as of
	February 5, 1998 between the Several Holders from time to
	time parties thereto and the Trust.                                                                                                                                                               
|        | 10.46   |             |  | Agency Agreement, dated as of February 5,
	1998, between the Company and the Trust.                                                                                                                                                                                                                             
|        | 10.47   |             |  | Credit Agreement, dated as of February 5,
	1998, among the Trust, the Several Holders from time to time
	parties thereto and First Union.                                                                                                                                                                       
|        | 10.48   |             |  | Participation Agreement, dated as of
	February 5, 1998, among the Company, the Trust, the various
	and other lending institutions which are parties hereto from
	time to time, as Holders, the various and other lending
	institutions which are parties hereto from time to time, as
	Lenders, and First Union.
|        | 10.49   |             |  | Lease Agreement, dated as of February 5,
	1998, between the Trust and the Company.                                                                                                                                                                                                                              
|        | 10.50   |             |  | MIDFA Agreement, dated June 29, 1998, by and
	between MIDFA, First Security, the Company and First Union
	(incorporated by reference to Form 10-Q for the quarter
	ended June 30, 1998).                                                                                                                        
|        | 10.51   |             |  | Insurance Agreement, dated June 29, 1998, by
	and between MIDFA and First Union (incorporated by reference to
	Form 10-Q for the quarter ended June 30, 1998).                                                                                                                                                  
|        | 10.52   |             |  | April 1, 1999 amendment to Consulting
	Agreement, dated August 1, 1993, as amended, between the
	Company and Solomon H. Snyder, M.D. (incorporated by
	reference to Form 10-Q for the quarter ended March 31,
	1999).                                                                                           
|        | 10.53   |             |  | Amendment to Directors Stock Option Plan
	(incorporated by reference to Form 10-Q for the quarter
	ended March 31, 1999).                                                                                                                                                                                      
|        | 10.54   |             |  | Amendment to Form of Stock Option Agreement under
	the Companys 1993 and 1998 Employee Share Option and
	Restricted Share Plans (incorporated by reference to
	Form 10-Q for the quarter ended March 31, 1999).                                                                                                
|        | 10.55   |             |  | Amendment to Form of Directors Stock Option
	Agreement, effective May 18, 1999 (incorporated by
	reference to Form 10-Q for the quarter ended June 30,
	1999).                                                                                                                                                 

52



---



##### 



|        |       |             |  |                                                                                                                                                                                                                                                                              
|------- | ----- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.56 |             |  | July 1, 1999 amendment to Consulting
	Agreement, dated August 1, 1993 between the Company and
	Solomon H. Snyder, M.D. (incorporated by reference to
	Form 10-Q for the quarter ended June 30, 1999).                                                                        
|        | 10.57 |             |  | Consulting Agreement, dated July 23, 1999,
	between the Company and Solomon H. Snyder, M.D.
	(incorporated by reference to Form 10-Q for the quarter
	ended June 30, 1999).                                                                                                  
|        | 10.58 |             |  | Form of Severance Agreement (incorporated by
	reference to Form 10-Q for the quarter ended
	September 30, 1999).                                                                                                                                                             
|        | 10.59 |             |  | Form of Change in Control Severance Agreement
	(incorporated by reference to Form 10-Q for the quarter
	ended September 30, 1999).                                                                                                                                           
|        | 10.60 |             |  | License, Development and Commercialization
	Agreement dated March 2, 2000, between the Company and
	ProQuest Pharmaceuticals Inc. (incorporated by reference to
	Form 10-Q for the quarter ended March 31, 2000).                                                            
|        | 10.61 |             |  | Rights Reversion Agreement dated October 23,
	2000, by and between Aventis Pharmaceutical Products Inc.,
	Rhone-Poulenc Rorer Inc., GPI Holdings, Inc. and Guilford
	Pharmaceuticals Inc. (incorporated by reference to
	Form 10-Q for the quarter ended September 30, 2000).
|        | 10.62 |             |  | Agreement dated October 24, 2000, by and
	between Cardinal Health Sales and Marketing Services, a division
	of RedKey Inc. and Guilford Pharmaceuticals Inc. (incorporated
	by reference to Form 10-Q for the quarter ended
	September 30, 2000).                            
|        | 10.63 |             |  | Employment Letter Agreement dated
	November 13, 2000, between the Company and David P. Wright
	(incorporated by reference for Form 10-K for year ended
	December 31, 2001).                                                                                                  
|        | 10.64 |             |  | Employment Letter Agreement dated October 6,
	2000, between the Company and Margaret M. Contessa (incorporated
	by reference for Form 10-K for year ended December 31,
	2001).                                                                                               
|        | 11.01 |             |  | Statement re: Computation of Per Share Earnings
	(See Notes to Consolidated Financial Statements).                                                                                                                                                                           
|        | 21.01 |             |  | Subsidiaries of Registrant (filed herewith).                                                                                                                                                                                                                                 
|        | 23.01 |             |  | Consent of KPMG LLP (filed herewith).                                                                                                                                                                                                                                        



---



|  |                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------
| | Confidential treatment of certain portions of
	these agreements has been granted by the Securities and Exchange
	Commission.

(b) Reports on 8-K:

None.

53



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                              
| | -----------------------------
| | GUILFORD PHARMACEUTICALS INC.



| |     |                         
| | --- | ------------------------
| | By: | /s/ CRAIG R. SMITH, M.D.

| |                                     
| | ------------------------------------
| |                                     
| | Craig R. Smith, M.D.                
| | Chairman and Chief Executive Officer

March 25, 2002

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed by the
following persons in the capacities and on the date indicated.

|                                                    |  |                                                                                                                             |  |               
|--------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                           |  | Title                                                                                                                       |  | Date          
|                                                    |  |                                                                                                                             |  |               
|                                                   
|/s/ CRAIG R. SMITH, M.D.Craig R. Smith, M.D.        |  | Chief Executive Officer and Director (Principal
	Executive Officer)                                                         |  | March 25, 2002
|                                                   
|/s/ ANDREW R. JORDANAndrew R. Jordan                |  | Sr. Vice President, Chief Financial Officer, and
	Treasurer (Principal Financial Officer and Principal Accounting
	Officer) |  | March 25, 2002
|                                                   
|/s/ SOLOMON H. SNYDERSolomon H. Snyder, M.D.        |  | Director                                                                                                                    |  | March 25, 2002
|                                                   
|/s/ GEORGE L. BUNTING, JR.George L. Bunting, Jr.    |  | Director                                                                                                                    |  | March 25, 2002
|                                                   
|/s/ W. LEIGH THOMPSONW. Leigh Thompson, M.D., Ph.D. |  | Director                                                                                                                    |  | March 25, 2002
|                                                   
|/s/ ELIZABETH M. GREETHAMElizabeth M. Greetham      |  | Director                                                                                                                    |  | March 25, 2002
|                                                   
|/s/ JOSEPH KLEIN, IIIJoseph Klein, III              |  | Director                                                                                                                    |  | March 25, 2002
|                                                   
|/s/ RONALD M. NORDMANNRonald M. Nordmann            |  | Director                                                                                                                    |  | March 25, 2002

54



---



##### 



The Board of Directors and Stockholders of

Guilford Pharmaceuticals Inc.:


We have audited the accompanying consolidated
balance sheets of Guilford Pharmaceuticals Inc. and subsidiaries
(the Company) as of December 31, 2001 and 2000,
and the related consolidated statements of operations, changes
in stockholders equity, and cash flows for each of the
years in the three-year period ended December 31, 2001.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Guilford Pharmaceuticals
Inc. and subsidiaries as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2001,
in conformity with accounting principles generally accepted in
the United States of America.

As discussed in Note 2 to the consolidated
financial statements, the Company changed its revenue
recognition policy for non-refundable upfront fees in 2000.

/s/ KPMG LLP

Philadelphia, Pennsylvania

February 8, 2002


F-1



---



##### 



GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED BALANCE SHEETS

|                                       |                                                                                                                                                       |                            |         |          |         |   |         |          |         | 
|-------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | -------- | ------- | - | ------- | -------- | ------- | 
|                                       |                                                                                                                                                       |                           
|                                       |                                                                                                                                                       | December 31,              
|                                       |                                                                                                                                                       |                           
|                                       |                                                                                                                                                       | 2001                       |         | 2000    
|                                       |                                                                                                                                                       |                            |         |         
|                                       |                                                                                                                                                       |                           
|                                       |                                                                                                                                                       | (in thousands,            
|                                       |                                                                                                                                                       | except share data)        
|ASSETS                                 |                                                                                                                                                       |                            |         |          |         |   |         |         
|Current assets:                        |                                                                                                                                                       |                            |         |          |         |   |         |         
|                                       | Cash and cash equivalents                                                                                                                             |                            | $       | 56,784   |         |   | $       | 32,806   |        
|                                       | Investments                                                                                                                                           |                            |         | 81,498   |         |   |         | 58,309   |        
|                                       | Accounts receivable, net                                                                                                                              |                            |         | 3,219    |         |   |         | 734      |        
|                                       | Inventories, net                                                                                                                                      |                            |         | 2,687    |         |   |         | 2,168    |        
|                                       | Prepaid expenses and other current assets                                                                                                             |                            |         | 3,365    |         |   |         | 1,762    |        
|                                       |                                                                                                                                                       |                            |         |          |         |   |         |         
|                                       |                                                                                                                                                       | Total current assets       |         |          | 147,553 |   |         |          | 95,779  | 
|Investments  restricted               |                                                                                                                                                       |                            | 16,456  |          |         |   | 18,335  |         
|Property and equipment, net            |                                                                                                                                                       |                            | 8,831   |          |         |   | 12,048  |         
|Intangible asset, net                  |                                                                                                                                                       |                            | 7,430   |          |         |   | 8,272   |         
|Other assets                           |                                                                                                                                                       |                            | 1,571   |          |         |   | 1,199   |         
|                                       |                                                                                                                                                       |                            |         |          |         |   |         |         
|                                       |                                                                                                                                                       | $                          | 181,841 |          |         | $ | 135,633 |         
|                                       |                                                                                                                                                       |                            |         |          |         |   |         |         
|                                      
|LIABILITIES AND STOCKHOLDERS
	EQUITY  |                                                                                                                                                       |                            |         |          |         |   |         |         
|Current liabilities:                   |                                                                                                                                                       |                            |         |          |         |   |         |         
|                                       | Accounts payable                                                                                                                                      |                            | $       | 6,040    |         |   | $       | 4,145    |        
|                                       | Current portion of long-term debt                                                                                                                     |                            |         | 4,615    |         |   |         | 2,481    |        
|                                       | Accrued payroll related costs                                                                                                                         |                            |         | 3,505    |         |   |         | 2,911    |        
|                                       | Accrued contracted services                                                                                                                           |                            |         | 2,652    |         |   |         | 2,693    |        
|                                       | Accrued expenses and other current liabilities                                                                                                        |                            |         | 2,272    |         |   |         | 1,444    |        
|                                       |                                                                                                                                                       |                            |         |          |         |   |         |         
|                                       |                                                                                                                                                       | Total current liabilities  |         |          | 19,084  |   |         |          | 13,674  | 
|Long-term debt, net of current portion |                                                                                                                                                       |                            | 4,137   |          |         |   | 5,130   |         
|Other liabilities                      |                                                                                                                                                       |                            | 991     |          |         |   |        |         
|                                       |                                                                                                                                                       |                            |         |          |         |   |         |         
|                                       |                                                                                                                                                       | Total liabilities          |         |          | 24,212  |   |         |          | 18,804  | 
|                                       |                                                                                                                                                       |                            |         |          |         |   |         |         
|Stockholders equity:                  |                                                                                                                                                       |                            |         |          |         |   |         |         
|                                       | Preferred stock, par value $0.01 per share;
	authorized 4,700,000 shares, none issued                                                                 |                            |         |         |         |   |         |         |        
|                                       | Series A junior participating preferred
	stock, par value $0.01 per share; authorized
	300,000 shares, none issued                                    |                            |         |         |         |   |         |         |        
|                                       | Common stock, par value $0.01 per share;
	authorized 75,000,000 shares, 29,975,063 and 24,318,982
	issued at December 31, 2001 and 2000, respectively |                            |         | 300      |         |   |         | 243      |        
|                                       | Additional paid-in capital                                                                                                                            |                            |         | 351,553  |         |   |         | 250,858  |        
|                                       | Accumulated deficit                                                                                                                                   |                            |         | (190,321 | )       |   |         | (130,004 | )      
|                                       | Accumulated other comprehensive loss                                                                                                                  |                            |         | (452     | )       |   |         | (823     | )      
|                                       | Note receivable from officer                                                                                                                          |                            |         | (60      | )       |   |         | (60      | )      
|                                       | Treasury stock, at cost: 256,906 and
	262,985 shares at December 31, 2001 and 2000,
	respectively                                                     |                            |         | (3,339   | )       |   |         | (3,277   | )      
|                                       | Deferred compensation                                                                                                                                 |                            |         | (52      | )       |   |         | (108     | )      
|                                       |                                                                                                                                                       |                            |         |          |         |   |         |         
|                                       |                                                                                                                                                       | Total stockholders equity |         |          | 157,629 |   |         |          | 116,829 | 
|                                       |                                                                                                                                                       |                            |         |          |         |   |         |         
|                                       |                                                                                                                                                       | $                          | 181,841 |          |         | $ | 135,633 |         
|                                       |                                                                                                                                                       |                            |         |          |         |   |         |         

See accompanying notes to consolidated financial
statements.

