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UNITED STATES

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,
2002

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

Indicate by check
mark whether the Registrant is an accelerated filer (as defined
in Rule 12b-2 of the
Act).     Yes þ     No o

As of June 30,
2002, the aggregate market value of the approximately 28,043,238
shares of common stock of the Registrant issued and outstanding
on such date, excluding approximately 1,778,480 shares held
by affiliates of the Registrant, was approximately
$215,442,893.12. This figure is based on the closing sales price
of $7.54 per share of the Registrants common stock as
reported on The NASDAQ® National Market on June 28,
2002.

As of
March 27, 2003, approximately 29,917,608 shares of
common stock of the Registrant were issued and outstanding.

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
Registrants Notice of Annual Meeting and Proxy Statement
to be filed no later than 120 days following
December 31, 2002 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) efforts to market, sell and
distribute GLIADEL® Wafer in the United States and
internationally; (2) efforts to expand the labeled uses for
GLIADEL® Wafer internationally; (3) the clinical
development of GPI 1485, our lead neuroimmunophilin ligand
compound; (4) the clinical development of our
AQUAVANInjection product
candidate; (5) research programs related to our
neuroimmunophilin ligand technology and NAALADase inhibition
technology; (6) efforts to scale-up product candidates from
laboratory bench quantities to commercial quantities;
(7) efforts to secure adequate supply of the active
pharmaceutical ingredients for clinical development and
commercialization; (8) efforts to manufacture drug
candidates for clinical development and eventual commercial
supply; (9) 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. These and any of the other 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 caution you that our actual
results may differ significantly from the results we discuss in
the forward-looking statements.

We discuss some 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 commercialization of
products that target the hospital and neurology markets.

We were incorporated in Delaware in July 1993.
Our principal executive offices are located at 6611 Tributary
Street, Baltimore, MD 21224. Our telephone number is
(410) 631-6300, and our website address is
http://www.guilfordpharm.com. We make our electronic filings
with the Securities and Exchange Commission (SEC), including our
annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments
to these reports, available on our website free of charge as
soon as practicable after we file or furnish them with the SEC.

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

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Products and Product Candidates

The following tables summarize the status of
GLIADEL® Wafer, our marketed product, and our other
research and development programs:

|                    |  |                                   |  |                                                                                                     
|------------------- |  | --------------------------------- |  | ----------------------------------------------------------------------------------------------------
|Marketed Product(1) |  | Indication/Condition              |  | Status                                                                                              
|                    |  |                                   |  |                                                                                                     
|GLIADEL® Wafer      |  | Recurrent glioblastoma multiforme |  | Currently approved for sale in the United States
    and in 25 other countries throughout the world.
|                    |  | Newly diagnosed malignant glioma  |  | Currently approved for sale in the United States
    and Canada.(2)                                 

|                                             |  |                                                                                                                  |  |             
|-------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ------------
|Clinical Development                         |  |                                                                                                                  |  |             
|Programs(1)                                  |  | Indication/Condition                                                                                             |  | Status      
|                                             |  |                                                                                                                  |  |             
|GPI 1485 (our lead neuroimmunophilin ligand) |  | Parkinsons disease                                                                                              |  | Phase II    
|AQUAVANTMInjection                           |  | Conscious sedation                                                                                               |  | Phase II    
|                                             |  | Sedation, anesthesia induction and maintenance
    for patients undergoing coronary artery bypass graft surgery. |  | Phase II    
|DOPASCAN® Injection                          |  | Imaging agent to diagnose and monitor
    Parkinsons disease                                                    |  | Phase III(3)

|                                                                    |  |                                                                                                                                                                  |  |             
|------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------
|Pre-clinical and Research                                           |  |                                                                                                                                                                  |  |             
|Programs(1)                                                         |  | Indications                                                                                                                                                      |  | Status      
|                                                                    |  |                                                                                                                                                                  |  |             
|GPI 16072 (NAALADase inhibitor compound)                            |  | Neuropathic pain and disease modification for
    diabetic neuropathy and other neuroprotective indications (such
    as ALS, glaucoma and stroke)               |  | Pre-clinical
|Other NAALADase inhibitor compounds                                 |  | Neuropathic pain and disease modification for
    diabetic neuropathy and other neuroprotective indications (such
    as ALS, glaucoma and stroke)               |  | Research    
|Other, neuroimmunophilin ligands, including
    Cyclophilin ligands |  | Cerebral ischemia, heart ischemia,
    Alzheimers disease, traumatic spinal cord injury, multiple
    sclerosis,vascular degeneration and Huntingdons diseases |  | Research    
|Other neurotrophic and cytoprotective small
    molecules           |  | Alzheimers disease, traumatic spinal cord
    injury, multiple sclerosis, neuropathy, stroke and other
    ischemic damage                                      |  | Research    



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|    |                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Marketed means that a product is
    currently being sold. Clinical Development means
    that the product is being used in clinical trials.
    Pre-clinical means testing in vitroand in
    animal models, pharmacology and toxicology testing, product
    formulation and process development. Research means

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | initial research related to specific molecular
    targets, synthesis of new chemical entities and assay
    development for the identification of lead compounds.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(2) | In November 2002, we withdrew an application
    submitted to the European Agency for the Evaluation of Medicinal
    Products, or the EMEA, to approve GLIADEL® Wafer for
    first-line therapy in Europe. We plan to resubmit
    this application to the EMEA during the second half of 2003.                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(3) | MAP Medical Technologies Oy, or MAP, our
    corporate partner in Europe for this technology, has informed us
    that it submitted an application to receive regulatory approval
    in Finland for DOPASCAN® Injection in April 2002. It
    expects the Finnish regulatory authorities to respond to this
    application by April 2003. Daiichi Radioisotope Laboratories,
    Ltd., or DRL, our corporate partner in Japan for this
    technology, has informed us that it completed a Phase III
    clinical trial with the product in July 2002, and expects to
    file an application for marketing approval in Japan with the
    Japanese Health Authority in the first half of 2003.

Marketed Product  GLIADEL®
Wafer

General

GLIADEL® Wafer is a proprietary
biodegradable polymer product that contains BCNU (carmustine), a
cancer chemotherapeutic drug. Up to eight wafers are implanted
in the cavity created when a neurosurgeon removes a brain tumor.
The wafers gradually erode and deliver BCNU directly to the
tumor site 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 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
glioblastoma multiforme, or GBM, for whom surgery is indicated.
Also in 1996, we entered into agreements with Aventis (then
Rhône-Poulenc Rorer) granting it marketing rights to
GLIADEL® Wafer in the U.S. and clinical development and
marketing rights in the rest of the world (excluding
Scandinavia, where the product is distributed and marketed by
Orion Pharma under an agreement with us entered into in 1995,
and later, Japan). Under these agreements, Aventis paid us
$7.5 million as a one time, 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% on its purchases of the product from us during the term of
the agreements. Between 1996 and October 2000, Aventis obtained
regulatory approval for GLIADEL® Wafer for the recurrent
indication in over 21 countries, including France, Germany, the
United Kingdom, Spain, Canada, South Korea and Israel.

In October 2000, we reacquired Aventis
marketing 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, after which, we have been
solely 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 10
internal marketing and sales management, reimbursement and
managed care specialists, medical affairs, professional services
and customer service personnel, and an approximately 28-person
field sales force.

In April 2001, we submitted a supplemental New
Drug Application, or sNDA, for GLIADEL® Wafer, seeking to
expand the label for the product to include use in initial
surgery for malignant glioma. In March 2002, the FDA sent us a
not approvable letter indicating concerns regarding the survival
benefit associated with GLIADEL® Wafer treatment during
initial surgery. In response to the FDAs letter, we
proposed that we obtain an additional one to two years of
follow-up data on patients enrolled in the GLIADEL® Wafer
Phase III clinical trial on which the sNDA was based, under the
assumption that the additional data might address the FDAs
concerns. We agreed with the FDA on the protocol and methods for
collecting and analyzing this additional long-term follow up
data. On September 19, 2002, we presented the results of
this analysis to FDA. After completing an informal review of
these data, the FDA advised us that the submission of an
amendment to the Companys sNDA containing the long-term
follow up data would receive a formal FDA review and

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reconsideration of the requested new labeling for
the product. On February 25, 2003, the FDA approved our
amended sNDA.


We pay 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 the product. During 2002, we
recognized approximately $0.6 million in royalty expense to
MIT.

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 and in September 2002. 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 expanded our manufacturing
facilities to allow for the additional synthesis of the
polyanhydride co-polymer used in the manufacture of
GLIADEL® Wafer. Also in 1998, we completed construction of
a second clean room facility, which we expect would allow us to
increase our GLIADEL® Wafer manufacturing capacity to
20,000 treatments annually.

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 in accordance with the FDAs current
Good Manufacturing Practice, or cGMP, regulations could cause
delays in our ability to sell the product.

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, in
connection with our reacquisition of commercialization rights to
GLIADEL® Wafer, during the fourth quarter of 2000 and the
first quarter of 2001, we established our commercial operations
capabilities in the United States, including marketing, sales
management, medical affairs, reimbursement and other relevant
functions to support a 28-member field sales force. When we
established our sales force, it was initially on a contract
basis through Cardinal Health Sales and Marketing Services, a
division of Cardinal Health Inc., or Cardinal. During October
2002, we brought our sales force in-house, and now members of
our sales force are directly employed by us. In order to assist
in the distribution of GLIADEL® Wafer, we engaged Cord
Logistics Inc., in November 2000, to handle fulfillment of
customer orders.

Also in 2001, we established a Canadian
subsidiary that is responsible for all aspects of the sales and
marketing of GLIADEL® Wafer in 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 agreement with IDIS Limited, based in the
U.K., for the distribution of GLIADEL® Wafer to our network
of European distributors and on a named hospital basis in
countries where we have not engaged a third-party distributor.
To date, we have entered into agreements for the marketing, sale
and distribution of GLIADEL® Wafer in Italy, Portugal,
Spain, the United Kingdom, Greece, South Africa, Australia,
Israel, Hong Kong and the Peoples Republic of China, as
well as in other international markets.

The establishment of commercial operations
provides us with the opportunity and flexibility to market and
sell other products we are developing, or products that we may
in-license or otherwise acquire.

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In 2002, 2001 and 2000, sales of GLIADEL®
Wafer generated revenues of $14.5, $20.4 and $1.5, respectively,
which represented 99%, 99%, and 8%, of our total revenues,
respectively.

Clinical Development Programs

GPI
1485

Our neuroimmunophilin ligand program, originated
from observations first made in the laboratory of
Dr. Solomon Snyder, Director of the Department of
Neuroscience at Johns Hopkins and one of our directors and
founders, that certain proteins that exist within a cell, known
as immunophilins, 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. As a result of this basic
research, Guilford scientists discovered GPI 1485 and many other
proprietary small molecules, called neuroimmunophilin ligands,
which are neurotrophic, i.e., regenerate nerves, 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 GPI 1485, which it
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
FDA 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
six-month 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 significant 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 have since renamed NIL-A as GPI 1485 and in
November 2002, initiated a Phase II clinical trial of GPI 1485,
for the treatment of Parkinsons disease. This Phase II
trial will provide an assessment of the long-term (two-year)
treatment effect of GPI 1485 in patients with mild to moderate
Parkinsons disease. We have designed this trial to
follow-up on the initial findings from the Phase II study
completed [by Amgen] of NIL-A. In particular, the current Phase
II trial will look more thoroughly at the ability of GPI 1485 to
reduce the requirement for conventional symptomatic therapy for
Parkinsons disease, as well as further assess the imaging
results that indicate GPI 1485 may reduce the rate of
progression of this disabling disease. The Phase II clinical
trial is a multicenter, randomized, double-blind,
placebo-controlled evaluation of the safety, pharmacokinetics
and efficacy of GPI 1485 in patients with mild to moderate
Parkinsons disease. A total of 200 patients will be
enrolled and randomly assigned to receive either placebo or
GPI 1485 orally four times a day. We expect the study to be
completed in 2005.

We have more than 60 U.S. patents protecting our
Neuroimmunophilin ligand technology.

AQUAVAN
Injection

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 converted in the body into an active drug.
The prodrug, which we have named AQUAVAN 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. AQUAVAN

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Injection may offer clinical benefit to patients
in a number of settings, including as an ICU sedating agent, an
anesthesia-induction drug and for conscious sedation in
outpatient procedures, such as colonoscopy.


Since we licensed AQUAVAN Injection from
ProQuest, we have conducted four Phase I clinical studies in
Europe in healthy volunteers and one Phase I clinical study in
the United States. In July 2002, we announced the commencement
of a Phase II clinical trial of AQUAVAN Injection in
patients undergoing coronary artery surgery. This study, taking
place in Europe, is the first use of AQUAVAN Injection in
surgical patients. The purpose of the study was to evaluate the
safety, tolerability and efficacy of AQUAVAN Injection,
compared to DIPRIVAN® Injectable Emulsion (i.e., the
branded formulation of propofol), for use in pre-operative
sedation, anesthesia induction and maintenance, and
post-operative ICU sedation in patients undergoing coronary
artery bypass surgery.

In February 2003, we announced the commencement
of a Phase II clinical trial of AQUAVAN Injection in the
United States in patients undergoing conscious sedation during
elective colonoscopy. The first part of the Phase II trial is a
dose ranging pilot study to determine the optimal sedative dose
of AQUAVAN Injection for use in achieving conscious
sedation in patients. Once identified, the second phase of the
trial will investigate and compare the effects of AQUAVAN
Injection to Midazolam HCI in patients undergoing colonoscopy.

We have exclusive rights in the U.S. to a
composition of matter patent covering AQUAVAN Injection.

DOPASCAN®Injection

DOPASCAN® Injection was invented by
scientists at the Research Triangle Institute, or RTI, in
Research Triangle Park, North Carolina. In 1994, we obtained
exclusive rights to patents covering DOPASCAN® Injection
from RTI.

DOPASCAN® Injection is our product candidate
for the diagnosis and monitoring of Parkinsons disease. It
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. They degenerate
in patients with Parkinsons disease. Parkinsons
disease affects 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. 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 may 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 the FDA will approve DOPASCAN® Injection as a safe and
effective diagnostic.

We have entered into an agreement with DRL, a
leading Japanese radiopharmaceutical company, to develop and
commercialize DOPASCAN® Injection in Japan, Korea and
Taiwan. DRL has informed us that

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it completed a Phase III clinical trial with
the product in July 2002, and expects to file an application for
marketing approval in Japan with the Japanese Health Authority
in the first half of 2003.


In January 2002, we announced that we sublicensed
European rights for the development and commercialization of
DOPASCAN® Injection to MAP, a division of Schering AG
located in Finland. Under 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. MAP has informed us that it submitted an application
to receive regulatory approval in Finland for DOPASCAN®
Injection in April 2002. It expects the Finnish regulatory
authorities to respond to this application by April 2003.

In May 2002, we sublicensed DOPASCAN®
Injection to Molecular Neuroimaging LLC, or MNI, a privately
held company based in New Haven, Connecticut that specializes in
the use of brain imaging technologies for, among other purposes,
the analysis of clinical trials of pharmaceutical product
candidates targeting neurodegenerative diseases. Under the terms
of our agreement with MNI, except under limited circumstances,
MNI pays us a royalty for each administration of DOPASCAN®
Injection. During the term of our agreement, MNI has also agreed
to provide us with favorable pricing for its services (including
the administration of DOPASCAN® Injection) for any clinical
trials for our product candidates. Presently, we have engaged
MNI to provide its services for our clinical trial of GPI 1485
for Parkinsons disease. MNIs sublicense to
DOPASCAN® Injection terminates upon the FDAs approval
of the product candidate for marketing and sale in the United
States.

Pre-Clinical and Research Programs

GPI 16072 and
Other NAALADase Inhibitor Compounds

NAALADase, or
N-Acetylated-Alpha-Linked-Acid-Dipeptidase, is a membrane-bound
enzyme found principally in the central and peripheral nervous
system. NAALADase is believed to play a role in modulating the
release of glutamate in the nervous system. Glutamate is one of
the brains most common chemical messengers. Under normal
conditions, glutamate is released into a microscopic
space  called the synapse  that exists
between neurons in the brain. There, it stimulates post-synaptic
glutamate receptors, an action that is critical to such
functions as learning, memory and motor control. However, during
conditions of acute injury or chronic disease, there may be a
large increase in glutamate release that incites a cascade of
biochemical events, ultimately leading to cell injury and death.

Our NAALADase inhibitor program is aimed at
developing a commercial drug to block excessive glutamate
release. Our initial target is diabetic neuropathy, a
debilitating and progressive disorder involving increased pain
sensitivity, tingling, weakness and numbness in a patients
extremities. It is believed to affect about one million people
in the United States, yet there are no approved drugs to treat
this disabling condition.

We are additionally evaluating the use of
NAALADase inhibitors as potential protective therapies for a
range of chronic neurodegenerative disorders. We have created
several unique classes of NAALADase inhibitors as a way to
diversify our research and maximize potential therapeutic
applications in peripheral neuropathy, chronic pain,
schizophrenia, Lou Gehrigs Disease (ALS), epilepsy, head
and spinal cord trauma, stroke, Alzheimers and
Parkinsons disease.

In several animal models of diabetic neuropathy
and neuropathic pain, our NAALADase inhibitors appear to
normalize pain sensitivity, increase nerve conduction velocity
and prevent nerve degeneration. Initially, we selected GPI 5693
as a lead NAALADase inhibitor compound and commenced Phase I
clinical studies with this compound in early 2001 for the
treatment of neuropathic pain and the underlying disease process
associated with diabetic peripheral neuropathy. 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
750mg per day. During 2001 and 2002, our scientists identified
GPI 16072 and other second-generation NAALADase inhibitor
compounds, which appear to be up to 100 times more potent than
GPI 5693 in pre-clinical studies. The increased potency of GPI
16072 may permit a lower dose of

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the compound to provide the same or greater
therapeutic effect than higher dosages of less potent compounds,
thereby reducing the potential for side effects. We have
completed extensive pre-clinical work with GPI 16072 and have
determined that it could be advanced into clinical trials with
the assistance of a future corporate partner for this program.


We have 35 U.S. patents and corresponding foreign
counterparts protecting our NAALADase technology.

Other
Neuroimmunophilin ligands and other neurotrophic and
cytoprotective small molecules

Our scientists have also developed potent, novel,
orally-active small molecule ligands of cyclophilin that may be
neuroprotective and neuroregenerative. These compounds have
shown neuroprotection and neurite outgrowth in animal models of
neurodegeneration. These activities may be mediated by the
actions of cyclophilin ligands on maintaining mitochondrial
viability and function. Cyclophilin ligands might be useful in
the treatment of cerebral ischemia, heart ischemia,
Huntingtons Disease, age-related macular degeneration,
traumatic brain injury, spinal cord injury and peripheral
neuropathy.

Reorganization

On July 30, 2002, we announced a
reorganization of our research and development programs, which
included a workforce reduction of 58 employees, most of whom
worked in the areas of research and development. In connection
with this reorganization, we suspended further development of
our polyphosphoester biopolymer drug delivery program, or PPE
Program, and our PARP inhibitor research program. The PPE
Program included our PACLIMER® Microspheres and
LIDOCAINE-PE Microspheres (formerly known as LIDOMER
Microspheres) development programs. PACLIMER® Microspheres
is a product candidate for investigating controlled,
site-specific administration and release of paclitaxel (brand
name TAXOL®) for ovarian cancer and non-small cell lung
cancer. LIDOCAINE-PE Microspheres is a product candidate for
controlled, site-specific administration and release of
LIDOCAINE, a commonly used analgesic, for post-operative pain.
Our PARP inhibitor research program investigated the inhibition
of the PARP enzyme for the prevention of cell necrosis in
connection with the occurrence of conditions such as stroke and
heart attack.

In order to further develop the programs that
were affected by this reorganization, we are pursuing corporate
partnerships and other similar licensing transactions.

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.

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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-approval 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 pre-clinical 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
pre-clinical, 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 pre-clinical
studies.

Pre-clinical testing includes formulation
development, laboratory evaluation of product chemistry and
animal studies to assess the potential safety and efficacy of
the product formulation. Pre-clinical tests to support an FDA
application must be conducted in accordance with the FDA
regulations concerning Good Laboratory Practices (GLPs). The
results of the pre-clinical 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

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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 pre-clinical 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, and the FDA does not have
to follow them, but frequently does.

User fee legislation now requires the submission
in federal fiscal year 2003 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
2007. 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
15 months for new drugs subject to user fee legislation,
although clinical development, reviews, or approvals of
treatments for cancer and other serious or life-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,

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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 neuroimmunophilin ligand products and inhibitors of
NAALADase, 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.

