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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                               ----------------

                                   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, 1997
                        COMMISSION FILE NUMBER: 0-23736

                               ----------------

                         GUILFORD PHARMACEUTICALS INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                  DELAWARE                  52-1841960
      (STATE OR OTHER JURISDICTION OF       (IRS EMPLOYER
       INCORPORATION OR ORGANIZATION)       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  X      No
                                        ---        ---

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

     As of March 17, 1998, the aggregate value of the approximately 19,445,145
shares of common stock of the Registrant issued and outstanding on such date,
excluding approximately 3,577,015 shares held by all affiliates of the
Registrant, was approximately $366,950,506. This figure is based on the closing
sales price of $23.125 per share of the Registrant's common stock as reported
on the Nasdaq(R) National Market on March 17, 1998.

                      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:

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                                       1
<PAGE>   2
                                     PART I

ITEM 1.  BUSINESS.

OVERVIEW

     Guilford Pharmaceuticals Inc. (together with its subsidiaries, "Guilford"
or the "Company") is a biopharmaceutical company engaged in the development and
commercialization of novel products in two principal areas: (i) targeted and
controlled drug delivery systems using proprietary biodegradable polymers for
the treatment of cancer and other diseases; and (ii) therapeutic and diagnostic
products for neurological diseases and conditions.

     Drug Delivery Business

     The Company's first product in its drug delivery business is GLIADEL(R)
wafer ("GLIADEL"), a novel treatment for glioblastoma multiforme, the most
common and rapidly fatal form of brain cancer.  GLIADEL was cleared for
marketing by the U.S. Food and Drug Administration ("FDA") in September 1996
for use as an adjunct to surgery to prolong survival in patients with recurrent
glioblastoma multiforme for whom surgical resection is indicated. GLIADEL was
commercially launched in the United States in February, 1997 by the Company's
worldwide (except for Scandinavia) marketing partner, Rhone-Poulenc Rorer
Pharmaceuticals, Inc. (together with its parent, Rhone-Poulenc Rorer, Inc.,
"RPR").  RPR has informed the Company that it has applied for regulatory
clearance in several other countries, including France, Canada, Argentina,
South Africa, Brazil, Korea and New Zealand, and is preparing to make filings
in other countries.  During the first quarter of 1998, RPR obtained regulatory
clearance to market GLIADEL in Argentina and Brazil.  The Company and RPR plan
to seek expansion of the labeling for GLIADEL for malignant glioma at the time
of initial surgery, and in this regard commenced patient enrollment in
December, 1997 in a multi-center Phase III clinical trial in Europe, the United
States and Israel for GLIADEL in patients undergoing initial surgery for
malignant glioma.  Additionally, in October, 1996 the Company commenced a
Phase I dose-escalation clinical trial for a high-dose formulation of GLIADEL
at varying concentrations of BCNU, the chemotherapeutic agent used in GLIADEL,
with levels ranging from 6.5% up to 20%, in contrast to the 3.85% concentration
contained in the currently marketed formulation of GLIADEL.  RPR is also
preparing to initiate clinical trials for GLIADEL for pediatric and metastatic
brain cancer in 1998.  Under its agreements with RPR, the Company is eligible
to receive up to an aggregate of $40 million in milestone and other payments
from RPR in the event that RPR is able to achieve certain specified
international marketing clearances and to expand the marketing indication for
GLIADEL to first surgery patients.

     The Company is also working to broaden its line of polymer-based oncology
products through the use of other chemotherapeutic agents, different polymer
systems and various formulations.  The Company's first product candidate in
this program is a controlled release formulation of the chemotherapeutic agent,
paclitaxel (Taxol(R)) for peritoneal administration.  In this formulation, the
paclitaxel is delivered via a proprietary biodegradable polyphosphoester
("PPE") polymer exclusively developed in collaboration with scientists at The
Johns Hopkins University ("Johns Hopkins"), and is initially targeted for the
treatment of ovarian cancer.  Other cancers that may be suitable for this type
of targeted therapeutic approach include tumors of the prostate, head and neck,
breast, liver and lungs.

     Neurological Products Program

     In Guilford's neurological business, the Company is developing DOPASCAN(R)
Injection ("DOPASCAN"), a radio-labeled tropane derivative imaging agent for
the diagnosis and monitoring of Parkinson's disease, as well as neurotrophic
(i.e., nerve regenerative) and neuroprotectant small molecules as potential
treatments for a range of neurodegenerative diseases and conditions such as
Parkinson's disease, Alzheimer's disease, stroke, ALS, multiple sclerosis,
spinal cord injury and peripheral neuropathies.  In addition, the Company is
researching small molecule therapeutics for cocaine and possibly other
addictions.

     In 1997, the Company completed a multi-center Phase II clinical trial in
North America of DOPASCAN in conjunction with the Parkinson Study Group, the
results of which indicate that DOPASCAN can differentiate subjects 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%).  No
serious adverse events were attributed to DOPASCAN in this study.

     The Company's neurotrophic program is based on observations first made in
Dr. Solomon Snyder's laboratory at Johns Hopkins that immunophilins, which are
intracellular proteins which bind to immunosuppressant drugs such as FK 506 and
cyclophilin A, are enriched 10-40 fold in the central nervous system.  The
Company is the exclusive licensee from Johns Hopkins of a U.S. patent
application covering the neurotrophic effects of certain immunosuppressant
drugs and other immunophilin ligands.  Guilford scientists, together with their
academic collaborators, further demonstrated that the neurotrophic pathway
could be separated from the immunosuppressant pathway, and Guilford scientists
have synthesized hundreds of proprietary small molecules which are potently
neurotrophic, orally-bioavailable and cross the blood-brain barrier.  Certain
in vivo pre-clinical results with one of the Company's novel neuroimmunophilin
ligands, GPI 1046, were published in the March 4, 1997 issue of the Proceedings
of the National Academy of Sciences.  These experiments demonstrated that GPI





                                       2
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1046 induced significant nerve regeneration and functional recovery in rodent
models of both central neuronal degeneration and peripheral nerve damage.  In
September 1997, the Company announced interim results from preliminary
experiments which appear to confirm these findings in a primate model of
Parkinson's disease.

     In August, 1997, the Company entered into a collaboration with Amgen Inc.
("Amgen") respecting the research, development and commercialization of the
Company's FKBP-based neuroimmunophilin ligand technology ("Neuroimmunophilin
Technology") for all human therapeutic and diagnostic applications.  Pursuant
to the terms of the Company's agreements with Amgen (the "Amgen Agreements"),
Amgen initially paid the Company a one time, non-refundable payment of $15
million and invested an additional $20 million in the Company in exchange for
640,095 shares of the Company's common stock and five-year Warrants to purchase
up to an additional 700,000 shares of Company common stock at an exercise price
of $35.15 per share.  Amgen also agreed to  pay up to $13.5 million in the
aggregate, payable quarterly over three years, to support research activities
at the Company relating to the Neuroimmunophilin Technology, with an option to
fund a fourth year of research, or under certain conditions, to terminate the
research program after two years.  Further, in the event Amgen achieves certain
specified development and regulatory milestones in each of ten different
clinical indications, Amgen has agreed to pay to the Company up to $392 million
in the aggregate. The Company will receive royalties on product sales, if any,
related to the Neuroimmunophilin Technology in the future.  There can be no
assurance, however, that  Amgen will be able to successfully develop any
FKBP-based neuroimmunophilin compound into a safe and effective regulatory
approved drug for neurological or other uses, and that Guilford will thereby
earn any of the milestone payments related to such development activities or
any royalties related to product sales.

     In its neuroprotectant program, Guilford is developing novel compounds to
protect brain cells from ischemia (the lack of oxygen delivery from reduced
blood flow) and other disorders caused by massive release of excitatory amino
acid neurotransmitters such as glutamate.  The Company is exploring three
distinct intervention points in a biochemical pathway in neuronal damage: (i)
pre-synaptic inhibition of glutamate release by inhibiting the enzyme,
NAALADase; (ii) post-synaptic inhibition of poly(ADP-ribose) polymerase
("PARP"); and (iii)  post-synaptic inhibition of nitric oxide via inhibition of
Nitric Oxide Synthase ("NOS").

     The Company's prototype NAALADase inhibitor, GPI 5000, has demonstrated
significant neuroprotectant activity in several cell culture and animal models
of neurodegeneration. In  in vitro and in vivo models of focal ischemia,
GPI-5000 exhibited approximately 95% and 65% neuroprotection of cortical
neurons, respectively.  In addition, in 1997, Company scientists presented
data on GPI 5000 in models of stroke, ALS, Parkinson's disease, myelination,
nerve crush, and spinal cord injury at the Annual Meeting of the Society for
Neuroscience.

     With respect to the Company's current prototype PARP inhibitor Compound,
GPI-6150, data suggest that this compound is several times more potent as a
PARP inhibitor than the prototype compound, GPI 6000, previously used by the
Company to establish proof of principle of the relevant mechanism of action.
In a study presented in September, 1997, GPI 6000 was shown to be effective in
reducing neuronal damage in a rat model of stroke.  The Company is currently
testing GPI 6150 and other proprietary  small molecule PARP inhibitors in
various animal models of ischemia.

     The Company also focused its efforts on researching and developing
therapeutics for cocaine and other addictions, and in 1997, was awarded a Small
Business Innovation Research (SBIR) grant and a one year contract with the
Office of National Drug Control Policy to provide funding for certain aspects
of the Company's addiction therapeutics program in the amounts of $100,000 and
$650,000, respectively.

                                   * * * * *

     Any statements made by the Company 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.  The  forward-looking statements
contained in this annual report, include, but are not limited to, those
concerning application for international regulatory clearances and labeling
expansions for GLIADEL, polymer product line extensions, the commencement and
completion of the research program relating to the Company's FKBP-based
neuroimmunophilin ligand technology and other technologies, clinical
development activities, including without limitation commencement and conduct
of clinical trials  related to GLIADEL, the Company's strategic plans,
anticipated expenditures and the need for additional funds, all of which
involve significant risks and uncertainties.  Investors are cautioned that
these forward-looking statements involve risks and uncertainties that could
cause the actual results to differ from those expressed in or implied by those
statements.  Information concerning factors that could affect such results are
set forth herein and in the Company's filings with the Securities and Exchange
Commission, including the section entitled "Risk Factors" set forth herein.

     GLIADEL(R) and DOPASCAN(R) are registered trademarks of the Company.
Taxol(R) is a registered trademark of Bristol-Myers Squibb Company.





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<PAGE>   4
PRODUCT AND DEVELOPMENT PROGRAMS

     The following table summarizes the current status of the Company's
product, product candidates and research programs:

<TABLE>
<CAPTION>
 PROGRAM/PRODUCT CANDIDATES             DISEASE INDICATIONS/CONDITIONS               STATUS (1)              CORPORATE PARTNER
 --------------------------             ------------------------------          --------------------    -------------------------
 <S>                                    <C>                                     <C>                     <C>
 DRUG DELIVERY BUSINESS

 GLIADEL                                Recurrent glioblastoma                  Market                  RPR (2); Orion Farmos (3)
   (3.85% BCNU)                         multiforme

                                        Malignant glioma at time of             Phase III               RPR (2); Orion Farmos (3)
                                        initial surgery

 GLIADEL                                Malignant glioma                        Phase I                 RPR (2); Orion Farmos (3)
   (6.5% up to 20% BCNU)

 Controlled-release paclitaxel          Ovarian Cancer                          Preclinical                          __
  (paclitaxel in PPE microspheres)


 NEUROLOGICAL PRODUCTS PROGRAM

 DOPASCAN                               Imaging agent to diagnose and           Phase II                DRL  (5)
                                        monitor Parkinson's disease

 NEUROTROPHIC DRUGS (6)

 Neuroimmunophilin ligands              Parkinson's disease                     Preclinical             Amgen

                                        Other nerve growth and repair
                                        indications (Alzheimer's disease,
                                        traumatic brain injury, traumatic
                                        spinal cord injury, multiple
                                        sclerosis, neuropathy, stroke and
                                        others)


 NEUROPROTECTIVE DRUGS (6)

 NAALADase inhibitors                   Stroke, head trauma, ALS,               Preclinical                          --
                                        Parkinson's disease, and
                                        peripheral neuropathies

 PARP inhibitors                        Stroke, cardiac ischemia, septic        Preclinical                          --
                                        shock

 NOS inhibitors                         Stroke, head trauma                     Research                             --


 ADDICTION THERAPEUTICS (6)

 Dopamine transporter ligand            Cocaine addiction                       Research                             --
</TABLE>

----------

(1)  "Research" includes initial research related to specific molecular
     targets, synthesis of new chemical entities and assay development for the
     identification of lead compounds. "Preclinical" includes testing of lead
     compounds in vitro and in animal models, pharmacology and toxicology
     testing, product formulation and process development prior to the
     commencement of clinical trials.