F-2



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                 |                                                            |                                       |         |        |        |      |         |         |        |   |         |         |        | 
|------------------------------------------------------------------------------------------------ | ---------------------------------------------------------- | ------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------- | ------ | - | ------- | ------- | ------ | 
|                                                                                                 |                                                            |                                      
|                                                                                                 |                                                            | Years Ended December 31,             
|                                                                                                 |                                                            |                                      
|                                                                                                 |                                                            | 2001                                  |         | 2000   |        | 1999
|                                                                                                 |                                                            |                                       |         |        |        |     
|                                                                                                 |                                                            |                                      
|                                                                                                 |                                                            | (in thousands, except per share data)
|Revenues:                                                                                        |                                                            |                                       |         |        |        |      |         |         |        |   |         |        
|                                                                                                 | Net product sales                                          |                                       | $       | 20,360 |        |      | $       | 1,492   |        |   | $       | 4,371   |       
|                                                                                                 | License fees and royalties                                 |                                       |         | 149    |        |      |         | 2,369   |        |   |         | 2,427   |       
|                                                                                                 | Contract revenues                                          |                                       |         |       |        |      |         | 10,625  |        |   |         | 9,500   |       
|                                                                                                 | Revenues under collaborative agreements                    |                                       |         | 25     |        |      |         | 3,570   |        |   |         | 5,263   |       
|                                                                                                 |                                                            |                                       |         |        |        |      |         |         |        |   |         |        
|                                                                                                 |                                                            | Total revenues                        |         |        | 20,534 |      |         |         | 18,056 |   |         |         | 21,561 | 
|Costs and Expenses:                                                                              |                                                            |                                       |         |        |        |      |         |         |        |   |         |        
|                                                                                                 | Cost of sales                                              |                                       |         | 2,836  |        |      |         | 1,358   |        |   |         | 2,308   |       
|                                                                                                 | Research and development                                   |                                       |         | 54,272 |        |      |         | 46,900  |        |   |         | 41,922  |       
|                                                                                                 | Selling, general and administrative                        |                                       |         | 30,113 |        |      |         | 14,144  |        |   |         | 11,281  |       
|                                                                                                 | Merger costs                                               |                                       |         |       |        |      |         | 1,403   |        |   |         |        |       
|                                                                                                 |                                                            |                                       |         |        |        |      |         |         |        |   |         |        
|                                                                                                 |                                                            | Total costs and expenses              |         |        | 87,221 |      |         |         | 63,805 |   |         |         | 55,511 | 
|                                                                                                 |                                                            |                                       |         |        |        |      |         |         |        |   |         |        
|Operating loss                                                                                   |                                                            |                                       | (66,687 | )      |        |      | (45,749 | )       |        |   | (33,950 | )      
|Other Income (Expense):                                                                          |                                                            |                                       |         |        |        |      |         |         |        |   |         |        
|                                                                                                 | Investment and other income                                |                                       |         | 6,870  |        |      |         | 7,751   |        |   |         | 7,722   |       
|                                                                                                 | Interest expense                                           |                                       |         | (500   | )      |      |         | (504    | )      |   |         | (640    | )     
|                                                                                                 |                                                            |                                       |         |        |        |      |         |         |        |   |         |        
|Loss before the cumulative effect of an
	accounting change                                       |                                                            |                                       | (60,317 | )      |        |      | (38,502 | )       |        |   | (26,868 | )      
|Cumulative effect of an accounting change                                                        |                                                            |                                       |        |        |        |      | (8,625  | )       |        |   |        |        
|                                                                                                 |                                                            |                                       |         |        |        |      |         |         |        |   |         |        
|Net loss                                                                                         |                                                            | $                                     | (60,317 | )      |        | $    | (47,127 | )       |        | $ | (26,868 | )      
|                                                                                                 |                                                            |                                       |         |        |        |      |         |         |        |   |         |        
|Basic and diluted loss per common
	share:                                                        |                                                            |                                       |         |        |        |      |         |         |        |   |         |        
|                                                                                                 | Loss before the cumulative effect of an
	accounting change |                                       | $       | (2.14  | )      |      | $       | (1.64   | )      |   | $       | (1.31   | )     
|                                                                                                 | Cumulative effect of an accounting change                  |                                       |         |       |        |      |         | (0.36   | )      |   |         |        |       
|                                                                                                 |                                                            |                                       |         |        |        |      |         |         |        |   |         |        
|                                                                                                 | Net loss                                                   |                                       | $       | (2.14  | )      |      | $       | (2.00   | )      |   | $       | (1.31   | )     
|                                                                                                 |                                                            |                                       |         |        |        |      |         |         |        |   |         |        
|Weighted-average shares outstanding to compute
	basic and diluted loss per share                 |                                                            |                                       | 28,249  |        |        |      | 23,517  |         |        |   | 20,475  |        
|Pro forma amounts assuming change in application
	of accounting principle applied retroactively: |                                                            |                                       |         |        |        |      |         |         |        |   |         |        
|                                                                                                 | Net loss                                                   |                                       | $       |       |        |      | $       | (38,502 | )      |   | $       | (21,118 | )     
|                                                                                                 | Net loss per common share                                  |                                       | $       |       |        |      | $       | (1.64   | )      |   | $       | (1.03   | )     

See accompanying notes to consolidated financial
statements.

F-3



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

(in thousands, except share data)

|                                                                                          |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |         |        |  
|----------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------------------ | ---------- | ---------- |  | ------- | --- | ------------- |  | ---------- | ------- | ------- |  | -------------- | -------- | ------------ | - | ------------- | ------ | - | ------ | - | --- | - |  | - | ------ | - |  | - | ---- | - |  | - | ------- | ------- | ------ | -
|                                                                                          |                             |                                                        |            |            |  |         |     | Accumulated   |  |            |         |         |  |                |          |             
|                                                                                          |                             | Common Stock                                           |            |            |  |         |     | Other         |  | Note       |         |         |  |                |          |             
|                                                                                          |                             |                                                        |            | Additional |  |         |     | Comprehensive |  | Receivable |         |         |  |                |          | Total       
|                                                                                          |                             | Number                                                 |            |            |  | Paid-in |     | Accumulated   |  | Income     |         | From    |  | Treasury       |          | Deferred     |   | Stockholders
|                                                                                          |                             | of Shares                                              |            | Amount     |  | Capital |     | Deficit       |  | (Loss)     |         | Officer |  | Stock, at Cost |          | Compensation |   | Equity       
|                                                                                          |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |              
|                                                                                          |                             |                                                       
|                                                                                          |                             | (In thousands, except share data)                     
|Balance, January 1, 1999                                                                  |                             |                                                        | 19,594,316 |            |  | $       | 196 |               |  | $          | 187,139 |         |  | $              | (56,009  | )            |   | $             | 876    |   |        | $ | (60 | ) |  | $ | (1,399 | ) |  | $ | (364 | ) |  | $ | 130,379 |        
|Comprehensive loss:                                                                       |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        
|                                                                                          | Net loss                    |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          | (26,868      | ) |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         | (26,868 | )     
|                                                                                          | Other comprehensive loss:   |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |         |       
|                                                                                          |                             | Unrealized loss on available-for-sale securities       |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   | (2,714 | ) |     |   |  |   |        |   |  |   |      |   |  |   |         |         | (2,714 | )
|                                                                                          |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        
|Total comprehensive loss                                                                  |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  | $ | (29,582 | )      
|                                                                                          |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        
|Issuance of common stock in private placement at
	$13.50 per share, net of offering costs |                             |                                                        | 3,360,000  |            |  |         | 34  |               |  |            | 42,374  |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   | 42,408  |        
|Other issuances of common stock                                                           |                             |                                                        | 373,997    |            |  |         | 3   |               |  |            | 2,601   |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   | 2,604   |        
|Purchase of 224,150 shares of common stock                                                |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   | (2,209 | ) |  |   |      |   |  |   | (2,209  | )      
|Distribution of 26,494 shares of treasury
	stock to 401(k) plan                           |                             |                                                        |            |            |  |         |     |               |  |            | 28      |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   | 324    |   |  |   |      |   |  |   | 352     |        
|Stock option compensation                                                                 |                             |                                                        |            |            |  |         |     |               |  |            | 947     |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   | 947     |        
|Amortization of deferred compensation                                                     |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   | 81   |   |  |   | 81      |        
|Forfeiture of unvested restricted stock                                                   |                             |                                                        |            |            |  |         |     |               |  |            | (176    | )       |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   | 176  |   |  |   |        |        
|                                                                                          |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        
|Balance, December 31, 1999                                                                |                             |                                                        | 23,328,313 |            |  | $       | 233 |               |  | $          | 232,913 |         |  | $              | (82,877  | )            |   | $             | (1,838 | ) |        | $ | (60 | ) |  | $ | (3,284 | ) |  | $ | (107 | ) |  | $ | 144,980 |        
|Comprehensive loss:                                                                       |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        
|                                                                                          | Net loss                    |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          | (47,127      | ) |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         | (47,127 | )     
|                                                                                          | Other comprehensive income: |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |         |       
|                                                                                          |                             | Unrealized gain on available-for-sale securities       |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   | 1,015  |   |     |   |  |   |        |   |  |   |      |   |  |   |         |         | 1,015  |  
|                                                                                          |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        
|Total comprehensive loss                                                                  |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  | $ | (46,112 | )      
|                                                                                          |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        
|Common stock issued in exchange for intangible
	asset                                     |                             |                                                        | 300,000    |            |  |         | 3   |               |  |            | 7,984   |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   | 7,987   |        
|Other issuances of common stock                                                           |                             |                                                        | 690,669    |            |  |         | 7   |               |  |            | 9,532   |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   | (56  | ) |  |   | 9,483   |        
|Purchase of 8,285 shares of common stock                                                  |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   | (237   | ) |  |   |      |   |  |   | (237    | )      
|Distribution of 20,180 shares of treasury
	stock to 401(k) plan                           |                             |                                                        |            |            |  |         |     |               |  |            | 139     |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   | 244    |   |  |   |      |   |  |   | 383     |        
|Stock option compensation                                                                 |                             |                                                        |            |            |  |         |     |               |  |            | 290     |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   | 290     |        
|Amortization of deferred compensation                                                     |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   | 55   |   |  |   | 55      |        
|                                                                                          |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        
|Balance, December 31, 2000                                                                |                             |                                                        | 24,318,982 |            |  | $       | 243 |               |  | $          | 250,858 |         |  | $              | (130,004 | )            |   | $             | (823   | ) |        | $ | (60 | ) |  | $ | (3,277 | ) |  | $ | (108 | ) |  | $ | 116,829 |        
|Comprehensive loss:                                                                       |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        
|                                                                                          | Net loss                    |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          | (60,317      | ) |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         | (60,317 | )     
|                                                                                          | Other comprehensive income: |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |         |       
|                                                                                          |                             | Cumulative effect of a change in accounting
	principle |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   | 83     |   |     |   |  |   |        |   |  |   |      |   |  |   |         |         | 83     |  
|                                                                                          |                             | Unrealized loss on interest rate swap agreements       |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   | (1,146 | ) |     |   |  |   |        |   |  |   |      |   |  |   |         |         | (1,146 | )
|                                                                                          |                             | Unrealized gain on available-for-sale securities       |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   | 1,434  |   |     |   |  |   |        |   |  |   |      |   |  |   |         |         | 1,434  |  
|                                                                                          |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        
|                                                                                          |                             | Total other comprehensive income                       |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |         | 371    |  
|                                                                                          |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        
|Total comprehensive loss                                                                  |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   | (59,946 | )      
|                                                                                          |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        
|Issuances of common stock                                                                 |                             |                                                        | 5,509,358  |            |  |         | 55  |               |  |            | 98,710  |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   | 98,765  |        
|Exercise of stock options                                                                 |                             |                                                        | 146,723    |            |  |         | 2   |               |  |            | 1,726   |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   | (385   | ) |  |   |      |   |  |   | 1,343   |        
|Distribution of 24,946 shares of treasury
	stock to 401(k) plan                           |                             |                                                        |            |            |  |         |     |               |  |            | 150     |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   | 323    |   |  |   |      |   |  |   | 473     |        
|Stock option compensation                                                                 |                             |                                                        |            |            |  |         |     |               |  |            | 109     |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   | 109     |        
|Amortization of deferred compensation                                                     |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   | 56   |   |  |   | 56      |        
|                                                                                          |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        
|Balance, December 31, 2001                                                                |                             |                                                        | 29,975,063 |            |  | $       | 300 |               |  | $          | 351,553 |         |  | $              | (190,321 | )            |   | $             | (452   | ) |        | $ | (60 | ) |  | $ | (3,339 | ) |  | $ | (52  | ) |  | $ | 157,629 |        
|                                                                                          |                             |                                                        |            |            |  |         |     |               |  |            |         |         |  |                |          |              |   |               |        |   |        |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        

See accompanying notes to consolidated financial
statements.