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 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

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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 establishes 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 for GLIADEL® Wafer, or if approved, our
product candidates.

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 registered 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, 2002, we owned or had
licensed rights to more than 130 U.S. patents and more than 100
foreign patents. In addition, we owned or had licensed more than
750 pending applications worldwide. We also own registered
trademarks to DOPASCAN®, PACLIMER®, and GLIADEL®
and have an allowed trademark application to AQUAVAN in
the United States.

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

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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 ultimately result.

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 2006. 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 the technology covered by the Agreement, 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 biodegradable polymers for use in connection with the
controlled local delivery of certain chemotherapeutic agents
(including paclitaxel (TAXOL®) and camptothecin). Under
this agreement, we are

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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, including filing a New Drug
Application for this technology by June 25, 2006. Our
failure to perform these obligations could result in losing our
rights to such technology. In addition, the underlying patents
are subject to march-in rights of the U.S. government.


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
yearly amounts for, and meet deadlines regarding development of
this technology, including filing a New Drug Application for
this technology by July 18, 2006. If we fail to meet these
requirements, the agreement could be terminated. In the event of
termination of these licenses, we would lose our rights to the
use of the licensed technology. In addition, the underlying
patents are subject to march-in rights of the U.S. government.

We have entered into exclusive license agreements
with Johns Hopkins, to patents covering the neurotrophic use of
neuroimmunophilin ligands. We have also entered into exclusive
license agreements with Johns Hopkins regarding the rights to
the inhibition of PARP and other technologies for
neuroprotective uses. 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 would lose our
rights to use the licensed 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 expire 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
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, and loss of our right to use this
technology.

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
AQUAVAN 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 are also required to pay
ProQuest royalties on AQUAVAN 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

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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. Some of 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 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 2006. 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.

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 AQUAVAN
Injection into a safe and effective drug or that it will be
cleared for marketing. Even if we are able to market
AQUAVAN 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
Lidocaine-PE Microspheres are based on a proprietary polymer
system, this technology could compete 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

15



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##### 



pain, including post-surgical pain. Additionally,
other companies are engaged in the development of improved
formulations of paclitaxel.


We believe that at least 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
$46.1 million, $54.3 million and $46.9 million
for the years ended December 31, 2002, 2001 and 2000,
respectively. These expenses were divided between our research
and development platforms in the following manner:

|                            |  |                         |        |      |  |      |        |  |  |   |        | 
|--------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                            |  |                        
|                            |  | Years ended December 31
|                            |  |                        
|                            |  | 2002                    |        | 2001 |  | 2000
|                            |  |                         |        |      |  |     
|Pharmaceutical technologies |  | $                       | 20,815 |      |  | $    | 24,512 |  |  | $ | 21,087 | 
|Biopolymer technologies     |  |                         | 4,990  |      |  |      | 8,563  |  |  |   | 8,648  | 
|Indirect expenses           |  |                         | 20,298 |      |  |      | 21,197 |  |  |   | 17,165 | 
|                            |  |                         |        |      |  |      |        |  |  |   |        | 
|                            |  | $                       | 46,103 |      |  | $    | 54,272 |  |  | $ | 46,900 | 
|                            |  |                         |        |      |  |      |        |  |  |   |        | 

Pharmaceutical
Technologies

Our pharmaceutical technology research and
development expenses decreased in 2002, compared to 2001,
primarily due to a decrease in expenses in our NAALADase
inhibitor program resulting from the completion of our Phase I
clinical trials of GPI 5693 (a lead NAALADase inhibitor
compound). The decrease in spending on our NAALADase inhibitors
was partially offset by an increase in spending on our
neuroimmunophilin ligand technology and our AQUAVAN
Injection program. For 2003, we expect research and development
expenses for our pharmaceutical technologies to be incurred
primarily in connection with further clinical development of
AQUAVAN Injection, the preparation for, and initiation of,
one or more Phase II clinical trials of GPI 1485, our lead
neuroimmunophilin ligand compound and additional NAALADase
inhibitor program research.

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

Biopolymer
Technologies

Our biopolymer technology research and
development expenses decreased in 2002, compared to 2001, due to
a decrease in expenses incurred in connection with the clinical
development of both PACLIMER®

16



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Microspheres and Lidocaine-PE (formerly
LIDOMERTM Microspheres). The decrease in clinical
development expenses resulted from the completion of our
clinical trials for PACLIMER® Microspheres (ovarian cancer)
and Lidocaine-PE (post-operative pain) during the first quarter
of 2002. In connection with our corporate restructuring in the
third quarter of 2002, we terminated the clinical trial for
PACLIMER® Microspheres (lung cancer). We, therefore, expect
research and development expenses related to our biopolymer
technology to further decrease during the remainder of 2003,
compared to 2002. Currently, we do not plan to conduct
additional research or clinical testing of our biopolymer
technologies. Instead, we plan to pursue a corporate
partnership, divestiture or similar strategic transaction to
further develop these 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
Lidocaine-PE as it advanced into the clinical trial.

Indirect
Expenses

Our indirect research and development expenses
decreased for the year ended 2002 compared to 2001, in part due
to decreased overhead and a reduction in force in the second
half of 2002. The increase from the year ended 2000 to 2001 was
caused by increased costs to operate our facilities as well as
increased general research and development management activity.
These expenses include the costs of operating and maintaining
our facilities, property and equipment, to the extent used in
connection with the research and development of our
technologies, as well as the costs of our general management of
research and development projects.

Product Liability and Insurance

Product liability risk is inherent in the
testing, manufacture, marketing and sale of GLIADEL® Wafer
and our 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, 2002, we employed 235
individuals. Of these 235 employees, 134 were employed in the
areas of research and product development and in the
manufacturing and quality control of GLIADEL® Wafer. The
remaining 101 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. 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. 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.

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

Craig R. Smith, M.D., Chairman of the Board of
Directors, President and Chief Executive Officer,age 57, joined the Company as a
Director when the Company was founded in July 1993.
Dr. Smith was elected President and Chief Executive Officer
in August 1993 and Chairman of the Board in January 1994. Prior
to joining the Company, Dr. Smith was Senior Vice President
for Business and Market Development at Centocor, Inc., a
biotechnology company. 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.

17



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Andrew R. Jordan, Executive Vice President,
Finance and Administration, Chief Financial Officer and
Treasurer,age 55, 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 and in February 2003, he was promoted to
Executive Vice President. 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.

John P. Brennan, Senior Vice President,
Technical Operations,age 60, joined
the Company as Vice President, Operations in January 1994 and
became Senior Vice President, Technical Operations in January
1997. 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.

Thomas C. Seoh, Senior Vice President,
Corporate and Commercial Development and Strategic Planning,age 45, 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.,
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 and General Counsel,age 61,
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 later as a partner from 1991 to
1994. Since 1995, Dr. Linck has served 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 55, 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 & Pre-clinical 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. and M.S. in
Medicinal Chemistry from the University of Kansas.
Dr. Vincek received a B.S. in Chemistry from Colorado State
University.

Margaret M. Contessa, Senior Vice President,
Human Resources,age 54, joined
Guilford as Vice President, 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 manufacturer of
specialty chemicals located in Greenwich, Connecticut. From 1986
through 1998, she was employed by Engelhard Corporation as
Director,

18



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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.


Barbara S. Slusher, Ph.D., Senior Vice
President, Research, Animals, & Toxicology,age 38, joined Guilford in January
1995 as Principal Scientist and Group Leader in Research and
Development. Dr. Slusher was promoted to Senior Vice
President, Research, Animals & Toxicology in August 2002
after being named Vice President, Biology in February 2000. From
April 1992 until Dr. Slusher joined Guilford, she was
Senior Research Pharmacologist for Zeneca Pharmaceuticals Inc.
Dr. Slusher received her Ph.D. in Pharmacology and
Molecular Sciences from the Johns Hopkins School of Medicine in
1991 and her Masters degree in Management from the Johns
Hopkins School of Continuing Studies in 1991. Dr. Slusher
received her B.S. degree in Chemistry from Dickinson College in
1986.

Denise D. Battles, Vice President, Corporate
Quality,age 47, joined Guilford in
August 1994 as Director of Quality Assurance and became Senior
Director of Product Compliance in August 1997. Ms. Battles
was promoted to Vice President of Corporate Quality in August
1999. Prior to joining the Company, Ms. Battles was
employed by Pharmaceutical Systems, Incorporated as the Director
of Quality Assurance and held various positions with Quality
Control and Quality Assurance at Baxter Healthcare Corporation.
Ms. Battles received her B.S. in Biology from Fisk
University in 1977 and received training at the Lake Forest
Graduate School of Management.

Valerie D. Riddle, M.D., Vice President,
Clinical Affairs,age 42, joined
Guilford in January 2001, as Vice President, Medical Affairs. In
August 2002, she was promoted to Vice President, Clinical
Affairs. Prior to joining Guilford, Dr. Riddle was Senior
Director, Medical Sciences at MedImmune, Inc. since 1998. From
1990 to 1998, Dr. Riddle held various positions with the
Washington Hospital Center, most recently as Director, HIV/ AIDS
Service, Section of Infectious Diseases. Dr. Riddle
received her M.D. and B.A. in Chemistry from the University of
South Florida in 1989 and 1984, respectively.

Francesca M. Cook, Vice President, Policy and
Reimbursement Services,age 38, joined
Guilford in March 2001. Prior to joining the Company,
Ms. Cook held various positions since 1996 with Covance
Health Economics and Outcomes Services, most recently as Vice
President. Before joining Covance Health Economics and Outcomes
Services, Ms. Cook was a Legislative Assistant for the
Office of Senator Carol Moseley-Braun, United States Senate in
Washington, D.C. Ms. Cook received her Master of Public
Health degree in 1988 from Yale University School of Medicine,
Department of Epidemiology and Public Health. She received her
Bachelor of Arts degree in Biology in 1986 from Mount Holyoke
College.

Jean-Marie Vallet, Vice President, Business
Development,age 47, joined Guilford
in May 2002. From 2000 to 2001, Dr. Vallet was Corporate
Vice President and President Human Healthcare for Valigen, a
functional genomics company. From 1996 to 2000, he held several
positions with Bristol-Myers Squibb, including, Vice President,
Business Development for the European region. Dr. Vallet
holds a Masters Degree in Biochemistry and Genetics from
the University of Paris XI. He received his Ph.D. in
Molecular Biology from the University of Geneva and an MBA from
IMD in Lausanne, Switzerland.

Michael Kelly, Vice President, Sales and
Marketing,age 38, joined the Company
in December 2002. Prior to joining the Company he held various
positions with Viropharma Incorporated, most recently as Vice
President of Sales from January 2001 through December 2002, and
before that as Vice President of Marketing from January 2000
through December 2000. In 1997, Mr. Kelly joined Viropharma as
Executive Director of Marketing. From 1991 until 1997,
Mr. Kelly held various positions at TAP Pharmaceuticals, a
pharmaceutical company, the latest being Manager of Hospital
Account Executives within the Mid-Atlantic Region.
Mr. Kelly received his B.S. in Marketing from the Trenton
State College and his M.B.A. from Rider College.

Asher M. Rubin, Vice President, Deputy General
Counsel and Secretary,age 32, joined
the Company in October 2000, as Senior Corporate Counsel and
Assistant Secretary. He was promoted to Associate General
Counsel and Assistant Secretary in August 2001, to Deputy
General Counsel and Assistant Secretary in February 2002, and to
Vice President, Deputy General Counsel and Secretary in February
2003. Prior to joining the Company, Mr. Rubin was an
associate with the law firm of Miles & Stockbridge P.C., in

19



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Baltimore, Maryland from February 1997 through
October 2000. Mr. Rubin received his A.B. in Policy
Sciences and Public Affairs from Duke University in 1992 and his
J.D. from the University of Maryland School of Law in 1995.


Item 2.     Properties

In August 1994, we entered into a lease for an
approximately 83,000 square foot building in Baltimore, Maryland
that currently serves as our headquarters, which we expanded in
1998 to approximately 90,000 square feet. We currently occupy
23,000 square feet for office space, 18,000 square feet for
manufacturing space for GLIADEL® Wafer, and 49,000 square
feet of research and development laboratories. The initial term
of the lease expires in June 2005. Thereafter, we may exercise
two five-year renewal options, 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 for
the construction and occupancy of a new laboratory and office
facility, consisting of approximately 77,000 square feet. We
took possession of this facility in June 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 for the facility.

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. In addition, see Leases footnote 11 in
the Notes to the Consolidated Financial Statements.

Item 3.     Legal
Proceedings

None.

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, 2002.

Item 4A.     Risk
Factors

An investment in our stock is very speculative
and involves a high degree of risk. You should carefully
consider the following important factors, as well as the other
information in this report and our other SEC filings, 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. Since we
were founded in July 1993, 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, development and clinical trial activities. As of
December 31, 2002, we had an accumulated deficit of
approximately $249.6 million. We expect to have significant
additional losses over the next several years due to expenses
associated with our product candidates related to research,
development and clinical trial activities, applying for and
obtaining meaningful patent protection and establishing freedom
to commercialize and applying for and receiving regulatory
approval for our drug product candidates.

Our product candidates are in research or various
stages of pre-clinical and clinical development. Except for
GLIADEL® Wafer, none of our products or product candidates
may be sold to the public. Nearly all of our past 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;
|
| |  | royalty payments from Aventis sale and
    distribution of GLIADEL® Wafer; and                                                                                                     

20



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| |   |                                             
| | - | --------------------------------------------
| |  | our sale and distribution of GLIADEL® Wafer.

Presently, we receive significant revenue only
from the sale of GLIADEL® Wafer and we do not expect that
revenue to be sufficient to support all our anticipated future
activities. We do not expect to generate revenue from the sale
of our product candidates for the next several years, if ever,
because of the significant risks associated with pharmaceutical
product development.

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



| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the successful development of and our ability to
    successfully market, sell and distribute our products, including
    GLIADEL® Wafer;                                                      
|
| |  | the successful development of our product
    candidates either on our own, or together with future corporate
    partners with whom we enter into collaborative or license
    agreements; and
|
| |  | the ability to in-license or acquire additional
    products in our targeted markets.                                                                                                          

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

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

Until February 25, 2003, we only had
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 who have a
brain tumor surgically removed and have recurrent
forms of a type of brain cancer called glioblastoma multiforme,
or GBM. A recurrent GBM is one in which the cancer
has returned after initial surgery to remove a brain tumor. The
number of patients undergoing recurrent surgery for GBM is very
limited, and we believe the total number of patients on an
annual basis who have GBM in the United States is approximately
3,000 to 4,000.

On February 25, 2003, we received FDA
approval to market GLIADEL® Wafer for patients undergoing
initial surgery for malignant glioma in conjunction with surgery
and radiation. The number of patients undergoing initial surgery
is estimated to be 8,000 per year.

In addition, in January 2002 we submitted
applications for approval to market GLIADEL® Wafer in
Europe for patients undergoing initial surgery for malignant
glioma. In November 2002, we withdrew those applications and
plan to resubmit them now that the FDA has approved our amended
sNDA. Presently, GLIADEL® Wafer is approved for recurrent
GBM market in only 21 countries, including France, Spain,
Germany and the U.K. GLIADEL® Wafer is currently approved
for first-line therapy only in the United States and Canada. If
we are not able to obtain additional approvals, the market for
GLIADEL® Wafer would remain limited, 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 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 sales experience and we expect
to incur significant expense in marketing, selling and
distributing GLIADEL®Wafer.

When we began selling GLIADEL® Wafer
ourselves in January 2001, it was the first time that we had
undertaken direct sales and marketing activities. We, therefore,
have limited experience in engaging in sales and marketing
efforts. This limited experience may limit our success.
Additionally, our sales and marketing efforts may use resources
and require attention from management that would otherwise be
provided to our drug development programs.

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
may be 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 reasons, we may be unable to meet the
expectations of these professionals and our stock price may
decline. These expectations may 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, it would
result in substantial costs and divert 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



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##### 



redundant cleanrooms. We estimate that the
facility currently being used has the capacity to manufacture
approximately 20,000 GLIADEL® Wafer treatments per year,
although to date, we have manufactured only limited quantities
of GLIADEL® Wafer in our facilities.


Additionally, 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 our facilities.

We also face risks inherent in the operation of a
facility for manufacturing pharmaceutical products, including:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | 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
(1) acquire, build or expand our internal manufacturing
capabilities, or (2) rely on third parties to manufacture
these product candidates. We cannot be sure that we will be able
to accomplish either of these tasks. If we are not able to do
so, 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, may, among other things, require the performance of
new clinical studies.

Revenues from
GLIADEL®Wafer and future
products, if any, depend in part on reimbursement from health
care payors, which is uncertain.

The 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. 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.

A significant portion of our sales are to a
specialty pharmaceutical distributor.

Approximately 69% of our sales of GLIADEL®
Wafer in 2002 were made to a specialty pharmaceutical
distributor. We have an agreement with this distributor
regarding its purchase of the product that permits either us or
the distributor to terminate the agreement upon 60 days
prior written notice. We have no assurance that this distributor
will not exercise its rights to terminate its agreement with us
at any time. If this distributor does terminate the agreement,
there can be no assurance that we will be able to enter into an
arrangement with another specialty distributor for the purchase
and sale of GLIADEL® Wafer. Additionally, under the terms
of our agreement with this distributor, if the agreement is
terminated, we have an obligation to repurchase any remaining
treatments of GLIADEL® Wafer that the distributor may have
in its inventory. As of December 31, 2002, we believe that
our specialty distributor had approximately $1.9 million of
GLIADEL® Wafer in its inventory.

Our sales to a specialty pharmaceutical
distributor depend on its sales to hospital pharmacies and
desired level of inventory.

This distributor orders treatments of the product
based upon, among other things, its estimation of our ability
and its ability to successfully sell GLIADEL® Wafer to
hospital pharmacies and its desired level of inventory. If the
demand for GLIADEL® Wafer from hospital pharmacies
decreases, or this distributor decreases the amount it keeps in
its inventory, this distributor may decrease or stop making
additional purchases of the product from us. The result of such
a decrease would be reflected in lower reported sales for
Guilford.

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 a drug
can be commercialized, we, or a future corporate partner will
have to:



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

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 because of factors that make them
unsuitable as drug candidates. These factors may 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.
Identifying other compounds that have suitable characteristics
may not always be possible.

24



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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 development and 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 future corporate partners, may not result in any
commercially viable products.

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

Our resources are limited; and therefore, our
business strategy requires us to enter into various arrangements
with:



| |   |                               
| | - | ------------------------------
| |  | corporate partners;           
|
| |  | academic investigators;       
|
| |  | licensors of technologies; and
|
| |  | licensees of our technologies.

In trying to attract corporate partners, we face
serious competition from other small pharmaceutical companies
and the in-house research and development staffs of larger
pharmaceutical companies. If we are unable to enter into such
arrangements with corporate partners, our ability to proceed
with the research, development, manufacture and/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 neuroimmunophilin ligand 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 pre-clinical 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 of ours. 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. Our
collaborators may, therefore, be pursuing alternative
technologies or product candidates in order to develop
treatments for the diseases or disorders targeted by our
collaborative arrangements. 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 pre-clinical
and clinical testing, and to

25



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##### 



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 research and development facility
completed in 1999 and other financial obligations, we are
required to hold, in the aggregate, unrestricted cash, cash
equivalents and investments of $40.0 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, 2002, we maintained
$18.6 million in restricted investments pursuant to these
financial obligations. In total, our banking covenants require
us to maintain approximately $58.6 million in restricted
and unrestricted cash, cash equivalents and investments. If we
do not maintain this amount, or these covenants are not removed
or changed, we may be in breach of these covenants.

Our capital requirements depend on numerous
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 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;                                                                          
|
| |  | the cost of product in-licensing;                                                                                         
|
| |  | our ability to establish collaborative
    arrangements with large pharmaceutical companies and others; and               
|
| |  | the progress of efforts to scale-up manufacturing
    processes.                                                          

We may use our existing resources before we
expect to because of changes in our research and development and
commercialization plans or other factors affecting our operating
expenses or capital expenditures.

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.

26



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##### 



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 multi-drug resistance compounds for nerve growth
applications. That company also stated that it has issued U.S.
patents and pending U.S. applications which claim compounds that
may be useful in nerve growth applications. We cannot give any
assurance as to the ability of our patents and patent
applications to adequately protect our 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 ultimately 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. If 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

27



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##### 



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, or we may find it necessary to provoke an
interference with a third party. These proceedings are often
expensive and time-consuming, even if we were to prevail in such
proceedings.

We rely on licensed intellectual property for
GLIADEL® Wafer and our other product candidates, the
agreements for which impose requirements on us.