(2)  RPR is the Company's corporate partner throughout the world, excluding
     Scandinavia

(3)  Orion Farmos is the Company's corporate partner in Scandinavia for
     GLIADEL.

(4)  Orion Farmos has certain rights of first refusal regarding Scandinavia.





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(5)  Daiichi Redioisotope Laboratories, Ltd. ("DRL") is the Company's corporate
     partner in Japan, Korea and Taiwan for DOPASCAN.

(6)  As used in this annual report, a  "prototype" compound is one which the
     Company uses to establish proof of principle of the relevant mechanism of
     action, but which it does not intend to develop into a product because of
     pharmacokinetic characteristics of the compound, the Company's proprietary
     position with respect to such compound or for other reasons. Upon in vitro
     and in vivo proof of principal of intervention in a biochemical mechanism
     of action, the Company seeks to develop proprietary lead compounds in this
     program through medicinal chemistry both around the prototype compounds
     and other compounds.

     Development and commercialization of the Company's product and product
candidates are subject to numerous risks and uncertainties, certain of which
are set forth under the section herein captioned "Risk Factors" and in this
annual report.

DRUG DELIVERY BUSINESS

     The Company's drug delivery business currently involves the use of
biodegradable polymers for targeted and controlled drug delivery of
chemotherapeutic drugs to treat cancer. Delivering high drug concentrations
locally for a sustained period of time may increase the efficacy of
chemotherapy in slowing tumor growth and/or reducing tumor mass and may
decrease the side effects associated with systemic drug administration.
Guilford has developed expertise in the discovery, clinical development and
manufacturing of polymer-based drug delivery products.

GLIADEL

     The Company's first product in its drug delivery business is GLIADEL, a
novel treatment for malignant glioma, the most common and rapidly fatal form of
primary brain cancer. GLIADEL is a white wafer about the size of a dime made of
a proprietary biodegradable polymer which contains the cancer chemotherapeutic
drug BCNU (carmustine). Up to eight GLIADEL wafers are implanted in the cavity
created when a neurosurgeon removes the brain tumor. The wafers gradually
degrade in the cavity and deliver BCNU directly to the tumor site in high
concentrations for an extended period of time without exposing the rest of the
body to the toxic side effects of BCNU. GLIADEL is used to complement standard
therapy with surgery, radiation therapy and systemic chemotherapy in patients
with recurrent glioblastoma multiforme. In a North American Phase III clinical
trial, GLIADEL was shown to increase the six-month survival rate by more than
50% in these patients. The availability of GLIADEL gives physicians a new
treatment option for this rapidly fatal disease.

     The Company entered into a strategic agreement with RPR in June 1996
granting RPR the worldwide (excluding Scandinavia) rights to market, sell and
distribute GLIADEL.  During 1996, RPR paid Guilford $27.5 million in milestone
payments, $7.5 million in an equity investment in Company Common Stock and
extended to the Company a $7.5 million line of credit to support future
expansion of the Company's GLIADEL and other polymer manufacturing capacity.
Under its agreements with RPR, Guilford receives a combined transfer price and
royalty of 35% up to 40% of the net sales of GLIADEL.   For 1997, the Company's
revenues related to GLIADEL sales were $7.3 million, $5.7 million  of which
were paid as a transfer price on units sold to RPR and $1.6 million of which
were paid as royalties on RPR sales to end-users.  In addition, the Company
could earn additional payments totaling up to $40.0 million (including $7.5
million in the form of an equity investment), subject to achievement of certain
milestone events, including expanded labeling to include use of GLIADEL at the
time of initial surgery and specified international marketing approvals. There
can be no assurance however that the Company will receive any or all of these
payments as they are contingent on obtaining clearances for GLIADEL, the timing
and extent of which are not within the control of the Company, and there can be
no assurance that any or all of such regulatory objectives will be attained.
The Company pays a royalty to Massachusetts Institute of Technology ("MIT") on
sales of GLIADEL pursuant to the license agreement under which the Company
acquired the underlying technology for this product.

     On September 23, 1996 the FDA approved the Company's New Drug Application
("NDA") for GLIADEL for use as an adjunct to surgery to prolong survival in
patients with recurrent glioblastoma multiforme for whom surgery is indicated.
RPR, the Company's worldwide (except for Scandinavia) marketing partner for
GLIADEL, commercially launched GLIADEL in the United States in February, 1997
through RPR's existing oncology sales force.  RPR has informed that Company
that it has applied for regulatory clearance in several other countries,
including [France], Canada, Argentina, South Africa, Brazil, Korea and New
Zealand, and is preparing to make similar filings in other countries.  During
the first quarter of 1998, RPR obtained regulatory clearance to market GLIADEL
in Argentina and Brazil.  The Company and RPR are also planning to seek
expansion of the labeling for GLIADEL.

     Guilford and RPR have initiated a series of new clinical trials for the
purpose of seeking to expand the market for GLIADEL.  Patient enrollment
commenced in December, 1997 for a multi-center Phase III randomized,
double-blind, placebo-controlled trial in Europe, the United States and Israel
in patients undergoing initial surgery for malignant glioma.  In addition,
following completion of preclinical studies suggesting that higher
concentrations of BCNU in GLIADEL may be even more effective and appear to be
safe, Guilford initiated a Phase I clinical trial in October, 1996 to test the
safety of escalating the concentration of BCNU in GLIADEL from its current
level of 3.85% up to 20%.  RPR is also preparing to initiate clinical trials
for GLIADEL for pediatric and metastatic brain cancer in





                                       5
<PAGE>   6
1998.

     The Company entered into its agreement with Orion Farmos, a major
Scandinavian health care company, for the sales, marketing and distribution of
GLIADEL in Scandinavia in October 1995. The agreement provides for payments to
Guilford based on GLIADEL sales made by Orion Farmos in Scandinavia. Orion
Farmos has commenced sales of GLIADEL in Scandinavia on a named hospital basis.

     Future sales of GLIADEL are subject to certain risks, including the
following.  The Company's agreements with RPR do not impose any minimum
purchase requirements on the part of RPR, and there can be no assurance that
RPR will be successful in marketing and selling GLIADEL.  In particular, prior
to the commercial launch of GLIADEL in the United States in February 1997,
RPR's oncology sales force had no prior experience marketing and selling a
product to neurosurgeons.  Furthermore, GLIADEL represents a novel approach to
the treatment of brain cancer, and there can be no assurance of broad
acceptance by the medical or patient communities.  The Company currently relies
on a single supplier for BCNU, the chemotherapeutic agent used in GLIADEL, and
on its own single manufacturing facility to produce GLIADEL.  Inability to
secure timely, sufficient, or GMP quality supply of BCNU, unforeseen plant
shutdowns due to personnel or plant or equipment problems, risks associated
with regulatory compliance (including the need to manufacture GLIADEL in
accordance with the FDA's current Good Manufacturing Practice (cGMP)
regulations), uncertainties regarding the receipt and timing of international
regulatory clearances for GLIADEL, the potential inability to meet future
product demand, the risk of product recalls due to excessive product breakage
or other reasons, among others, could adversely affect the timing and extent of
any future revenues related to GLIADEL sales.  For discussion of these and
other risks, see the section herein captioned "Risk Factors".

     Other Polymer-Based Drug Delivery Products.  The Company is working to
broaden its line of polymer-based products to include drug delivery products
for the treatment of tumors outside the central nervous system. Other cancers
that may be suitable for this type of targeted therapeutic approach include
tumors of the prostate, ovaries, head and neck, breast, esophagus, liver,
pancreas, lung and colon. In addition, the Company is investigating other
polymer systems and additional configurations such as micro- and nanospheres,
gels, beads and rods for stereotactic implantation.  The Company's first
product candidate in this program is a controlled release formulation of the
chemotherapeutic agent, paclitaxel (Taxol(R)) for peritoneal administration.
In this formulation the paclitaxel is delivered via a PPE polymer developed in
collaboration with scientists at Johns Hopkins, and is initially targeted  for
the treatment of ovarian cancer.  As part of this effort, the Company has
entered into two research collaborations with a biomedical engineering
laboratory at Johns Hopkins to discover new polymers and to advise the Company
on new product development. In June 1996, the Company entered into a license
agreement with MIT and Johns Hopkins relating to a patent application claiming
certain biodegradable polymers for use in connection with the controlled local
delivery of certain chemotherapeutic agents (including paclitaxel (Taxol(R))
and camptothecin) for treating solid tumors.  In July 1996, the Company entered
into a license agreement with Johns Hopkins relating to two issued U.S. patents
relating to PPE polymers.

Neurological Products Program

     DOPASCAN.  The Company's product candidate for the diagnosis and
monitoring of Parkinson's disease, DOPASCAN, is administered intravenously in
trace quantities and allows physicians to obtain images of dopamine neurons in
the brain. Dopamine neurons are highly concentrated in a specialized area of
the brain that degenerates in Parkinson's disease. Parkinson's disease is a
common neurodegenerative disorder affecting more than 600,000 patients in the
United States.  In its early stages, Parkinson's disease can be very difficult
to distinguish clinically from other diseases with similar symptoms but which
do not respond well or at all to specific therapy for Parkinson's disease.
Unfortunately, there are no diagnostic tests currently available that can
reliably detect the neuronal degeneration in Parkinson's disease, and the
typical delay between the onset of symptoms 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, sometimes severe, side
effects.  Following intavenous injections with DOPASCAN, images of a subject's
brain are obtained with the SPECT camera and can identify loss of dopamine
neurons in the brain, and to date, over 1,000 patients have been imaged in the
United States and Europe using DOPASCAN.  In a multi-center Phase IIb clinical
trial conducted by the Parkinson's Study Group in the United States and
completed in 1997, DOPASCAN 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 in this study.  There can be no assurance, however, that similar
results will be seen in any other clinical trials for DOPASCAN that may be
conducted in the future or that DOPASCAN will be approved as a safe and
effective FDA-cleared diagnostic.

     The Company has entered into an agreement with DRL, a leading Japanese
radiopharmaceutical company, to develop and commercialize DOPASCAN in Japan,
Korea and Taiwan. DRL has informed the Company that it has completed Phase II
clinical trials in Japan and anticipates commencing Phase III clinical trials
in 1998.  The Company intends to seek partners for distribution of this





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<PAGE>   7
product in other territories, including the United States and Europe.

Neurotrophic Drugs

     Guilford, together with it corporate partner, Amgen, is developing small
molecule, orally bioavailable compounds to promote nerve growth and repair
(neurotrophic agents) for the treatment of neurological disorders. The
degeneration or damage of nerve cells in the brain and peripheral neurons
resulting from certain diseases and conditions causes a loss of either central
nervous system function (e.g., Alzheimer's disease, Parkinson's disease,
multiple sclerosis, spinal cord injury and stroke) or peripheral nerve function
(e.g., diabetic neuropathy and other peripheral neuropathies). Under normal
circumstances, damaged nerves have a very limited ability to regrow, which
poses a major obstacle for the treatment of these conditions.