F-4



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

|                                                                             |                                                              |                                                      |         |        |         |      |          |      |         |   |          |     |         |  
|---------------------------------------------------------------------------- | ------------------------------------------------------------ | ---------------------------------------------------- | ------- | ------ | ------- | ---- | -------- | ---- | ------- | - | -------- | --- | ------- | -
|                                                                             |                                                              |                                                     
|                                                                             |                                                              | Years Ended December 31,                            
|                                                                             |                                                              |                                                     
|                                                                             |                                                              | 2001                                                 |         | 2000   |         | 1999
|                                                                             |                                                              |                                                      |         |        |         |     
|                                                                             |                                                              |                                                     
|                                                                             |                                                              | (in thousands, except share data)                   
|Cash Flows From Operating
	Activities:                                       |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    
|Net loss                                                                     |                                                              | $                                                    | (60,317 | )      |         | $    | (47,127  | )    |         | $ | (26,868  | )  
|Adjustments to reconcile net loss to net cash
	used in operating activities: |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    
|Depreciation and amortization                                                |                                                              |                                                      | 4,855   |        |         |      | 4,321    |      |         |   | 5,118    |    
|Non-cash compensation expense                                                |                                                              |                                                      | 638     |        |         |      | 893      |      |         |   | 866      |    
|Changes in assets and liabilities:                                           |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    
|                                                                             | Accounts receivable, net, prepaid expenses and
	other assets |                                                      |         | (4,460 | )       |      |          | (865 | )       |   |          | (37 | )      
|                                                                             | Inventories, net                                             |                                                      |         | (519   | )       |      |          | (820 | )       |   |          | (57 | )      
|                                                                             | Accounts payable and other liabilities                       |                                                      |         | 3,204  |         |      |          | 908  |         |   |          | 247 |        
|                                                                             |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    
|                                                                             |                                                              | Net cash used in operating activities                |         |        | (56,599 | )    |          |      | (42,690 | ) |          |     | (20,731 | )
|                                                                             |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    
|Cash Flows From Investing
	Activities:                                       |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    
|Purchases of property and equipment                                          |                                                              |                                                      | (286    | )      |         |      | (541     | )    |         |   | (1,850   | )  
|Maturities of held-to-maturity securities                                    |                                                              |                                                      |        |        |         |      | 510      |      |         |   | 2,023    |    
|Maturities of available-for-sale securities                                  |                                                              |                                                      | 77,670  |        |         |      | 239,643  |      |         |   | 164,325  |    
|Purchases of available-for-sale securities                                   |                                                              |                                                      | (97,546 | )      |         |      | (185,400 | )    |         |   | (179,155 | )  
|                                                                             |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    
|                                                                             |                                                              | Net cash (used in) provided by investing
	activities |         |        | (20,162 | )    |          |      | 54,212  |   |          |     | (14,657 | )
|                                                                             |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    
|Cash Flows From Financing
	Activities:                                       |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    
|Net proceeds from issuances of common stock                                  |                                                              |                                                      | 100,108 |        |         |      | 9,483    |      |         |   | 45,012   |    
|Purchase of treasury stock                                                   |                                                              |                                                      |        |        |         |      | (237     | )    |         |   | (2,209   | )  
|Proceeds from long-term debt                                                 |                                                              |                                                      | 3,733   |        |         |      |         |      |         |   | 600      |    
|Principal payments on long-term debt                                         |                                                              |                                                      | (3,102  | )      |         |      | (2,298   | )    |         |   | (2,159   | )  
|                                                                             |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    
|                                                                             |                                                              | Net cash provided by financing activities            |         |        | 100,739 |      |          |      | 6,948   |   |          |     | 41,244  |  
|                                                                             |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    
|Net increase in cash and cash equivalents                                    |                                                              |                                                      | 23,978  |        |         |      | 18,470   |      |         |   | 5,856    |    
|Cash and cash equivalents at the beginning of
	period                        |                                                              |                                                      | 32,806  |        |         |      | 14,336   |      |         |   | 8,480    |    
|                                                                             |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    
|Cash and cash equivalents at the end of
	period                              |                                                              | $                                                    | 56,784  |        |         | $    | 32,806   |      |         | $ | 14,336   |    
|                                                                             |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    
|Supplemental disclosures of cash flow
	information:                          |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    
|Net interest paid                                                            |                                                              | $                                                    | 500     |        |         | $    | 490      |      |         | $ | 590      |    
|Non-cash investing and financing activities:                                 |                                                              |                                                      |         |        |         |      |          |      |         |   |          |    



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Capital lease obligations of $510 and $543 were
	incurred in 2001 and 2000, respectively, when the Company
	entered into new leases for certain computer equipment.                                                         
|
| | During 2000, the Company issued
	300,000 shares of common stock valued at $8,000 and assumed
	the obligation for product returns estimated at $500 in return
	for the rights to market, sell and distribute GLIADEL®
	Wafer.

See accompanying notes to consolidated financial
statements.

F-5



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(1) Organization and Description of
Business

Guilford Pharmaceuticals Inc. (together with its
subsidiaries, Guilford or the Company)
is a fully integrated pharmaceutical company located in
Baltimore, Maryland, targeting the neurological, surgical and
critical care markets. The Companys mission is to develop
novel proprietary biopolymer-based therapeutics for surgeons and
novel pharmaceutical products for the diagnosis and treatment of
neurological disorders.

(2) Summary of Significant Accounting
Policies and Practices



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
financial statements of Guilford and its subsidiaries, all of
which are wholly owned. All intercompany balances and
transactions have been eliminated in consolidation.



| |                    
| | -------------------
| | Segment Information

The Company operates primarily in one industry
segment, which includes research, development, and
commercialization of novel products for the healthcare industry.
The Company is managed and operated as one business. A single
management team that reports to the Chief Executive Officer
comprehensively manages the entire business. The Company does
not operate separate lines of business or separate business
entities with respect to its product or product candidates. The
Company operates primarily from its corporate headquarters
located within the United States and derives revenues primarily
from its sales to customers within the United States. During the
year ended December 31, 2001, approximately one percent of
revenue was from customers outside of the United States.
Accordingly, the Company does not prepare discrete financial
information with respect to separate geographic or product areas
and does not have separately reportable segments as defined by
Standard of Financial Accounting Standards (SFAS)
No. 131, Disclosure about Segments of an Enterprise and
Related Information.



| |                 
| | ----------------
| | Cash Equivalents

The Company had cash equivalents of
$53.9 million and $30.3 million at December 31,
2001 and 2000, respectively, which consisted of money market
funds. The Company classifies all highly liquid investments with
an original maturity of three months or less at the time of
purchase as cash equivalents.



| |            
| | -----------
| | Investments

Investment securities at December 31, 2001
and 2000 consist of direct obligations of the
U.S. government and U.S. government agencies,
asset-backed securities and corporate debt securities. The
Company classifies investments at the time of purchase as either
available-for-sale or held-to-maturity. Investments in
securities that are classified as available-for-sale are carried
at their fair values. Unrealized holding gains and losses on
available-for-sale securities are excluded from current earnings
(loss) and are reported as a separate component of
stockholders equity as Accumulated other
comprehensive income (loss). Realized gains and losses on
available-for-sale securities are determined on a specific
identification basis. Held-to-maturity securities are those
securities for which the Company has the ability and intent to
hold the security until maturity. Held-to-maturity securities
are carried at cost, adjusted for the amortized discount or
premium. Dividends and interest income are recognized when
earned, regardless of the type of security.

A decline in the market value of any
available-for-sale or held-to-maturity security below cost that
is deemed to be other than temporary is an impairment that would
result in a reduction in the carrying amount to fair value. Such
impairment, if any, is charged to current earnings, and an
adjusted cost basis for the security is established.

F-6



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                               
| | ----------------------------------------------
| | Investment in Equity Securities 
	Cost Method

Equity investments that are less than 20% of an
investee companys voting stock and where the Company lacks
the ability to significantly influence the investee company are
accounted for under the cost method of accounting. Under this
method, the Companys share of the earnings or losses of
the investee company is not included in the consolidated
statements of operations. A decline in market value below cost
that is deemed to be other than temporary is an impairment that
would result in a reduction in the carrying amount to fair
value. Such impairment, if any, is charged to current earnings,
and an adjusted cost basis for the security is established.



| |                              
| | -----------------------------
| | Interest Rate Swap Agreements

As a hedge against fluctuations in interest
rates, the Company entered into interest rate swap agreements to
exchange a portion of its variable interest rate financial
obligations for fixed rates. The Company does not speculate on
the future direction of interest rates nor does the Company use
these derivative financial instruments for trading purposes. The
differential to be paid or received as interest rates change is
accrued and recognized as an adjustment of interest expense
related to the financial obligation. If an interest rate swap
agreement is terminated prior to its maturity, the gain or loss
is recognized over the remaining original life of the interest
rate swap agreement if the item hedged remains outstanding, or
immediately, if the item hedged does not remain outstanding. If
the interest rate swap agreement is not terminated prior to
maturity, but the underlying hedged item is no longer
outstanding, the interest rate swap agreement is marked to
market and any unrealized gain or loss is recognized immediately
in income.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost or
market. Cost is determined using a weighted-average approach,
which approximates the first-in, first-out method.

Inventories are net of applicable reserves and
allowances. Inventories include finished goods and raw materials
that may be either available for sale, consumed in production,
or consumed internally in the Companys development
activities. Inventories identified for development activities
are expensed in the period in which such inventories are
designated for such use.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost.
Depreciation and amortization are calculated on the
straight-line method over the estimated useful lives of the
assets, generally three to seven years for furniture and
equipment, and over the shorter of the estimated useful life of
leasehold improvements or the related lease term for such
improvements. Upon the disposition of assets, the cost and
related accumulated depreciation are removed from the accounts
and any resulting gain or loss is included in the consolidated
statements of operations. Expenditures for repairs and
maintenance are expensed as incurred.



| |                 
| | ----------------
| | Intangible Asset

The intangible asset, net of accumulated
amortization, represents the cost to reacquire the rights to
market, sell and distribute GLIADEL®Wafer from Aventis S.A.
(Aventis) (See Note 16). The Company is
amortizing this intangible asset over a period of 10 years
using the straight-line method.



| |                                 
| | --------------------------------
| | Impairment of Long-Lived
	Assets

The Company accounts for long-lived assets in
accordance with the provisions of SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles be
reviewed for impairment

F-7



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets held and used is measured
by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.



| |                  
| | -----------------
| | Accounting Change

In December 1999, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin
No. 101 (SAB 101), which summarizes the
views of the SEC in applying generally accepted accounting
principles to revenue recognition in financial statements. The
Company adopted SAB 101 in the fourth quarter of 2000
effective January 1, 2000, resulting in a non-cash charge
of $8.6 million, or $0.36 per basic and diluted share.
In accordance with SAB 101, the charge has been reflected
on a separate line entitled Cumulative effect of an
accounting change on the Consolidated Statements of
Operations. Under SAB 101, non-refundable upfront fee
arrangements that contain an element of continuing involvement
must be deferred and recognized as revenue over the involvement
period. See Note 16 for a description of the past
agreements impacted by SAB 101. For the year ended
December 31, 2000, the Company recognized $8.6 million
of contract revenues, which were deferred upon adoption of
SAB 101. There was no effect on 2001 as a result of
SAB 101. The effect of the adoption of SAB 101 on the
pre-change interim periods is disclosed in Note 20.

Pro forma amounts assuming the change in
application of accounting principle applied retroactively was as
follows (in thousands except for per share data):

|                          |  |      |         |      |  |   |         |  
|------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                          |  | 2000 |         | 1999
|                          |  |      |         |     
|Revenue                   |  | $    | 18,056  |      |  | $ | 27,311  |  
|Net loss                  |  | $    | (38,502 | )    |  | $ | (21,118 | )
|Net loss per common share |  | $    | (1.64   | )    |  | $ | (1.03   | )



| |                    
| | -------------------
| | Revenue Recognition

Revenue from product sales is recognized when
there is persuasive evidence that an arrangement exists, the
price is fixed and determinable, title has passed, and
collection is reasonably assured. Product sales are reported net
of allowances for estimated discounts, rebates, charge backs and
product returns. The Companys policy is to provide an
exchange for customers when the customers product has
reached its expiration date or was damaged in shipment.