We have licensed intellectual property, including
patents, patent applications and know-how, from universities and
others, including intellectual property underlying GLIADEL®
Wafer, DOPASCAN® Injection, AQUAVAN 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. If we cannot meet our obligations
under these license agreements, we may lose access to our key
technology.

Losing our proprietary rights to our licensed
technology would have a significant negative effect on our
business, financial condition and results of operations.

Our license agreements for GLIADEL® Wafer
require us to pay a royalty to MIT on sales of GLIADEL®
Wafer. Similarly, we will have to pay milestone and/or royalty
payments in connection with the successful development and
commercialization of DOPASCAN® Injection, AQUAVAN
Injection and any products that result from the
neuroimmunophilin ligand technology.

In addition, our U.S. patent protection for
GLIADEL® Wafer expires in 2006. 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.

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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 on a timely basis key supplies necessary to
manufacture GLIADEL® Wafer, 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 DOPASCAN® Injection
and of distributing it to diagnostic centers.

Based on our assessment of companies in the
United States that are capable of manufacturing and distributing
DOPASCAN® Injection, we believe a significant risk exists
in our ability to produce DOPASCAN® Injection in sufficient
quantities and at an acceptable cost to conduct Phase III
clinical trials in the United States that would be necessary to
support NDA submission for the product. 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. Instead, in order to further develop DOPASCAN®
Injection, we are relying upon our international corporate
partners, DRL and MAP.

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 use resulting inventions for any governmental
purpose. In addition, the U.S. government has the right to grant
to others licenses under any of these non-exclusive licenses 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 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. Several of our principal technology license
agreements contain provisions recognizing these rights.

Pre-clinical 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 pre-clinical 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 could 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

29



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##### 



market and sell them. Results from pre-clinical
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, pre-clinical 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 or any
foreign regulatory authority.

As a condition to approval of our product
candidates under development, the FDA could require additional
pre-clinical, clinical or other studies. Any requirement that we
perform additional studies could delay, or increase the expense
of our product candidates regulatory approval. This delay or
increased expense could have a negative effect on our business.
Additionally, to receive regulatory approval, we must also
demonstrate that the product is capable of being manufactured in
accordance with applicable regulatory standards.

When trying to obtain regulatory approval,
significant risk exists that:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | we will not be able to satisfy the FDAs
    requirements with respect to any of our drug product candidates,
    or                        
|
| |  | even if the FDA does approve our product
    candidates, 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 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 is rigorous and lengthy.
We have expended, and will continue to expend, substantial
resources in order to do this. 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 could 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.

Because controlled drug products and
radio-labeled drugs are subject to special regulations in
addition to those applicable to other drugs, the DEA and the
Nuclear Regulatory Commission (NRC) may regulate some of
our products and product candidates, including DOPASCAN®
Injection, as controlled substances and as radio-labeled 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
substances from being diverted into illicit

30



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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 radio-labeled 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.

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, or they may introduce a
competitive product before we are able to do so. 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 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 make
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.

31



---



##### 



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                                                                          
|
| |  | exclusivity, through patent protection, or FDA
    regulations.                     

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, which could have a material
adverse effect on our business.

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
our products. We currently maintain only $10 million of
product liability insurance covering clinical trials and product
sales. 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. Product liability claims
and/or the failure to obtain adequate product liability
insurance 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, President 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. Drs. Smith and Snyder have
extensive experience in the pharmaceutical 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 of them 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,
|
| |  | pre-clinical testing,                                  

32



---



##### 





| |   |                           
| | - | --------------------------
| |  | clinical trial management,
|
| |  | regulatory affairs,       
|
| |  | intellectual property,    
|
| |  | sales and marketing,      
|
| |  | manufacturing, and        
|
| |  | business development.     

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, it 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 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 partners) do not comply with
the governing 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.

We may also 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

33



---



##### 



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 under the symbol GLFD. As of
March 19, 2003, there were approximately 182 holders of
record of our common stock and more than 8,670 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.

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:

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|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  | 
|              
|2002           |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 12.35 |     |  | $ | 7.12  | 
|Second Quarter |  |      | 7.94  |     |  |   | 5.17  | 
|Third Quarter  |  |      | 6.29  |     |  |   | 3.50  | 
|Fourth Quarter |  |      | 5.19  |     |  |   | 3.18  | 



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

On November 19, and December 16, 2002,
we issued 4,736 shares and 1,461 shares of our common stock,
respectively, to Burns McClellan Inc. (Burns
McClellan), in consideration for Burns McClellan providing
us with investor relations/public relations services. 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, 2002 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, 2002 and 2001, and for each of the years in
the three-year period ended December 31, 2002, 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

34



---



##### 



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              
|                                                                          |  |                                      
|                                                                          |  | 1998                                  |         | 1999 |  | 2000 |         | 2001 |  | 2002
|                                                                          |  |                                       |         |      |  |      |         |      |  |     
|                                                                          |  |                                      
|                                                                          |  | (In thousands, except per share data)
|STATEMENT OF OPERATIONS DATA:                                             |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total revenues                                                            |  | $                                     | 12,483  |      |  | $    | 21,561  |      |  | $    | 18,056  |   |  | $ | 20,534  |   |  | $ | 14,665  |  
|Costs and expenses:                                                       |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cost of sales                                                             |  |                                       | 2,036   |      |  |      | 2,308   |      |  |      | 1,358   |   |  |   | 2,836   |   |  |   | 2,836   |  
|Research and development                                                  |  |                                       | 37,722  |      |  |      | 41,922  |      |  |      | 46,900  |   |  |   | 54,272  |   |  |   | 46,103  |  
|Selling, general and administrative                                       |  |                                       | 10,546  |      |  |      | 11,281  |      |  |      | 14,144  |   |  |   | 30,113  |   |  |   | 29,845  |  
|Merger costs                                                              |  |                                       |        |      |  |      |        |      |  |      | 1,403   |   |  |   |        |   |  |   |        |  
|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total costs and expenses                                                  |  |                                       | 50,304  |      |  |      | 55,511  |      |  |      | 63,805  |   |  |   | 87,221  |   |  |   | 78,784  |  
|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Operating loss                                                            |  |                                       | (37,821 | )    |  |      | (33,950 | )    |  |      | (45,749 | ) |  |   | (66,687 | ) |  |   | (64,119 | )
|Other income, net                                                         |  |                                       | 8,123   |      |  |      | 7,082   |      |  |      | 7,247   |   |  |   | 6,370   |   |  |   | 4,849   |  
|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Loss before the cumulative effect of an
    accounting change             |  |                                       | (29,698 | )    |  |      | (26,868 | )    |  |      | (38,502 | ) |  |   | (60,317 | ) |  |   | (59,270 | )
|Cumulative effect of an accounting change                                 |  |                                       |        |      |  |      |        |      |  |      | (8,625  | ) |  |   |        |   |  |   |        |  
|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net loss                                                                  |  | $                                     | (29,698 | )    |  | $    | (26,868 | )    |  | $    | (47,127 | ) |  | $ | (60,317 | ) |  | $ | (59,270 | )
|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Basic and diluted loss per common
    share(1):                           |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Loss before the cumulative effect of an
    accounting change             |  | $                                     | (1.52   | )    |  | $    | (1.31   | )    |  | $    | (1.64   | ) |  | $ | (2.14   | ) |  | $ | (1.99   | )
|Cumulative effect of an accounting change                                 |  |                                       |        |      |  |      |        |      |  |      | (0.36   | ) |  |   |        |   |  |   |        |  
|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net loss                                                                  |  | $                                     | (1.52   | )    |  | $    | (1.31   | )    |  | $    | (2.00   | ) |  | $ | (2.14   | ) |  | $ | (1.99   | )
|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Basic and dilutive equivalent shares
    outstanding(1)                   |  |                                       | 19,479  |      |  |      | 20,475  |      |  |      | 23,517  |   |  |   | 28,249  |   |  |   | 29,805  |  
|                                                                         
|BALANCE SHEET DATA:                                                       |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash, cash equivalents and restricted and
    unrestricted investments(2) |  | $                                     | 128,261 |      |  | $    | 144,718 |      |  | $    | 109,450 |   |  | $ | 154,738 |   |  | $ | 101,803 |  
|Total assets(2)                                                           |  |                                       | 150,959 |      |  |      | 164,242 |      |  |      | 135,633 |   |  |   | 181,841 |   |  |   | 121,086 |  
|Long-term debt                                                            |  |                                       | 8,766   |      |  |      | 7,152   |      |  |      | 5,130   |   |  |   | 4,137   |   |  |   | 3,720   |  
|Total stockholders equity                                                |  |                                       | 130,379 |      |  |      | 144,980 |      |  |      | 116,829 |   |  |   | 157,629 |   |  |   | 99,258  |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For information concerning the calculation of
    loss per share, see Note 19, to the footnotes to our
    consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(2) | Includes restricted investments of
    $16.5 million, $21.4 million, $18.3 million,
    $16.5 million and $18.6 million at December 31,
    1998, 1999, 2000, 2001 and 2002, respectively. See Notes 8 and
    11, to the footnotes to our consolidated financial statements.
    In addition to these restricted investments, we are required to
    maintain, in the aggregate, unrestricted cash, cash equivalents,
    and investments of $40.0 million at all times under the
    terms of certain of our financial obligations.

35



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##### 





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 us and our subsidiaries, including:



| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | where our revenues came from;                                                                                                
|
| |  | what our revenues and expenses were in 2002, 2001
    and 2000;                                                              
|
| |  | why revenues and expenses changed from the year
    before;                                                                  
|
| |  | what significant factors affect our business;                                                                                
|
| |  | how all of the foregoing affect our overall
    financial condition; and                                                     
|
| |  | what our expenditures for capital projects were
    in 2002, 2001 and 2000 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 2002, 2001 and 2000 as well as our
financial position at December 31, 2002 and 2001. We
analyze and explain the annual changes in the specific line
items set forth in our consolidated statements of operations.
This analysis may be important to you in making decisions about
your investment in Guilford.

Results of Operations  Revenue

Revenues

During 2002, 2001, and 2000, we recognized
revenues of $14.7 million, $20.5 million, and
$18.1 million, respectively. These revenues consisted of
the following:

|                                        |                                                                                        |                 |      |      |  |      |      |      |  |   |      |     | 
|--------------------------------------- | -------------------------------------------------------------------------------------- | --------------- | ---- | ---- |  | ---- | ---- | ---- |  | - | ---- | --- | 
|                                        |                                                                                        | 2002            |      | 2001 |  | 2000
|                                        |                                                                                        |                 |      |      |  |     
|                                        |                                                                                        |                
|                                        |                                                                                        | ($ in millions)
|REVENUES RELATED TO GLIADEL®
    WAFER: |                                                                                        |                 |      |      |  |      |      |      |  |   |      |    
|                                        | Net product sales                                                                      |                 | $    | 14.5 |  |      | $    | 20.4 |  |   | $    | 1.5 | 
|                                        | License fees and royalties                                                             |                 |      |     |  |      |      |     |  |   |      | 2.4 | 
|                                        | Non-recurring milestone payments                                                       |                 |      |     |  |      |      |     |  |   |      | 2.0 | 
|                                        | Non-recurring rights and milestone payments
    pursuant to implementation of SAB 101. |                 |      |     |  |      |      |     |  |   |      | 4.9 | 
|                                       
|REVENUES FROM AMGEN:                    |                                                                                        |                 |      |      |  |      |      |      |  |   |      |    
|                                        | Non-recurring rights and milestone payments
    pursuant to implementation of SAB 101. |                 |      |     |  |      |      |     |  |   |      | 3.7 | 
|                                        | Research funding under collaborative agreements                                        |                 |      |     |  |      |      |     |  |   |      | 3.4 | 
|OTHER                                   |                                                                                        |                 | 0.2  |      |  |      | 0.1  |      |  |   | 0.2  |    
|                                        |                                                                                        |                 |      |      |  |      |      |      |  |   |      |    
|TOTAL                                   |                                                                                        | $               | 14.7 |      |  | $    | 20.5 |      |  | $ | 18.1 |    
|                                        |                                                                                        |                 |      |      |  |      |      |      |  |   |      |    

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

36



---



##### 



$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 approved 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 and
manufacturing fees 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.


Revenues from GLIADEL Wafer  Net Product
Sales

For the years ended December 31, 2002 and
2001, we recognized GLIADEL® Wafer net sales of
approximately $14.5 million and $20.4 million
respectively. During this time, 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. Sales in 2001 were higher than sales in
2002, due to sales to our distributors in 2001, as a result of
the anticipation that we would receive approval from the FDA to
expand the label for GLIADEL® Wafer to include use at the
time of first surgery for malignant glioma. In March 2002, the
FDA informed us that the expanded label was not approvable.
Consequently, physician demand for the product did not increase,
resulting in an imbalance between units in the distribution
channel and pull through demand. Because the supply of the
product in the distribution channel had increased in excess of
demand, we chose, during the second half of 2002 to reduce the
sale of product to our specialty distributor in order to more
closely align the number of units in the distribution channel
with demand under the more limited product label for recurrent
surgery. As a result, we made no further shipments to our
specialty distributor in the fourth quarter of 2002.

In response to the FDAs decision and
concerns, we submitted an amendment to our sNDA application,
which included an additional two years of survival data from the
Phase III clinical trial of GLIADEL® Wafer. We agreed with
the FDA on the protocol and methods for collecting and analyzing
this additional long-term follow-up data. On September 19,
2002, we presented the results of this analysis to the FDA.
After completing an informal review of these data, the FDA
advised us that the submission of an amendment to the
Companys sNDA containing the long-term follow-up data
would receive a formal FDA review and reconsideration of the
requested new labeling for the product. On February 25,
2003, the FDA notified us that our amended sNDA was approved;
and therefore, we could commence marketing GLIADEL® Wafer
for use at the time of initial surgery for malignant glioma as
an adjunct to surgery and radiation.

For the year ended December 31, 2000, we
recognized revenue of $1.5 million 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.

GLIADEL® Wafer net sales to customers within
the United States were approximately $ 14.1 million (97%)
and $ 20.1 million (99%) for the years ended
December 31, 2002 and 2001, respectively. The remaining
units were sold outside the United States, including Europe,
Canada, South America, Israel and Australia, either through
distributors or direct to hospitals.

Approximately $10.1 million (985 units) or
69% and $4.2 million (430 units) or 21% of GLIADEL®
Wafer treatments sold during the years ended December 31,
2002 and 2001, respectively, were sold to specialty
distributors. During the third quarter of 2001 we decided to
sell GLIADEL® Wafer through specialty distributors in
preparation for the expected increase in demand that would have
been associated with an expanded label. At the time of the
specialty distributors initial orders in 2001, we provided
extended payment terms of up to 120 days. For the years
ended 2002 and 2001, one specialty distributor accounted for
approximately $10.1 million and $2.5 million
respectively, of net product sales. This distributor has
nationwide

37



---



##### 



marketing and distribution capabilities that
complement our sales and marketing efforts. Additionally, when
we make sales to this distributor, they are responsible for
shipping the product that they purchase to hospital pharmacies,
thereby reducing our overall distribution costs. Without this
distributor, we would incur separate shipping costs from our
logistical distributor for each shipment of the product to
hospital pharmacies and other end-users. This specialty
distributor charges discounts on its purchases of GLIADEL®
Wafer based on its expected sales to end-users and the amount of
capital it has committed to the product as of the date of its
purchases. We have the ability to accept or reject purchase
orders from the specialty distributor at our sole discretion.
For the years ended December 31, 2002 and 2001, our
specialty distributors sold 1,015 and 214 units, respectively,
to hospitals and wholesalers. It is our general practice to have
our sales representatives direct hospital pharmacies to this
distributor for purchases of the product, except for purchases
under our GLIADEL® Advantage Program (formerly known as the
Ensured Availability Program), a special sales and marketing
program described below. We are currently engaged in a dispute
with an affiliate of this specialty distributor, which is
described in the section below, entitled Liquidity and
Capital Resources. The outcome of this dispute may affect
our business relationship with this specialty distributor, which
may in turn negatively affect our sales of GLIADEL® Wafer.
For additional risks associated with our sale of GLIADEL®
Wafer to this specialty distributor, see the risk factors
discussed above in Item 4.A., under the headings A
significant portion of our sales are to a specialty
pharmaceutical distributor, and Our sales to a
specialty pharmaceutical distributor depend on its sales to
hospital pharmacies and desired level of inventory.


Additionally, for the first six months of 2002,
we engaged in an enhanced marketing initiative with the
specialty distributor that ended on June 30, 2002. Of the
treatments sold to this specialty distributor during the six
month period ended June 30, 2002, 94% (650 units) were sold
in connection with this marketing initiative. This marketing
initiative included mailing information about GLIADEL®
Wafer to prospective customers, telemarketing activity and
working with our sales representatives to set up customer
accounts. This marketing initiative cost approximately $201,000
for the six-month period ended June 30, 2002. We did not
operate a similar marketing initiative in 2001.

During the years ended December 31, 2002 and
2001, we sold treatments of GLIADEL® Wafer pursuant to our
GLIADEL® Advantage Program, which is designed to increase
neurosurgeons awareness of GLIADEL® Wafer and to
ensure its availability when the neurosurgeon requires it. Under
this program, customers are provided 180-day payment terms.
During the years ended December 31, 2002 and 2001, we
recognized net revenue of approximately $0.7 million and
$2.8 million, respectively, under this program. Effective
January 23, 2003, we are no longer offering this program.

For the years ended December 31, 2002 and
2001, approximately $3.7 million, or 25% and $13.4 million,
or 66% of GLIADEL® Wafer net sales, respectively, resulted
from sales directly to hospitals or drop shipments to hospitals
pursuant to purchase orders from wholesalers. Substantially all
of these sales to hospitals and wholesalers included our normal
payment terms including discounts for early payment.

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 year
ended December 31, 2000, royalty revenue on Aventis sales
of GLIADEL® Wafer to third parties was $2.4 million.

Contract Revenues

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 years ended December 31, 2002 and
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 during the year ended
December 31, 2000 upon receipt of approval to market and
sell GLIADEL® Wafer in certain countries.

38



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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. The research funding began 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, 2002, 2001 and 2000, were $2.8 million,
$2.8 million and $1.4 million, respectively. Cost of
sales includes the cost of materials, labor and overhead. Gross
profit percentage (net product sales less cost of sales as a
percent of net product sales) for the years ended
December 31, 2002 and 2001 was 80% and 86%, respectively.
Gross profit percentage for the year ended December 31,
2002 was reduced due to decreased production volumes in 2002
compared to 2001, when volumes were increased to support
expected higher demand driven by an anticipated first surgery
approval for GLIADEL® Wafer. Gross profit percentage
comparisons to 2000 are not meaningful as the company 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 cost to manufacture GLIADEL® Wafer at
current market levels can vary materially with production
volume. To the extent that production levels increase or
decrease in the future, we anticipate that the unit cost to
manufacture GLIADEL® Wafer may decrease or increase,
respectively. As a result, we would expect the cost of product
sales of GLIADEL® Wafer, and accordingly, gross profit
percentage, to fluctuate from year to year.

Research and Development Expenses

Our research and development projects are
currently focused on pharmaceutical research and development.
For our biopolymer technologies and our PARP Inhibitors, we have
chosen to pursue potential corporate partnerships or other
strategic alternatives in order to further their research and
development, rather

39



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than develop these projects ourselves. The
following chart sets forth our projects in each of these areas
and the stage to which each has been developed:


|                             |                                              |             |  |              |  |  |  |          | 
|---------------------------- | -------------------------------------------- | ----------- |  | ------------ |  |  |  | -------- | 
|                             |                                              | Development |  |             
|                             |                                              | Stage       |  | Status      
|                             |                                              |             |  |             
|Pharmaceutical technologies: |                                              |             |  |              |  |  |  |         
|                             | GPI 1485 (neuroimmunophilin ligand)          |             |  | Phase II     |  |  |  | Active   | 
|                             | AQUAVANInjection                            |             |  | Phase II     |  |  |  | Active   | 
|                             | NAALADase inhibitors                         |             |  | Pre-clinical |  |  |  | Active   | 
|                             | Other neuroimmunophilin ligands              |             |  | Research     |  |  |  | Active   | 
|                             | Other CNS projects                           |             |  | Research     |  |  |  | Active   | 
|                             | PARP inhibitors                              |             |  | Research     |  |  |  | Inactive | 
|                            
|Biopolymer technologies:     |                                              |             |  |              |  |  |  |         
|                             | PACLIMER® Microspheres (Ovarian Cancer)      |             |  | Phase I/II   |  |  |  | Inactive | 
|                             | PACLIMER® Microspheres (Lung Cancer)         |             |  | Phase I/II   |  |  |  | Inactive | 
|                             | Lidocaine-PE (formerly LIDOMERMicrospheres) |             |  | Phase I      |  |  |  | Inactive | 
|                             | Other biopolymer projects                    |             |  | Research     |  |  |  | Inactive | 

For each of our research and development
projects, we incur both direct and indirect expenses. Direct
expenses include salaries and other costs of personnel, raw
materials and supplies. We may also incur third party costs
related to these projects, such as contract research, consulting
and clinical development costs. Indirect expenses, such as
facility and equipment costs, utilities, general research and
development management and other administrative overhead are
allocated to research and development generally based on, among
other things, the extent to which our general research and
development efforts make use of facilities, non-project
personnel and other resources.