     In 1990, scientists at Johns Hopkins led by Dr. Solomon H. Snyder
discovered that a binding protein for commonly used immunosuppressive agents
such as tacrolimus (FK-506), was concentrated 10 to 40 fold higher in the brain
than in the immune system.  The Johns Hopkins scientists went on to discover
that commonly used immunosuppressive drugs can promote nerve growth, and
Guilford has exclusively licensed from Johns Hopkins a U.S. patent application
claiming these discoveries. Guilford and Johns Hopkins scientists further
discovered that the mechanism of nerve growth promotion is independent of the
mechanism responsible for immunosuppression, and is mediated by binding to the
major neuroimmunophilin in the brain. This binding was discovered to initiate a
previously unknown neurotrophic cascade.

     Based on these discoveries, the Company has synthesized hundreds of
proprietary small molecule neuroimmunophilin ligands in several distinct
chemical series that promote nerve growth without being immunosuppressive. The
Company has filed numerous patent applications in the United States and
internationally relating to both novel compositions and methods of treating
neurological disorders utilizing these compounds. These compounds induce nerve
growth directly, as well as potentiate nerve growth in the presence of nerve
growth factors. Several of Guilford's lead compounds have exhibited
neurotrophic effects at picomolar and even sub-picomolar concentrations in in
vitro nerve cell cultures.

     Experimental results for one of these compounds, GPI-1046, were reported
in 1996 and published in the March 4, 1997 issue of the Proceedings of the
National Academy of Sciences. In two animal models of Parkinson's disease,
GPI-1046 demonstrated neuroprotective and neuroregenerative effects and
recovery of behavioral function. In one experiment where a neurotoxin and
GPI-1046 were administered simultaneously, the compound produced a 90%
protection and/or regeneration of the nigral-striatal dopamine neurons, the
dopamine neurons which are selectively lost in Parkinson's disease. In another
experiment where GPI-1046 was administered up to one month following the
administration of the neurotoxin, a 45% regeneration of functional striatal
dopamine neurons and near complete normalization of behavior in the affected
animals was observed.  In September 1997, the Company announced interim results
from preliminary experiments which appear to confirm these findings in a
primate model of Parkinson's disease.  In addition to animal models of
Parkinson's disease, GPI-1046 has been shown to promote nerve regeneration in a
rat model of peripheral nerve injury. In this model, GPI-1046 increased the
size and number of axons and also increased the degree of myelination of nerve
cells in a damaged sciatic nerve, leading to partial functional improvement in
the paralyzed leg.  Data also show that Guilford's neuroimmunophilin ligand
compounds exhibit systemic activity, oral bioavailability, and the ability to
cross the blood-brain barrier, unlike many naturally occurring nerve growth
factors.  The preclinical results discussed above and elsewhere in this annual
report are based on a limited number of animal studies and animal models of
disease, and there can be no assurance that the Company and its collaborative
partner, Amgen, will be able to successfully develop one or more of these
compounds or that they will be approved as a safe and effective drug.

     Company scientists have designed and synthesized additional compounds from
several distinct chemical series with improved potency and pharmacokinetic
profiles compared to GPI-1046. One such example, GPI-1216, potently promotes
neurite outgrowth in chick sensory neurons in cell culture in sub-picomolar
concentrations, and has been shown to be efficacious in an in vivo model of
Parkinson's disease. Additional compounds from other patent series, such as
GPI-1511, GPI-1234 and GPI-1485, have been shown in animal models to be orally
useful and more potent than GPI-1046 in vivo.

     Company data indicate that the Company's neuroimmunophilin ligands can
produce nerve regeneration following multiple routes of administration,
including oral administration. Further, neuroimmunophilin ligands are able to
cross the blood-brain barrier, while many naturally-occurring nerve growth
factors, proteins and peptides are not orally bioavailable and do not cross the
blood-brain barrier.  Several of the Company's neuroimmunophilin ligand
compounds have shown neurotrophic effects in a range of different types of
neurons such as dopaminergic, cholinergic, serotonergic and peripheral, and
therefore could be useful in a range of disorders, including potentially
certain neurological disorders, such as Parkinson's disease and Alzheimer's
disease, and other non-neurological diseases and conditions.

     In August 1997, the Company entered into a collaboration with Amgen
respecting the research, development and commercialization of the
Neuroimmunophilin Technology for all human therapeutic and diagnostic
applications.  Pursuant to the terms of the Amgen





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<PAGE>   8
Agreements, Amgen initially paid the Company a one time, non-refundable payment
of $15 million and invested an additional $20 million in the Company in
exchange for 640,095 shares of the Company's common stock and five-year
Warrants to purchase up to an additional 700,000 shares of Company common stock
at an exercise price of $35.15 per share.  In connection with the sale of
these securities, the Company granted Amgen certain demand and "piggyback"
registration rights under applicable securities laws.

     Amgen also agreed to provide to the Company up to $13.5 million in the
aggregate, payable quarterly over three years, to support research activities
at the Company relating to the Neuroimmunophilin Technology, with an option to
fund a fourth year of research or, under certain conditions, to terminate the
research program after two years. Subject to its obligation to fund two years
of research at Guilford, Amgen has the right to discontinue all its activities
relating to the development and commercialization of the Neuroimmunophilin
Technology at any time. The Amgen Agreements provide for milestone payments of
up to $392 million in the aggregate to the Company in the event Amgen achieves
certain specified development milestones in each of ten different clinical
indications, seven of which are neurological (i.e., Parkinson's disease,
Alzheimer's disease, traumatic brain injury, traumatic spinal cord injury,
multiple sclerosis, neuropathy and stroke) and three of which are
non-neurological.  In addition, the Company will receive royalties on product
sales, if any, related to the Neuroimmunophilin Technology in the future.
Under the Amgen Agreements, Amgen will conduct and pay for the development and
commercialization of products related to the Neuroimmunophilin Technology.
Under certain limited circumstances, Guilford has the option to conduct certain
Phase I and Phase II clinical trials on one product candidate and has the right
to co-promote in the United States one product commercialized under the Amgen
Agreements.

     As noted in the section herein captioned "Risk Factors" and elsewhere in
this annual report, there can be no assurance Amgen will be able to
successfully develop any FKBP-based neuroimmunophilin compound or that such
compounds will be approved as safe and effective drugs for neurological or
other uses and that Guilford will earn any of the milestone payments related to
such development activities.  In particular, there can be no assurance that
Amgen will be able to achieve any of the development milestones set forth in
the Amgen Agreements with respect to any specified indication. The research,
development and commercialization of early stage technology like the
Neuroimmunophilin Technology is subject to significant risks and uncertainty
respecting, among other things, selection of an appropriate lead compound,
successful completion of the pre-clinical and clinical development activities,
regulatory clearances, formulation of final product dosage forms, scale-up from
bench quantities to commercial quantities and manufacture of products and
commercialization of such products as well as the successful preservation and
extension of the patent and other intellectual property rights. For discussion
of these and other risks, see the section herein captioned "Risk Factors".

Neuroprotective Drugs

     Guilford is developing novel compounds to protect brain cells against
damage from ischemia (the lack of oxygen delivery from reduced blood flow) and
other insults and disorders which cause damage due to massive release of
excitatory amino acid neurotransmitters such as glutamate. The Company's
approach is to identify and clinically test compounds that have the ability to
intervene at three distinct steps in a biochemical pathway leading to neuronal
damage: (i) inhibition of NAALADase; (ii) inhibition of PARP; and (iii)
inhibition of NOS.

     In normal brain function, the pre-synaptic release of the neurotransmitter
glutamate, resulting in stimulation of post-synaptic glutamate receptors
(including n-methyl-D-aspartate (NMDA)), plays a critical role in many central
neuronal functions. However, in conditions such as ischemia, epilepsy and
Huntington's disease, there is a massive increase in pre-synaptic glutamate
release, which results in excessive activation of post-synaptic glutamate
receptors. This, in turn, causes excess production of the neurotransmitter
nitric oxide, mediated by the enzyme NOS, which results in damage to cellular
DNA. The nerve cell then attempts to repair such damage, mediated by the enzyme
PARP, which leads to depletion of cell energy and cell death.

NAALADase Inhibitors

     To date, a number of biopharmaceutical companies have attempted to find
compounds which might block the effects of excess glutamate on post-synaptic
glutamate receptors. However, a number of post-synaptic glutamate antagonists
have been associated with toxicities.

     Guilford scientists have succeeded in inhibiting an enzyme, NAALADase,
involved in the pre-synaptic release of glutamate, that is, preventing
excessive levels of glutamate from being produced and released in the first
place. The Company has identified compounds which exhibit nanomolar potency in
vitro. The Company has filed a number of composition of matter patent
applications, relating to several series of novel compounds, and method of use
patent applications, relating to the use of NAALADase inhibitors for
neurological and anti-cancer uses. GPI-5000, the Company's prototype
pre-synaptic glutamate inhibitor, has demonstrated significant neuroprotectant
activity in several cell culture and animal models of neurodegeneration. In
both in vitro and in vivo models of focal ischemia, GPI-5000 exhibited
approximately 95% and 65% neuroprotection of cortical neurons , respectively.
To the Company's knowledge, such a magnitude of neuroprotection is
significantly greater than that reported by post-synaptic glutamate receptor
antagonists, calcium channel antagonists or pH modulators tested under similar
conditions. In addition, because GPI-5000, as well as Guilford's other series
of





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<PAGE>   9
proprietary compounds, do not interact with post-synaptic glutamate receptors,
they may not be associated with the toxicities associated with post-synaptic
glutamate antagonists.  In addition, in 1997, Company scientists presented data
on GPI 5000 in models of stroke, ALS, Parkinson's disease, myelination, nerve
crush, and spinal cord injury at the Annual Meeting for the Society for
Neuroscience.

PARP Inhibitors

     The Company is developing compounds which inhibit PARP, a nuclear enzyme
that is involved in the repair of damaged DNA. Nitric oxide has been shown to
damage DNA in nerve cells and to trigger the activation of PARP, which in turn
leads to depletion of energy in the cell, resulting in cell death. Guilford and
Johns Hopkins scientists have shown that inhibitors of PARP can prevent
neurotoxicity in cultures of cerebral cortical neurons, suggesting that they
may be effective in treating stroke and neurodegenerative diseases.  Guilford
scientists have developed a high throughput assay to screen for PARP
inhibitors, and the Company has filed U.S. and international patent
applications for several series of PARP inhibitors and has an exclusive license
to a U.S. patent for the use of PARP inhibitors to treat disease conditions
caused by  NMDA neurotoxicity, such as stroke.  Among the series of PARP
inhibitors, the Company's proprietary GPI 6150 family of compounds has been
shown to be the most potent.  Animal data suggest that GPI 6150 is several
times more potent as a PARP inhibitor than the prototype compound, GPI 6000,
previously used by the Company to establish proof of principle of the relevant
mechanism of action.  In a study presented in September, 1997, GPI 6000 was
shown to be effective in reducing neuronal tissue damage in a rat model of
stroke.  The Company is currently testing another prototype compounds, GPI
6150, and other proprietary small molecule PARP inhibitors in various animal
models of ischemia, and Guilford scientists have found that GPI 6150 can
significantly protect against neuronal damage in a rat model of focal ischemia,
although chemical studies are necessary to confirm these results from animal
studies.

     NOS Inhibitors

     The Company is researching compounds that inhibit the formation of nitric
oxide, a neurotransmitter that mediates certain important actions of glutamate.
When excess glutamate is released (e.g., due to stroke or severe head trauma),
a variety of biochemical effects occur, including activation of NOS, an enzyme
that synthesizes nitric oxide from the amino acid arginine. In animal models of
vascular stroke, treatment with nitroarginine, a NOS inhibitor, blocked 70% of
neuronal damage. There are three distinct known forms of NOS: neuronal NOS
(nNOS), inducible NOS (iNOS) and endothelial NOS (eNOS). In animal models of
stroke, there is a 50% reduction of neuronal damage in a "knock-out" mouse
lacking nNOS. In contrast, inhibition of eNOS will reduce blood flow to the
brain during stroke, thus aggravating nerve cell damage. Consequently, there is
considerable interest in identifying compounds which selectively inhibit nNOS.
The Company is currently investigating novel mechanisms to selectively inhibit
nNOS activity. The Company has an exclusive license to an issued U.S. patent
which relates to the use of NOS inhibitors to prevent or treat disease
conditions caused by glutamate neurotoxicity.