Our historical return rate is applied to our unit
sales to provide an allowance for future product returns. This
historical return rate is calculated by blending the significant
product return experience of our previous marketing, sales and
distribution partner, with our own product return experience.
The product return rate is periodically updated to reflect
actual experience.

Collaborative research revenue is recognized, up
to the contractual limits, when the Company meets its
performance obligations under the respective agreements.
Payments received that relate to future performance are deferred
and recognized as revenue at the time such future performance
has been accomplished.

Commencing with the adoption of SAB 101,
non-refundable upfront fee arrangements that contain an element
of continuing involvement are deferred and recognized as revenue
over the involvement period. Revenue for the year ended
December 31, 2000, has been adjusted to reflect the
implementation of SAB 101.

Milestone payments, which represent a substantive
step in the development process or significant achievement for
the product, are recognized when earned.

F-8



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                               
| | ----------------------------------------------
| | Research and Development and Royalty
	Expenses

Internal research and development costs are
expensed as incurred. Third party research and development costs
are expensed as performed. Royalty expense related to product
sales is recognized concurrently with the recognition of product
revenue and included as part of cost of sales. Royalty expense
from third-party sales is expensed concurrent with such revenue
recognition and is offset against royalty revenue related to
third-party sales.



| |                            
| | ---------------------------
| | Accounting for Income Taxes

Deferred tax assets and liabilities are
determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured using
the enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse. The measurement of
deferred tax assets is reduced, if necessary, by a valuation
allowance if it is more likely than not that some portion or all
of the deferred tax asset will not be realized. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized as income in the period that such tax rate changes
are enacted. Accordingly, the Company provides an allowance for
all deferred tax assets and liabilities because there is no
assurance that they will be realized.



| |                         
| | ------------------------
| | Stock-Based Compensation

The Company discloses information relating to
stock-based compensation awards in accordance with SFAS No.123,
Accounting for Stock-Based Compensation,
(SFAS 123), and has elected to apply the
provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, to such compensation
awards. Under the Companys employee share option plans,
the Company grants employee stock options at an exercise price
equal to the fair market value at the date of grant. No
compensation expense is recorded with respect to such stock
option grants. Compensation expense for options granted to
non-employees is determined in accordance with SFAS 123 as
the fair value of the consideration received or the fair value
of the equity instruments issued whichever is more reliably
measured. Compensation expense for options granted to
non-employees is remeasured as the underlying options vest.



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

Under SFAS No. 130, Reporting Comprehensive
Income, the Company is required to display comprehensive income
(loss) and its components as part of the Companys full set
of financial statements. The purpose of reporting comprehensive
income (loss) is to report a measure of all changes in equity of
an enterprise that result from recognized transactions and other
economic events of the period, except those resulting from
investments by owners and distributions to owners. The
measurement and presentation of net income (loss) did not
change. Comprehensive income (loss) is comprised of net income
(loss) and other comprehensive income (loss). Other
comprehensive income (loss) includes certain changes in equity
of the Company that are excluded from net income (loss).
Comprehensive income (loss) for years ended December 31,
2001, 2000 and 1999 has been reflected in the Consolidated
Statements of Changes in Stockholders Equity.



| |                          
| | -------------------------
| | Earnings (Loss) per Share

Basic earnings (loss) per share (EPS)
is computed by dividing earnings (loss) by the weighted-average
number of shares outstanding for the period. The computation of
diluted EPS is similar to basic EPS except that the
weighted-average number of shares outstanding for the period is
increased to include the number of additional shares that would
have been outstanding if the dilutive potential common shares
had been issued. Potential common shares are excluded if the
effect on earnings (loss) per share is antidilutive.

F-9



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                     
| | ------------------------------------
| | Fair Value of Financial
	Instruments

The fair value of the Companys financial
instruments is the amount for which the instrument could be
exchanged in a current transaction between willing parties. For
cash and cash equivalents, accounts receivable, prepaid expenses
and other current assets, accounts payable and accrued expenses,
the carrying amounts included in the consolidated balance sheet
equal or approximate fair value because of the short duration of
these instruments. The fair values of investments in debt
securities are based on quoted market prices at the reporting
date for those or similar investments. The fair value of the
Companys long-term debt is estimated by discounting the
future cash flows of each instrument at rates currently offered
to the Company for similar debt instruments offered by the
Companys bankers. Current market pricing models were used
to estimate fair values of the Companys interest rate swap
agreements carried on the Companys consolidated balance
sheet in the categories of accrued expenses and other current
liabilities and other liabilities.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

The Company invests excess cash in accordance
with a policy objective that seeks to preserve both liquidity
and safety of principal. The policy limits investments to
certain instruments issued by institutions with strong
investment grade credit ratings (as defined) at the time of
purchase and places restrictions on their term to maturity and
concentrations by type and issuer.

The Company has an exposure to credit risk in its
trade accounts receivable from sales of GLIADEL® Wafer. The
Company began selling GLIADEL® Wafer on January 1,
2001, primarily in the United States, to hospitals directly and
through wholesalers, and to specialty distributors. Before
January 1, 2001, substantially all of the Companys
net product sales and royalties were from Aventis, its
previous marketing sales and distribution partner.



| |              
| | -------------
| | Uncertainties

The Company is subject to various risks common to
companies within the pharmaceutical and biotechnology
industries. These include, but are not limited to, development
by competitors of new technological innovations; dependence on
key personnel; dependence on a limited number of products; risks
inherent in the research and development of pharmaceutical and
biotechnology products; protection of proprietary technology;
estimation by the Company of the size and characteristics of the
market for the Companys product(s); acceptance of the
Companys product(s) by the countrys regulatory
agencies in which the Company may choose to sell its products,
as well as acceptance by customers; health care cost containment
initiatives; and product liability and compliance with
government regulations and agencies, including the Federal Food
and Drug Administration (FDA).



| |                 
| | ----------------
| | Use of Estimates

The preparation of the Companys financial
statements, in conformity with accounting principles generally
accepted in the United States of America, requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, revenues and expenses, and
disclosures of contingent assets and liabilities at the date of
the financial statements. Actual results will likely differ from
those estimates.

F-10



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | Reclassifications

Certain prior year amounts have been reclassified
to conform with the current year presentation.



| |                         
| | ------------------------
| | New Accounting Standards

Effective January 1, 2001, the Company
adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 137 and SFAS
No. 138. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities. As a result of adopting SFAS 133, the
Company recorded an unrealized gain as a transition adjustment
of approximately $0.1 million in Accumulated other
comprehensive income as a cumulative effect of a change in
accounting principle to recognize the fair value of its interest
rate swap agreements that were designated as cash-flow hedges.
SFAS 133 requires derivatives to be recognized on the
balance sheet at their fair value. The Company designated the
derivatives as cash-flow hedges at the time the contract was
entered into and formally documented all relationships between
the derivative instruments and hedged items, as well as its risk
management objective and strategy for undertaking the hedge
transaction.

The Company formally assesses on an ongoing basis
whether the interest rate swap agreements used in the hedge
transaction are highly effective in offsetting changes in fair
values of cash flows of hedged items. Changes in the fair value
of a derivative that is highly effective and that is designated
as and qualifies as a cash flow hedge is recorded in
Accumulated other comprehensive income. When it is
determined that a derivative is not highly effective as a hedge
or that it has ceased to be highly effective, the Company will
continue to carry the derivative on the balance sheet at its
fair value but will recognize any gain or loss in its
Consolidated Statements of Operations.

Effective July 1, 2001, the Company adopted
SFAS No. 141, Business Combinations. SFAS 141 requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and eliminates
the pooling-of-interest method. In addition, SFAS 141
specifies criteria that intangible assets acquired in a business
combination must meet in order to be recognized and reported
separately from goodwill. The adoption of SFAS 141 did not
have an impact on the historical consolidated financial
statements of the Company.

F-11



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(3) Investments

Investments in marketable securities as of
December 31, 2001 and 2000 are as follows (in thousands):

|                          |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|------------------------- |  | ---- | ------ | ---------- |  | ---------- | --- | ----- |  | - | ---- | - |  | - | ------ | 
|                          |  |      |        | Gross      |  | Gross      |     |      
|                          |  |      |        | Unrealized |  | Unrealized |     |      
|                          |  |      |        | Holding    |  | Holding    |     | Fair 
|                          |  | Cost |        | Gains      |  | Losses     |     | Value
|                          |  |      |        |            |  |            |     |      
|2001                      |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|Available-for-sale        |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|U.S. Treasury Securities  |  | $    | 41,787 |            |  | $          | 181 |       |  | $ |     |   |  | $ | 41,968 | 
|Corporate Debt Securities |  |      | 51,292 |            |  |            | 502 |       |  |   |     |   |  |   | 51,794 | 
|Other Debt Securities     |  |      | 4,264  |            |  |            |    |       |  |   | (72  | ) |  |   | 4,192  | 
|                          |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|                          |  | $    | 97,343 |            |  | $          | 683 |       |  | $ | (72  | ) |  | $ | 97,954 | 
|                          |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|2000                      |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|Available-for-sale        |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|U.S. Treasury Securities  |  | $    | 28,895 |            |  |            |    |       |  | $ | (162 | ) |  | $ | 28,733 | 
|Corporate Debt Securities |  |      | 38,181 |            |  |            |    |       |  |   | (605 | ) |  |   | 37,576 | 
|Other Debt Securities     |  |      | 10,391 |            |  |            |    |       |  |   | (56  | ) |  |   | 10,335 | 
|                          |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|                          |  | $    | 77,467 |            |  | $          |    |       |  | $ | (823 | ) |  | $ | 76,644 | 
|                          |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 

At December 31, 2001 and 2000, investments
of $16.5 million and $18.3 million, respectively are
classified as Investments-restricted in the
accompanying consolidated balance sheets (see Notes 8 and
10).

Maturities of investments in marketable
securities classified as available-for-sale as of
December 31, 2001 were as follows (in thousands):

|                   |                       |           |        |        |  |   |        |        | 
|------------------ | --------------------- | --------- | ------ | ------ |  | - | ------ | ------ | 
|                   |                       | Amortized |        | Fair  
|                   |                       | Cost      |        | Value 
|                   |                       |           |        |       
|Available-for-sale |                       |           |        |        |  |   |        |       
|                   | Due in 1 year or less |           | $      | 29,219 |  |   | $      | 29,298 | 
|                   | Due in 1-5 years      |           |        | 68,124 |  |   |        | 68,656 | 
|                   |                       |           |        |        |  |   |        |       
|                   |                       | $         | 97,343 |        |  | $ | 97,954 |       
|                   |                       |           |        |        |  |   |        |       

(4) Accounts Receivable

Accounts receivable consist of the following (in
thousands):

|                                     |  |              |       |      |  |   |     | 
|------------------------------------ |  | ------------ | ----- | ---- |  | - | --- | 
|                                     |  |             
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2001         |       | 2000
|                                     |  |              |       |     
|Trade accounts receivable            |  | $            | 3,371 |      |  | $ | 734 | 
|Less allowance for doubtful accounts |  |              | (152  | )    |  |   |    | 
|                                     |  |              |       |      |  |   |     | 
|                                     |  | $            | 3,219 |      |  | $ | 734 | 
|                                     |  |              |       |      |  |   |     | 

Trade accounts receivable amounts at
December 31, 2000 represent amounts due from Aventis, the
Companys marketing, sales and distribution partner for its
GLIADEL® Wafer prior to the Company reacquiring those
rights effective January 1, 2001.

F-12



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(5) Inventories

Inventories consist of the following:

|                |  |                |       |      |  |   |       | 
|--------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                |  |               
|                |  | December 31,  
|                |  |               
|                |  | 2001           |       | 2000
|                |  |                |       |     
|                |  |               
|                |  | (In thousands)
|Raw materials   |  | $              | 245   |      |  | $ | 304   | 
|Work in process |  |                | 650   |      |  |   | 603   | 
|Finished goods  |  |                | 1,792 |      |  |   | 1,261 | 
|                |  |                |       |      |  |   |       | 
|                |  | $              | 2,687 |      |  | $ | 2,168 | 
|                |  |                |       |      |  |   |       | 

(6) Property and Equipment

Property and equipment consist of the following:

|                                               |  |                |         |      |  |   |         |  
|---------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                               |  |               
|                                               |  | December 31,  
|                                               |  |               
|                                               |  | 2001           |         | 2000
|                                               |  |                |         |     
|                                               |  |               
|                                               |  | (In thousands)
|Laboratory equipment                           |  | $              | 4,345   |      |  | $ | 4,467   |  
|Manufacturing equipment                        |  |                | 2,602   |      |  |   | 2,522   |  
|Computer and office equipment                  |  |                | 6,526   |      |  |   | 5,735   |  
|Leasehold improvements                         |  |                | 16,008  |      |  |   | 15,961  |  
|                                               |  |                |         |      |  |   |         |  
|                                               |  |                | 29,481  |      |  |   | 28,685  |  
|Less accumulated depreciation and amortization |  |                | (20,650 | )    |  |   | (16,637 | )
|                                               |  |                |         |      |  |   |         |  
|                                               |  | $              | 8,831   |      |  | $ | 12,048  |  
|                                               |  |                |         |      |  |   |         |  

(7) Intangible Asset

Intangible asset consists of the following:

|                                       |  |                |       |      |  |   |       |  
|-------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | -
|                                       |  |               
|                                       |  | December 31,  
|                                       |  |               
|                                       |  | 2001           |       | 2000
|                                       |  |                |       |     
|                                       |  |               
|                                       |  | (In thousands)
|Reacquisition of GLIADEL® Wafer rights |  | $              | 8,412 |      |  | $ | 8,412 |  
|Less accumulated amortization          |  |                | (982  | )    |  |   | (140  | )
|                                       |  |                |       |      |  |   |       |  
|                                       |  | $              | 7,430 |      |  | $ | 8,272 |  
|                                       |  |                |       |      |  |   |       |  

As described in Note 16, the Company
reacquired the rights to market, sell and distribute
GLIADEL® Wafer during October 2000. Upon reacquisition, the
Company determined that this intangible asset had a finite life
and would be amortized over a life of ten years.