Our research and development expenses were
$46.1 million, $54.3 million and $46.9 million
for the years ended December 31, 2002, 2001 and 2000,
respectively. These expenses were divided between our research
and development platforms in the following manner:

|                            |  |                         |        |      |  |      |        |  |  |   |        | 
|--------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                            |  |                        
|                            |  | Years ended December 31
|                            |  |                        
|                            |  | 2002                    |        | 2001 |  | 2000
|                            |  |                         |        |      |  |     
|Pharmaceutical technologies |  | $                       | 20,815 |      |  | $    | 24,512 |  |  | $ | 21,087 | 
|Biopolymer technologies     |  |                         | 4,990  |      |  |      | 8,563  |  |  |   | 8,648  | 
|Indirect expenses           |  |                         | 20,298 |      |  |      | 21,197 |  |  |   | 17,165 | 
|                            |  |                         |        |      |  |      |        |  |  |   |        | 
|                            |  | $                       | 46,103 |      |  | $    | 54,272 |  |  | $ | 46,900 | 



| |                            
| | ---------------------------
| | Pharmaceutical Technologies

Our pharmaceutical technology research and
development expenses decreased in 2002, compared to 2001,
primarily due to a decrease in expenses in our NAALADase
inhibitor program resulting from the completion of our Phase I
clinical trials of GPI 5693 (a lead NAALADase inhibitor
compound). The decrease in spending on our NAALADase inhibitors
was partially offset by an increase in spending on our FKBP
neuroimmunophilin ligand technology and our AQUAVAN
Injection program. For 2003, we expect research and development
expenses for our pharmaceutical technologies to be incurred
primarily in connection with further clinical development of
AQUAVAN Injection, the preparation for, and initiation of,
one or more Phase II clinical trials of GPI 1485, our lead
neuroimmunophilin ligand compound and additional NAALADase
inhibitor program research.

Research and development expenses related to our
pharmaceutical and related technologies increased in 2001
compared to 2000. This increase is the result of advancing
AQUAVAN Injection and GPI 5693 into clinical trials and
was offset by a reduction in expenses associated with our
neuroimmunophilin program.

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Biopolymer
Technologies

Our biopolymer technology research and
development expenses decreased in 2002, compared to 2001, due to
a decrease in expenses incurred in connection with the clinical
development of both PACLIMER® Microspheres and Lidocaine-PE
(formerly LIDOMER Microspheres). The decrease in clinical
development expenses resulted from the completion of our
clinical trials for PACLIMER® Microspheres (ovarian cancer)
and Lidocaine-PE (post surgical pain) during the first quarter
of 2002. In connection with our corporate restructuring in the
third quarter of 2002, we terminated the clinical trial for
PACLIMER® Microspheres (lung cancer). We, therefore, expect
research and development expenses related to our biopolymer
technology to further decrease during the remainder of 2003,
compared to 2002. Currently, we do not plan to conduct
additional research or clinical testing of our biopolymer
technologies. Instead, we plan to pursue a corporate
partnership, divestiture or similar strategic transaction to
further develop these 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
Lidocaine-PE as it advanced into clinic.



| |                  
| | -----------------
| | Indirect Expenses

Our indirect research and development expenses
decreased for the year ended 2002 compared to 2001, in part due
to decreased overhead and a reduction in force in the second
half of 2002. The increase from the year ended 2000 to 2001 was
caused by increased costs to operate our facilities, as well as
increased general research and development management activity.

Selling, General and Administrative
Expenses

Our selling, general and administrative
(SG&A) expenses were $29.8 million,
$30.1 million and $14.1 million for the years ended
December 31, 2002, 2001 and 2000, respectively. For the
year ended December 31, 2002, the costs incurred to market,
sell and distribute GLIADEL® Wafer were $14.6 million
compared to $16.1 million for the year ended
December 31, 2001. The decrease in expense is largely
attributable to GLIADEL® Wafer sales and marketing start up
costs incurred in 2001 that did not recur in 2002. 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.

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
$3.4 million, $4.5 million and $0.9 million for the
years ended December 31, 2002, 2001 and 2000, respectively,
for services provided by Cardinal under the Cardinal Agreement.
On July 9, 2002, we notified Cardinal that under the terms
of the Cardinal Agreement, we were exercising our option to
transition the contract sales force to us. As a result, on
October 1, 2002 the sales representatives became Guilford
employees, and pursuant to the terms of the Cardinal Agreement,
we paid Cardinal a $0.2 million transition fee.

Costs and expenses associated with our general
and administrative functions were $15.2 million,
$14.0 million and $12.3 million for the years ended
December 31, 2002, 2001 and 2000, respectively. The
increase for the year ended December 31, 2002 to 2001 is
largely attributable to a restructuring charge of
$1.3 million, which consisted of employee severance costs,
including severance pay, related payroll taxes and insurance and
outplacement services. The increase from 2001 to 2000 was
attributable to the expansion of our overall corporate
development activities as well as overall general and
administrative spend. Our general and administrative functions
include the areas of executive management, finance and
administration, investor and public relations, corporate
development, human resources 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

41



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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 selling, general
and administrative expenses.


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.

Other Income and Expense

Other income and expense consists primarily of
income on our investments and interest expense on our debt and
other financial obligations. Our investment income was
$5.4 million, $6.9 million and $7.7 million for
the years ended December 31, 2002, 2001 and 2000,
respectively. The decrease in investment income in 2002 compared
to 2001 was primarily due to lower interest rates and investment
balances maintained during those periods. The decrease in
investment income in 2001 compared to 2000 was primarily due to
lower interest rates in 2001 on modestly larger average
investment balances maintained during that year.

We incurred interest expense of $0.5 million
for each of the years ended December 31, 2002, 2001 and
2000. 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 to a
commercial bank primarily used to repay a $2.4 million note
payable to Cardinal pursuant to the Cardinal Agreement.

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 since inception
primarily through the issuance of equity securities, revenues
from the sales of GLIADEL® Wafer, funding pursuant to
collaborative agreements and proceeds from loans or other
borrowings. For the year ended 2002, cash, cash equivalents and
investments were reduced by $52.9 million to primarily fund
net operating activities.

Our cash, cash equivalents and investments were
$101.8 million at December 31, 2002. Of this amount, we
pledged $18.6 million as collateral for certain of our
loans and other financial lease obligations. In addition to
these restricted investments, we are required to maintain, in
the aggregate, unrestricted cash, cash equivalents, and
investments of $40.0 million at all times under the terms
of certain of our financial obligations. In total, our banking
covenants require us to maintain approximately
$58.6 million in restricted and unrestricted investments
pursuant to these financial obligations. We believe we will be
able to stay in compliance with our covenants and restrictions
for the year ended December 31, 2003, by either maintaining
the necessary cash requirements or restructuring the covenants
and restrictions. We are currently examining opportunities to
reduce these collateral and liquidity requirements; however,
there can be no assurances that we will be successful in our
attempts to modify these obligations.

42



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Our total long-term debt decreased a net
$1.8 million to $6.9 million at December 31,
2002, compared to $8.8 million at December 31, 2001.
This decrease is primarily due to repayments of
$6.7 million offset by borrowings of $3.0 million from a
commercial bank combined with additional financings in the
amount of $1.9 million for insurance and capital leases.

On May 2, 2002, the Company borrowed
$3.0 million from a commercial bank, in order to repay the
note payable to Cardinal. This new indebtedness bears interest
at the rate of one-month LIBOR plus 0.625% and is payable in
four equal annual installments of principal beginning
April 30, 2003, with the final payment due on
April 30, 2006. Interest payments are due quarterly. In
connection with this indebtedness, we are required to maintain
with the commercial bank, restricted cash, cash equivalents and
investments in the amount of the unpaid principal balance of
this indebtedness.

The Company funds capital additions through
either lease arrangements or direct purchases utilizing our
existing cash. To the extent possible, we finance property and
equipment requirements by obtaining capital and operating
leases. We funded capital expenditures of $3.1 million,
$2.4 million and $3.5 million for the years ended
December 31, 2002, 2001, and 2000, respectively. Of the
capital expenditures funded during the year ended
December 31, 2002, $1.5 million were funded pursuant
to capital equipment lease arrangements, $1.3 million through
operating leases, and $0.3 million were acquired through
the use of our cash. In connection with this indebtedness, we
are required to maintain restricted cash, cash equivalents and
investments in the amount of $1.1 million.

In October 2002, the Company entered into a new
master lease agreement to provide up to $1.0 million for
computer and equipment financing. The Companys previous
master lease agreement, entered into in August 2001 expired on
June 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, 2002, the Company had leased approximately
$0.3 million in equipment under this master lease agreement.

In February 1998, we entered into a real estate
development agreement and operating lease with a special purpose
entity sponsored by a commercial bank, to design, construct and
lease a research and development facility. The entity 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. None of our officers or directors are affiliated
with this special purpose entity. 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
$18.8 million at December 31, 2002 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. The Companys maximum exposure to loss as
a result of the SPE is the residual guarantee
($13.8 million). We are required to maintain collateral
equal to approximately 74% (after certain guarantees) of the
remaining balance of the lessors net investment in the
facility. We were required to maintain cash collateral of
$13.8 million as of December 31, 2002, 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 relative to this
Agreement.

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

43



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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.


In addition to the interest rate swap agreements
covering the underlying debt for our research and development
facility, we entered into a series of interest rate swap
transactions in 1998 and 1999, with a commercial bank covering
at that time $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 the same rate as the underlying bond
and term loans.

During 2002, the Company terminated its agreement
with Cardinal to provide a contract sales force. The termination
has led to a dispute regarding amounts owed to Cardinal at the
termination date. The Company does not believe it has any
remaining obligations to Cardinal at December 31, 2002
relative to the agreement; however, Cardinal has asserted that
it may be owed $0.8 million. On March 13, 2003, we
received notice from the parent of Cardinal that National
Speciality Services Inc. (NSS), an affiliate of Cardinal and a
subsidiary of its Parent, was going to offset the amount
Cardinal claims we owe it against an account payable in the
amount of approximately $1.8 million that NSS owes us, in
addition to taking certain unearned prompt payment discounts,
also in payment of the amounts that Cardinal claims we owe it.
NSS is the specialty distributor to whom we sell GLIADEL®
Wafer. We do not believe that Cardinal or NSS has the right to
make an offset under our agreement with NSS for amounts that
Cardinal claims we owe it. The Company does not believe the
resolution of this matter will have a material adverse effect on
the Companys consolidated financial condition, result of
operations or liquidity.

We have an agreement with the specialty
distributor to whom we sell GLIADEL® Wafer that permits
either us or the specialty distributor to terminate the
agreement upon 60 days prior written notice. Under the
terms of our agreement with this distributor, if the agreement
is terminated, we have an obligation to repurchase any remaining
treatments of GLIADEL® Wafer that the distributor may have
in its inventory. As of December 31, 2002, we believe that
our specialty distributor had approximately $1.9 million of
GLIADEL® Wafer in its inventory.

We expect to need significantly greater capital
to continue our research and development programs and
pre-clinical and clinical testing and to manufacture and market,
sell and distribute our products. Our future capital
requirements will depend on many factors, including but not
limited to, revenues from the sale of GLIADEL® Wafer,
progress of our research and development programs, progress of
pre-clinical and clinical testing, time and cost involved in
obtaining regulatory approval, 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 marketing developments, ability to
establish collaborative arrangements, ability to enter into
licensing agreements and contractual arrangements with others,
and the cost of product in-licensing. As a result, we may need
significant additional funding in the future. The source, timing
and availability of this funding will depend on market
conditions, interest rates and other factors. This funding may
be sought through various sources, including debt and equity
offerings, corporate collaborations, bank borrowings, lease
arrangements relating to fixed assets or other financing
methods. There can be no assurances that additional funds will
be available on favorable terms, if at all.

We believe that our existing resources will be
sufficient to fund our activities through at least
December 31, 2003. 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 neuroimmunophilin ligand);
|
| |  | AQUAVAN Injection;                          
|
| |  | NAALADase Inhibitors;                        
|
| |  | other neuroimmunophilin ligands; and         
|
| |  | other research projects                      

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

The following are contractual commitments at
December 31, 2002, associated with debt obligations, lease
obligations and our research and development projects (in
thousands):

|                                           |  |                        |        |         |  |           |        |           |  |          |       |  |  |   |       |  |  |   |   | 
|------------------------------------------ |  | ---------------------- | ------ | ------- |  | --------- | ------ | --------- |  | -------- | ----- |  |  | - | ----- |  |  | - | - | 
|                                           |  |                       
|                                           |  | Payments Due By Period
|                                           |  |                       
|Contractual Commitments(1)                 |  | Total                  |        | <1 Year |  | 1-3 Years |        | 4-5 Years |  | >5 years
|                                           |  |                        |        |         |  |           |        |           |  |         
|Long-term debt                             |  | $                      | 5,896  |         |  | $         | 2,330  |           |  | $        | 2,561 |  |  | $ | 1,005 |  |  | $ |  | 
|Capital lease obligations                  |  |                        | 1,024  |         |  |           | 870    |           |  |          | 154   |  |  |   |      |  |  |   |  | 
|Operating leases                           |  |                        | 4,847  |         |  |           | 2,401  |           |  |          | 2,316 |  |  |   | 130   |  |  |   |  | 
|Research and development facility lease(2) |  |                        | 3,004  |         |  |           | 1,344  |           |  |          | 1,660 |  |  |   |      |  |  |   |  | 
|Research and development arrangements(3)   |  |                        | 12,782 |         |  |           | 10,852 |           |  |          | 1,819 |  |  |   | 111   |  |  |   |  | 
|                                           |  |                        |        |         |  |           |        |           |  |          |       |  |  |   |       |  |  |   |   | 
|Total Contractual Commitments              |  | $                      | 27,553 |         |  | $         | 17,797 |           |  | $        | 8,510 |  |  | $ | 1,246 |  |  | $ |  | 
|                                           |  |                        |        |         |  |           |        |           |  |          |       |  |  |   |       |  |  |   |   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 note) to acquire, construct and lease
    a research and development facility. Construction was completed
    in 1999 at a total cost 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 $1.3 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, also known as
    LIBOR) 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
    investment in the facility. We do not believe that our facility
    has experienced a property value decline below the residual
    value guarantee. 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) | Research and development arrangements include
    commitments that we have entered into at December 31, 2002,
    to engage third parties to perform various aspects of our
    research and development efforts subsequent to December 31,
    2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Critical Accounting Policies and
Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and
expenses and disclosure of contingent assets and liabilities. We
base our estimates and judgments on historical experience and
various other factors that are believed to be reasonable under
the circumstances. Actual results could differ from our
estimates and assumptions. We believe the following critical
accounting policies, among others, affect our more significant
estimates and assumptions and require the use of complex
judgment in their application.

45



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##### 



Revenue Recognition.Revenue from sales of GLIADEL®
Wafer, our only marketed product, is recognized when, pursuant
to Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, all four of the
following criteria are met: (i) we have persuasive evidence
that an arrangement exists, (ii) the price is fixed and
determinable, (iii) title has passed and
(iv) collection is reasonably assured. Our primary customer
is National Specialty Services, Inc. (or NSS), a large specialty
pharmaceutical distributor who sells directly into the retail
channel. Product demand by this distributor during a given
period may not correlate with prescription demand for the
product in that period. As a result, we periodically evaluate
NSS inventory position. If we believe these levels are too
high based on prescription demand, we will not accept purchase
orders from or ship additional product to NSS until these levels
are reduced. Provisions for sales discounts, and estimates for
chargebacks, rebates, damaged product returns, and exchanges for
expired product are established as a reduction of product sales
revenues at the time such revenues are recognized. These revenue
reductions are established by us as our best estimate at the
time of sale based on historical experience, adjusted to reflect
known changes in the factors that impact such reserves.

Research and Development Expenses.For each of our research and
development projects, we incur both direct and indirect
expenses. Direct expenses include salaries and other costs of
personnel, raw materials and supplies. We may also incur third
party costs related to these projects, such as contract
research, consulting and clinical development costs. Indirect
expenses, such as facility and equipment costs, utilities,
general research and development management and other
administrative overhead are allocated to research and
development generally based on, among other things, the extent
to which our general research and development efforts make use
of facilities, non-project personnel and other resources. We
review and accrue clinical trials expenses based on estimates of
work performed and completion of certain events. We believe that
this method best aligns the expenses we record with the efforts
we expend. Accrued clinical costs are subject to revisions as
trials progress to completion. Revisions are charged to expense
in the period in which the facts that give rise to the revision
become known.

Special Purpose Entity.In February 1998, we entered into a
real estate development agreement and operating lease with a
special purpose entity sponsored by a commercial bank, to
design, construct and lease a research and development facility.
The entity 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. None of our officers
or directors is affiliated with this special purpose entity.
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 $18.8 million
at December 31, 2002 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 do not
believe that our facility has experienced a property value
decline below the residual value guarantee. 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. The Companys maximum exposure to loss as a result of
the SPE is the residual guarantee ($13.8 million).

New Accounting Pronouncements

In November 2002, the Financial Accounting
Standards Board issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others (the Interpretation). The Interpretation will
significantly change current practice in the accounting for, and
disclosure of, guarantees. The Interpretation requires certain
guarantees to be recorded at fair value as those terms are
defined in SFAS 5, Accounting for Contingencies. The Company
does not expect the adoption of the Interpretation to have a
significant financial impact on its Consolidated Financial
Statements.

46



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##### 



In December 2002, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure(SFAS 148) which amends Statement of Financial
Accounting Standards No. 123, Accounting for
Stock-Based Compensation. SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation
and requires more prominent and more frequent disclosures in the
financial statements of the effects of stock-based compensation.
The provisions of SFAS 148 are effective for fiscal years ending
after December 15, 2002 and the interim disclosure
provisions are effective for interim periods beginning after
December 15, 2002. The Company will provide the required
interim disclosures beginning in the quarter ended
March 31, 2003. The Company has elected to continue
accounting for stock options in accordance with APB 25. As such,
no compensation expense for stock options has been recognized
under the fair value basis of accounting on the consolidated
statements of operations.

In January 2003, the FASB issued Interpretation
No. 46 (FIN 46), Consolidation of
Variable Interest Entities with the objective of improving
financial reporting by companies involved with variable interest
entities. A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity
investors with voting rights, or (b) has equity investors
that do not provide sufficient financial resources for the
entity to support its activities. Historically, entities
generally were not consolidated unless the entity was controlled
through voting interests. FIN 46 changes that by requiring a
variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to
receive a majority of the entitys residual returns or
both. A company that consolidates a variable interest entity is
called the primary beneficiary of that entity. FIN
46 also requires disclosures about variable interest entities
that a company is not required to consolidate but in which it
has a significant variable interest. The consolidation
requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation
requirements of FIN 46 apply to existing entities in the first
fiscal year or interim period beginning after June 15,
2003. Also, certain disclosure requirements apply to all
financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.

The Company is in the process of assessing the
impact of FIN 46 on the Company and specifically as it relates
to the operating lease for its research and development facility
with a special purpose entity (SPE) sponsored by a
commercial bank. If it is determined to apply, the application
of FIN 46 may result in the Company consolidating the SPE for
the quarter ended September 30, 2003 in the Companys
consolidated financial statements, or alternatively, it may
result in the Company exploring alternatives such as selling or
restructuring its interest in the facility. See note 11 of our
consolidated financial statements for the pro forma impact of
consolidating the SPE on certain categories of our consolidated
balance sheet at December 31, 2002, and on our net loss for
the year ended December 31, 2002.

Outlook

For the year ending December 31, 2003, we
expect sales of GLIADEL® Wafer to be between
$20.0 million and $25.0 million, with a point estimate
of $23.0 million.

Additionally, we are actively looking to acquire
another product to market and sell. Although this is a
competitive market, we remain committed to finding an acceptable
opportunity through in-licensing, co-promotion, or other
potential avenues.

We anticipate that cost of goods sold, as a
percentage of net sales, will decrease as our production volume
increases. For 2003, we estimate cost of goods sold as a
percentage of net sales will be between 15% and 20%.