Addiction Therapeutics

     The Company is also focusing its efforts on the development of
therapeutics for cocaine addiction and other addictive behaviors.  The
Company's cocaine addiction therapeutics program focuses on the development of
drugs which prevent cocaine from binding to dopamine transporters while
minimally affecting normal dopamine transport function, thus potentially
limiting the effects of cocaine.

     Guilford scientists have identified and synthesized novel compounds with
specificity for the cocaine recognition site in the brain and the Company has
filed patent applications covering several classes of compounds. A prototype
compound, GPI-2138, is 17 times more potent in binding to the cocaine binding
site than in inhibiting dopamine uptake, compared to cocaine. In animal
experiments, GPI-2138 blocked certain behavioral effects produced by cocaine,
including hyperlocomotion and cocaine self-administration. Company scientists
have synthesized other compounds which exhibit a binding-to-uptake ratio in
vitro of as high as 38 times greater than cocaine. The Company has also entered
into a cooperative research and development agreement with the National
Institute of Drug Abuse to identify and develop cocaine antagonists. In
addition to cocaine addiction, other forms of addiction, including alcohol and
heroin addiction, may result from facilitation of dopaminergic
neurotransmission in certain areas of the brain. As a result, Guilford
scientists are currently investigating whether GPI-2138 and related compounds
may block the addictive properties of alcohol and heroin in laboratory animals.
The Company is using GPI-2138 to establish proof of principle of the relevant
mechanism of action but does not intend to further develop this compound into a
product. The Company is currently seeking to develop proprietary lead compounds
in this program through medicinal chemistry around GPI-2138 and other
compounds.  In 1997, the Company was awarded a Small Business Innovation
Research (SBIR) grant and a one year contract with the Office of National Drug
Control Policy to provide funding for certain aspects of the Company's
addiction therapeutics program in the amounts of $100,000 and $650,000,
respectively.

MANUFACTURING AND RAW MATERIALS

     The Company currently manufactures GLIADEL using a proprietary process at
its 12,500 square foot manufacturing facility in Baltimore, Maryland.
Approximately 5,500 square feet of packaging, quality control, laboratory, and
warehouse space were added in


                                       9
<PAGE>   10
1996 to support the commercial launch of GLIADEL. The facility has been in
operation since April 1995 and was inspected by the FDA in October 1995. The
Company's current facilities are designed to enable the Company to produce up
to 8,000 GLIADEL treatments (each consisting of eight GLIADEL wafers) annually.
In January, 1998 the Company completed construction of an expansion of its
manufacturing facilities to allow for the additional synthesis of the
polyanhydride co-polymer used in the manufacture of GLIADEL.  The Company also
will be able to use this facility to produce its newest proprietary
biodegradable polymers, the PPEs, in connection with the development of other
polymer-based products.  In addition, the Company has commenced construction of
a second clean room facility, which the Company expects to be completed by the
end of 1998 and will increase the Company's GLIADEL manufacturing capacity to
20,000-30,000 treatments annually.  Furthermore, the Company expects that this
second clean room facility will also provide sufficient capacity to produce any
clinical supply  of  PPE polymer based product candidates needed in the future,
including its paclitaxel/PPE polymer product candidate currently under
development for ovarian cancer.

     The Company believes that the various materials used in GLIADEL are
readily available and will continue to be available at reasonable prices.
Nevertheless, while the Company believes that it has an adequate supply of
BCNU, the active chemotherapeutic ingredient in GLIADEL, to meet current demand
and has entered into an agreement for process development of BCNU with a
potential second source of BCNU, any interruption in the ability of the current
supplier to deliver this ingredient could prevent the Company from delivering
the product on a timely basis. The Company depends upon the availability of
certain single-source raw materials in its formulations, but is seeking
alternate suppliers for most of these raw materials as well. There can be no
assurance that such sources can be secured successfully on terms acceptable to
the Company, or at all. Failure of any supplier to provide sufficient
quantities of raw material in accordance with cGMP could cause delays in
clinical trials and commercialization of products.

     Pursuant to its agreements with  Nordion International Inc., a leading
supplier of radiolabeled products based in Canada, and its European subsidiary,
Nordion Europe S.A. (collectively, "Nordion"), the Company synthesizes the
precursor of DOPASCAN and supplies it to Nordion, which then radiolabels
DOPASCAN with Iodine-123 for distribution to hospitals involved in the clinical
trials in North America and Europe, respectively. During the term of these
agreements, Nordion has agreed not to perform development, manufacture or
supply services for any competing Iodine-123 radiolabeled imaging diagnostic
for Parkinson's disease based on dopamine transporter binding.

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 and perhaps 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 recordkeeping and reporting
requirements.  Noncompliance with applicable requirements can result in warning
letters, fines, recall or seizure of products, total or partial suspension of
production and/or distribution, refusal of the government to enter into supply
contracts or to approve marketing applications and criminal prosecution.

     Upon FDA approval, a drug may only be marketed for the approved
indications in the approved dosage forms and at the approved dosage levels. The
FDA also may require post-marketing testing and surveillance to monitor the
record of the approved product.  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 cGMP regulations. In
complying with the cGMP regulations, manufacturers must continue to expend
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 applicable cGMP requirements. Failure to comply subjects the
manufacturer to possible FDA action, such as suspension of manufacturing,
seizure of the product or voluntary recall of a product. Adverse experiences
with the 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 newly marketed drug may be commercially
distributed in the United States include: (i) conducting appropriate
preclinical laboratory and animal tests; (ii) submitting to the FDA an
application for an IND, which must become effective before clinical trials may
commence; (iii) conducting well-controlled human clinical trials that establish
the safety and efficacy of the drug product; (iv) filing with the FDA a 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. In addition to
obtaining FDA approval for each indication to be treated with each product,
each domestic drug manufacturing establishment must register with the FDA, list
its drug products with the FDA, comply





                                       10
<PAGE>   11
with cGMP requirements and be subject to inspection by the FDA. Foreign
manufacturing establishments distributing drugs in the United States also must
comply with cGMP requirements, list their products, and are subject to periodic
inspection by FDA or by local authorities under agreement with FDA.  Under the
FDA Modernization Act of 1997 ("FDAMA"), which was enacted on November 21, 1997
and which became effective in many respects on February 19, 1998, foreign
manufacturers are now required to register their establishments.  The FDAMA
also contains numerous other provisions pertaining to or involving the review
and approval of drugs and devices.  One of its purposes is to streamline or
improve the FDA drug application review and approval process.  The precise
impact that these new statutory provisions will have on Guilford's product
candidates is unclear, however, particularly until the FDA begins to implement
the new law.

     With respect to a drug product with an active ingredient not previously
approved by the FDA, the manufacturer must usually submit a full NDA, including
complete reports of preclinical, clinical and laboratory studies, to prove that
the product is safe and effective.  Under the FDAMA, the FDA is to issue a
guideline that describes when abbreviated study reports may be submitted.  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 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. The FDAMA also contains provisions on the approval of supplemental
applications.  By May 21, 1998 the FDA is required to publish or issue
standards for the review of such applications and guidelines clarifying data
requirements.  A manufacturer intending to conduct clinical trials ordinarily
will be required first to submit an IND to the FDA containing information
relating to previously conducted preclinical studies.

     Preclinical testing includes formulation development, laboratory
evaluation of product chemistry and animal studies to assess the potential
safety and efficacy of the product formulation. Preclinical tests usually must
be conducted in accordance with the FDA regulations concerning Good Laboratory
Practices ("GLPs"). The results of the preclinical tests are submitted to the
FDA as part of the IND and are reviewed by the FDA prior to authorizing the
sponsor to conduct clinical trials in human subjects. Unless the FDA issues a
clinical hold on an IND, the IND will become 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 and
are subject to detailed protocols. Clinical trials involve the administration
of the investigational drug product to human subjects. Each protocol indicating
how the clinical trial will be conducted usually must be submitted for review
to the FDA as part of the IND. The FDA's review of a study protocol does not
necessarily mean that, if the study is successful, it will constitute proof of
efficacy or safety. Further, each clinical study must be conducted under the
auspices of an independent institutional review board ("IRB") established
pursuant to FDA regulations. The IRB considers, among other factors, ethical
concerns and informed consent requirements. The FDA or the IRB may require
changes in a protocol both prior to and after the commencement of a trial.
There is no assurance that the IRB or the FDA will permit a study to go forward
or, once started, to be completed. Clinical trials may be placed on hold at any
time for a variety of reasons, particularly if safety concerns arise, or
regulatory requirements are not met.

     The three phases of clinical trials are generally conducted sequentially,
but they may overlap. In Phase I, the initial introduction of the drug into
humans, the drug is tested for safety, side effects, dosage tolerance,
metabolism and clinical pharmacology. Phase II involves controlled tests in a
larger but still limited patient population to determine the efficacy of the
drug for specific indications, to determine optimal dosage and to identify
possible side effects and safety risks. Phase II testing for an indication
typically takes at least from one and one-half to two and one-half years to
complete. If preliminary evidence suggesting effectiveness has been obtained
during Phase II evaluations, expanded Phase III trials are undertaken to gather
additional information about effectiveness and safety that is needed to
evaluate the overall benefit-risk relationship of the drug and to provide an
adequate basis for physician labeling. Phase III studies for a specific
indication generally take at least 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 the Company's product candidates.

     Reports of results of the preclinical studies and clinical trials for
non-biological drugs are submitted to the FDA in the form of an NDA for
approval of marketing and commercial shipment. New user fee legislation enacted
in 1997 now requires the submission in fiscal year 1997 of $256,846 to cover
the costs of FDA review of a full NDA.  Annual fees also exist for certain
approved prescription drugs and the establishments that make them.  The NDA
typically includes information pertaining to the preparation of drug
substances, analytical methods, drug product formulation, 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. The
FDAMA requires FDA, not later than 180 days after enactment, to issue proposed
regulations governing the approval of radiopharmaceuticals, such as DOPASCAN.
Not later than 18 months after enactment, FDA is required to promulgate final
regulations.  It is unclear how these other provisions may affect the potential
for approval of DOPASCAN.





                                       11
<PAGE>   12
     The median FDA approval time is currently about 14 months, although
reviews and approvals of treatments for cancer and other serious or
life-threatening diseases may be accelerated or expedited. 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 efficacy with sufficient levels of statistical assurance.
The FDAMA now provides that FDA may consider one clinical study, as
appropriate.  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). Notwithstanding the submission
of such data, the FDA ultimately may decide that the application does not
satisfy its regulatory criteria for approval.

     Phase III or other clinical studies may be conducted after, rather than
before, FDA approval under certain circumstances.  Traditionally, for example,
the FDA may determine under its expedited or accelerated approval regulations
that earlier studies may 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 with an experimental drug of
patients not in clinical trials may also be allowed under a Treatment IND
before general marketing begins and pending FDA approval. 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 and expedited or accelerated approval regulations are
limited, for example, to drug products intended to treat AIDS or other serious
or life-threatening diseases and that provide meaningful therapeutic benefit to
patients over existing treatments or that are for diseases for which no
satisfactory alternative therapy exists. The FDAMA contains provisions for the
approval of "Fast Track Products" and for "Expanded Access to Investigational
Therapies and Diagnostics".  These new statutory provisions apply to many
products covered by the FDA's regulations.  Not later than November 21, 1998,
FDA must issue guidance on the policies and procedures to "fast track" drugs.
The provisions governing investigational products became effective on February
19, 1988.  No assurances exist that the Company's product candidates will
qualify for cost-recovery, expedited or accelerated approvals or for treatment
use under the FDA's old regulations or the new statutory provisions.

     The full NDA process for newly marketed non-biological drugs takes 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 the Company 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 the Company's non-biological
drug products or that FDA approval of such applications can be obtained.