F-13



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(8) Indebtedness

Long-term debt consists of the following:

|                                                                                                                                                                                                                                        |  |                |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                                                                                                                                                                                                                        |  |               
|                                                                                                                                                                                                                                        |  | December 31,  
|                                                                                                                                                                                                                                        |  |               
|                                                                                                                                                                                                                                        |  | 2001           |        | 2000
|                                                                                                                                                                                                                                        |  |                |        |     
|                                                                                                                                                                                                                                        |  |               
|                                                                                                                                                                                                                                        |  | (In thousands)
|Note payable to Cardinal Health Sales and
	Marketing Services, interest at LIBOR + 1.75% (4.1% at
	December 31, 2001), payable in monthly installments of $147
	including principal and interest with final payment due
	September 2003 |  | $              | 2,981  |      |  | $ |       |  
|Borrowings under bond financing arrangement,**
	payable in monthly installments of $78, plus interest at
	LIBOR + 0.75% (2.9% at December 31, 2001*), with
	final payment due December 2004                                             |  |                | 2,824  |      |  |   | 3,765  |  
|Borrowings under term loan,** payable in monthly
	installments of $101, plus interest at LIBOR + 0.625%
	(2.8% at December 31, 2001*), with final payment due
	April 2003                                                               |  |                | 1,624  |      |  |   | 2,842  |  
|Note payable to the City of Baltimore, interest
	at 2.0% per annum, payable in monthly installments
	including principal and interest, of approximately $5, with
	final payment due December 2009                                       |  |                | 490    |      |  |   | 545    |  
|Capital leases***, interest imputed per lease
	schedule at rates of 11% to 22% per annum, lease schedules
	expire between March 2002 and November 2003                                                                                  |  |                | 566    |      |  |   | 459    |  
|Other note payable in monthly installments of
	$39, including principal and interest (at 5.5%) with final
	payment due July 2002                                                                                                        |  |                | 267    |      |  |   |       |  
|                                                                                                                                                                                                                                        |  |                |        |      |  |   |        |  
|Total long-term debt                                                                                                                                                                                                                    |  |                | 8,752  |      |  |   | 7,611  |  
|Less current portion of long-term debt                                                                                                                                                                                                  |  |                | (4,615 | )    |  |   | (2,481 | )
|                                                                                                                                                                                                                                        |  |                |        |      |  |   |        |  
|Long-term debt, net of current portion                                                                                                                                                                                                  |  | $              | 4,137  |      |  | $ | 5,130  |  
|                                                                                                                                                                                                                                        |  |                |        |      |  |   |        |  



---



| |   |           
| | - | ----------
| | * | See Note 9



| |    |                                                
| | -- | -----------------------------------------------
| | ** | Secured by equipment and leasehold improvements



|    |            
|--- | -----------
|*** | See Note 10

Aggregate maturities of long-term debt for each
of the five years subsequent to December 31, 2001, and
thereafter are approximately: 2002, $4.6 million; 2003,
$2.8 million; 2004, $1.0 million; 2005,
$0.1 million; 2006, $0.1 million; and thereafter,
$0.2 million. The fair value of long-term debt is
$8.3 million at December 31, 2001.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Note Payable Pursuant to Cardinal Health
	Sales and Marketing Services Agreement

During October 2000, the Company entered into a
three-year agreement (the Cardinal Agreement) with
Cardinal Health Sales and Marketing Services
(Cardinal) to provide Guilford with sales
representatives for GLIADEL® Wafer. In accordance with the
terms of the Cardinal Agreement, during the first year of the
Cardinal Agreement the Company was obligated to pay
$2.0 million of costs and expenses. Amounts incurred and
invoiced in excess of $2.0 million are payable monthly over
the remaining two years of the contract period at an
interest rate based on the three-month LIBOR plus 1.75%, which
was 4.1% at December 31, 2001.

F-14



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                           
| | --------------------------
| | Bond Financing Arrangement

In 1994, the Company entered into an
$8.0 million bond financing arrangement with a commercial
bank. The bond was issued by the Maryland Economic Development
Corporation. At December 31, 2001, 82% of the outstanding
borrowings is guaranteed by the Maryland Industrial Development
Financing Authority.



| |                      
| | ---------------------
| | Restrictive Covenants

The debt agreements referred to above contain
restrictions that require the Company to meet certain financial
covenants. Under the bond financing arrangement, the Company
maintained $0.5 million and $0.6 million at
December 31, 2001 and 2000, respectively, as cash
collateral (approximately 18% of the outstanding principal
balance less $100,000). In accordance with the term loan
agreement, the Company maintained as cash collateral
$1.6 million and $2.8 million at December 31,
2001 and 2000, respectively (equal to 100% of the outstanding
principal balance). Total collateral is included in the
accompanying Consolidated Balance Sheets as
Investments-restricted. Other covenants preclude the
Company from declaring any cash dividends on its common stock
without prior written consent.



| |                         
| | ------------------------
| | Revolving Line of Credit

In 1998, the Company entered into a revolving
line of credit agreement for $5.0 million renewable
annually with a commercial bank. Borrowings under the line of
credit, are intended solely for short-term working capital needs
and incur interest at LIBOR plus 0.55% and are payable on
demand. The bank requires the Company to maintain unrestricted
cash, cash equivalents and investments in the aggregate amount
of $40.0 million. This requirement is met in conjunction
with a similar requirement related to our financial obligations
associated with our research and development facility (see
Note 10). There were no amounts drawn under the line of
credit during 2001 or 2000.

(9) Interest Rate Swap
Agreements

During 1998 and 1999, the Company entered into
interest rate swap agreements with a commercial bank
(counterparty) to reduce the impact of changes in
interest rates on certain financial obligations (see
Notes 8 and 10). These agreements have a total notional
principal amount of approximately $24.4 million at
December 31, 2001. The Company has effectively fixed its
floating rate debt and certain financial lease obligations to an
annual rate of approximately 6%. These interest rate swap
agreements have approximately the same maturity dates as the
financial obligations and expire on various dates through
February 2005. Approximately $20.0 million of the interest
rate swap agreements provide the commercial bank with a call
provision exercisable during 2003. In the event of
non-performance by the counter party, the Company could be
exposed to market risk related to interest rates. When the fair
value of the agreements is positive, the counter party owes the
Company, which creates market risk for the Company. Conversely,
when the fair value of the agreements is negative, the Company
owes the counter party and, therefore, it does not possess
market risk. At December 31, 2001, the fair value of the
interest rate swap agreements was a liability of
$1.1 million. At December 31, 2000, the fair value of
the interest rate swap agreements was an asset of
$0.1 million. Current market pricing models were used to
estimate fair values of these interest rate swap agreements.

(10) Leases

In order to meet our anticipated future
facilities needs, we initiated a project to design, construct,
and lease a research and development facility. To accomplish
this task, in February 1998, we entered into a real estate
development agreement and operating lease with a special purpose
entity (SPE) sponsored by a commercial bank. The SPE is not
consolidated in our consolidated financial statements and we
have accounted for this arrangement as an operating lease in
accordance with SFAS No. 13, Accounting for Leases, as
amended. Had we consolidated this SPE, the pro forma
impact on certain categories of our consolidated

F-15



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

balance sheet at December 31, 2001, and our
net loss for the year ended December 31, 2001, would be as
follows (in thousands):

|                                       |  |             |         |           |  |   |         |  
|-------------------------------------- |  | ----------- | ------- | --------- |  | - | ------- | -
|                                       |  | As Reported |         | Pro Forma
|                                       |  |             |         |          
|Property and equipment, net            |  | $           | 8,831   |           |  | $ | 26,633  |  
|Total assets                           |  |             | 181,841 |           |  |   | 199,643 |  
|Long-term debt, net of current portion |  |             | 4,137   |           |  |   | 22,916  |  
|Total liabilities                      |  |             | 24,212  |           |  |   | 43,231  |  
|Net loss                               |  |             | (60,317 | )         |  |   | (60,726 | )

This facility, which was substantially completed
in June 1999 for a total cost of approximately
$19.5 million, was constructed adjacent to our current
headquarters in Baltimore, Maryland and provides approximately
73,000 square feet of research and development capacity.
The initial lease term is for a period of 84 months
(including the construction period) and expires in February
2005. We have the option to either purchase the facility on the
remaining anniversary dates during the initial lease term, or
sell the facility to a third party at the expiration of the
initial lease term. In the event the facility is sold to a third
party, we will be obligated to pay the lessor any shortfall
between the sales price and 83% of the lessors net
investment in the facility. The lessors net investment in
the facility was approximately $19.0 million at
December 31, 2001 and we anticipate that it will be further
reduced to approximately $18.2 million by the expiration of
the initial lease term in February 2005. We are required to
maintain collateral equal to approximately 83% of the remaining
balance of the lessors net investment in the facility. We
had cash collateral of $14.3 million as of
December 31, 2001 and 2000, which is included in the
accompanying consolidated balance sheets as
Investments  restricted. In addition to
this cash collateral requirement, we are subject to various
other affirmative and negative covenants, the most restrictive
of which requires us to maintain unrestricted cash, cash
equivalents, and investments in the aggregate equal to
$40 million.

Pursuant to the terms of the operating lease
agreement, we are obligated to make monthly lease payments equal
to the interest, based on monthly LIBOR plus 0.625%, calculated
on the lessors net investment in the facility plus
principal of $20,000. As a result of the interest rate swap
agreements entered into during 1998 and 1999 with a commercial
bank in the notional amount of $20.0 million, we
effectively fixed the interest rates on these variable interest
rate-based lease payments, at approximately 6%. These interest
rate swap agreements provide the commercial bank with a call
provision exercisable during 2003. Assuming the commercial bank
exercises its call provision, we would be exposed to market risk
related to the underlying interest rates of the operating lease.
Future minimum lease payments under this lease are included in
the table below. We describe these interest rate swap
transactions with the commercial bank in Note 9.

In August 2001, the Company entered into a new
master lease agreement to provide up to $5.0 million for
computer and equipment financing. The Companys previous
master lease agreement, entered into in March 1998, expired on
March 31, 2001. The Companys ability to draw on this
master lease agreement expires on June 30, 2002. The term
of each operating lease varies from 24 to 48 months based
upon the type of equipment being leased. As of December 31,
2001, the Company had leased approximately $0.4 million in
equipment under this master lease agreement.

The Company entered into a master lease agreement
related to the land and building which it occupies as its
corporate headquarters. The term of the lease is for
approximately ten years and expires June 2005 with options to
renew for two five-year periods. The Company has the option to
purchase the building at the end of the initial lease term for
its then current fair market value (excluding improvements).

F-16



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys future minimum lease payments
under these non-cancelable operating leases (with initial or
remaining lease terms in excess of one year) and future minimum
capital lease payments for years subsequent to December 31,
2001 are as follows (in thousands):

|                                                      |                                                            |         |      |           |  |   |       |        | 
|----------------------------------------------------- | ---------------------------------------------------------- | ------- | ---- | --------- |  | - | ----- | ------ | 
|                                                      |                                                            | Capital |      | Operating
|                                                      |                                                            | Leases  |      | Leases   
|                                                      |                                                            |         |      |          
|2002                                                  |                                                            | $       | 520  |           |  | $ | 4,303 |       
|2003                                                  |                                                            |         | 120  |           |  |   | 3,659 |       
|2004                                                  |                                                            |         |     |           |  |   | 2,645 |       
|2005                                                  |                                                            |         |     |           |  |   | 593   |       
|                                                      |                                                            |         |      |           |  |   |       |       
|                                                      | Total minimum lease payments                               |         |      | 640       |  |   | $     | 11,200 | 
|                                                      |                                                            |         |      |           |  |   |       |       
|Less amounts representing interest                    |                                                            |         | (74  | )         |  |   |       |       
|                                                      |                                                            |         |      |           |  |   |       |       
|                                                      | Present value of net minimum lease payments                |         |      | 566       |  |   |       |        | 
|Less current maturities of capital lease
	obligations |                                                            |         | (454 | )         |  |   |       |       
|                                                      |                                                            |         |      |           |  |   |       |       
|                                                      | Capital lease obligations, excluding current
	installments |         | $    | 112       |  |   |       |        | 
|                                                      |                                                            |         |      |           |  |   |       |       

Rent expense for operating leases was
approximately $4.4 million, $4.8 million, and
$4.2 million for the years ended December 31, 2001,
2000 and 1999, respectively.