We expect research and development expenditures
in 2003 to be approximately $35.0 million to
$40.0 million. We anticipate that selling, general and
administrative costs will remain constant in 2003, reflecting
normal adjustments for recurring salary, benefits and similar
costs. Accordingly, we would expect selling, general and
administrative expenditures to be in the range of $29.0 to
$32.0 million.

47



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##### 



Our current budgets and plans include cash
proceeds from potential corporate collaborations and/or
strategic financings of approximately $10.0 million to
$15.0 million. If we can achieve these objectives, we will
expect to have cash at the end of 2003 of not less than
approximately $65.0 to $70.0 million. To increase cash flow, we
also continue to focus on out-licensing or selling product
candidates or technologies we do not intend to pursue the
development of ourselves.



|         |                                                               
|-------- | --------------------------------------------------------------
|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, 2002 was $100.7 million and yield to maturity
was approximately 3.0%. The weighted-average return on our
investments during the year ended December 31, 2002 was
approximately 4.5%.

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 $21.1 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 $22.3 million as of December 31, 2002.
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
$1.6 million at December 31, 2002. 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



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##### 





|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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 2003 Proxy Statement, which will be
filed no later than 120 days following December 31,
2002. 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 2003
Proxy Statement, which will be filed no later than 120 days
following December 31, 2002.



|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

Except for the Equity Compensation Plan
information set forth below, 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 2003 Proxy Statement, which will be
filed no later than 120 days following December 31,
2002.



| |                                                                       
| | ----------------------------------------------------------------------
| | Securities Authorized for Issuance Under
    Equity Compensation Plans

|                                                               |       |                   |           |                  |  |                      |       |       |  |  |           |           | 
|-------------------------------------------------------------- | ----- | ----------------- | --------- | ---------------- |  | -------------------- | ----- | ----- |  |  | --------- | --------- | 
|                                                               |       |                   |           |                  |  | Number of           
|                                                               |       |                   |           |                  |  | securities          
|                                                               |       | Number of         |           | Weighted-        |  | remaining for       
|                                                               |       | securities to be  |           | average exercise |  | future issuance     
|                                                               |       | issued upon       |           | price of         |  | under equity        
|                                                               |       | exercise of       |           | outstanding      |  | compensation        
|                                                               |       | outstanding       |           | options,         |  | plans (excluding    
|                                                               |       | options, warrants |           | warrants and     |  | securities reflected
|                                                               |       | and rights        |           | rights           |  | in column (A))      
|                                                               |       |                   |           |                  |  |                     
|                                                               |       | (A)               |           | (B)              |  | (C)                 
|Equity compensation plans approved by security
    holders     |       |                   | 3,066,486 | (1)              |  | $                    | 15.32 |       |  |  | 1,819,958 |          
|Equity compensation plans not approved by
    security holders |       |                   | 2,788,793 | (2)              |  | $                    | 14.95 |       |  |  | 0         |          
|                                                               | Total |                   |           | 5,855,279        |  |                      | $     | 15.14 |  |  |           | 1,819,958 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of shares to be issued upon exercise of
    outstanding options granted under the Guilford Pharmaceuticals
    Inc. 1993 Employee Share Option and Restricted Share Plan, as
    amended, the Guilford Pharmaceuticals Inc. Directors Stock
    Option Plan, and the Guilford Pharmaceuticals Inc. 2002 Plan
    (the 2002 Plan). Of these plans, the only plan under
    which options may be granted in the future is the 2002 Plan.                                                                                                                                                               
|   
|(2) | Consists of shares to be issued upon exercise of
    outstanding options granted under the Guilford Pharmaceuticals
    Inc. 1998 Employee Share Option and Restricted Share Plan (the
    1998 Plan), and shares issuable to the following
    consultants, in the amounts set forth beside each of their names
    (collectively, the Consultants Option
    Arrangements): Henry Brem (70,000 shares); Robert Langer
    (142,800 shares); Richard Casey (55,000 shares); Kam Leong
    (30,000 shares); John Newman (35,000 shares); Solomon Snyder
    (90,000 shares); and Susan Smith (8,000 shares).

49



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##### 



Equity Compensation Plans Not Approved by
Security Holders

The disclosure required by paragraph (d)(3) of
Item 201 of Regulation S-K for the 1998 Plan and the
Consultants Option Arrangements is incorporated herein by
reference from Note 15 to our Notes To Consolidated Financial
Statements set forth on pages F-19 through F-23 of this
annual report, under the headings, Employee Share
Option and Restricted Share Plans,and,
Consultants,respectively.



|         |                                                   
|-------- | --------------------------------------------------
|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 2003 Proxy Statement, which will be
filed no later than 120 days following December 31,
2002.



|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

a)     Evaluation of
Disclosure Controls and Procedures.The Chief Executive
Officer and the Chief Financial Officer have reviewed our
disclosure controls and procedures as of a date within the
90-day period prior to the filing of this annual report (the
Evaluation Date). Based on that review, they have
concluded that, as of the Evaluation Date, these controls and
procedures were, in design and operation, effective to assure
that the information required to be included in this report has
been properly collected, processed, and timely communicated to
those responsible in order that it may be included in this
report.

b)     Changes in
Internal Controls.Subsequent to the Evaluation Date, there
have been no significant changes, including corrective actions,
in our internal controls or in other factors that could
significantly affect the disclosure controls and procedures.

50



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##### 



PART IV

Item 15.     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, 2002 and 2001                                                        |  |        | F-2 | 
|Consolidated Statements of Operations for the
    Years Ended December 31, 2002, 2001 and 2000                          |  |        | F-3 | 
|Consolidated Statements of Changes in
    Stockholders Equity for the Years Ended December 31,
    2002, 2001 and 2000 |  |        | F-4 | 
|Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2002, 2001, and 2000                         |  |        | 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-27 | 
|Schedule II  Valuation and Qualifying
    Accounts |  |  | F-28 | 

(a)(3) Exhibits

The following exhibits are filed as part of this
report:

|        |        |             |  |                                                                                                                                                                                                                                                  
|------- | ------ | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 3.01A  |             |  | Amended and Restated Certificate of Incorporation
    of the Company (incorporated by reference to the
    Registrants Registration Statement on Form S-1
    (No. 33-76938)).                                                                  
|        | 3.01B  |             |  | Certificate of Designation, Preferences and
    Rights of Series A Junior Participating Preferred Stock
    dated September 29, 1995 (incorporated by reference to the
    Registrants Current Report on Form 8-K filed
    September 26, 1995).
|        | 3.01C  |             |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation dated April 1, 1997
    (incorporated by reference to the Registrants current
    Report on Form 8-K filed April 4, 1997).                                    
|        | 3.01D  |             |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation dated May 19, 1998 (filed
    herewith).                                                                                                                       
|        | 3.02   |             |  | Amended and Restated Bylaws as of February 2003
    (filed herewith).                                                                                                                                                                            
|        | 4.01   |             |  | Specimen Stock Certificate (incorporated by
    reference to the Registrants Registration Statement on
    Form S-1 (No. 33-76938)).                                                                                                            
|        | 4.02A  |             |  | Stockholder Rights Agreement dated
    September 26, 1995 (incorporated by reference to the
    Registrants Form 8-K filed October 10, 1995).                                                                                                   
|        | 4.02B  |             |  | Form of Amendment No. 1 to Stockholder
    Rights Agreement (incorporated by reference to the
    Registrants Form 8-K, filed October 20, 1998).                                                                                                
|        | 10.01A |             |  | 1993 Employee Share Option and Restricted Share
    Plan (1993 Option Plan) (incorporated by reference
    to the Registrants Registration Statement on Form S-1
    (No. 33-76938)).                                                         
|        | 10.01B |             |  | Amendment to 1993 Option Plan (incorporated by
    reference to the Registrants Registration Statement on
    Form S-1 (No. 33-94530)).                                                                                                         
|        | 10.01C |             |  | Amendment to 1993 Option Plan (incorporated by
    reference to the Registrants Form 10-Q for the
    quarter ended June 30, 1996).                                                                                                             

51



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##### 



|        |         |             |  |                                                                                                                                                                                                                                                                                            
|------- | ------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 10.01D  |             |  | Amendment to 1993 Option Plan (incorporated by
    reference to the Registrants Form 10-K for the year
    ended December 31, 1996).                                                                                                                                                      
|        | 10.01E  |             |  | Amendment to 1993 Option Plan (incorporated by
    reference to the Registrants Registration Statement on
    Form S-8 (No. 333-56092))                                                                                                                                                   
|        | 10.01F  |             |  | Amendment to 1993 Option Plan (filed herewith).                                                                                                                                                                                                                                            
|        | 10.01G  |             |  | Form of Stock Option Agreement under the 1993
    Option Plan (filed herewith).                                                                                                                                                                                                            
|        | 10.02A  |             |  | 1998 Employee Share Option and Restricted Share
    Plan, as amended (1998 Option Plan) (incorporated by
    reference to the Registrants Form S-8
    (No. 333-30814)).                                                                                                                
|        | 10.02B  |             |  | Amendment to 1998 Option Plan (incorporated by
    reference to the Registrants Form 10-K for the year
    ended December 31, 1998).                                                                                                                                                      
|        | 10.02C  |             |  | Form of Stock Option Agreement under the 1998
    Option Plan (filed herewith).                                                                                                                                                                                                            
|        | 10.03A  |             |  | Guilford Pharmaceuticals Inc. Directors
    Stock Option Plan (Directors Plan)
    (incorporated by reference to the Registrants Registration
    Statement on Form S-1 (No. 33-76938)).                                                                                              
|        | 10.03B  |             |  | Amendment to Directors Plan (incorporated
    by reference to the Registrants Form 10-K for the
    year ended December 31, 1998).                                                                                                                                                       
|        | 10.03C  |             |  | Amendment to Directors Plan (incorporated
    by reference to the Registrants Form 10-Q for the
    quarter ended March 31, 1999).                                                                                                                                                       
|        | 10.03D  |             |  | Form of Stock Option Agreement under the
    Directors Plan (filed herewith).                                                                                                                                                                                                             
|        | 10.04   |             |  | Guilford Pharmaceuticals Inc. 2001 Stock Purchase
    Plan (incorporated by reference to the Registrants
    Registration Statement on Form S-8 (No. 333-71218)).                                                                                                                         
|        | 10.05   |             |  | Guilford Pharmaceuticals Inc. 2002 Employee Stock
    Purchase Plan (filed herewith).                                                                                                                                                                                                      
|        | 10.06   |             |  | Guilford Pharmaceuticals Inc. 2002 Stock Option
    and Incentive Plan and form of stock option agreements
    (2002 Option Plan) (filed herewith).                                                                                                                                      
|        | 10.07   |             |  | Employment Agreement between the Company and
    Craig R. Smith, M.D (incorporated by reference to the
    Registrants Registration Statement on Form S-1
    (No. 33-76938)).                                                                                                            
|        | 10.08   |             |  | Employment Agreement between the Company and
    Andrew R. Jordan (incorporated by reference to the
    Registrants Registration Statement on Form S-1
    (No. 33-76938)).                                                                                                               
|        | 10.09   |             |  | Amendments to employment agreements between the
    Company and each of Andrew R. Jordan and Craig R. Smith
    (incorporated by reference to the Registrants
    Form 10-Q for the quarter ended September 30, 1996).                                                                    
|        | 10.10   |             |  | Form of Change in Control Severance Agreement
    (incorporated by reference to the Form 10-Q for the quarter
    ended September 30, 1998).                                                                                                                                               
|        | 10.11   |             |  | Form of Severance Agreement (filed herewith).                                                                                                                                                                                                                                              
|        | 10.12   |             |  | Form of Director and Officer Indemnification
    Agreement (incorporated by reference to the Registrants
    Registration Statement on Form S-1 (No. 33-76938)).                                                                                                                          
|        | 10.13   |             |  | Form of Tax Indemnity Agreement (incorporated by
    reference to the Registrants Registration Statement on
    Form S-1 (No. 33-76938)).                                                                                                                                                 
|        | 10.14   |             |  | 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).                                                                                                       
|        | 10.15A |             |  | 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 (incorporated by reference to the Registrants
    Registration Statement on Form S-1 (No. 33-76938)).
|        | 10.15B  |             |  | Appendix A to RTI Agreement (incorporated by
    reference to the Registrants Registration Statement on
    Form S-1 (No. 33-76938)).                                                                                                                                                     
|        | 10.16  |             |  | License Agreement, dated March 15, 1994,
    between the Company and Scios Nova (incorporated by reference to
    the Registrants Registration Statement on Form S-1
    (No. 33-76938)).                                                                                                 
|        | 10.17  |             |  | License Agreement, dated December 20, 1993,
    between the Company and The Johns Hopkins University
    (incorporated by reference to the Registrants Registration
    Statement on Form S-1 (No. 33-76938)).                                                                            

52



---



##### 



|        |        |             |  |                                                                                                                                                                                                                                                                                                                                                                            
|------- | ------ | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 10.19 |             |  | Amended and Restated License Agreement, effective
    November 25, 1998, between the Company and The Johns
    Hopkins University (incorporated by reference to the
    Registrants Form 10-K filed March 30, 1999).                                                                                                                                                      
|        | 10.20 |             |  | License Agreement, dated December 9, 1995,
    by and between the Company and Daiichi Radioisotope
    Laboratories, Ltd (incorporated by reference to the
    Registrants Form 10-K for the year ended December 31,
    1995).                                                                                                                                           
|        | 10.21 |             |  | License and Distribution Agreement, dated
    October 13, 1995, by and between the Company and Orion
    Corporation Farmos (incorporated by reference to the
    Registrants Form 10-K/ A for the year ended
    December 31, 1995).                                                                                                                                     
|        | 10.22  |             |  | License, Development and Commercialization
    Agreement dated March 2, 2000, between the Company and
    ProQuest Pharmaceuticals Inc. (incorporated by reference to the
    Registrants Form 10-Q for the quarter ended
    March 31, 2000).                                                                                                                            
|        | 10.23  |             |  | Distribution Agreement, dated September 27,
    2001, between the Company and National Specialty Services, Inc.
    (incorporated by reference to the Registrants
    Form 10-Q for the quarter ended March 31, 2002).                                                                                                                                                    
|        | 10.24  |             |  | Lease Agreement, dated August 30, 1994,
    between Crown Royal, L.P. and the Company (incorporated by
    reference to the Registrants Form 10-Q for the
    quarter ended September 30, 1994).                                                                                                                                                                          
|        | 10.25A |             |  | Loan and Financing Agreement between the Maryland
    Economic Development Corporation (MEDCO), the
    Company and Signet Bank/ Maryland (Signet)
    (L&F Agreement) (incorporated by reference to
    the Registrants Form 10-K for the year ended December
    31, 1994).                                                                                       
|        | 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) (incorporated
    by reference to the Registrants Form 10-K for the
    year ended December 31, 1994).                                                                                                                       
|        | 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 (incorporated by reference to
    the Registrants Form 10-K for the year ended
    December 31, 1994).                                                                                                                 
|        | 10.27A |             |  | Insurance Agreement between the Maryland
    Industrial Development Financing Authority and Signet
    (Insurance Agreement) (incorporated by reference to
    the Registrants Form 10-K for the year ended
    December 31, 1994).                                                                                                                                     
|        | 10.27B |             |  | Letter, dated April 2, 1996, amending
    Insurance Agreement (incorporated by reference to the
    Registrants Form 10-K for the year ended
    December 31, 1996).                                                                                                                                                                                                      
|        | 10.27C |             |  | Amendment No. 2, dated June 29, 1998,
    to Insurance Agreement (incorporated by reference to the
    Registrants Form 10-Q for the quarter ended
    June 30, 1998).                                                                                                                                                                                                    
|        | 10.28  |             |  | 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 (incorporated by
    reference to the Registrants Form 10-K for the year
    ended December 31, 1997).
|        | 10.29  |             |  | Amended and Restated Trust Agreement, dated as of
    February 5, 1998 between the Several Holders from time to
    time parties thereto and the Trust (incorporated by reference to
    the Registrants Form 10-K for the year ended
    December 31, 1997).                                                                                                             
|        | 10.30  |             |  | Agency Agreement, dated as of February 5,
    1998, between the Company and the Trust (incorporated by
    reference to the Registrants Form 10-K for the year
    ended December 31, 1997).                                                                                                                                                                              
|        | 10.31  |             |  | Credit Agreement, dated as of February 5,
    1998, among the Trust, the Several Holders from time to time
    parties thereto and First Union (incorporated by reference to
    the Registrants Form 10-K for the year ended
    December 31, 1997).                                                                                                                     

53



---



##### 



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.32 |             |  | 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 (incorporated by reference to the
    Registrants Form 10-K for the year ended
    December 31, 1997).
|        | 10.33 |             |  | Lease Agreement, dated as of February 5,
    1998, between the Trust and the Company (incorporated by
    reference to the Registrants Form 10-K for the year
    ended December 31, 1997).                                                                                                                                                                                                                                          
|        | 10.34 |             |  | MIDFA Agreement, dated June 29, 1998, by and
    between MIDFA, First Security, the Company and First Union
    (incorporated by reference to the Registrants
    Form 10-Q for the quarter ended June 30, 1998).                                                                                                                                                                                                                    
|        | 10.35 |             |  | Insurance Agreement, dated June 29, 1998, by
    and between MIDFA and First Union (incorporated by reference to
    the Registrants Form 10-Q for the quarter ended June
    30, 1998).                                                                                                                                                                                                                                             
|        | 10.36 |             |  | Term Loan, dated April 30, 1996, as amended
    on December 6, 1996, by and between the Company and Signet
    Bank (incorporated by reference to the Registrants
    Form 10-K for the year ended December 31, 1996.                                                                                                                                                                                                                
|        | 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:

On December 5, 2002, the Company filed a
current report on Form 8-K disclosing under Item 5
certain management changes.

On November 14, 2002, the Company filed a
current report on Form 8-K for the purpose of furnishing
under Item 9 a copy of the written certification required
by 18 U.S.C. § 1350, as adopted pursuant to § 906 of
the Sarbanes-Oxley Act of 2002.