     A five year period of market exclusivity is provided for newly marketed
active ingredients of drug products not previously approved and a three-year
period for certain changes in approved drug products that require for approval
the submission of safety and efficacy information (other than bioequivalence
studies). A period of five years is available for new chemical entities not
previously approved by FDA. A period of three years is available for changes in
approved products, such as in delivery systems of previously approved products.
Both periods of marketing exclusivity mean that 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 approved
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
product candidates of the Company.

OTHER REGULATION

     Products marketed outside the United States which are manufactured in the
United States are subject to certain FDA regulations, as well as regulation by
the country in which the products are to be sold. The Company 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.





                                       12
<PAGE>   13
     The Company also is governed by other federal, state and local laws of
general applicability. 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 DEA regulates controlled substances, such as narcotics.
Establishments handling controlled substances must, for example, be licensed
and inspected by the DEA, and may be subject to export, import, security and
production quota requirements. Radiolabeled products, including drugs, are also
subject to regulation by the Department of Transportation and to state and
federal licensing requirements. Various states often have comparable health and
environmental laws, such as those governing the use and disposal of controlled
and radiolabeled products.

     While the Company is not actively involved in product areas involving
biotechnology and has no current plans to develop products utilizing modern
biotechnology, if the Company were to move in that direction, it would
potentially be subject to extensive regulation. The USEPA, the FDA and other
federal and state regulatory bodies have developed or are in the process of
developing specific requirements concerning products of biotechnology that may
affect research and development programs and product lines. The Company is
unable to predict whether any governmental agency will adopt requirements,
including regulations, which would have a material and adverse effect on any
future product applications involving biotechnology.

PATENTS AND PROPRIETARY TECHNOLOGY

     Guilford believes that patent and trade secret protection is crucial to
its business and that its future will depend in part on its ability to obtain
patents, maintain trade secret protection and operate without infringing the
proprietary rights of others. As of December 31, 1997, the Company owned or had
licensed rights to 58 U.S. and 123 foreign patents and 74 U.S. and 299 foreign
patent applications with claims relating to its biodegradable polymer, imaging,
neurotrophic, neuroprotective, addiction therapeutics and other programs.

     The role, validity and value of patents, licenses and proprietary
technology in the business of the Company are subject to various uncertainties
and contingencies. The Company's success will depend in part on its ability to
obtain, maintain and enforce patent protection for its products and processes
or license rights to patents, maintain trade secret protection and operate
without infringing upon the proprietary rights of others. The degree of patent
protection afforded to pharmaceutical and biotechnological inventions is
uncertain, and a number of Guilford's product candidates are subject to this
uncertainty. The Company is aware of a company which has asserted in a public
filing that it has patent applications claiming the use of certain of its
immunosuppressive compounds and multidrug resistance compounds for nerve growth
applications, as well as a patent and patent applications relating to compounds
which it claims are useful in nerve growth applications. While the Company does
not believe that its neurotrophic compounds infringe on such company's patent,
no assurance can be given as to the ability of the Company's patents and patent
applications to adequately protect the Company's neurotrophic product
candidates or that the Company's neurotrophic product candidates will not
infringe or be dominated by this company's patent or patent applications, if
issued. There can be no assurance that any patent applications filed by, or
assigned or licensed to, the Company will be granted, that the Company will
develop additional products or processes that are patentable, or that any
patents issued to, or licensed by, the Company will provide the Company with
any competitive advantages or adequate protection for its products. In
addition, there can be no assurance that any existing or future patents or
intellectual property issued to, or licensed by, the Company will not
subsequently be challenged, invalidated or circumvented by others.

     It is Guilford's policy to control the disclosure and use of Guilford's
know-how and trade secrets under confidentiality agreements with employees,
consultants and other parties. There can be no assurance, however, that its
confidentiality agreements will be honored, that others will not independently
develop equivalent or competing technology, that disputes will not arise
concerning the ownership of intellectual property or the applicability of
confidentiality obligations, or that disclosure of Guilford's trade secrets
will not occur. To the extent that consultants or other research collaborators
use intellectual property owned by others in their work with the Company,
disputes may also arise as to the rights to related or resulting intellectual
property.

     Guilford supports and collaborates in research conducted in universities
and in governmental research organizations. There can be no assurance that the
Company will have or be able to acquire exclusive rights to the inventions or
technical information derived from such collaborations or that disputes will
not arise as to rights in derivative or related research programs conducted by
the Company. In addition, in the event of a contractual breach by the Company,
certain of the Company's collaborative research contracts provide for transfer
of technology (including any patents or patent applications) to the contract
sponsors.

     If the Company is required to defend against charges of infringement of
patent or proprietary rights of third parties or to protect its own patent or
proprietary rights against third parties, the Company may incur substantial
costs and could lose rights to develop or market certain products or be
required to pay monetary damages or royalties to license proprietary rights
from third parties. In response to actual or threatened litigation, the Company
may seek licenses from third parties or attempt to redesign its products or
processes to avoid infringement; however, there can be no assurance that the
Company will be able to obtain licenses on acceptable terms or at all or
redesign its products or processes. In addition to being a party to patent
infringement litigation, the Company could be required to


                                       13
<PAGE>   14
participate in patent interference proceedings declared by the U.S. Patent and
Trademark Office, which would be expensive and time-consuming, even if the
Company were to prevail in such a proceeding. The Company may also be forced to
initiate legal proceedings to protect its patent position or other proprietary
rights. These proceedings typically are costly, protracted, and offer no
assurance of success.

TECHNOLOGY LICENSING AGREEMENTS

     In March 1994, the Company entered into an agreement  (the "GLIADEL
Agreement") with Scios Inc. ("Scios") pursuant to which the Company licensed
from Scios exclusive worldwide rights to 35 U.S. patents and patent
applications as well as 115 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 is
covered by three U.S. patents which expire between 2005 and 2010 and certain
related international patents and patent applications. In April 1994, Scios
assigned all of its rights and obligations under the GLIADEL Agreement to MIT.
Under the terms of the GLIADEL Agreement, Guilford is obligated to pay a
royalty on all net sales of products incorporating such technology as well as a
percentage of all royalties received by Guilford from sublicensees and certain
advance and minimum annual royalty payments. In 1997, Guilford paid $301,000 in
royalty payments to MIT related to payments made to the Company from RPR and
Orion Farmos related to GLIADEL. Guilford has 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. In addition, Guilford is
obligated to spend a minimum dollar amount in developing products resulting
from the technology through 1997 and to meet certain development milestones.
Although the Company believes that it can comply with such obligations, failure
of the Company to perform these obligations could result in the Company losing
its right to the new polymer-based product.

     In June 1996, the Company entered into a license agreement with MIT and
Johns Hopkins respecting a patent application covering certain biodegradable
polymers for use in connection with the controlled local delivery of certain
chemotherapeutic agents (including paclitaxel (Taxol(R)) and camptothecin) for
treating solid tumors. Under this agreement, the Company is 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 Guilford.
Furthermore, under the terms of the agreement, the Company has committed to
spend minimum amounts to develop the technology and to meet certain development
milestones. Although the Company believes that it can comply with such
obligations, failure of the Company to perform these obligations could result
in the Company losing its rights to such technology.

     In July 1996, the Company entered into a license agreement with Johns
Hopkins for two U.S. patents respecting certain PPE polymers developed at Johns
Hopkins. This agreement, among other things, requires Guilford to pay certain
processing, maintenance and/or up-front fees, milestone payments and royalties,
a portion of proceeds from sublicenses, and fees and costs related to patent
prosecution and maintenance and to spend minimum amounts for and meet deadlines
regarding development of this technology. In the event of termination of these
licenses, the Company could lose its rights to use of the licensed technology.
The Company has also entered into a sponsored research agreement with Johns
Hopkins with respect to this PPE technology and has a right of first
negotiation regarding inventions that result from this work.  As of December
31, 1997, including the patents mentioned above, the Company owned or had
licensed rights to five U.S. patents and six U.S. patent applications with
claims relating to PPE polymers.

     The Company obtained exclusive worldwide rights to DOPASCAN pursuant to a
March 1994 license agreement (the "RTI Agreement") with Research Triangle
Institute ("RTI"), which grants Guilford 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 and certain related precursors and analogues are
covered by U.S. patents which start expiring in 2009, as well as certain
related international patents and patent applications. Under the RTI Agreement,
the Company reimbursed RTI for certain past patent-related expenses and agreed
to make annual payments to RTI to support mutually agreed upon research to be
conducted at RTI through March 1999. In addition, the Company is obligated to
pay RTI a royalty on gross revenues to Guilford 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. In
January 1997, the Company paid RTI $32,000 as a result of a payment received
from DRL, the Company's DOPASCAN partner in Japan. Guilford must use
commercially reasonable efforts to develop products related to the licensed
technology and to meet certain performance milestones. Failure of the Company
to perform its obligations under the RTI Agreement in the future could result
in termination of the license.

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





                                       14
<PAGE>   15
United States Government Rights

     Aspects of the technology licensed under the Company's license agreements
may be subject to certain Government Rights. These rights 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 grant licenses which may be exclusive under any of such
inventions to a third-party if it determines 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 government also has
the right to take title to a subject invention if there is failure to disclose
the invention and elect title within specified time limits. In addition, the
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. Provisions recognizing these Government Rights are
contained in the Company's principal technology license agreements.

SALES, MARKETING AND DISTRIBUTION

     In general, the Company's strategy is to seek to establish strategic
alliances with larger pharmaceutical companies to develop and promote products
that require extensive development, sales and marketing resources. Within the
United States, the Company may seek to retain co-promotion rights with respect
to some or all compounds or indications in any such strategic alliances, or the
Company may elect to market and distribute its products directly where the
commercial prospects so warrant.

     In June 1996, the Company entered into a marketing, sales and distribution
rights agreement and other related agreements with RPR granting RPR worldwide
(excluding Scandinavia) marketing, sales, promotion and distribution rights for
GLIADEL. Upon execution of these agreements, the Company received $7.5 million
for 281,531 shares of Common Stock. Furthermore, in addition to an aggregate of
$27.5 million in rights payments made by RPR upon execution of the agreements
in June 1996 and FDA clearance of the GLIADEL NDA in September 1996, the
agreements with RPR provide for up to an additional $40 million in payments in
the event that certain regulatory and other milestones are achieved, although
there can be no assurance that any or all of such milestones will be attained
and certain of these payments are contingent on international regulatory
filings and clearances, the timing and extent of which are largely within the
control of RPR. Moreover, RPR may, under certain circumstances, fund up to
approximately $17 million for the development of higher dose forms of GLIADEL
being developed by the Company and for certain additional clinical studies
related to GLIADEL. Finally, under these agreements, the Company has the right
under certain circumstances to borrow up to an aggregate of $7.5 million to
expand the Company's GLIADEL manufacturing and related facilities. In addition
to the payments outlined above, the Company will act as the exclusive
manufacturer of GLIADEL and will receive transfer price payments and royalties
based on any "net sales" (as defined in the agreements with RPR) of GLIADEL.
RPR's exclusive rights terminate in a particular country upon the later of the
expiration of the last to expire of certain patents applicable in that country
or the last commercial sale of GLIADEL in that country. Under the Company's
agreements with RPR, RPR has an exclusive six-month period following
development of new polymer technology by the Company to make an offer to
license such technology for oncology applications.

     In October 1995, the Company entered into an agreement appointing Orion
Farmos distributor for GLIADEL in Scandinavia, and in December 1995 the Company
entered into an agreement with DRL for the marketing, sale and distribution of
DOPASCAN in Japan, Korea and Taiwan.