The amount of computer equipment and related
accumulated depreciation recorded under capital leases was
$1.1 million and $0.5 million, respectively at
December 31, 2001, and $0.5 million and
$0.1 million, respectively at December 31, 2000.

(11) Income Taxes

As of December 31, 2001, we had net
operating loss (NOL) carryforwards available for
federal income tax purposes of approximately $180 million,
which expire at various dates between 2010 and 2021. NOL
carryforwards are subject to ownership change limitations and
may also be subject to various other limitations on the amounts
to be utilized. As of December 31, 2001, we had tax credit
carryforwards of approximately $9 million expiring between
2010 and 2021.

Actual income tax (benefit) expense differs from
the expected income tax (benefit) expense computed at the
effective federal rate as follows:

|                                                   |  |                |         |      |  |      |         |   |  |   |        |  
|-------------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                   |  | 2001           |         | 2000 |  | 1999
|                                                   |  |                |         |      |  |     
|                                                   |  |               
|                                                   |  | (In thousands)
|Computed expected tax benefit at
	statutory rate |  | $              | (20,508 | )    |  | $    | (16,023 | ) |  | $ | (9,135 | )
|State income tax, net of federal benefit           |  |                | (4,174  | )    |  |      | (3,303  | ) |  |   | (1,867 | )
|General business credit generated                  |  |                | (1,874  | )    |  |      | (1,827  | ) |  |   | (1,631 | )
|Other, net                                         |  |                | 223     |      |  |      | (19     | ) |  |   | 62     |  
|Increase in valuation allowance                    |  |                | 26,333  |      |  |      | 21,172  |   |  |   | 12,571 |  
|                                                   |  |                |         |      |  |      |         |   |  |   |        |  
|                                                   |  | $              |        |      |  | $    |        |   |  | $ |       |  
|                                                   |  |                |         |      |  |      |         |   |  |   |        |  

Realization of deferred tax assets related to our
NOL carryforwards and other items is dependent on future
earnings, which are uncertain. Accordingly, a valuation
allowance has been established equal to net deferred tax assets
which may not be realized in the future, resulting in net
deferred tax assets of approximately $138,000 at
December 31, 2001. The change in the valuation allowance
was an increase of approximately $26.3 million in 2001,
$21.2 million in 2000 and $12.6 million in 1999.

F-17



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Significant components of our deferred tax assets
and liabilities as of December 31, 2001 and 2000 are shown
below.

|                          |                                                        |                         |        |         |     |  |        |         |     | 
|------------------------- | ------------------------------------------------------ | ----------------------- | ------ | ------- | --- |  | ------ | ------- | --- | 
|                          |                                                        |                        
|                          |                                                        | December 31,           
|                          |                                                        |                        
|                          |                                                        | 2001                    |        | 2000   
|                          |                                                        |                         |        |        
|                          |                                                        |                        
|                          |                                                        | (in thousands)         
|Deferred tax assets:      |                                                        |                         |        |         |     |  |        |        
|                          | Net operating loss carryforwards                       |                         | $      | 73,613  |     |  | $      | 50,786  |    
|                          | Research and experimentation credits                   |                         |        | 9,147   |     |  |        | 7,273   |    
|                          | Compensatory stock grants                              |                         |        | 2,380   |     |  |        | 2,208   |    
|                          | Depreciation                                           |                         |        | 1,241   |     |  |        | 235     |    
|                          | Alternative minimum tax credit carryforwards           |                         |        | 138     |     |  |        | 138     |    
|                          | Accrued expenses                                       |                         |        | 1,428   |     |  |        | 1,218   |    
|                          | Contribution carryover and capitalized start-up
	costs |                         |        | 549     |     |  |        | 185     |    
|                          | Other                                                  |                         |        | 340     |     |  |        | 100     |    
|                          |                                                        |                         |        |         |     |  |        |        
|                          |                                                        |                         | 88,836 |         |     |  | 62,143 |        
|Deferred tax liabilities: |                                                        |                         |        |         |     |  |        |        
|                          | Prepaid expenses and other                             |                         |        | (1,113  | )   |  |        | (753    | )  
|                          |                                                        |                         |        |         |     |  |        |        
|                          | Net deferred tax assets                                |                         |        | 87,723  |     |  |        | 61,390  |    
|                          | Valuation allowance                                    |                         |        | (87,585 | )   |  |        | (61,252 | )  
|                          |                                                        |                         |        |         |     |  |        |        
|                          |                                                        | Net deferred tax assets |        | $       | 138 |  |        | $       | 138 | 
|                          |                                                        |                         |        |         |     |  |        |        

(12) Capital

In June 2001, the Company sold 3,000,000 newly
issued shares of its common stock to certain institutional
investors in a PIPE (Private Investment in Public Equity),
resulting in net proceeds to the Company of approximately
$56.2 million.

In January 2001, the Company sold
2,506,000 shares of its common stock to certain
institutional investors under a shelf registration, resulting in
net proceeds to the Company of approximately $42.6 million.

In December 2000, the Company sold
150,000 shares of its common stock to institutional
investors, as part of the shelf registration filed in November
2000, providing net proceeds of approximately $3.0 million.

In October 2000, the Company issued
300,000 shares of its common stock, valued at approximately
$8.0 million to Aventis in consideration for the
reacquisition of the rights to market, sell and distribute
GLIADEL® Wafer (see Note 16).

The Company repurchased 18,867, 8,285, and
224,150 shares of its common stock at an aggregate cost of
approximately $0.4 million, $0.2 million, and
$2.2 million during the years ended December 31, 2001,
2000 and 1999, respectively. For the shares of common stock
repurchased during 1999, 212,900 shares were purchased
pursuant to the stock repurchase program approved by the
Companys Board of Directors in September 1998. In August
1999, this stock repurchase program was terminated.

Warrants granted to Amgen, Inc. in 1997, to
purchase up to 700,000 shares of the Companys common
stock at an exercise price of $35.15 per share remain
outstanding at December 31, 2001, and expire during 2002.

F-18



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company is authorized to issue up to
4,700,000 shares of preferred stock in one or more
different series with terms fixed by the Board of Directors.
Stockholder approval is not required to issue this preferred
stock. There were no shares of this preferred stock outstanding
at December 31, 2001 or 2000.

(13) Stockholder Rights Plan

In September 1995, the Board of Directors adopted
a Stockholder Rights Plan in which preferred stock purchase
rights (Rights) were granted at the rate of one
Right for each share of common stock. All Rights expire on
October 10, 2005. At December 31, 2001, the Rights
were neither exercisable nor traded separately from the
Companys common stock, and become exercisable only if a
person or group becomes the beneficial owner of 20% or more of
the Companys common stock or announces a tender or
exchange offer that would result in its ownership of 20% or more
of the Companys common stock without the approval of the
Board of Directors. Each holder of a Right, other than the
acquiring person, would be entitled to purchase $120 worth of
common stock of the Company for each Right at the exercise price
of $60 per Right, which would effectively enable such
Rights holders to purchase common stock at one-half of the then
current price.

If the Company is acquired in a merger, or if 50%
or more of the Companys assets are sold in one or more
related transactions, then each right would entitle the holder
thereof to purchase $120 worth of common stock of the acquiring
company at the exercise price of $60 per Right. At any time
after a person or group of persons becomes the beneficial owner
of 20% or more of the common stock, the Board of Directors, on
behalf of all stockholders, may exchange one share of common
stock for each Right, other than Rights held by the acquiring
person.

(14) Share Option and Restricted Share
Plans



| |                                                  
| | -------------------------------------------------
| | Employee Share Option and Restricted Share
	Plans

The Company adopted Employee Share Option and
Restricted Share Plans in 1993 (the 1993 Plan) and
1998 (the 1998 Plan and together with the 1993 Plan,
the Plans). The Plans were established to provide
eligible individuals with an opportunity to acquire or increase
an equity interest in the Company and to encourage such
individuals to continue in the employment of and contribute to
the success of the Company. Eligible individuals include any
full-time employee of the Company and other individuals whose
participation in the Plans is determined by the Board of
Directors to be in the Companys best interest. The 1993
Plan allows the Company to issue incentive stock options to
eligible individuals while the 1998 Plan does not. Share options
are granted under both Plans at the fair market value of the
stock on the day immediately preceding the date of grant or date
of initial employment, if later. The Plans permit employees to
pay for shares purchased pursuant to the exercise of options
through the tender to the Company of shares of the
Companys common stock that have been held by the employee
for at least six months. Share options are exercisable
under both Plans for a period not to exceed 10 years from
the date of grant. During 2001, the Company revised the vesting
schedule for share option grants under both Plans. Share option
grants to new hires and share option grants that are part of the
Companys bonus program under both Plans now vest with
respect to 25% of the award on the first anniversary date of the
grant date and the remaining 75% of the award vests in equal
installments over the next 36 months. Prior to this change
in the vesting schedule, share option grants to new hires under
both Plans vested at 50% of the award on the second anniversary
date of the grant date and 25% on each of the third and fourth
anniversary dates. Share option grants that were part of the
Companys bonus program vested at 25% per year.
Because the market value of the Companys common stock on
the date of the change in the vesting schedule was in excess of
the exercise price of the share option grants affected, no
compensation expense was recorded.

The Company has granted, pursuant to the Plans,
restricted shares to some of its executive officers in
connection with the commencement of their employment with the
Company. Shares awarded under the restricted share provisions of
the Plans are valued at the fair market value of the stock on
the day immediately

F-19



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

preceding the date of award (or date of grant, if
later) and require a vesting period determined by the Board of
Directors. Restricted share awards generally vest with respect
to 25% of the award on each of the first four anniversary dates
of the employees commencement of employment with the
Company. To the extent that the award does not provide the
executive officer to pay for such stock, unearned compensation
is recorded at the time an award of restricted stock is made to
the executive officer. Unearned compensation is calculated as
the product of multiplying the number of shares awarded by the
fair market value of the Companys common stock. Unearned
compensation is charged to expense over the vesting period of
the restricted shares.

Should an individual leave the employment of the
Company for any reason (other than by reason of death or
permanent disability) the award recipient would forfeit their
ownership rights for all share options and restricted shares not
otherwise fully vested. All unvested options and restricted
shares held by the Companys employees vest in full upon
certain events constituting a change in control of the Company.

At December 31, 2001, the maximum share
options issuable under the Plans were 6,635,000, of which up to
400,000 shares may be issued under the restricted share
provisions. During the years ended December 31, 2001, 2000
and 1999, the Company granted 2,098,354, 1,115,277 and
722,719 share options and restricted shares under the
Plans, respectively. At December 31, 2001, there were
4,761,305 share options and 200,414 restricted shares
outstanding under the Plans, of which 2,001,910 were exercisable
as of December 31, 2001. At December 31, 2001, there
were 676,270 share options or restricted shares (subject to
the above limitations) available for grant under the Plans.



| |                    
| | -------------------
| | The Directors Plan

The Directors Stock Option Plan (the
Directors Plan) was established to provide
non-employee directors an opportunity to acquire or increase an
equity interest in the Company. Under the Directors Plan,
300,000 shares of common stock are reserved for issuance at
an exercise price not less than fair value of the Companys
common stock on the day immediately preceding the date of grant.
Such share options vest 50% on the first anniversary of the date
of grant and 100% on the second anniversary. Under the
Directors Plan 15,000, 52,500 and 22,500 share
options were granted during the years ended December 31,
2001, 2000 and 1999, respectively. As of December 31, 2001,
262,500 share options were outstanding under the
Directors Plan, of which 221,250 are exercisable as of
December 31, 2001. At December 31, 2001, there were
37,500 share options available for grant under the
Directors Plan.