54



---



##### 



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, President and Chief Executive
    Officer

March 31, 2003

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

|                                                   |  |                                                                                                                                        |  |               
|-------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                          |  | Title                                                                                                                                  |  | Date          
|                                                   |  |                                                                                                                                        |  |               
|                                                  
|/s/ CRAIG R. SMITH, M.D.Craig R. Smith, M.D.       |  | President, Chief Executive Officer and Director
    (Principal Executive Officer)                                                      |  | March 31, 2003
|                                                  
|/s/ ANDREW R. JORDANAndrew R. Jordan               |  | Executive Vice President, Chief Financial Officer
    and Treasurer (Principal Financial Officer and Principal
    Accounting Officer) |  | March 31, 2003
|                                                  
|/s/ GEORGE L. BUNTING, JR.George L. Bunting, Jr.   |  | Director                                                                                                                               |  | March 31, 2003
|                                                  
|/s/ BARRY M. FOXBarry M. Fox                       |  | Director                                                                                                                               |  | March 31, 2003
|                                                  
|/s/ ELIZABETH M. GREETHAMElizabeth M. Greetham     |  | Director                                                                                                                               |  | March 31, 2003
|                                                  
|/s/ JOSEPH R. KLEIN, IIIJoseph R. Klein, III       |  | Director                                                                                                                               |  | March 31, 2003
|                                                  
|/s/ RONALD M. NORDMANNRonald M. Nordmann           |  | Director                                                                                                                               |  | March 31, 2003
|                                                  
|/s/ SOLOMON H. SNYDER, M.D.Solomon H. Snyder, M.D. |  | Director                                                                                                                               |  | March 31, 2003
|                                                  
|/s/ W. LEIGH THOMPSONW. Leigh Thompson             |  | Director                                                                                                                               |  | March 31, 2003
|                                                  
|/s/ JOSEPH R. CHINNICIJoseph R. Chinnici           |  | Director                                                                                                                               |  | March 31, 2003

55



---



##### 



CERTIFICATION

I, Craig R. Smith, M.D., certify that:

1. I have reviewed this annual report on
Form 10-K of Guilford Pharmaceuticals Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officer and I have indicated in this annual report whether there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: March 31, 2003



|                                                | 
|----------------------------------------------- | 
|/s/ CRAIG R. SMITH, M.D.                        | 
|                                                | 
|Craig R. Smith, M.D.                            | 
|Chairman, President and Chief Executive Officer | 

56



---



##### 



CERTIFICATION

I, Andrew R. Jordan, certify that:

1. I have reviewed this annual report on
Form 10-K of Guilford Pharmaceuticals Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officer and I have indicated in this annual report whether there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: March 31, 2003



|                                                          | 
|--------------------------------------------------------- | 
|/s/ ANDREW R. JORDAN                                      | 
|                                                          | 
|Andrew R. Jordan                                          | 
|Executive Vice President, Finance and
    Administration, | 
|Chief Financial Officer and Treasurer                     | 

57



---



##### 



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, 2002 and 2001,
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, 2002.
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, 2002 and 2001, and
the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2002,
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 7, 2003, except for the third
paragraph 
   of Note 20, which is as of March 13, 2003


F1



---



##### 



GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                             |                            |         |          |        |   |         |          |         | 
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | -------- | ------ | - | ------- | -------- | ------- | 
|                                         |                                                                                                                                                             |                           
|                                         |                                                                                                                                                             | December 31,              
|                                         |                                                                                                                                                             |                           
|                                         |                                                                                                                                                             | 2002                       |         | 2001    
|                                         |                                                                                                                                                             |                            |         |         
|                                         |                                                                                                                                                             |                           
|                                         |                                                                                                                                                             | (in thousands,            
|                                         |                                                                                                                                                             | except share data)        
|ASSETS                                   |                                                                                                                                                             |                            |         |          |        |   |         |         
|Current assets:                          |                                                                                                                                                             |                            |         |          |        |   |         |         
|                                         | Cash and cash equivalents                                                                                                                                   |                            | $       | 14,777   |        |   | $       | 56,784   |        
|                                         | Investments                                                                                                                                                 |                            |         | 68,454   |        |   |         | 81,498   |        
|                                         | Accounts receivable, net                                                                                                                                    |                            |         | 768      |        |   |         | 3,219    |        
|                                         | Inventories                                                                                                                                                 |                            |         | 2,993    |        |   |         | 2,687    |        
|                                         | Prepaid expenses and other current assets                                                                                                                   |                            |         | 907      |        |   |         | 3,365    |        
|                                         |                                                                                                                                                             |                            |         |          |        |   |         |         
|                                         |                                                                                                                                                             | Total current assets       |         |          | 87,889 |   |         |          | 147,553 | 
|Investments  restricted                 |                                                                                                                                                             |                            | 18,572  |          |        |   | 16,456  |         
|Property and equipment, net              |                                                                                                                                                             |                            | 6,534   |          |        |   | 8,831   |         
|Intangible asset, net                    |                                                                                                                                                             |                            | 6,589   |          |        |   | 7,430   |         
|Other assets                             |                                                                                                                                                             |                            | 1,492   |          |        |   | 1,571   |         
|                                         |                                                                                                                                                             |                            |         |          |        |   |         |         
|                                         |                                                                                                                                                             | $                          | 121,086 |          |        | $ | 181,841 |         
|                                         |                                                                                                                                                             |                            |         |          |        |   |         |         
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY |                                                                                                                                                             |                            |         |          |        |   |         |         
|Current liabilities:                     |                                                                                                                                                             |                            |         |          |        |   |         |         
|                                         | Accounts payable                                                                                                                                            |                            | $       | 6,279    |        |   | $       | 6,040    |        
|                                         | Current portion of long-term debt                                                                                                                           |                            |         | 3,200    |        |   |         | 4,615    |        
|                                         | Accrued payroll related costs                                                                                                                               |                            |         | 1,700    |        |   |         | 3,505    |        
|                                         | Accrued contracted services                                                                                                                                 |                            |         | 3,308    |        |   |         | 2,652    |        
|                                         | Accrued expenses and other current liabilities                                                                                                              |                            |         | 2,096    |        |   |         | 2,272    |        
|                                         |                                                                                                                                                             |                            |         |          |        |   |         |         
|                                         |                                                                                                                                                             | Total current liabilities  |         |          | 16,583 |   |         |          | 19,084  | 
|Long-term debt, net of current portion   |                                                                                                                                                             |                            | 3,720   |          |        |   | 4,137   |         
|Other liabilities                        |                                                                                                                                                             |                            | 1,525   |          |        |   | 991     |         
|                                         |                                                                                                                                                             |                            |         |          |        |   |         |         
|                                         |                                                                                                                                                             | Total liabilities          |         |          | 21,828 |   |         |          | 24,212  | 
|                                         |                                                                                                                                                             |                            |         |          |        |   |         |         
|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, 29,980,063 and 29,975,063 issued
    at December 31, 2002 and 2001, respectively |                            |         | 300      |        |   |         | 300      |        
|                                         | Additional paid-in capital                                                                                                                                  |                            |         | 350,352  |        |   |         | 351,553  |        
|                                         | Accumulated deficit                                                                                                                                         |                            |         | (249,591 | )      |   |         | (190,321 | )      
|                                         | Accumulated other comprehensive loss                                                                                                                        |                            |         | (691     | )      |   |         | (452     | )      
|                                         | Note receivable from officer                                                                                                                                |                            |         | (85      | )      |   |         | (60      | )      
|                                         | Treasury stock, at cost: 79,030 and 256,906
    shares at December 31, 2002 and 2001, respectively                                                          |                            |         | (1,027   | )      |   |         | (3,339   | )      
|                                         | Deferred compensation                                                                                                                                       |                            |         |         |        |   |         | (52      | )      
|                                         |                                                                                                                                                             |                            |         |          |        |   |         |         
|                                         |                                                                                                                                                             | Total stockholders equity |         |          | 99,258 |   |         |          | 157,629 | 
|                                         |                                                                                                                                                             |                            |         |          |        |   |         |         
|                                         |                                                                                                                                                             | $                          | 121,086 |          |        | $ | 181,841 |         
|                                         |                                                                                                                                                             |                            |         |          |        |   |         |         

See accompanying notes to consolidated financial
statements.

F2



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                    |                                                               |                                       |         |        |        |      |         |        |        |   |         |         |        | 
|--------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------- | ------ | 
|                                                                                                    |                                                               |                                      
|                                                                                                    |                                                               | Years Ended December 31,             
|                                                                                                    |                                                               |                                      
|                                                                                                    |                                                               | 2002                                  |         | 2001   |        | 2000
|                                                                                                    |                                                               |                                       |         |        |        |     
|                                                                                                    |                                                               |                                      
|                                                                                                    |                                                               | (in thousands, except per share data)
|Revenues:                                                                                           |                                                               |                                       |         |        |        |      |         |        |        |   |         |        
|                                                                                                    | Net product sales                                             |                                       | $       | 14,538 |        |      | $       | 20,360 |        |   | $       | 1,492   |       
|                                                                                                    | License fees and royalties                                    |                                       |         | 58     |        |      |         | 149    |        |   |         | 2,369   |       
|                                                                                                    | Contract revenues                                             |                                       |         |       |        |      |         |       |        |   |         | 10,625  |       
|                                                                                                    | Revenues under collaborative agreements                       |                                       |         | 69     |        |      |         | 25     |        |   |         | 3,570   |       
|                                                                                                    |                                                               |                                       |         |        |        |      |         |        |        |   |         |        
|                                                                                                    |                                                               | Total revenues                        |         |        | 14,665 |      |         |        | 20,534 |   |         |         | 18,056 | 
|Costs and Expenses:                                                                                 |                                                               |                                       |         |        |        |      |         |        |        |   |         |        
|                                                                                                    | Cost of sales                                                 |                                       |         | 2,836  |        |      |         | 2,836  |        |   |         | 1,358   |       
|                                                                                                    | Research and development                                      |                                       |         | 46,103 |        |      |         | 54,272 |        |   |         | 46,900  |       
|                                                                                                    | Selling, general and administrative                           |                                       |         | 29,845 |        |      |         | 30,113 |        |   |         | 14,144  |       
|                                                                                                    | Merger costs                                                  |                                       |         |       |        |      |         |       |        |   |         | 1,403   |       
|                                                                                                    |                                                               |                                       |         |        |        |      |         |        |        |   |         |        
|                                                                                                    |                                                               | Total costs and expenses              |         |        | 78,784 |      |         |        | 87,221 |   |         |         | 63,805 | 
|                                                                                                    |                                                               |                                       |         |        |        |      |         |        |        |   |         |        
|Operating loss                                                                                      |                                                               |                                       | (64,119 | )      |        |      | (66,687 | )      |        |   | (45,749 | )      
|Other Income (Expense):                                                                             |                                                               |                                       |         |        |        |      |         |        |        |   |         |        
|                                                                                                    | Investment and other income                                   |                                       |         | 5,350  |        |      |         | 6,870  |        |   |         | 7,751   |       
|                                                                                                    | Interest expense                                              |                                       |         | (501   | )      |      |         | (500   | )      |   |         | (504    | )     
|                                                                                                    |                                                               |                                       |         |        |        |      |         |        |        |   |         |        
|Loss before the cumulative effect of an
    accounting change                                       |                                                               |                                       | (59,270 | )      |        |      | (60,317 | )      |        |   | (38,502 | )      
|Cumulative effect of an accounting change                                                           |                                                               |                                       |        |        |        |      |        |        |        |   | (8,625  | )      
|                                                                                                    |                                                               |                                       |         |        |        |      |         |        |        |   |         |        
|Net loss                                                                                            |                                                               | $                                     | (59,270 | )      |        | $    | (60,317 | )      |        | $ | (47,127 | )      
|                                                                                                    |                                                               |                                       |         |        |        |      |         |        |        |   |         |        
|Basic and diluted loss per common
    share:                                                        |                                                               |                                       |         |        |        |      |         |        |        |   |         |        
|                                                                                                    | Loss before the cumulative effect of an
    accounting change |                                       | $       | (1.99  | )      |      | $       | (2.14  | )      |   | $       | (1.64   | )     
|                                                                                                    | Cumulative effect of an accounting change                     |                                       |         |       |        |      |         |       |        |   |         | (0.36   | )     
|                                                                                                    |                                                               |                                       |         |        |        |      |         |        |        |   |         |        
|                                                                                                    | Net loss                                                      |                                       | $       | (1.99  | )      |      | $       | (2.14  | )      |   | $       | (2.00   | )     
|                                                                                                    |                                                               |                                       |         |        |        |      |         |        |        |   |         |        
|Weighted-average shares outstanding to compute
    basic and diluted loss per share                 |                                                               |                                       | 29,805  |        |        |      | 28,249  |        |        |   | 23,517  |        
|Pro forma amounts assuming change in application
    of accounting principle applied retroactively: |                                                               |                                       |         |        |        |      |         |        |        |   |         |        
|                                                                                                    | Net loss                                                      |                                       | $       |       |        |      | $       |       |        |   | $       | (38,502 | )     
|                                                                                                    | Net loss per common share                                     |                                       | $       |       |        |      | $       |       |        |   | $       | (1.64   | )     

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)

|                                                                   |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        |  
|------------------------------------------------------------------ | ------------------------------------------------------- | --------------------------------- | ---------- | ---------- |  | ------- | --- | ----------- |  | ------------- | ------- | ------- |  | -------------- | -------- | ------------ |  | ------------- | ------ | ------ | - | - | --- | - |  | - | ------ | - |  | - | ---- | - |  | - | ------- | ------ | -
|                                                                   |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |             
|                                                                   |                                                         | Common Stock                      |            |            |  |         |     | Accumulated |  | Note          |         |         |  |                |          |             
|                                                                   |                                                         |                                   |            | Additional |  |         |     | Other       |  | Receivable    |         |         |  |                |          | Total       
|                                                                   |                                                         | Number of                         |            |            |  | Paid-in |     | Accumulated |  | Comprehensive |         | From    |  | Treasury       |          | Deferred     |  | Stockholders
|                                                                   |                                                         | Shares                            |            | Amount     |  | Capital |     | Deficit     |  | Income (Loss) |         | Officer |  | Stock, at Cost |          | Compensation |  | Equity       
|                                                                   |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |              
|                                                                   |                                                         |                                  
|                                                                   |                                                         | (In thousands, except share data)
|Balance, January 1, 2000                                           |                                                         |                                   | 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 loss:                                          |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|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 loss                          |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         | 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 |       
|Comprehensive loss:                                                |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Net loss                                                           |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                | (59,270  | )            |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   | (59,270 | )     
|Other comprehensive loss:                                          |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|                                                                   | Unrealized loss on interest rate swap agreements        |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        | (452   | ) |   |     |   |  |   |        |   |  |   |      |   |  |   |         | (452   | )
|                                                                   | Unrealized gain on available-for-sale securities        |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        | 217    |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         | 217    |  
|                                                                   | Equity adjustment from foreign currency
    translation |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        | (4     | ) |   |     |   |  |   |        |   |  |   |      |   |  |   |         | (4     | )
|                                                                   |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|                                                                   | Total other comprehensive loss                          |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         | (239   | )
|                                                                   |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Total comprehensive loss                                           |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  | $ | (59,509 | )     
|                                                                   |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Exercise of stock options                                          |                                                         |                                   | 5,000      |            |  |         |     |             |  |               | 19      |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Distribution of 71,693 shares of treasury stock
    to 401(k) plan |                                                         |                                   |            |            |  |         |     |             |  |               | (390    | )       |  |                |          |              |  |               |        |        |   |   |     |   |  |   | 932    |   |  |   |      |   |  |   | 542     |       
|Distribution of 99,986 shares of treasury stock
    to ESPP plans  |                                                         |                                   |            |            |  |         |     |             |  |               | (775    | )       |  |                |          |              |  |               |        |        |   |   |     |   |  |   | 1,299  |   |  |   |      |   |  |   | 524     |       
|Distribution of 6,197 shares of treasury stock to
    consultant   |                                                         |                                   |            |            |  |         |     |             |  |               | (55     | )       |  |                |          |              |  |               |        |        |   |   |     |   |  |   | 81     |   |  |   |      |   |  |   | 26      |       
|Extension of note receivable to officer                            |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   | (25 | ) |  |   |        |   |  |   |      |   |  |   | (25     | )     
|Amortization of deferred compensation                              |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   | 52   |   |  |   | 52      |       
|                                                                   |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Balance, December 31, 2002                                         |                                                         |                                   | 29,980,063 |            |  | $       | 300 |             |  | $             | 350,352 |         |  | $              | (249,591 | )            |  | $             | (691   | )      |   | $ | (85 | ) |  | $ | (1,027 | ) |  | $ |     |   |  | $ | 99,258  |       
|                                                                   |                                                         |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       

See accompanying notes to consolidated financial
statement.

F4



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |      |         |  
|------------------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | - | -------- | ---- | ------- | -
|                                                                                |                                                                 |                                                        
|                                                                                |                                                                 | Years Ended December 31,                               
|                                                                                |                                                                 |                                                        
|                                                                                |                                                                 | 2002                                                    |         | 2001   |         | 2000
|                                                                                |                                                                 |                                                         |         |        |         |     
|                                                                                |                                                                 |                                                        
|                                                                                |                                                                 | (in thousands, except share data)                      
|Cash Flows From Operating
    Activities:                                       |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     
|Net loss                                                                        |                                                                 | $                                                       | (59,270 | )      |         | $    | (60,317 | )      |         | $ | (47,127  | )   
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     
|Realized (gains)/losses on sale of
    available-for-sale securities            |                                                                 |                                                         | (394    | )      |         |      | 478     |        |         |   | 164      |     
|Depreciation and amortization                                                   |                                                                 |                                                         | 5,433   |        |         |      | 4,855   |        |         |   | 4,321    |     
|Non-cash compensation expense                                                   |                                                                 |                                                         | 620     |        |         |      | 638     |        |         |   | 893      |     
|Changes in assets and liabilities:                                              |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     
|                                                                                | Accounts receivable, net, prepaid expenses and
    other assets |                                                         |         | 4,963  |         |      |         | (4,460 | )       |   |          | (865 | )      
|                                                                                | Inventories                                                     |                                                         |         | (306   | )       |      |         | (519   | )       |   |          | (820 | )      
|                                                                                | Accounts payable and other liabilities                          |                                                         |         | (1,004 | )       |      |         | 3,204  |         |   |          | 908  |        
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     
|                                                                                |                                                                 | Net cash used in operating activities                   |         |        | (49,958 | )    |         |        | (56,121 | ) |          |      | (42,256 | )
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     
|Cash Flows From Investing
    Activities:                                       |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     
|Purchases of property and equipment                                             |                                                                 |                                                         | (282    | )      |         |      | (286    | )      |         |   | (541     | )   
|Maturities of held-to-maturity securities                                       |                                                                 |                                                         |        |        |         |      |        |        |         |   | 510      |     
|Maturities and sales of available-for-sale
    securities                       |                                                                 |                                                         | 83,425  |        |         |      | 77,192  |        |         |   | 239,479  |     
|Purchases of available-for-sale securities                                      |                                                                 |                                                         | (72,428 | )      |         |      | (97,546 | )      |         |   | (185,400 | )   
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     
|                                                                                |                                                                 | Net cash provided by (used in) investing
    activities |         |        | 10,715  |      |         |        | (20,640 | ) |          |      | 54,048  |  
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     
|Cash Flows From Financing
    Activities:                                       |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     
|Net proceeds from issuances of common stock                                     |                                                                 |                                                         | 19      |        |         |      | 100,108 |        |         |   | 9,483    |     
|Purchase of treasury stock                                                      |                                                                 |                                                         |        |        |         |      |        |        |         |   | (237     | )   
|Proceeds from issuance of long-term debt                                        |                                                                 |                                                         | 3,389   |        |         |      | 3,733   |        |         |   |         |     
|Principal payments on debt                                                      |                                                                 |                                                         | (6,696  | )      |         |      | (3,102  | )      |         |   | (2,298   | )   
|Proceeds from sale of treasury stock                                            |                                                                 |                                                         | 524     |        |         |      |        |        |         |   |         |     
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     
|                                                                                |                                                                 | Net cash (used in) provided by financing
    activities |         |        | (2,764  | )    |         |        | 100,739 |   |          |      | 6,948   |  
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     
|Net (decrease) increase in cash and cash
    equivalents                        |                                                                 |                                                         | (42,007 | )      |         |      | 23,978  |        |         |   | 18,470   |     
|Cash and cash equivalents at the beginning of
    year                          |                                                                 |                                                         | 56,784  |        |         |      | 32,806  |        |         |   | 14,336   |     
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     
|Cash and cash equivalents at the end of
    year                                |                                                                 | $                                                       | 14,777  |        |         | $    | 56,784  |        |         | $ | 32,806   |     
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     
|Supplemental disclosures of cash flow
    information:                          |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     
|Net interest paid                                                               |                                                                 | $                                                       | 447     |        |         | $    | 500     |        |         | $ | 490      |     
|Non-cash investing and financing activities:                                    |                                                                 |                                                         |         |        |         |      |         |        |         |   |          |     



| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Capital lease obligations of $1,475, $510, and
    $543 were incurred in 2002, 2001 and 2000, respectively, when
    the Company entered into leases for certain computer equipment.                                                
|
| | During 2002, the Company converted a $2,473
    payable to Cardinal to a note payable.                                                                                                                                              
|
| | 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, engaged in the research, development and
commercialization of products that target the hospital and
neurology markets.

(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 life sciences
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, 2002, approximately three 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
Statement of Financial Accounting Standards (SFAS)
No. 131, Disclosure about Segments of an Enterprise and
Related Information.

Cash
Equivalents

The Company had cash equivalents of
$13.6 million and $53.9 million at December 31,
2002 and 2001, 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, 2002
and 2001 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 of the
Companys investment 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 investment 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 include finished goods,
work-in-process, 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 17). The Company is amortizing
this intangible asset over a period of 10 years using the
straight-line method.

Impairment of
Long-Lived Assets

Effective January 1, 2002, the Company
adopted 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

F7



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

reclassification of certain existing intangibles
as goodwill and reassessment of the useful lives of existing
recognized intangibles. The adoption of SFAS 142 did not have an
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 has been our consistent accounting treatment.

The Company accounts for long-lived assets in
accordance with the provisions of SFAS No. 144,
Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of. SFAS No. 144
requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment 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 undiscounted 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 17
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 2002
or 2001 as a result of SAB 101. The effect of the adoption of
SAB 101 on interim periods is disclosed in Note 21.

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

|                          |  |      |         |  
|------------------------- |  | ---- | ------- | -
|                          |  | 2000
|                          |  |     
|Revenue                   |  | $    | 18,056  |  
|Net loss                  |  | $    | (38,502 | )
|Net loss per common share |  | $    | (1.64   | )

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 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.