     In August 1997, the Company entered into a collaboration with Amgen
respecting the research, development and commercialization of the
Neuroimmunophilin Technology for all human therapeutic and diagnostic
applications.  Pursuant to the terms of the Amgen Agreements, Amgen initially
paid the Company a one time, non-refundable payment of $15 million and invested
an additional $20 million in the Company in exchange for 640,095 shares of the
Company's common stock and five-year Warrants to purchase up to an additional
700,000 shares of Company common stock at an exercise price of $35.15 per
share.  In connection with the sale of these securities, the Company granted
Amgen certain demand and "piggyback" registration rights under applicable
securities laws.  Amgen also agreed to provide to the Company up to $13.5
million in the aggregate, payable quarterly over three years, to support
research activities at the Company relating to the Neuroimmunophilin
Technology, with an option to fund a fourth year of research or, under certain
conditions, to terminate the research program after two years. The Amgen
Agreements provide for milestone payments of up to $392 million in the
aggregate to the Company in the event Amgen achieves certain specified
development milestones in each of ten different clinical indications, seven of
which are neurological (i.e., Parkinson's disease, Alzheimer's disease,
traumatic brain injury, traumatic spinal cord injury, multiple sclerosis,
neuropathy and stroke) and three of which are non-neurological.  In addition,
the Company will receive royalties on product sales, if any, related to the
Neuroimmunophilin Technology in the future.  Amgen has agreed to fund, develop
and commercialize the Neuroimmunophilin Technology.  Under certain limited
circumstances, Guilford has the option to conduct certain Phase I and Phase II
clinical trials on certain product candidates and has the right to co-promote
in the United States





                                       15
<PAGE>   16
one product commercialized under the Amgen Agreements.  Amgen has the right to
and may elect at any time to discontinue all activities relating to the
development and commercialization of the Neuroimmunophilin Technology.

COMPETITION

     The Company is involved in evolving technological fields in which
developments are expected to continue at a rapid pace.  Guilford's success
depends upon its ability to compete effectively in the research, development
and commercialization of products and technologies in its 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, experience and manufacturing, marketing, financial and managerial
resources and represent significant competition for the Company. 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 under
development by the Company.

     The Company is aware of several competing approaches under development for
the treatment of malignant glioma including using radioactive seeds for
interstitial radiotherapy, increasing the permeability of the blood-brain
barrier to chemotherapeutic agents, sensitizing cancer cells to
chemotherapeutic agents using gene therapy and developing chemotherapeutics
directed to specific receptors in brain tumors. To the Company's knowledge,
none of these approaches has resulted in compounds studied in randomized,
controlled trials which have shown them to be superior to conventional therapy.

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

     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. However much of this
activity has focused on naturally occurring growth factors. Such large
molecules generally cannot cross the blood-brain barrier and thus present
problems in administration and delivery. One company has announced that certain
of its neuroimmunophilin ligands showed positive results in stimulating nerve
growth in an animal model of nerve crush, and has disclosed that it has made
patent filings covering compounds and uses in connection with nerve growth
promotion. In addition, another company announced that IGF-1 showed positive
results in clinical trials of a peripheral neurodegenerative disorder.

     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.

     In the field of cocaine addiction, most of the investigated compounds to
date have been studied by academic and government groups. Further, much of this
work has been with known agents, such as carbamazepine, that are commercially
available for other indications. Guilford is aware of another company that is
investigating the use of butylcholinesterase as a treatment for acute cocaine
overdose. The Company is aware of one company that is investigating an
immunological approach in an attempt to develop a cocaine vaccine. The Company
is not aware of other commercial research programs targeting specific cocaine
antagonists, which do not interfere with normal dopamine neuron function.

     Any product candidate that the Company develops and for which it gains
regulatory approval, including GLIADEL, must then compete for market acceptance
and market share.  For certain of the Company's product candidates, an
important factor will be the timing of market introduction of competitive
products. Accordingly, the relative speed with which the Company 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 capabilities of the Company's 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 the Company's product candidates relative to their cost,
method of administration, price and patent protection. There can be no
assurance that the Company's competitors will not develop more effective or
more affordable products or achieve earlier product development completion,
patent protection, regulatory approval or product commercialization than the
Company. The achievement of any of these goals by the Company's competitors
could have a material adverse effect on the Company's business, financial
condition and results of operations.

PRODUCT LIABILITY AND INSURANCE





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<PAGE>   17
     Product liability risk is inherent in the testing, manufacture, marketing
and sale of the Company's product candidates, and there can be no assurance
that the Company will be able to avoid significant product liability exposure.
While the Company currently maintains $10,000,000 of product liability
insurance covering clinical trials and product sales, there can be no assurance
that such or any future insurance coverage obtained by the Company will be
adequate or that claims will be covered by the Company's insurance.  The
Company's 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 the Company in the future on
acceptable terms, or at all.

EMPLOYEES

     At December 31, 1997, the Company employed 198 individuals.  Of these 198
employees, 167 were employed in the areas of research and product development
and in manufacturing and quality control of GLIADEL. The remaining 31 employees
performed general and administrative functions, including executive, finance
and administration, legal and business development. None of the Company's
employees are currently represented by a labor union.  To date, the Company has
experienced no work stoppages related to labor issues and believes its
relations with its employees are good.

     All employees are required to enter into a confidentiality agreement with
the Company. Hiring and retaining qualified personnel are important factors for
the Company's future success. The Company is likely to continue to add
personnel particularly in the areas of research, clinical research and
operations, including manufacturing. Intense competition exists for these
qualified personnel from other biotechnology and biopharmaceutical companies,
academic, research and governmental organizations. There can be no assurance
that the Company will be able to continue to hire qualified personnel and, if
hired, that the Company will be able to retain these individuals.

SCIENTIFIC ADVISORY BOARD

     Guilford's Scientific Advisory Board consists of individuals with
recognized expertise in fields related to Guilford's research and development
programs. The Scientific Advisory Board meets with the Company at least twice a
year to discuss research priorities and new developments in neuroscience and
consults with and meets informally with the Company on an as-needed basis.

     The following persons are members of Guilford's Scientific Advisory Board:

     SOLOMON H. SNYDER, M.D. has been a Director of the Company and Chairman of
the Scientific Advisory Board since the Company's inception in July 1993. Dr.
Snyder received his M.D. in 1962 from Georgetown Medical School, trained as a
Research Associate with Julius Axelrod at the National Institute of Mental
Health and completed his Psychiatry Residency at Johns Hopkins Hospital. He is
presently Director of the Department of Neuroscience at Johns Hopkins Medical
School and Distinguished Service Professor of Neuroscience, Pharmacology and
Molecular Sciences, and Psychiatry. Dr. Snyder has received a number of awards
including the Albert Lasker Award in Basic Biomedical Research, the Wolf Prize
and the Bower Award. He is a member of the U.S. National Academy of Sciences,
the Institute of Medicine and the American Academy of Arts and Sciences. Dr.
Snyder is a director of Scios.

     Dr. Snyder has provided consulting services to the Company under
consulting agreements since August 1993. In September 1995, the Company and Dr.
Snyder entered into a new consulting agreement pursuant to which Dr. Snyder
will provide consulting services to the Company through August 1998, unless the
agreement is further extended or earlier terminated. Under the agreement, Dr.
Snyder performs consulting and advisory services as requested by the Company
for a minimum of 24 days and a maximum of 38 days per year, subject to
adjustment under certain circumstances. With certain limited exceptions, Dr.
Snyder has agreed not to engage in any business activity with or provide any
consulting or related services to any organization which directly competes with
the Company during the term of the agreement and for a period of one year
thereafter.

     JOSEPH COYLE, M.D. is Chairman of the consolidated Department of
Psychiatry and Ebens Draper Professor of Psychiatry and Neuroscience at the
Harvard Medical School. He obtained his M.D. from Johns Hopkins in 1969 and
completed his Psychiatry Residency at Johns Hopkins. His research involves
clinical as well as basic studies of neurotransmitter systems and drug actions
in the brain.  He has received numerous honors, including the McAlpin Award of
the National Mental Health Association, the Gold Medal Award of the Society for
Biological Psychiatry and election to the Institute of Medicine of the National
Academy of Sciences.

     SAMUEL H. BARONDES, M.D. is the Jeanne and Sanford Robertson Professor of
Neurobiology and Psychiatry and Director of the Center for Neurobiology and
Psychiatry at the University of California, San Francisco. He received his M.D.
from Columbia University in 1958, trained in internal medicine at the Peter
Bent Brigham Hospital, in molecular biology at the National Institutes of
Health and in psychiatry at the McLean and Massachusetts General Hospitals. Dr.
Barondes has received a number of awards including the Royer Award and the
Stillmark Medal, is a member of the Institute of Medicine, and also serves as
President of the McKnight Endowment Fund for Neuroscience.





                                       17
<PAGE>   18
     Paul Greengard, Ph.D.  Received his Ph.D. from Johns Hopkins in 1953.
Following service as the Director of the Biochemistry Department at Ciba-Geigy
Research Laboratories and as Professor of Pharmacology at Yale University, he
assumed his present position as Professor at Rockefeller University in 1983.
His research on molecular mechanisms of signal transduction and drug action has
been recognized by numerous awards including the Life Sciences Award of the
Federation of American Societies for Experimental Biology and the Bristol-Myers
Award for Neuroscience.  Dr. Greengard is a member of the National Academy of
Sciences and the American Academy of Arts and Sciences.

     ROBERT LANGER, Ph.D. is presently Germeshausen Professor in the Department
of Chemical Engineering at MIT. Dr. Langer obtained his Ph.D. from MIT in 1974
and since then has been a member of the MIT faculty. Dr. Langer is a leading
authority on polymer drug delivery systems. He has received numerous awards
including election to the U.S. National Academy of Sciences, the National
Academy of Engineering and the Institute of Medicine.

     IRA SHOULSON, M.D. obtained his M.D. from the University of Rochester in
1971 where he completed internal medicine and neurology residencies. He is
presently Louis C. Lasagna Professor of Experimental Therapeutics and Professor
of Neurology, Pharmacology and Medicine at the University of Rochester. He is
the recipient of numerous honors including the Modern Medicine Award for
Distinguished Achievement. Dr. Shoulson is a national leader in the design and
execution of major clinical trials evaluating drug actions in Parkinson's
disease, Huntington's disease and other movement disorders. Dr. Shoulson has
served two terms as a member of the Peripheral and Central Nervous System
Advisory Committee of the FDA.

     ANNE YOUNG, M.D., Ph.D. obtained her M.D. and Ph.D. degrees from Johns
Hopkins Medical School in 1973 and 1974, respectively, and completed her
Neurology Residency at the University of California in San Francisco. She
served on the faculty of the Neurology Department at the University of Michigan
and since 1991 has been Julieanne Dorn Professor of Neurology at the Harvard
Medical School and Chief of the Neurology Service at the Massachusetts General
Hospital. She has received numerous honors including election to the American
Academy of Arts and Sciences. Her laboratory research focuses on the actions of
excitatory amino acids in the brain, while her clinical research deals with
movement disorders.

ITEM 1A.  EXECUTIVE OFFICERS OF REGISTRANT

     CRAIG R. SMITH, M.D., age 52, joined the Corporation as a Director at the
Corporation's inception in July 1993. Dr. Smith was elected President and Chief
Executive Officer in August 1993 and was elected Chairman of the Board in
January 1994. Prior to joining the Corporation, Dr. Smith was Senior Vice
President for Business and Market Development at Centocor, Inc., a
biotechnology corporation. Dr. Smith joined Centocor in 1988 as Vice President
of Clinical Research after serving on the Faculty of the Department of Medicine
at Johns Hopkins Medical School for 13 years. 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.

     JOHN P. BRENNAN, age 55,  joined the Corporation as Vice President,
Operations in January 1994 and became Senior Vice President, Operations in
January 1997. From 1980 to 1993, he was Vice President, Technical Operations
and Manufacturing for G.D.  Searle and Co., a pharmaceutical company, and was
responsible for the operation of manufacturing plants in North America, Latin
America and Europe and the worldwide pharmaceutical and process technology from
1980 to 1993. From 1977 to 1980, Mr. Brennan was General Manager of the E.R.
Squibb & Sons, Inc. manufacturing facility in Humacao, Puerto Rico. Mr. Brennan
held various technical positions at Smith Kline Corporation from 1960 to 1977.
Mr. Brennan has over 37 years of experience in the pharmaceutical industry.
Mr. Brennan received his B.S. in Chemistry from the Philadelphia College of
Pharmacy and Science in 1968 and attended the Wharton Graduate Management
Program in 1976.