If a non-employee director is not permitted to
receive additional stock option grants under the terms of the
Directors Plan, he or she may instead receive annual
grants of non-qualified stock options to purchase
7,500 shares under the terms of the 1998 Plan. Such options
are to be for a term of 10 years and are exercisable 50% at
the end of year one and 100% at the end of year two. Under these
circumstances, non-employee directors were granted 37,500,
22,500 and 15,000 share options during the years ended
December 31, 2001, 2000, and 1999, respectively, with an
exercise price equal to fair value at date of grant. At
December 31, 2001, 37,500 of these share options were
exercisable.



| |                    
| | -------------------
| | Stock Purchase Plan

In September 2001, the Company established the
2001 Stock Purchase Plan (the 2001 Plan) to
encourage and assist employees in acquiring an equity interest
in the Company. The 2001 Plan is authorized to issue up to
300,000 shares of common stock. Eligible employees may
elect to have up to 15% of their annual gross earnings withheld
to purchase common stock at 85% of the fair market value of the
common stock on the first trading day or the last trading day of
the offering period, whichever is lower. The 2001 Plan was not
subject to shareholder approval; and therefore, does not
currently comply with the requirements of Sections 421 and
423 of the Internal Revenue Code. The Company has not issued any
common shares to fulfill purchases made by employees under the
2001 Plan as of December 31, 2001.

F-20



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |            
| | -----------
| | Consultants

Prior to 1997, the Company granted share options
to each of two consultants to purchase up to 225,000 shares
of the Companys common stock, valid for 10 years from
issuance, with varying exercise prices. Vesting periods are
based on either the passage of time or upon the achievement of
certain milestones. Of these share options, 212,800 were
exercisable as of December 31, 2001. The Company recognized
$0.1 million, $0.3 million and $0.4 million in
non-cash compensation expense, in accordance with SFAS 123,
relating to the value of such share options (as determined using
the Black-Scholes pricing model) for the years ended
December 31, 2001, 2000 and 1999, respectively, and as of
December 31, 2001, compensation expense relating to such
agreements has been fully recognized.

The following is a summary of the Companys
share option activity and balances as of and for the years ended
December 31, 2001, 2000 and 1999:

|                           |  |         |           |           |  |   |       | 
|-------------------------- |  | ------- | --------- | --------- |  | - | ----- | 
|                           |  |         |           | Weighted-
|                           |  |         |           | Average  
|                           |  | Share   |           | Exercise 
|                           |  | Options |           | Price    
|                           |  |         |           |          
|Balance, January 1, 1999   |  |         | 2,912,230 |           |  | $ | 15.94 | 
|Granted                    |  |         | 752,719   |           |  |   | 12.89 | 
|Exercised                  |  |         | (61,064   | )         |  |   | 5.81  | 
|Canceled                   |  |         | (378,231  | )         |  |   | 18.84 | 
|                           |  |         |           |           |  |   |       | 
|Balance, December 31, 1999 |  |         | 3,225,654 |           |  |   | 15.08 | 
|Granted                    |  |         | 1,173,277 |           |  |   | 27.17 | 
|Exercised                  |  |         | (525,643  | )         |  |   | 12.47 | 
|Canceled                   |  |         | (222,192  | )         |  |   | 20.98 | 
|                           |  |         |           |           |  |   |       | 
|Balance, December 31, 2000 |  |         | 3,651,096 |           |  |   | 18.98 | 
|Granted                    |  |         | 2,113,354 |           |  |   | 17.78 | 
|Exercised                  |  |         | (146,723  | )         |  |   | 11.77 | 
|Canceled                   |  |         | (163,122  | )         |  |   | 20.61 | 
|                           |  |         |           |           |  |   |       | 
|Balance, December 31, 2001 |  |         | 5,454,605 |           |  |   | 18.66 | 
|                           |  |         |           |           |  |   |       | 

Share options outstanding and exercisable by
price range are as follows:

|                         |  |                     |           |                  |  |                     |     |              |  |           |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ---------------- |  | ------------------- | --- | ------------ |  | --------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                  |  |                    
|                         |  | Options Outstanding |           |                  |  | Options Exercisable
|                         |  |                     |           |                  |  |                    
|                         |  |                     |           | Weighted-        |  | Weighted-           |     |              |  | Weighted-
|                         |  | As of               |           | Average          |  | Average             |     | As of        |  | Average  
|                         |  | December 31,        |           | Remaining        |  | Exercise            |     | December 31, |  | Exercise 
|Range of Exercise Prices |  | 2001                |           | Contractual Life |  | Price               |     | 2001         |  | Price    
|                         |  |                     |           |                  |  |                     |     |              |  |          
|$ 0.01 - $10.00          |  |                     | 393,192   |                  |  |                     | 7.0 |              |  | $         | 7.55  |  |  |  | 173,842   |  |  | $ | 5.77  | 
|10.01 -  20.00           |  |                     | 3,897,264 |                  |  |                     | 7.0 |              |  |           | 17.19 |  |  |  | 1,935,268 |  |  |   | 16.16 | 
|20.01 -  30.00           |  |                     | 1,153,899 |                  |  |                     | 7.6 |              |  |           | 27.30 |  |  |  | 536,148   |  |  |   | 27.60 | 
|30.01 -  40.00           |  |                     | 10,250    |                  |  |                     | 6.4 |              |  |           | 32.16 |  |  |  | 8,702     |  |  |   | 31.42 | 
|                         |  |                     |           |                  |  |                     |     |              |  |           |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 5,454,605 |                  |  |                     | 7.1 |              |  |           | 18.66 |  |  |  | 2,653,960 |  |  |   | 17.84 | 
|                         |  |                     |           |                  |  |                     |     |              |  |           |       |  |  |  |           |  |  |   |       | 

The foregoing table includes options to purchase
218,000 shares that were outstanding and exercisable as of
December 31, 2001, granted outside of the Companys
stock option plans.

F-21



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                             
| | ----------------------------
| | Pro Forma Option Information

Using the Black-Scholes option pricing model, the
per share weighted-average fair value of all share options
granted during 2001, 2000 and 1999 was $10.00, $8.61 and $7.76,
respectively, on the date of grant with the following
weighted-average assumptions.

|                        |  |      |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  | 2001 |      | 2000 |  | 1999
|                        |  |      |      |      |  |     
|Expected dividend yield |  |      | 0    | %    |  |      | 0    | % |  |  | 0    | %
|Risk-free interest rate |  |      | 3.2  | %    |  |      | 5.1  | % |  |  | 5.9  | %
|Volatility              |  |      | 96.1 | %    |  |      | 66.7 | % |  |  | 57.3 | %
|Expected life in years  |  |      | 4    |      |  |      | 4    |   |  |  | 4    |  

The Company applies APB 25 in accounting for
share options granted to employees and, accordingly, no
compensation expense has been recognized related to such share
options to the extent that such share options were granted at an
exercise price that equaled the fair market value at the grant
date. Had the Company determined compensation cost based on the
fair value at the grant date for its share options under
SFAS 123 (using the Black-Scholes pricing model), the
Companys net loss would have been increased to the pro
forma amounts indicated below:

|                                 |  |             |  |                                       |         |      |  |      |         |   |  |   |         |  
|-------------------------------- |  | ----------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                 |  |             |  |                                      
|                                 |  |             |  | Years Ended December 31,             
|                                 |  |             |  |                                      
|                                 |  |             |  | 2001                                  |         | 2000 |  | 1999
|                                 |  |             |  |                                       |         |      |  |     
|                                 |  |             |  |                                      
|                                 |  |             |  | (In thousands, except per share data)
|Net loss                         |  | As reported |  | $                                     | (60,317 | )    |  | $    | (47,127 | ) |  | $ | (26,868 | )
|                                 |  | Pro forma   |  | $                                     | (76,269 | )    |  | $    | (53,892 | ) |  | $ | (32,903 | )
|Basic and diluted loss per share |  | As reported |  | $                                     | (2.14   | )    |  | $    | (2.00   | ) |  | $ | (1.31   | )
|                                 |  | Pro forma   |  | $                                     | (2.70   | )    |  | $    | (2.29   | ) |  | $ | (1.61   | )

(15) 401(k) Profit Sharing Plan

The Companys 401(k) Profit Sharing Plan
(the 401(k) Plan) is available to all employees
meeting certain eligibility criteria and permits participants to
contribute up to certain limits as established by the Internal
Revenue Code. The Company may make contributions equal to a
percentage of a participants contribution or may
contribute a discretionary amount to the 401 (k) Plan.

The Company currently elects to match employee
contributions with the Companys common stock equal to 50%
of the first 6% of an employees voluntary contribution.
Such amounts vest 25% per year, based on a
participants years of service with the Company. The
Company has made contributions of approximately
$0.5 million, $0.4 million and $0.3 million for
the years ended December 31, 2001, 2000 and 1999,
respectively.

(16) Significant Contracts and Licensing
Agreements



| |           
| | ----------
| | Amgen Inc.

In August 1997, the Company entered into an
agreement with Amgen (the Agreement) relating to the
research, development and commercialization of the
Companys FKBP neuroimmunophilin ligand technology for all
human therapeutic and diagnostic applications. Pursuant to the
terms of the Agreement, the Company received an aggregate of
$35 million, consisting of a one-time non-refundable
payment of $15 million upon the signing of the Agreement
and $20 million for 640,095 shares of the
Companys common stock and warrants, exercisable for five
years, to purchase up to an additional 700,000 shares of
the Companys common stock at $35.15 per share.

F-22



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under the terms of the Agreement, Amgen provided
the Company $13.5 million, in the aggregate, over three
years to support research activities relating to the FKBP
neuroimmunophilin ligand technology. The Company recognized
$3.4 million, and $4.5 million in research support for
the years ended December 31, 2000 and 1999, respectively.

Commencing with the adoption of SAB 101 in
2000, the one-time non-refundable payment of $15.0 million
was required to be deferred and amortized over the continuing
involvement period, pursuant to the three years of research
funding. As a result, the Company recorded a cumulative effect
of an accounting change of approximately $3.7 million as of
January 1, 2000 for the unamortized portion. Since the
continuing involvement ended during 2000, this remaining
deferred amount was recognized as contract revenue during 2000.

Additionally, the Agreement provided for certain
milestone payments to the Company, in up to ten different
specified clinical indications, in the event Amgen achieved
certain development milestones. During the year ended
December 31, 1999, the Company received $5.0 million
in milestone payments.

During September 2001, Amgen elected to terminate
this Agreement and return to the Company all rights to the
technology it had licensed from the Company and certain clinical
trial supplies, in exchange for a payment from us of
approximately $0.2 million.



| |        
| | -------
| | Aventis

In June 1996, the Company entered into a
Marketing, Sales and Distribution Agreement (together with
related agreements, the Aventis Agreements) with
Aventis. Under the Aventis Agreements, Aventis had worldwide
marketing rights (except in Scandinavia and Japan) for
GLIADEL® Wafer. The Company received $15.0 million
upon the signing of these agreements ($7.5 million as an
equity investment and $7.5 million as a one-time
non-refundable rights payment). During September 1996, the
Company obtained clearance from the FDA to market GLIADEL®
Wafer for recurrent glioblastoma multiforme and, accordingly,
received a $20.0 million non-refundable milestone payment
from Aventis. During 2000 and 1999, the Company received
$2.0 million and $4.5 million, respectively, in
milestone payments for obtaining certain international
regulatory approvals. Through December 31, 2000, the
Company manufactured and supplied GLIADEL ® Wafer to
Aventis and received revenues from net product sales and
royalties based on sales.

Commencing with the adoption of SAB 101 in
2000, the non-refundable upfront payment of $7.5 million
was required to be deferred and amortized over the continuing
involvement period, pursuant to the manufacturing agreement. As
a result, the Company recorded a cumulative effect of an
accounting change of approximately $4.9 million as of
January 1, 2000 for the unamortized portion. As a result of
the termination of the Aventis Agreements as described below,
this remaining deferred amount was recognized as contract
revenue during 2000.

On October 23, 2000, the Company entered
into a Rights Reversion Agreement (the Rights Reversion
Agreement) with Aventis, pursuant to which the Company
reacquired the rights to market, sell and distribute
GLIADEL® Wafer. In consideration for the reacquisition of
these rights, the Company issued to Aventis 300,000 shares
of its common stock, valued at approximately $8.0 million,
assumed the obligations for product returns subsequent to
December 31, 2000, and granted Aventis certain registration
rights with respect to such stock. The Company recorded a
liability for estimated product returns of approximately
$0.5 million at December 31, 2000. In accordance with
the terms of the Rights Reversion Agreement, effective
January 1, 2001, the Company has been responsible for all
aspects of the worldwide marketing, sale and distribution of
GLIADEL® Wafer (except in Scandinavia where GLIADEL®
Wafer is distributed by Orion Corporation Pharma).

F-23



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                              
| | -----------------------------
| | ProQuest Pharmaceuticals Inc.

In March 2000, the Company acquired from ProQuest
Pharmaceuticals Inc. (ProQuest) an exclusive
worldwide license to a prodrug of propofol, a widely used
anesthetic. Pursuant to this transaction, the Company paid
approximately $0.7 million for 133,333 shares of
common stock of ProQuest and approximately $0.3 million for
in-process research and development that was expensed. Under the
terms of the agreement, the Company is obligated to make
payments based on clinical development milestones and royalties
on any product sales. During the year ended December 31,
2001, the Company made a milestone payment to ProQuest in the
amount of $0.3 million. In exchange for that payment, the
Company received an additional 30,303 shares of common
stock of ProQuest. ProQuest is a privately held pharmaceutical
company based in Lawrence, Kansas. The investment in ProQuest is
accounted for under the cost method and is included in the
accompanying consolidated balance sheets as Other
assets.