F8



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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. For each of our research and
development projects, we incur both direct and indirect
expenses. Direct expenses include salaries and other costs of
personnel, raw materials and supplies. We may also incur third
party costs related to these projects, such as contract
research, consulting and clinical development costs. Indirect
expenses, such as facility and equipment costs, utilities,
general research and development management and other
administrative overhead are allocated to research and
development generally based on, among other things, the extent
to which our general research and development efforts make use
of facilities, non-project personnel and other resources. We
review and accrue clinical trials expenses based on estimates of
work performed and completion of certain events. We believe that
this method best aligns the expenses we record with the efforts
we expend. Accrued clinical costs are subject to revisions as
trials progress to completion. Revisions are charged to expense
in the period in which the facts that give rise to the revision
become known. 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

In December 2002, the FASB issued Statement
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. This
statement amends FASB Statement No. 123; Accounting for
Stock-Based Compensation,to provide alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the
method used on reported results. The requirements of Statement
No. 148 are effective for fiscal years ending after
December 15, 2002, except for financial reports containing
condensed financial statements for

F9



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

interim periods. The Company continues to account
for stock based compensation under APB No. 25. If Statement
No. 123 would have been applied it would have had the
following impact:

|                                                                                                                      |                                 |                        |         |       |   |      |         |       |   |   |         |       |  
|--------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ---------------------- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                      |                                 |                       
|                                                                                                                      |                                 | Year Ended December 31
|                                                                                                                      |                                 |                       
|                                                                                                                      |                                 | 2002                   |         | 2001  |   | 2000
|                                                                                                                      |                                 |                        |         |       |   |     
|Net loss, as reported                                                                                                 |                                 | $                      | (59,270 | )     |   | $    | (60,317 | )     |   | $ | (47,127 | )    
|Add:  Total stock-based employee
    compensation expense determined under fair value based method
    for all awards |                                 |                        | (12,990 | )     |   |      | (15,952 | )     |   |   | (6,765  | )    
|                                                                                                                      |                                 |                        |         |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                                    |                                 | $                      | (72,260 | )     |   | $    | (76,269 | )     |   | $ | (53,892 | )    
|                                                                                                                      |                                 |                        |         |       |   |      |         |       |   |   |         |      
|Loss per share:                                                                                                       |                                 |                        |         |       |   |      |         |       |   |   |         |      
|                                                                                                                      | Basic and diluted  as reported |                        | $       | (1.99 | ) |      | $       | (2.14 | ) |   | $       | (2.00 | )
|                                                                                                                      |                                 |                        |         |       |   |      |         |       |   |   |         |      
|                                                                                                                      | Basic and diluted  pro forma   |                        | $       | (2.42 | ) |      | $       | (2.70 | ) |   | $       | (2.29 | )
|                                                                                                                      |                                 |                        |         |       |   |      |         |       |   |   |         |      
|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, 2002, 2001 and
2000 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.

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.

F10



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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 U.S. 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.

Reclassifications

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

New
Accounting Standards

In January 2003, the FASB issued Interpretation
No. 46 (FIN 46), Consolidation of
Variable Interest Entities with the objective of improving
financial reporting by companies involved with variable interest
entities. A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity
investors with voting rights, or (b) has equity investors
that do not provide sufficient financial resources for the
entity to support its activities. Historically, entities
generally were not consolidated unless the entity was controlled
through voting interests. FIN 46 changes that by requiring a
variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to
receive a majority of the entitys residual returns or
both. A company that consolidates a variable interest entity is
called the primary beneficiary of that entity. FIN
46 also requires disclosures about variable interest entities
that a company is not required to consolidate but in which it
has a significant variable interest. The consolidation
requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation
requirements of FIN 46 apply to existing entities in the first
fiscal year or interim period beginning after June 15,
2003. Also, certain disclosure requirements apply to all
financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.

F11



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company is in the process of assessing the
impact of FIN 46 on the Company and specifically as it relates
to the operating lease for its research and development facility
with a special purpose entity (SPE) sponsored by a
commercial bank. If it is determined to be applicable, FIN 46
may result in the Company consolidating the SPE for the quarter
ended September 30, 2003 in the Companys consolidated
financial statements, or it may result in the Company exploring
alternatives such as selling or restructuring its interest in
the facility.

(3) Investments

Investments in marketable securities as of
December 31, 2002 and 2001 are as follows (in thousands):

|                                  |  |      |        |            |  |            |     |       |  |   |     |   |  |   |        | 
|--------------------------------- |  | ---- | ------ | ---------- |  | ---------- | --- | ----- |  | - | --- | - |  | - | ------ | 
|                                  |  |      |        | Gross      |  | Gross      |     |      
|                                  |  |      |        | Unrealized |  | Unrealized |     |      
|                                  |  |      |        | Holding    |  | Holding    |     | Fair 
|                                  |  | Cost |        | Gains      |  | Losses     |     | Value
|                                  |  |      |        |            |  |            |     |      
|                                  |  |      |        |            |  |            |     |      
|2002                              |  |      |        |            |  |            |     |       |  |   |     |   |  |   |        | 
|Available-for-sale                |  |      |        |            |  |            |     |       |  |   |     |   |  |   |        | 
|U.S. Government Backed Securities |  | $    | 57,897 |            |  | $          | 629 |       |  | $ |    |   |  | $ | 58,526 | 
|Corporate Debt Securities         |  |      | 23,646 |            |  |            | 210 |       |  |   |    |   |  |   | 23,856 | 
|Other Debt Securities             |  |      | 1,655  |            |  |            |    |       |  |   | (11 | ) |  |   | 1,644  | 
|Restricted Money Market Account   |  |      | 3,000  |            |  |            |    |       |  |   |    |   |  |   | 3,000  | 
|                                  |  |      |        |            |  |            |     |       |  |   |     |   |  |   |        | 
|                                  |  | $    | 86,198 |            |  | $          | 839 |       |  | $ | (11 | ) |  | $ | 87,026 | 
|                                  |  |      |        |            |  |            |     |       |  |   |     |   |  |   |        | 
|2001                              |  |      |        |            |  |            |     |       |  |   |     |   |  |   |        | 
|Available-for-sale                |  |      |        |            |  |            |     |       |  |   |     |   |  |   |        | 
|U.S. Government Backed 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 | 
|                                  |  |      |        |            |  |            |     |       |  |   |     |   |  |   |        | 

At December 31, 2002 and 2001, investments
of $18.6 million and $16.5 million, respectively are
classified as Investments-restricted in the
accompanying consolidated balance sheets (see Notes 8 and 11).

Maturities of investments in marketable
securities classified as available-for-sale as of
December 31, 2002 were as follows (in thousands):

|                   |                       |           |   |        |  |  |   |        | 
|------------------ | --------------------- | --------- | - | ------ |  |  | - | ------ | 
|                   |                       | Amortized |   | Fair  
|                   |                       | Cost      |   | Value 
|                   |                       |           |   |       
|Available-for-sale |                       |           |   |        |  |  |   |       
|                   | Due in 1 year or less |           | $ | 14,554 |  |  | $ | 14,726 | 
|                   | Due in 1-5 years      |           | $ | 70,925 |  |  | $ | 72,300 | 

Included in investment and other income are net
realized gains on disposals of available for-sale securities of
$0.4 million in 2002. Proceeds from the sale of
available-for-sale securities aggregated $83.4 million in
2002, resulting in gross realized gains of $0.7 million and
gross realized losses of $0.3 million.

F12



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(4) Accounts Receivable

Accounts receivable consist of the following (in
thousands):

|                                     |  |              |     |      |  |   |       |  
|------------------------------------ |  | ------------ | --- | ---- |  | - | ----- | -
|                                     |  |             
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2002         |     | 2001
|                                     |  |              |     |     
|Trade accounts receivable            |  | $            | 795 |      |  | $ | 3,371 |  
|Less allowance for doubtful accounts |  |              | (27 | )    |  |   | (152  | )
|                                     |  |              |     |      |  |   |       |  
|                                     |  | $            | 768 |      |  | $ | 3,219 |  
|                                     |  |              |     |      |  |   |       |  

(5) Inventories

Inventories consist of the following:

|                |  |                |       |      |  |   |       | 
|--------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                |  |               
|                |  | December 31,  
|                |  |               
|                |  | 2002           |       | 2001
|                |  |                |       |     
|                |  |               
|                |  | (In thousands)
|Raw materials   |  | $              | 218   |      |  | $ | 245   | 
|Work in process |  |                | 851   |      |  |   | 650   | 
|Finished goods  |  |                | 1,924 |      |  |   | 1,792 | 
|                |  |                |       |      |  |   |       | 
|                |  | $              | 2,993 |      |  | $ | 2,687 | 
|                |  |                |       |      |  |   |       | 

(6) Property and Equipment

Property and equipment consist of the following:

|                                               |  |                |         |      |  |   |         |  
|---------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                               |  |               
|                                               |  | December 31,  
|                                               |  |               
|                                               |  | 2002           |         | 2001
|                                               |  |                |         |     
|                                               |  |               
|                                               |  | (In thousands)
|Laboratory equipment                           |  | $              | 4,345   |      |  | $ | 4,345   |  
|Manufacturing equipment                        |  |                | 2,616   |      |  |   | 2,602   |  
|Computer and office equipment                  |  |                | 8,102   |      |  |   | 6,526   |  
|Leasehold improvements                         |  |                | 16,176  |      |  |   | 16,008  |  
|                                               |  |                |         |      |  |   |         |  
|                                               |  |                | 31,239  |      |  |   | 29,481  |  
|Less accumulated depreciation and amortization |  |                | (24,705 | )    |  |   | (20,650 | )
|                                               |  |                |         |      |  |   |         |  
|                                               |  | $              | 6,534   |      |  | $ | 8,831   |  
|                                               |  |                |         |      |  |   |         |  

(7) Intangible Asset

Intangible asset consists of the following:

|                                       |  |                |        |      |  |   |       |  
|-------------------------------------- |  | -------------- | ------ | ---- |  | - | ----- | -
|                                       |  |               
|                                       |  | December 31,  
|                                       |  |               
|                                       |  | 2002           |        | 2001
|                                       |  |                |        |     
|                                       |  |               
|                                       |  | (In thousands)
|Reacquisition of GLIADEL® Wafer rights |  | $              | 8,412  |      |  | $ | 8,412 |  
|Less accumulated amortization          |  |                | (1,823 | )    |  |   | (982  | )
|                                       |  |                |        |      |  |   |       |  
|                                       |  | $              | 6,589  |      |  | $ | 7,430 |  
|                                       |  |                |        |      |  |   |       |  

F13



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As described in Note 17, 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.

(8) Indebtedness

Long-term debt and capital leases consists of the
following:

|                                                                                                                                                                                                                                                                                       |  |                |        |      |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                                                                                                                                                                                                                                                                       |  |               
|                                                                                                                                                                                                                                                                                       |  | December 31,  
|                                                                                                                                                                                                                                                                                       |  |               
|                                                                                                                                                                                                                                                                                       |  | 2002           |        | 2001
|                                                                                                                                                                                                                                                                                       |  |                |        |     
|                                                                                                                                                                                                                                                                                       |  |               
|                                                                                                                                                                                                                                                                                       |  | (In thousands)
|Note payable to a commercial bank, interest at
    LIBOR + 0.625 (2.1 % at December 31, 2002), principal is
    payable in four equal annual installments beginning in April
    2003. Interest is payable quarterly beginning in July 2002,
    until final principal payment is made |  | $              | 3,000  |      |  | $ |       |  
|Note payable to Cardinal Health Sales and
    Marketing Services, interest at LIBOR + 1.75%, Re-paid during
    2002                                                                                                                                                                   |  |                |       |      |  |   | 2,981  |  
|Borrowings under bond financing arrangement,**
    payable in monthly installments of $78, plus interest at LIBOR +
    0.75% (2.2% at December 31, 2002*), with final payment due
    December 2004.                                                                                  |  |                | 1,883  |      |  |   | 2,824  |  
|Borrowings under term loan,** payable in monthly
    installments of $101, plus interest at LIBOR + 0.625% (2.1% at
    December 31, 2002*), with final payment due April 2003                                                                                                         |  |                | 406    |      |  |   | 1,624  |  
|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                                                                             |  |                | 433    |      |  |   | 490    |  
|Capital leases***, interest imputed per lease
    schedule at rates of 11% to 22% per annum, lease schedules
    expire between January 2003 and December 2004                                                                                                                         |  |                | 1,024  |      |  |   | 566    |  
|Other note payable in monthly installments of
    $44, including principal and interest (at 5.5%) with final
    payment due April 2003                                                                                                                                                |  |                | 174    |      |  |   | 267    |  
|                                                                                                                                                                                                                                                                                       |  |                |        |      |  |   |        |  
|Total long-term debt                                                                                                                                                                                                                                                                   |  |                | 6,920  |      |  |   | 8,752  |  
|Less current portion of long-term debt                                                                                                                                                                                                                                                 |  |                | (3,200 | )    |  |   | (4,615 | )
|                                                                                                                                                                                                                                                                                       |  |                |        |      |  |   |        |  
|Long-term debt, net of current portion                                                                                                                                                                                                                                                 |  | $              | 3,720  |      |  | $ | 4,137  |  
|                                                                                                                                                                                                                                                                                       |  |                |        |      |  |   |        |  



---

* See Note 9

** Secured by equipment and leasehold
improvements

*** See Note 11

Aggregate maturities of long-term debt for each
of the five years subsequent to December 31, 2002, and
thereafter are approximately: 2003, $3.2 million; 2004,
$1.9 million; 2005, $0.8 million; 2006,
$0.8 million; 2007, $0.2 million. The fair value of
long-term debt is $6.9 million at December 31, 2002.

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, 2002, 82% of the outstanding
borrowings is guaranteed by the Maryland Industrial Development
Financing Authority.

F14



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Commercial
Loan Agreement

In May 2002, the Company borrowed
$3.0 million from a commercial bank in order to repay a
note payable to Cardinal Health. This new indebtedness bears
interest at the rate of one-month LIBOR plus 0.625% and is
payable in four equal annual installments of principal beginning
April 30, 2003, with the final payment due on
April 30, 2006. Interest payments commenced on
July 31, 2002 and are quarterly thereafter, until fully
paid.

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 $0.3 million and $0.5 million at December
31, 2002 and 2001, 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 of $0.4 million and
$1.6 million at December 31, 2002 and 2001, respectively
(equal to 100% of the outstanding principal balance). In
accordance with the commercial loan agreement, the Company
maintained cash collateral of $3.0 million at December 31,
2002 (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.

(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 fluctuations
in market interest rates on certain financial obligations (see
Notes 8 and 11). These agreements have a total notional
principal amount of approximately $22.3 million at
December 31, 2002. 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 counterparty owes the
Company, which creates market risk for the Company. Conversely,
when the fair value of the agreements is negative, the Company
owes the counterparty and, therefore, it does not possess market
risk. At December 31, 2002, the fair value of the interest
rate swap agreements was a liability of $1.6 million,
compared to $1.1 million at December 31, 2001. Current
market pricing models were used to estimate fair values of these
interest rate swap agreements.

(10) Restructuring

On July 30, 2002, the Company announced a
workforce reduction of 58 employees, most of whom worked in the
areas of research and development. As a result of this
reduction, the Company recorded a restructuring charge of
$1.5 million of which $0.2 million was reversed during
the fourth quarter of 2002. The Companys restructuring
plans and associated costs consisted of employee severance costs
including severance pay, related payroll taxes and insurance,
and outplacement services. All terminations and termination
benefits were communicated to the affected employees during the
third quarter of 2002 and severance benefits are expected to be
paid in full within one year of the date of the announcement.

At December 31, 2002, outstanding
liabilities related to the restructuring totaled
$0.2 million and are included in Accrued expenses and
other current liabilities in the accompanying Balance
Sheets. The

F15



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company is accounting for the restructuring in
accordance with EITF 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring).

(11) 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 as the
Company has accounted for this arrangement as an operating lease
in accordance with SFAS No. 13, Accounting for
Leases, as amended. In accordance with FIN 46, the Company
is assessing whether the SPE will need to be consolidated for
financial reporting purposes. Had we consolidated this SPE, the
pro formaimpact on certain categories of our
consolidated balance sheet at December 31, 2002, and our
net loss for the year ended December 31, 2002, would be as
follows (in thousands):

|                            |  |             |         |           |  |   |         |  
|--------------------------- |  | ----------- | ------- | --------- |  | - | ------- | -
|                            |  | As Reported |         | Pro Forma
|                            |  |             |         |          
|Property and equipment, net |  | $           | 6,534   |           |  | $ | 23,686  |  
|Total assets                |  |             | 121,086 |           |  |   | 138,238 |  
|Total debt                  |  |             | 6,920   |           |  |   | 25,459  |  
|Total liabilities           |  |             | 21,828  |           |  |   | 40,607  |  
|                           
|Net loss                    |  | $           | (59,270 | )         |  | $ | (59,682 | )

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 $18.8 million at December 31, 2002 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. The Companys maximum exposure to loss as
a result of its involvement with the SPE is the residual
guarantee ($13.8 million). 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 $13.8 million and $14.3 million as of
December 31, 2002 and 2001 respectively, 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% (2.1% at
December 31, 2002), 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 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.

F16



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In October 2002, the Company entered into a new
master lease agreement to provide up to $1.0 million for
computer and equipment financing. The Companys previous
master lease agreement, entered into in August 2001, expired in
June 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, 2002, the Company had leased approximately
$0.3 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).

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,
2002 are as follows (in thousands):

|                                                         |                                                               |         |      |           |  |   |       |       | 
|-------------------------------------------------------- | ------------------------------------------------------------- | ------- | ---- | --------- |  | - | ----- | ----- | 
|                                                         |                                                               | Capital |      | Operating
|                                                         |                                                               | Leases  |      | Leases   
|                                                         |                                                               |         |      |          
|2003                                                     |                                                               | $       | 950  |           |  | $ | 3,745 |      
|2004                                                     |                                                               |         | 274  |           |  |   | 3,001 |      
|2005                                                     |                                                               |         |     |           |  |   | 975   |      
|2006                                                     |                                                               |         |     |           |  |   | 130   |      
|                                                         |                                                               |         |      |           |  |   |       |      
|                                                         | Total minimum lease payments                                  |         |      | 1,224     |  |   | $     | 7,851 | 
|Less amounts representing interest                       |                                                               |         | (200 | )         |  |   |       |      
|                                                         |                                                               |         |      |           |  |   |       |      
|                                                         | Present value of net minimum lease payments                   |         |      | 1,024     |  |   |       |       | 
|Less current maturities of capital lease
    obligations |                                                               |         | (870 | )         |  |   |       |      
|                                                         |                                                               |         |      |           |  |   |       |      
|                                                         | Capital lease obligations, excluding current
    installments |         | $    | 154       |  |   |       |       | 
|                                                         |                                                               |         |      |           |  |   |       |      

Rent expense for operating leases was
approximately $4.8 million, $4.4 million, and
$4.8 million for the years ended December 31, 2002,
2001 and 2000, respectively.

The amount of equipment and related accumulated
depreciation recorded under capital leases was $2.5 million
and $1.6 million, respectively at December 31, 2002,
and $1.1 million and $0.5 million, respectively at
December 31, 2001.

(12) Income Taxes

As of December 31, 2002, we had net
operating loss (NOL) carryforwards available for
federal income tax purposes of approximately
$240.5 million, which expire at various dates between 2010
and 2022. 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, 2002, we
had tax credit carryforwards of approximately $10.6 million
expiring between 2010 and 2022.

F17



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                      |  |                |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                      |  | 2002           |         | 2001 |  | 2000
|                                                      |  |                |         |      |  |     
|                                                      |  |               
|                                                      |  | (In thousands)
|Computed expected tax benefit at
    statutory rate |  | $              | (20,152 | )    |  | $    | (20,508 | ) |  | $ | (16,023 | )
|State income tax, net of federal benefit              |  |                | (3,330  | )    |  |      | (4,174  | ) |  |   | (3,303  | )
|General business credit generated                     |  |                | (1,292  | )    |  |      | (1,874  | ) |  |   | (1,827  | )
|Other, net                                            |  |                | (318    | )    |  |      | 223     |   |  |   | (19     | )
|Increase in valuation allowance                       |  |                | 25,092  |      |  |      | 26,333  |   |  |   | 21,172  |  
|                                                      |  |                |         |      |  |      |         |   |  |   |         |  
|                                                      |  | $              |        |      |  | $    |        |   |  | $ |        |  
|                                                      |  |                |         |      |  |      |         |   |  |   |         |  

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 being completely reserved for
December 31, 2002. The change in the valuation allowance
was an increase of approximately $25.1 million in 2002,
$26.3 million in 2001, and $21.2 million in 2000.