     ANDREW R. JORDAN, age 50, joined the Corporation as Vice President,
Secretary, Treasurer and Chief Financial Officer in September 1993 and became
Senior Vice President, Treasurer and Chief Financial Officer in January 1997.
Prior to joining the Corporation, Mr. Jordan held various positions with KPMG
Peat Marwick LLP, a public accounting firm, beginning in 1973, including
partner since 1983. Mr. Jordan's experience at KPMG Peat Marwick 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.

     DAVID R. SAVELLO, Ph.D., age 52, joined the Corporation as Senior Vice
President, Drug Development in April 1997.  Prior to joining the Corporation,
Dr. Savello was employed by Glaxo Wellcome, Inc. ("Glaxo") since 1985, most
recently as Vice President, North American Regulatory Affairs from 1995 to
1997.  Prior to 1995, Dr. Savello served as Vice President, Drug Development
and later as Vice President, Regulatory Affairs and Compliance, at the
affiliated entity Glaxo Research Institute.  Dr. Savello's duties at Glaxo
included leading U.S. and Canadian regulatory operations and International
Research and Development, Quality Assurance, and Good Manufacturing Practices
for all bulk drug substance and clinical supplies manufacturing and packaging.
Dr. Savello received his Ph.D. and M.S. in pharmaceuticals from the University
of Maryland in 1972 and 1971, respectively, and his B.S. in pharmacy in





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<PAGE>   19
1968 from the Massachusetts College of Pharmacy.

     NICHOLAS LANDEKIC, age 39, joined the Corporation in March 1995 as Vice
President, Business Development. From January 1992 to February 1995, Mr.
Landekic was Senior Director of Business Development at Cephalon, Inc. and was
responsible for licensing and other corporate collaborations.   From 1989 to
1992, he was a Senior Manager of Product Planning at Bristol-Myers Squibb
Company and was responsible for worldwide commercial development and strategic
planning for currently marketed and new central nervous system products.  From
1985 to 1989, Mr. Landekic worked for Johnson & Johnson Corporation in a
variety of positions in business development and finance.  Mr. Landekic
received his M.B.A. in Finance/Marketing from the State University of New York
at Albany, an M.A. in Biology from Indiana University and a B.S. in Biology
from Marist College.

     THOMAS C. SEOH, age 40, joined the Corporation in April 1995 as Vice
President, General Counsel and Secretary. From 1992 to 1995, Mr. Seoh was
affiliated with the ICN Pharmaceuticals, Inc. ("ICN") group, as Vice President
and Associate General Counsel of ICN from 1994 to 1995, Vice President, General
Counsel and Secretary of Viratek, Inc. from 1993 to 1994 and Deputy General
Counsel of SPI Pharmaceuticals, Inc. from 1992 to 1994, providing legal
function support for pharmaceutical operations, research and development and
corporate development. From 1990 to 1992, Mr. Seoh was General Counsel and
Secretary of Consolidated Press U.S., Inc., the North American holding
corporation of the Sydney, Australia-based Consolidated Press group. Prior
thereto, Mr. Seoh was associated with the New York and London law offices of
Lord, Day & Lord, Barrett Smith. Mr. Seoh received his J.D. and A.B. from
Harvard University.

     PETER D. SUZDAK, Ph.D., age 39, joined the Corporation in March 1995 as
Vice President, Research.  Prior thereto, Dr. Suzdak was Director of
Neurobiology at Novo Nordisk A/S and was responsible for all neurobiology
research from 1993 to 1995, and Department Head for Receptor Neurochemistry
from 1988 to 1992 as well as a member of the drug discovery management group
from 1989 to 1995.  Prior thereto, Dr. Suzdak was a Pharmacology Research
Associate in the Clinical Neuroscience Branch of the National Institute of
Mental Health in Bethesda, Maryland from 1985 to 1988.  Dr. Suzdak received his
Ph.D. in Neuroscience from the University of Connecticut and a B.S. in Pharmacy
from St. Johns University.

     WILLIAM C. VINCEK, Ph.D., age 50, joined the Company as Vice President,
Corporate Quality in August 1997.  From November 1993 until Dr. Vincek joined
the Company, he was Group Director, CMC & Preclinical Regulatory Affairs and
Global Research and Development GMP Quality Assurance at Glaxo.  Prior thereto
from 1984 until October 1993, Dr. Vincek held various positions at SmithKline
Beecham Pharmaceuticals and related entities, most recently from July 1992
until October 1993 as Director, Pharmaceutical Analysis Department.  Dr. Vincek
received his Ph.D. in Medicinal Chemistry from the University of Kansas, where
he also received a M.S. in Medicinal Chemistry.  Dr. Vincek received a B.S. in
Chemistry from Colorado State University.

ITEM 2.  PROPERTIES.

     In August 1994, the Company entered into a master lease for an
approximately 83,000 square foot building in Baltimore, Maryland. The Company
currently occupies 23,000 square feet for office space, 18,000 square feet for
manufacturing space, and 42,000 square feet of research and development
laboratories.  The Company is currently in the process of adding 5,000 square
feet to its animal handling facilities and expects completion by April, 1998.
The master lease expires in July 2005. Two five-year renewal options are
available to the Company or the Company may exercise a purchase option any time
after the ninth year for the then current fair market value.  In June 1997, the
Company entered into a lease with an affiliate of Scios for approximately
16,200 square feet of laboratory and office space with an initial term ending
on December 31, 1998.  In October, 1997, the Company exercised its option under
the lease to extend the term until June 30, 1999.  In February, 1998 the
parties amended this lease to include an additional 16,500 square feet of
laboratory and office space and extended the term until July 31, 1999.

     In February 1998, the Company entered into an operating lease with a trust
affiliated with First Union National Bank ("First Union") respecting the
construction and occupancy of a new laboratory and office facility, consisting
of approximately 72,500 square feet and scheduled to be completed in the second
quarter, 1999.  The lease expires in February 2005, at which time the Company
has 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, the Company may, with the consent of First Union, enter into a new
lease arrangement.  See "Management's Discussion of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for a more complete
description of the Company's arrangements with First Union.  The Company
expects to consolidate all its operations into its current and this new
facility in 1999.

ITEM 3.  LEGAL PROCEEDINGS.

The Company is not a party to any material legal proceedings.

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





                                      19
<PAGE>   20
None.

ITEM 4A.  RISK FACTORS

   An investment in the shares of the Company's common stock is speculative in
nature and involves a high degree of risk. In addition to the other information
contained in this annual report, the following factors should be considered
carefully in evaluating the Company and its business before purchasing the
shares of the Company's common stock. This annual report contains, in addition
to historical information, forward-looking statements, including, but not
limited to, those concerning application for international regulatory
clearances and labeling expansions for GLIADEL, polymer product line
extensions, the commencement and completion of the research program relating to
the Company's FKBP-based neuroimmunophilin ligand technology and other
technologies, clinical development activities, including without limitation
commencement and conduct of clinical trials related to GLIADEL, the Company's
strategic plans, anticipated expenditures and the need for additional funds,
all of which involve risks and uncertainties.  The Company's actual results
could differ materially. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below, as well as
those discussed elsewhere in this annual report.

   HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY.  The Company
incurred annual net operating losses from its inception through the end of
fiscal 1997, with the sole exception of fiscal 1996 and, as of December 31,
1997, had an accumulated deficit of $26.3 million. Prior to February 25, 1997,
the date on which GLIADEL was commercially launched in the United States,
substantially all of the Company's revenues had been recognized as research and
development or non-recurring milestone payments under the Company's
collaborations, and again in fiscal 1997, the majority of the Company's
revenues came in the form of non-recurring milestone payments.  Except for
revenues from sales and non-recurring milestone payments related to GLIADEL
under the Company's agreements with RPR and the research funding and
non-recurring rights and milestone payments payable under the Company's
collaboration with Amgen relating to the Company's Neuroimmunophilin
Technology, the Company's product candidates are not expected to generate
revenues for at least the next several years, if at all, and whether GLIADEL
sales will generate any significant revenues remains uncertain.  Furthermore,
whether the Company will ever recognize revenues from milestone payments or
royalties paid on product sales under its collaboration with Amgen is subject
to significant risk and uncertainty, including but not limited to, risks
associated with new product development, the conduct of pre-clinical studies
and human clinical trials, obtaining regulatory approval, scale-up and
manufacturing of new products and commercialization of new products, all of
which risks are discussed below in this "Risk Factors" section.  While the
Company reported net income for the second and third quarters of 1996 and  the
third quarter of 1997, the income recognized in the 1996 periods was the result
of significant and non-recurring payments from RPR with respect to GLIADEL and
the income reported in the third quarter 1997 was primarily be due to receipt
of a one-time, non-recurring rights payment from Amgen.  The Company does not
anticipate that fiscal 1998 will be profitable, and there can be no assurance
that the Company will ever achieve or sustain profitability in the future.
Furthermore, the Company expects to experience quarter-to-quarter and
year-to-year fluctuations in its operating results due to a variety of factors,
including, but not limited to, the timing and amount of sales of GLIADEL, the
timing and realization of milestone and other payments under the Company's
collaborative agreements, including its collaboration with Amgen, and expenses
relating to the Company's research and development, clinical and manufacturing
activities as well as activities undertaken in connection with the preservation
and extension of the Company's intellectual property rights.  The Company's
ability to realize sustained profitability in the future will depend upon,
among other things, the successful marketing of GLIADEL by RPR, receipt of
regulatory clearance for additional indications for GLIADEL in the United
States as well as Europe and other countries, the successful completion of
clinical trials for and, if completed, receipt of regulatory clearance for the
marketing of, DOPASCAN, and the successful development of any product
candidates falling under the Company's collaboration with Amgen.  In addition,
the Company must enter into collaborative arrangements and license agreements
on acceptable terms with others with respect to its product candidates and
earlier stage technologies as they are developed.  The Company will be required
to conduct substantial additional research, development and clinical trials and
to receive necessary regulatory clearances that, together with future general
and administrative expenses, are expected to result in significant expenses for
the foreseeable future.  No assurance can be given as to the ability of the
Company to achieve significant and sustained revenues or realize sustained
profitable operating results.

   DEPENDENCE ON GLIADEL AND RPR.  The Company's prospects are highly dependent
on sales by RPR of the Company's first commercial product, GLIADEL, which was
commercially launched in the United States in February, 1997.  The Company
currently has insufficient information upon which to assess the ability of the
product to gain market acceptance or the extent of the marketing efforts
necessary to gain any such acceptance.  The failure of GLIADEL to gain market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.

   To date, the Company has received clearance from the FDA to market GLIADEL
in the United States only for patients with recurrent glioblastoma multiforme
for whom surgical resection is indicated.  The number of patients undergoing
surgery for recurrent glioblastoma multiforme is very limited.  The Company
believes that the total number of patients in the United States who undergo
surgery for recurrent glioblastoma multiforme may be less than 10,000 per year.
In order to expand the indications for which GLIADEL may be used, the Company
and RPR must successfully complete additional lengthy clinical trials and
thereafter receive clearance from


                                       20
<PAGE>   21
the FDA.  No assurance can be given as to the ability of the Company or RPR to
successfully complete these clinical trials and to receive appropriate
regulatory clearance on a timely basis, or at all, and the inability to do so
would have a material adverse effect on the Company's business, financial
condition and results of operations.  To date, RPR  has received international
regulatory approvals in only two countries to market GLIADEL, and there can be
no assurance that any other such approvals will be obtained.