(17) Related Party Transactions

In connection with the sale of 34,129 shares
of the Companys common stock in February 1994, to an
officer of the Company, he delivered to the Company a
full-recourse note bearing an interest of 5.34% annually in the
amount of $60,000. That note, as amended, was due and payable
during February 2002, at which time we extended the payment date
of the note to February 2004. At the time that the payment date
was extended, principal and interest in the note was
approximately $85,000.

(18) Earnings (Loss) Per
Share

The following table presents the computations of
basic and diluted EPS:

|                                                           |                                                            |                                       |         |       |   |      |         |       |   |   |         |       |  
|---------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------------- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                           |                                                            | 2001                                  |         | 2000  |   | 1999
|                                                           |                                                            |                                       |         |       |   |     
|                                                           |                                                            |                                      
|                                                           |                                                            | (in thousands, except per share data)
|Loss before the cumulative effect of an
	accounting change |                                                            | $                                     | (60,317 | )     |   | $    | (38,502 | )     |   | $ | (26,868 | )    
|Net loss                                                   |                                                            | $                                     | (60,317 | )     |   | $    | (47,127 | )     |   | $ | (26,868 | )    
|Weighted-average shares outstanding                        |                                                            |                                       | 28,249  |       |   |      | 23,517  |       |   |   | 20,475  |      
|Total weighted-average diluted shares(1)                   |                                                            |                                       | 28,249  |       |   |      | 23,517  |       |   |   | 20,475  |      
|                                                          
|Basic and diluted EPS:                                     |                                                            |                                       |         |       |   |      |         |       |   |   |         |      
|                                                           | Loss before the cumulative effect of an
	accounting change |                                       | $       | (2.14 | ) |      | $       | (1.64 | ) |   | $       | (1.31 | )
|                                                           | Net loss applicable to common stockholders                 |                                       | $       | (2.14 | ) |      | $       | (2.00 | ) |   | $       | (1.31 | )



---



|    |                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At December 31, 2001, 2000 and 1999, there
	were approximately 332,000, 889,000 and 246,000 instruments,
	respectively, that were considered antidilutive and accordingly
	excluded in the above calculation.

(19) Commitments and
Contingencies

The Company has entered into various agreements
in order to advance its research and development activities.
These agreements may take the form of research and development
agreements, consulting agreements and/or licensing agreements.
As of December 31, 2001, the Company had committed to fund
approximately $5.6 million pursuant to these agreements.
Approximately 74% of this amount will be incurred during 2002.

The Company has entered into various licensing
agreements for certain of its technologies, which commit the
Company to minimum annual research spending on certain mutually
agreed-upon research and development projects. In the aggregate,
these minimum annual research expenditures are approximately
$1.0 million. These minimum annual research expenditures
typically continue until marketing approval of a

F-24



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

product incorporating the licensed technology. In
addition, certain of these licensing agreements require the
Company to make payments upon achieving specific milestones as
well as requiring the payment of royalties on future net sales
of licensed products, if any, as well as a percentage of all
payments received by the Company from sublicensees, if any.

The Company from time to time is involved in
routine legal matters and contractual disputes incidental to its
normal operations. In managements opinion, there exists no
matters that are expected to have a material adverse effect on
the Companys consolidated financial condition, results of
operations or liquidity.

(20) Quarterly Financial Data
(unaudited)

Revenues for each the first three quarters of
2000 were restated to give effect for the implementation of a
change in accounting pursuant to the adoption of SAB 101 in
the fourth quarter, retroactively to January 1, 2000. The
impact of the change resulted in an increase in contract revenue
of $1.4 million in each of the quarters ended
March 31, 2000, June 30, 2000 and September 30,
2000. For the quarter ended December 31, 2000, the impact
of the change resulted in an increase in contract revenue of
$4.4 million.

|                                      |  |           |         |          |  |               |         |              |  |   |         |   |  |   |         |  
|------------------------------------- |  | --------- | ------- | -------- |  | ------------- | ------- | ------------ |  | - | ------- | - |  | - | ------- | -
|2001 Quarter Ended                    |  |           |         |          |  |               |         |             
|(in thousands, except per share data) |  | March 31, |         | June 30, |  | September 30, |         | December 31,
|                                      |  |           |         |          |  |               |         |             
|Revenues                              |  | $         | 4,748   |          |  | $             | 3,109   |              |  | $ | 5,925   |   |  | $ | 6,752   |  
|Gross margin(1)                       |  |           | 4,082   |          |  |               | 2,784   |              |  |   | 5,220   |   |  |   | 5,438   |  
|Net loss                              |  |           | (14,568 | )        |  |               | (18,180 | )            |  |   | (13,762 | ) |  |   | (13,807 | )
|                                     
|Net loss per common share             |  | $         | (0.55   | )        |  | $             | (0.67   | )            |  | $ | (0.46   | ) |  | $ | (0.46   | )

|                                                                            |  |             |        |             |  |               |         |              |  |             |         |             |  |             |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ----------- | ------ | ----------- |  | ------------- | ------- | ------------ |  | ----------- | ------- | ----------- |  | ----------- | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                            |  |             |        |             |  |               |         |             
|                                                                            |  | March 31,   |        | June 30,    |  | September 30, |         | December 31,
|2000 Quarter Ended                                                          |  |             |        |             |  |               |         |             
|(in thousands, except per share data)                                       |  | As Reported |        | As Restated |  | As Reported   |         | As Restated  |  | As Reported |         | As Restated |  | As Reported
|                                                                            |  |             |        |             |  |               |         |              |  |             |         |             |  |            
|Revenues                                                                    |  | $           | 3,267  |             |  | $             | 4,704   |              |  | $           | 2,291   |             |  | $           | 3,728   |   |  | $ | 2,978   |   |  | $ | 4,416   |   |  | $ | 5,208   |  
|Gross margin(1), (2)                                                        |  |             | 240    |             |  |               | 240     |              |  |             | 310     |             |  |             | 310     |   |  |   | (310    | ) |  |   | (310    | ) |  |   | (106    | )
|Loss before the cumulative effect of an
	accounting change                  |  |             | (7,919 | )           |  |               | (6,482  | )            |  |             | (11,761 | )           |  |             | (10,324 | ) |  |   | (11,559 | ) |  |   | (10,121 | ) |  |   | (11,575 | )
|Net loss                                                                    |  |             | (7,919 | )           |  |               | (15,107 | )            |  |             | (11,761 | )           |  |             | (10,324 | ) |  |   | (11,559 | ) |  |   | (10,121 | ) |  |   | (11,575 | )
|                                                                           
|Loss per common share before the cumulative
	effect of an accounting change |  | $           | (0.34  | )           |  | $             | (0.28   | )            |  | $           | (0.50   | )           |  | $           | (0.44   | ) |  | $ | (0.49   | ) |  | $ | (0.43   | ) |  | $ | (0.49   | )
|Net loss per common share                                                   |  |             | (0.34  | )           |  |               | (0.65   | )            |  |             | (0.50   | )           |  |             | (0.44   | ) |  |   | (0.49   | ) |  |   | (0.43   | ) |  |   | (0.49   | )



---



|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Gross margin is calculated as net product sales
	less cost of sales.                                                                                                                            
|   
|(2) | During the third and fourth quarters of 2000,
	production volume was less than planned, as a result
	manufacturing overhead not capitalized as inventory was expensed
	as part of cost of sales.

F-25



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

The Board of Directors and Stockholders

Guilford Pharmaceuticals Inc.:


Under date of February 8, 2002, we reported
on the consolidated balance sheets of Guilford Pharmaceuticals
Inc. and subsidiaries (the Company) as of
December 31, 2001 and 2000, and the related consolidated
statements of operations, changes in stockholders equity,
and cash flows for each of the years in the three-year period
ended December 31, 2001, which are included in the
Form 10-K. Our report refers to a change in the
Companys revenue recognition policy for non-refundable
upfront fees in 2000. In connection with our audits of the
aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule.
This financial statement schedule is the responsibility of the
Companys management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.

In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

/s/ KPMG LLP

Philadelphia, Pennsylvania

February 8, 2002


F-26



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

SCHEDULE II

(in thousands)


|                                       |  |          |     |                  |  |                  |   |            |  |            |   |  |  |   |   |  |  |   |     | 
|-------------------------------------- |  | -------- | --- | ---------------- |  | ---------------- | - | ---------- |  | ---------- | - |  |  | - | - |  |  | - | --- | 
|                                       |  |          |     |                  |  |                  |   |           
|                                       |  |          |     | Additions        |  |                  |   |           
|                                       |  |          |     |                  |  |                  |   |           
|Description                            |  | Balance  |     | Charged to Costs |  | Charged to Other |   |            |  | Balance   
|(Balance sheet caption)                |  | @ 1/1/99 |     | and Expenses     |  | Accounts         |   | Deductions |  | @ 12/31/99
|                                       |  |          |     |                  |  |                  |   |            |  |           
|Bad debt reserve (Accounts receivable) |  | $        |    |                  |  | $                |  |            |  | $          |  |  |  | $ |  |  |  | $ |    | 
|Inventory reserve (Inventory)          |  |          | 257 |                  |  |                  |   |            |  |            |   |  |  |   |   |  |  |   | 257 | 

|                                                                         |  |            |     |                  |  |                  |     |            |  |            |   |  |  |   |      |   |  |   |     | 
|------------------------------------------------------------------------ |  | ---------- | --- | ---------------- |  | ---------------- | --- | ---------- |  | ---------- | - |  |  | - | ---- | - |  | - | --- | 
|                                                                         |  |            |     |                  |  |                  |     |           
|                                                                         |  |            |     | Additions        |  |                  |     |           
|                                                                         |  |            |     |                  |  |                  |     |           
|Description                                                              |  | Balance    |     | Charged to Costs |  | Charged to Other |     |            |  | Balance   
|(Balance sheet caption)                                                  |  | @ 12/31/99 |     | and Expenses     |  | Accounts         |     | Deductions |  | @ 12/31/00
|                                                                         |  |            |     |                  |  |                  |     |            |  |           
|Bad debt reserve (Accounts receivable)                                   |  | $          |    |                  |  | $                |    |            |  | $          |  |  |  | $ |     |   |  | $ |    | 
|Inventory reserve (Inventory)                                            |  |            | 257 |                  |  |                  | 158 |            |  |            |   |  |  |   | (257 | ) |  |   | 158 | 
|Product return reserve (Accrued expenses and
	other current liabilities) |  |            |    |                  |  |                  | 499 | (1)        |  |            |   |  |  |   |      |   |  |   | 499 | 

|                                                                         |  |            |     |                  |  |                  |       |            |  |            |   |  |  |   |      |      |  |   |     | 
|------------------------------------------------------------------------ |  | ---------- | --- | ---------------- |  | ---------------- | ----- | ---------- |  | ---------- | - |  |  | - | ---- | ---- |  | - | --- | 
|                                                                         |  |            |     |                  |  |                  |       |           
|                                                                         |  |            |     | Additions        |  |                  |       |           
|                                                                         |  |            |     |                  |  |                  |       |           
|Description                                                              |  | Balance    |     | Charged to Costs |  | Charged to Other |       |            |  | Balance   
|(Balance sheet caption)                                                  |  | @ 12/31/00 |     | and Expenses     |  | Accounts         |       | Deductions |  | @ 12/31/01
|                                                                         |  |            |     |                  |  |                  |       |            |  |           
|Bad debt reserve (Accounts receivable)                                   |  | $          |    |                  |  | $                | 152   |            |  | $          |  |  |  | $ |     |      |  | $ | 152 | 
|Inventory reserve (Inventory)                                            |  |            | 158 |                  |  |                  | 115   |            |  |            |   |  |  |   | (36  | )(2) |  |   | 237 | 
|Product return reserve (Accrued expenses and
	other current liabilities) |  |            | 499 |                  |  |                  | 1,111 | (3)        |  |            |   |  |  |   | (859 | )(4) |  |   | 751 | 



---



|    |                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reserve established for potential product returns
	pursuant to the reacquisition of the marketing, sales and
	distribution rights for GLIADEL® Wafer and was considered
	part of the cost of acquisition. (See Note 16 to the
	footnotes to our consolidated financial statements.)
|   
|(2) | Disposal of obsolete inventory reacquired
	pursuant to the reacquisition of the marketing, sales and
	distribution rights for GLIADEL® Wafer (See Note 16 to
	the footnotes to our consolidated financial statements).                                                             
|   
|(3) | The provision for product returns is a reduction
	of gross product sales revenue.                                                                                                                                                                                                  
|   
|(4) | Product returned pursuant to the Companys
	return policy and charged to this reserve.                                                                                                                                                                                             

F-27