Significant components of our deferred tax assets
and liabilities as of December 31, 2002 and 2001 are shown
below.

|                          |                                                           |                         |         |          |   |  |        |         |     | 
|------------------------- | --------------------------------------------------------- | ----------------------- | ------- | -------- | - |  | ------ | ------- | --- | 
|                          |                                                           |                        
|                          |                                                           | December 31,           
|                          |                                                           |                        
|                          |                                                           | 2002                    |         | 2001    
|                          |                                                           |                         |         |         
|                          |                                                           |                        
|                          |                                                           | (in thousands)         
|Deferred tax assets:      |                                                           |                         |         |          |   |  |        |        
|                          | Net operating loss carryforwards                          |                         | $       | 97,299   |   |  | $      | 73,613  |    
|                          | Research and experimentation credits                      |                         |         | 10,587   |   |  |        | 9,147   |    
|                          | Compensatory stock grants                                 |                         |         | 342      |   |  |        | 2,380   |    
|                          | Depreciation                                              |                         |         | 1,974    |   |  |        | 1,241   |    
|                          | Alternative minimum tax credit carryforwards              |                         |         |         |   |  |        | 138     |    
|                          | Accrued expenses                                          |                         |         | 1,825    |   |  |        | 1,428   |    
|                          | Contribution carryover and capitalized start-up
    costs |                         |         | 537      |   |  |        | 549     |    
|                          | Other                                                     |                         |         | 616      |   |  |        | 340     |    
|                          |                                                           |                         |         |          |   |  |        |        
|                          |                                                           |                         | 113,180 |          |   |  | 88,836 |        
|Deferred tax liabilities: |                                                           |                         |         |          |   |  |        |        
|                          | Prepaid expenses and other                                |                         |         | (503     | ) |  |        | (1,113  | )  
|                          |                                                           |                         |         |          |   |  |        |        
|                          | Net deferred tax assets                                   |                         |         | 112,677  |   |  |        | 87,723  |    
|                          | Valuation allowance                                       |                         |         | (112,677 | ) |  |        | (87,585 | )  
|                          |                                                           |                         |         |          |   |  |        |        
|                          |                                                           | Net deferred tax assets |         | $        |  |  |        | $       | 138 | 
|                          |                                                           |                         |         |          |   |  |        |        

(13) 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
transaction), 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.

F18



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 17).

The Company repurchased 18,867 and 8,285 shares
of its common stock at an aggregate cost of approximately
$0.4 million, and $0.2 million, during the years ended
December 31, 2001 and 2000, respectively.

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 expired during 2002.

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, 2002 or 2001.

(14) 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, 2002, 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.

(15) Equity Compensation Plans

Stock Option
and Restricted Share Plans

The Company adopted Stock Option and Restricted
Share Plans in 1993, 1998 and 2002 (the 1993 Plan,
the 1998 Plan, and the 2002 Plan,
respectively, and collectively, the Plans). The
Plans were adopted to provide eligible individuals with an
opportunity to acquire or increase an equity interest in the
Company and to encourage these individuals to continue in the
employment of the Company and contribute to its success.
Eligible individuals include full-time employees of the Company
and others whose participation in the Plan is determined by the
Board of Directors to be in the best interests of the Company.
Employees of the Company generally receive share option grants
upon the commencement of their employment, and to the extent
approved by the Compensation Committee of the Board of
Directors, as a long-term incentive bonus award in February of
each year. Share options under the Plans are granted at a price
per share equal to the fair market value of the Companys
Common Stock on the day immediately preceding the grant date, or
if later, the date that the employee commences employment with
the Company. The 1993 Plan and the 2002 Plan permitted the
issuance of incentive stock options, but the 1998 Plan does not.
Share options granted under the

F19



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Plans are exercisable for a period of not more
than 10 years from the grant date. Share options granted
under the Plans vest with respect to 25% of any grant upon the
first anniversary of the grant date, and thereafter, the
remaining grant vests in 36 equal monthly installments.

The Company has granted, pursuant to the 1993
Plan and the 1998 Plan, restricted shares to some of its
officers in connection with the commencement of their employment
with the Company. The 2002 Plan permits the Company to grant
restricted shares, but it has not done so. Restricted share
grants are valued at the fair market value of the Companys
Common Stock on the day immediately preceding the date of the
grant and are subject to a vesting period determined by the
Compensation Committee of the Board of Directors. Restricted
share grants generally vest in 25% increments on the first four
anniversaries following the grant date. If the grant does not
require the officer to pay for the stock underlying the grant,
the Company records unearned compensation at the time of the
grant in the amount of the fair market value of the
Companys Common Stock on the date of the grantmultiplied bythe number of shares that were subject to the
grant. This unearned compensation is expensed over the vesting
period.

If an employees employment with the Company
terminates for any reason (other than by reason of death,
permanent disability), the employees share option grant or
restricted shares grant, as the case may be, terminates with
respect to the unvested portion of any grant. All unvested
options and restricted shares held by the Companys
employees vest in full upon events constituting a change in
control of the Company.

Upon the adoption of the 2002 Plan by the
Companys stockholders in May 2002, the Company terminated
the 1993 Plan and the 1998 Plan with respect to any future
option or restricted share grants. Therefore, the Company may
only grant share options or restricted shares under the 2002
Plan.

As of December 31, 2002, the maximum number
of shares issuable under the Plans was 8,173,112, of which
500,000 shares may be issued under the restricted share
provisions. During the years ended December 31, 2002, 2001
and 2000, the Company granted 2,131,132, 2,098,354 and 1,115,277
share options and restricted shares under the Plans,
respectively. As of December 31, 2002, there were 5,161,979
share options and 200,414 restricted shares outstanding under
the Plans, of which, with respect to the share options,
2,440,793 were exercisable as of December 31, 2002. As of
December 31, 2002, there were 1,819,958 shares available
for grant under the 2002 Plan.

The
Directors Plan

The Directors Stock Option Plan (the
Directors Plan) was adopted to provide
non-employee directors an opportunity to acquire or increase an
equity interest in the Company. Under the Directors Plan
300,000 shares of the Companys Common Stock were reserved
for issuance at an exercise price not less than the fair market
value of the Companys Common Stock on the day immediately
preceding the grant date. Share option grants under the
Directors Plan vest 50% on the first anniversary of the
grant date and are 100% vested on the second anniversary of the
grant date. As of December 31, 2002, 262,500 share options
were outstanding under the Directors Plan, of which
255,000 were exercisable. Share options granted under the
Directors Plan are for term of 10 years. The Company
did not make any share option grants under the Directors
Plan in 2002, and granted 15,000 and 52,500 share options,
respectively, for the years ended December 31, 2001 and
2000.

Upon the adoption of the 2002 Plan by the
Companys stockholders in May 2002, the Company terminated
the Directors Plan with respect to any future option
grants. Therefore, the Company may only grant share options to
Directors under the 2002 Plan. Share options granted to
Directors under the 2002 Plan are granted on substantially
the same terms and conditions as they were under the
Directors Plan.

F20



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Employee
Stock Purchase Plans

In September 2001, the Company established the
2001 Stock Purchase Plan (the 2001 Stock Purchase
Plan), to encourage and assist employees to acquire an
equity interest in the Company. The 2001 Plan is authorized to
issue up to 300,000 shares of the Companys Common Stock.
Eligible employees may elect to have up to 15% of their annual
gross earnings withheld to purchase shares of the Companys
Common Stock at 85% of the fair market value of the Common Stock
on either the first or last trading day of the offering period,
whichever is lower. The 2001 Stock Purchase 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. As of December 31, 2002, the Company
has issued 73,438 shares of the Companys Common Stock
under the 2001 Stock Purchase Plan.

In May 2002, the Companys shareholders
adopted the 2002 Stock Purchase Plan (the 2002 Stock
Purchase Plan), to encourage and assist employees to
acquire an equity interest in the Company. The 2002 Stock
Purchase Plan is authorized to issue up to 300,000 shares of the
Companys Common Stock. Eligible employees may elect to
have up to 15% of their annual gross earnings withheld to
purchase shares of the Companys Common Stock at 85% of the
fair market value of the Common Stock on either the first or
last trading day of the offering period, whichever is lower. As
stated, the 2002 Stock Purchase Plan was approved by
shareholders; and therefore, is intended to comply with the
requirements of Section 423 of the Internal Revenue Code.
As of December 31, 2002, the Company has issued 26,548
shares of the Companys Common Stock under the 2002 Stock
Purchase Plan.

Consultants

In 1995, 1996 and 2000, the Company granted share
options to certain of the Companys consultants. The total
number of share options granted to these consultants was
675,500. With respect to each share option grant, the grant is
valid for 10 years from the grant date and is subject to a
vesting period based upon either the passage of time or the
achievement of certain milestones. Of these share options,
430,800 share options were exercisable as of December 31,
2002. The Company recognized $0.1 million and
$0.3 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 and 2000,
respectively, and as of the December 31, 2001, compensation
expense relating to the share options grants 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, 2002, 2001 and 2000:

|                           |  |         |           |           |  |   |       | 
|-------------------------- |  | ------- | --------- | --------- |  | - | ----- | 
|                           |  |         |           | Weighted-
|                           |  |         |           | Average  
|                           |  | Share   |           | Exercise 
|                           |  | Options |           | Price    
|                           |  |         |           |          
|Balance, January 1, 2000.  |  |         | 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 | 
|                           |  |         |           |           |  |   |       | 

F21



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                           |  |         |            |           |  |   |       | 
|-------------------------- |  | ------- | ---------- | --------- |  | - | ----- | 
|                           |  |         |            | Weighted-
|                           |  |         |            | Average  
|                           |  | Share   |            | Exercise 
|                           |  | Options |            | Price    
|                           |  |         |            |          
|Granted                    |  |         | 2,131,132  |           |  |   | 7.55  | 
|Exercised                  |  |         | (5,000     | )         |  |   | 3.09  | 
|Canceled                   |  |         | (1,725,458 | )         |  |   | 16.94 | 
|                           |  |         |            |           |  |   |       | 
|Balance, December 31, 2002 |  |         | 5,855,279  |           |  | $ | 15.14 | 
|                           |  |         |            |           |  |   |       | 

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 |  | 2002                |           | Contractual Life |  | Price               |     | 2002         |  | Price    
|                         |  |                     |           |                  |  |                     |     |              |  |          
|                         |  |                     |           |                  |  |                     |     |              |  |          
|$ 0.01  $10.00          |  |                     | 2,038,969 |                  |  |                     | 8.6 |              |  | $         | 7.30  |  |  |  | 283,194   |  |  | $ | 7.09  | 
|10.01   20.00           |  |                     | 2,980,141 |                  |  |                     | 6.2 |              |  |           | 17.08 |  |  |  | 2,225,155 |  |  |   | 16.61 | 
|20.01   30.00           |  |                     | 828,415   |                  |  |                     | 6.2 |              |  |           | 27.30 |  |  |  | 623,192   |  |  |   | 27.18 | 
|30.01   40.00           |  |                     | 7,750     |                  |  |                     | 4.8 |              |  |           | 30.70 |  |  |  | 7,671     |  |  |   | 30.68 | 
|                         |  |                     | 5,855,279 |                  |  |                     | 7.0 |              |  |           | 15.14 |  |  |  | 3,139,212 |  |  |   | 17.88 | 

The foregoing table includes options to purchase
218,000 shares that were outstanding and exercisable as of
December 31, 2002, granted outside of the Companys
stock option plans.

Pro Forma
Option Information

Using the Black-Scholes option pricing model, the
per share weighted-average fair value for all share options
granted during 2002, 2001 and 2000 was $4.69, $10.00, and $8.61,
respectively, on the date of grant with the following
weighted-average assumptions.

|                        |  |      |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  | 2002 |      | 2001 |  | 2000
|                        |  |      |      |      |  |     
|                        |  |      |      |      |  |     
|Expected dividend yield |  |      | 0    | %    |  |      | 0    | % |  |  | 0    | %
|Risk-free interest rate |  |      | 1.7  | %    |  |      | 3.2  | % |  |  | 5.1  | %
|Volatility              |  |      | 76.0 | %    |  |      | 96.1 | % |  |  | 66.7 | %
|Expected life in years  |  |      | 4    |      |  |      | 4    |   |  |  | 4    |  

In December 2002, the FASB issued Statement
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
This statement amends FASB Statement No. 123; Accounting
for Stock-Based Compensation,to provide alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the
method used on reported results. The requirements of Statement
No. 148 are effective for fiscal years ending after
December 15, 2002, except for financial reports containing
condensed financial statements for interim periods. The Company
continues to account for stock based compensation under APB
No. 25.

(16) 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

F22



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 non-cash
contributions of Company stock of approximately
$0.5 million, $0.5 million, and $0.4 million for
the years ended December 31, 2002, 2001 and 2000,
respectively.

(17) 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.

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 in research support for the year ended
December 31, 2000.

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.

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

F23



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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).

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 which we are developing under the trade name
AQUAVANInjection. 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. During the second quarter of 2002, we achieved a
development milestone related to AQUAVAN Injection, which
resulted in a payment due to ProQuest of $0.75 million and
the Company receiving additional shares of the common stock of
ProQuest. At December 31, 2002, the estimated market value
of our total investment in ProQuest, including the purchases
made in the second quarter of 2002, was $0.9 million. As a
result, we have recorded the 2002 milestone payments of
$0.75 million as a research and development cost.

The investment in ProQuest is accounted for under
the cost method and is included in the accompanying consolidated
balance sheets as Other assets. ProQuest is a
privately held pharmaceutical company based in Lawrence, Kansas.

(18) Related Party Transaction

In connection with the sale of 34,129 shares of
the Companys common stock in February 1994 to John P.
Brennan, the Companys Senior Vice President, Technical
Operations, 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 December 31, 2002, the principal and
accrued interest for the note was approximately $85,000.

F24



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(19) Earnings (Loss) Per Share

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

|                                                              |                                                               |                                       |         |       |   |      |         |       |   |   |         |       |  
|------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                              |                                                               | 2002                                  |         | 2001  |   | 2000
|                                                              |                                                               |                                       |         |       |   |     
|                                                              |                                                               |                                      
|                                                              |                                                               | (in thousands, except per share data)
|Loss before the cumulative effect of an
    accounting change |                                                               | $                                     | (59,270 | )     |   | $    | (60,317 | )     |   | $ | (38,502 | )    
|Net loss                                                      |                                                               | $                                     | (59,270 | )     |   | $    | (60,317 | )     |   | $ | (47,127 | )    
|Weighted-average shares outstanding                           |                                                               |                                       | 29,805  |       |   |      | 28,249  |       |   |   | 23,517  |      
|Total weighted-average diluted shares(1)                      |                                                               |                                       | 29,805  |       |   |      | 28,249  |       |   |   | 23,517  |      
|Basic and diluted EPS:                                        |                                                               |                                       |         |       |   |      |         |       |   |   |         |      
|                                                              | Loss before the cumulative effect of an
    accounting change |                                       | $       | (1.99 | ) |      | $       | (2.14 | ) |   | $       | (1.64 | )
|                                                              | Net loss applicable to common stockholders                    |                                       | $       | (1.99 | ) |      | $       | (2.14 | ) |   | $       | (2.00 | )



---



|    |                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At December 31, 2002, 2001 and 2000, there
    were approximately 263,000, 332,000, and 889,000 instruments,
    respectively, that were considered antidilutive and accordingly
    excluded in the above calculation.

(20) 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, 2002, the Company had committed to fund
approximately $12.8 million pursuant to these agreements.
Approximately 85% of this amount will be incurred during 2003.

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 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.

During 2002, the Company terminated its agreement
with Cardinal Health to provide a contract sales force. The
termination has led to a dispute regarding amounts owed to
Cardinal at the termination date. The Company does not believe
it has any remaining obligations to Cardinal at
December 31, 2002 relative to the agreement; however,
Cardinal has asserted that it may be owed $0.8 million. On
March 13, 2003, the Company received notice from the parent
of Cardinal Health (Parent) that National Specialty
Services Inc. (NSS), an affiliate of Cardinal Health
and another subsidiary of Parent, was going to offset the amount
Cardinal Health claims the Company owes it against an account
payable in the amount of approximately $1.8 million that
NSS owes the Company, in addition to taking certain unearned
prompt payment discounts, also in payment of the amounts that
Cardinal Health claims the Company owes it. NSS is the specialty
distributor to whom the Company sells GLIADEL® Wafer. The
Company does not believe that Parent or NSS has the right to
make an offset under the Companys agreement with NSS for
amounts that Cardinal Health claims the Company owes it. The
Company does not believe the resolution of this matter will have
a material adverse effect on the Companys consolidated
financial condition, results of operations or liquidity.

F25



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

(21) Quarterly Financial Data
(unaudited)

|                                      |  |           |         |          |  |               |         |              |  |   |         |   |  |   |         |  
|------------------------------------- |  | --------- | ------- | -------- |  | ------------- | ------- | ------------ |  | - | ------- | - |  | - | ------- | -
|2002 Quarter Ended                    |  |           |         |          |  |               |         |             
|(in thousands, except per share data) |  | March 31, |         | June 30, |  | September 30, |         | December 31,
|                                      |  |           |         |          |  |               |         |             
|Revenues                              |  | $         | 6,184   |          |  | $             | 3,591   |              |  | $ | 3,294   |   |  | $ | 1,596   |  
|Gross margin(1)                       |  |           | 5,215   |          |  |               | 2,559   |              |  |   | 2,623   |   |  |   | 1,305   |  
|Net loss                              |  |           | (13,524 | )        |  |               | (16,835 | )            |  |   | (14,571 | ) |  |   | (14,340 | )
|                                     
|Net loss per common share             |  | $         | (0.45   | )        |  | $             | (0.57   | )            |  | $ | (0.49   | ) |  | $ | (0.48   | )

|                                      |  |           |         |          |  |               |         |              |  |   |         |   |  |   |         |  
|------------------------------------- |  | --------- | ------- | -------- |  | ------------- | ------- | ------------ |  | - | ------- | - |  | - | ------- | -
|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   | )



---



|    |                                                                        
|--- | -----------------------------------------------------------------------
|(1) | Gross margin is calculated as net product sales
    less cost of sales.

F26



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##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

The Board of Directors and Stockholders

Guilford Pharmaceuticals Inc.:


Under date of February 7, 2003, except for
the third paragraph of Note 20, which is as of
March 13, 2003, we reported on the consolidated balance
sheets of Guilford Pharmaceuticals Inc. and subsidiaries (the
Company) as of December 31, 2002 and 2001, 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, 2002, 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 7, 2003


F27



---



##### 



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

SCHEDULE II

(in thousands)


|                                                                            |  |          |     |                  |  |                  |     |            |  |            |     |     |  |   |      |   |  |   |     | 
|--------------------------------------------------------------------------- |  | -------- | --- | ---------------- |  | ---------------- | --- | ---------- |  | ---------- | --- | --- |  | - | ---- | - |  | - | --- | 
|                                                                            |  |          |     |                  |  |                  |     |           
|                                                                            |  |          |     | Additions        |  |                  |     |           
|                                                                            |  |          |     |                  |  |                  |     |           
|Description                                                                 |  | Balance  |     | Charged to Costs |  | Charged to Other |     |            |  | Balance   
|(Balance sheet caption)                                                     |  | @ 1/1/00 |     | and Expenses     |  | Accounts         |     | Deductions |  | @ 12/31/00
|                                                                            |  |          |     |                  |  |                  |     |            |  |           
|Allowance for doubtful accounts (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
|                                                                            |  |            |     |                  |  |                  |       |            |  |           
|Allowance for doubtful accounts (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 | 

|                                                                            |  |            |     |                  |  |                  |       |            |  |            |   |  |  |   |        |   |  |   |     | 
|--------------------------------------------------------------------------- |  | ---------- | --- | ---------------- |  | ---------------- | ----- | ---------- |  | ---------- | - |  |  | - | ------ | - |  | - | --- | 
|                                                                            |  |            |     |                  |  |                  |       |           
|                                                                            |  |            |     | Additions        |  |                  |       |           
|                                                                            |  |            |     |                  |  |                  |       |           
|Description                                                                 |  | Balance    |     | Charged to Costs |  | Charged to Other |       |            |  | Balance   
|(Balance sheet caption)                                                     |  | @ 12/31/01 |     | and Expenses     |  | Accounts         |       | Deductions |  | @ 12/31/02
|                                                                            |  |            |     |                  |  |                  |       |            |  |           
|Allowance for doubtful accounts (Accounts
    receivable)                   |  | $          | 152 |                  |  | $                | (125  | )          |  | $          |  |  |  | $ |       |   |  | $ | 27  | 
|Inventory reserve (Inventory)                                               |  |            | 237 |                  |  |                  | (163  | )          |  |            |  |  |  |   |       |   |  |   | 74  | 
|Product return reserve (Accrued expenses and
    other current liabilities) |  |            | 751 |                  |  |                  | 1,314 |            |  |            |  |  |  |   | (1,773 | ) |  |   | 292 | 



---



|    |                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 17 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 17 to the
    footnotes to our consolidated financial statements).                                                                 
|   
|(3) | The provision for product returns is a reduction
    of gross product sales.                                                                                                                                                                                                                   
|   
|(4) | Product returned pursuant to the Companys
    return policy and charged to this reserve.                                                                                                                                                                                                      

F28