   The Company granted RPR exclusive worldwide (excluding Scandinavia)
marketing, sales and distribution rights for GLIADEL.  The Company's agreements
with RPR do not impose any minimum purchase or sale requirements on RPR.
Therefore, the success of GLIADEL is entirely dependent upon the sales and
marketing efforts of RPR.  The Company has limited experience in dealing with
RPR for the sale of products, and prior to the February, 1997 commercial launch
of GLIADEL in the United States, RPR's oncology sales force had no prior
experience in marketing a product to neurosurgeons.  There can be no assurance
that RPR will elect to aggressively market and promote GLIADEL and will
successfully do so, and the inability or unwillingness of RPR to do so would
have a material adverse effect on the Company's business, financial condition
and results of operations.  In addition, GLIADEL is a very fragile product.
Product recalls due to excessive breakage of the GLIADEL wafers or for other
reasons could also have a material adverse effect on the Company's business,
financial condition and results of operations.

   The Company's agreements with RPR provide for additional payments to the
Company upon the timely achievement of designated milestones relating to
further clinical development and regulatory approvals.  In many instances,
achievement of the milestone is dependent on the efforts of RPR.  No assurance
can be given that any of these milestones will be satisfied in such a manner as
will allow the Company to become entitled to these payments.  The potential
milestone payments under the RPR agreements are significant.  Therefore,
failure to meet the milestones under the agreements could have a material
adverse effect on the Company's business, financial condition and result of
operations.

   THE AMGEN COLLABORATION.  The amounts payable to the Company under the
Amgen Agreements in the form of future potential development milestone
payments and royalty payments on product sales are dependent on a number of
factors, many of which are not within the Company's control, including the
selection of an appropriate lead compound(s), successful completion of the
pre-clinical and clinical development activities, regulatory clearances and
commercialization of the Neuroimmunophilin Technology, as well as the
successful preservation and extension of the patent and other intellectual
property rights licensed to Amgen, all of which are subject to significant
risks and uncertainties.  For a description of these and other material risks
related to the research, development and commercialization of the
Neuroimmunophilin Technology, see the Risk Factor sections set forth below
entitled "Technological Uncertainties," "Uncertainty Regarding Patent and
Proprietary Technology," "Dependence on Licenses of Intellectual Property,"
"Uncertainty of Preclinical and Clinical Trial Results," "Government Regulation
and Product Approvals," "Novel Alternative Technologies and Therapeutic
Approaches" and "Competition and Technological Change."

   Moreover, under the terms of the Amgen Agreements, the Company has no
control over the development activities regarding the Neuroimmunophilin
Technology which have been left to the sole discretion of Amgen.  The Amgen
Agreements also do not specify a timetable for achieving developmental and
commercialization goals with respect to the Neuroimmunophilin Technology.  In
the event that Amgen determines to conduct clinical trials on a product
candidate resulting from its collaboration with the Company, there can be no
assurance as to the ability of Amgen to successfully complete any such clinical
trials and thereafter to receive clearance from domestic or foreign regulatory
authorities to market any such products.  Further, the Neuroimmunophilin
Technology represents a new approach to the treatment of certain types of
neurological and other diseases and conditions, and Guilford and Amgen have
limited experience in the formulation of and in scaling-up and manufacturing
the types of compounds covered by the Neuroimmunophilin Technology, and there
can be no assurance that Amgen will ever be successful in scaling up any such
compounds needed for commercial sale. For a more complete description of the
kinds of risks associated with product manufacture, see the second paragraph
under the section entitled "Limited Manufacturing Capabilities" below.  In the
event Amgen is able to obtain all regulatory approvals necessary to market a
product resulting from its collaboration with the Company, the Amgen Agreements
do not specify any minimum sales requirements for Amgen, and thus any royalty
amounts payable to the Company in the future will be entirely dependent upon
the sales and marketing efforts of Amgen, over which Guilford will have no
control.  In addition, there can be no assurance that Amgen will not in the
future pursue technologies for product candidates competitive with the
Neuroimmunophilin Technology.

   RELIANCE ON SUPPLIERS.  The Company currently is able to purchase certain
key components for GLIADEL and its product candidates only from single
suppliers. These suppliers are subject to many strict regulatory requirements.
There can be no assurance that these suppliers will comply, or have complied,
with applicable regulatory requirements or that they will otherwise continue to
supply the Company with the key components for its product candidates.  In the
event that suppliers are unable or refuse to supply the Company, or will supply
the Company only at a prohibitive cost, there can be no assurance that the
Company could access additional sources at acceptable prices, on a timely
basis, or at all.  The current formulation of GLIADEL utilizes BCNU
(carmustine) as its chemotherapeutic agent. BCNU is currently





                                       21
<PAGE>   22
available only from a single source in the United States and the Company is not
aware of any supplier outside of the United States.  The Company currently
obtains its BCNU from this U.S. supplier on a purchase order basis and not
pursuant to any long-term supply agreement.  While the Company is taking steps
to obtain an additional supplier, the process of qualifying a second supplier
is lengthy, and there can be no assurance that the Company's efforts will be
successful. Failure to receive key supplies necessary for the manufacture of
GLIADEL on a timely basis at a reasonable cost could result in delays of
product shipments, which would have a material adverse effect on the Company's
business, financial condition and results of operations.  The manufacture of
DOPASCAN requires a precursor to be labeled with a radioactive isotope of
iodine to form the final product. Only a limited number of companies are
capable of performing the necessary radioiodination of the precursor and
distribution of the final radioiodinated product.  While the Company currently
has a development and supply arrangement with one of these companies for
planned phase III clinical trials, there can be no assurance that the Company,
if necessary or desirable, will be able to enter into an agreement with another
of these companies for the radioiodination of the precursor on acceptable
terms, or at all, or that the Company's current supplier will meet the
Company's need for DOPASCAN.

   LIMITED MANUFACTURING CAPABILITIES.  To commercialize GLIADEL, the Company
must be able to manufacture this product in commercial quantities in compliance
with regulatory requirements and at acceptable costs.  The Company is
manufacturing its initial product candidate, GLIADEL, at its manufacturing
facility in Baltimore, Maryland, which consists of production laboratories and
a cleanroom occupying approximately 12,500 square feet.  The facility currently
has the capacity to manufacture approximately 8,000 GLIADEL treatments per
year.  Although the Company believes the facility meets current Good
Manufacturing Practices ("cGMP") requirements and the facility has been
inspected by the FDA, the Company has manufactured only limited quantities of
GLIADEL in the facility. There can be no assurance that the Company will be
able to continue to satisfy applicable regulatory standards, including cGMP
requirements, and other requirements relating to the manufacture of GLIADEL in
the facility.  The Company also faces risks inherent in the operation of a
single facility for manufacture of GLIADEL, including risks of unforeseen plant
shutdowns due to personnel, equipment or other factors, and the possible
inability of the facility to produce GLIADEL in quantities sufficient to meet
demand.  Any delay in the manufacturing of GLIADEL could result in delays of
product shipments, which would have a material adverse effect on the Company's
business, financial condition and results of operations.

   Currently, the Company has no manufacturing capabilities for its product
candidates, and in order to complete the commercialization process of its
product candidates, the Company must either acquire, build or expand its
manufacturing facilities or rely on third parties to manufacture product
candidates.  There can be no assurance that the Company or its collaboration
partners will be able to acquire, build or expand facilities that will meet the
Company's quality, quantity and timing requirements on acceptable terms, or at
all, or that the Company or its collaboration partners will be able to enter
into manufacturing contracts with others on acceptable terms, or at all, and
the inability of the Company or its collaboration partners to do so could have
a material adverse effect on the Company's business, financial condition and
results of operations.  Third-party manufacturers must also comply with FDA,
DEA, and other regulatory requirements for their facilities, including cGMP
regulations.  Moreover, there can be no assurance that the manufacturing of
product candidates on a limited basis for investigational use will lead to a
successful transition to commercial, large-scale production.  Small changes in
methods of manufacture may affect the safety, efficacy or controlled release of
the product.  Changes in methods of manufacture, including commercial scale-up,
can, among other things, require the performance of new clinical studies.
Should the Company decide to manufacture its other product candidates,
substantial start-up expenses would be incurred, expansion of facilities would
be required and additional personnel would have to be hired.

   TECHNOLOGICAL UNCERTAINTIES.  Except for GLIADEL, the Company does not
expect to generate revenues from product sales, including any products that may
result from its collaboration with Amgen, for at least the next several years,
if at all.  Substantially all of the Company's resources have been, and for the
foreseeable future will continue to be, dedicated to the discovery, development
and commercialization of proprietary products for the diagnosis, treatment and
prevention of neurological diseases and conditions and for targeted, controlled
drug delivery using biodegradable polymers for the treatment of cancer and
other diseases.  The Company's product candidates will require additional
development, extensive preclinical and clinical trials, regulatory approval and
additional investment prior to any commercialization.  In certain cases, the
Company's compounds, such as GPI-5000, GPI-6000, GPI-6150, and GPI-2138, are
"prototypes," which the Company is using to establish proof of principle of the
relevant mechanism of action, but which the Company does not intend to develop
into a product because of pharmacokinetic characteristics of the compound, the
Company's proprietary position with respect to such compound or for other
reasons.  There can be no assurance that the Company's product development
efforts will progress as expected, or at all.  In addition, the Company's
product candidates are subject to the risks of failure inherent in the
development of products based on new technologies.  These risks include the
possibilities that the Company's new approaches to the diagnosis, treatment and
prevention of neurological diseases and conditions and targeted, controlled
drug delivery will not result in any products that gain market acceptance; that
any or all of the Company's product candidates will be found to be unsafe,
ineffective, or otherwise fail to receive necessary regulatory clearances or,
if granted, such clearances will not be revoked; that any or all of the
products, if safe and effective, will be difficult to manufacture on a large
scale or uneconomical to market; that proprietary rights of third parties will
preclude the Company from





                                       22
<PAGE>   23
marketing such products; or that third parties will market  superior or more
cost-effective products.  As a result, there can be no assurance that the
Company's activities, either directly or through collaboration partners, will
result in any commercially viable products.

   NEED FOR ADDITIONAL PARTNERS.  The Company's strategy for the research,
development and commercialization of its product candidates has required, and
will continue to require, the Company to enter into various arrangements with
corporate and academic collaborators, licensors, licensees and others, and the
Company will, therefore, be dependent upon the success of these parties in
performing their responsibilities and obligations.  The Company is actively
seeking partners to assist in the development of DOPASCAN as well as in the
Company's neuroprotective drug program.  There can be no assurance that the
Company will be able to enter into collaborative arrangements or license
agreements that the Company deems necessary or appropriate to develop and
commercialize its product candidates, or that any or all of the contemplated
benefits from such collaborative arrangements or license agreements will be
realized.  Failure to obtain such arrangements or agreements could result in
delays in marketing the Company's product candidates or the inability to
proceed with the development, manufacture or sale of product candidates.
Certain of the collaborative arrangements that the Company currently has or may
enter into in the future may place responsibility on the collaborative partner
for preclinical testing, clinical trials and/or preparation and submission of
applications for regulatory approval of potential pharmaceutical or other
products. Should a collaborative partner fail to develop or commercialize
successfully any product candidate to which it has rights, the Company's
business, financial condition and results of operations could be materially and
adversely affected.  There can be no assurance that collaborators, including
Amgen, will not pursue alternative technologies or product candidates either on
their own or in collaboration with others, including the Company's competitors,
as a means for developing treatments for the diseases or disorders targeted by
the Company's collaborative arrangements. Collaborative arrangements may also
require the Company to meet certain regulatory, research or other development
milestones and expend minimum levels of funds, and there can be no assurance
that the Company will be successful in doing so. Failure of the Company to meet
its obligations under its collaborative arrangements could result in a
termination of those arrangements and could have a material adverse effect on
the Company's business, financial condition and results of operations.

   LIKELY VOLATILITY OF STOCK PRICE.  The market price of the Company's common
stock has been and is likely to continue to be highly volatile, and an
investment in these securities involves substantial risks.  The market prices
for securities of biotechnology companies (including the Company) have been
highly volatile, and the stock market from time to time has experienced
significant price and volume fluctuations that may be unrelated to the
operating performance of a particular company.  A number of factors could
result in the Company's failure to meet the expectations of securities analysts
or investors and may have a significant impact on the price of the Company's
common stock.  Such factors include, but are not limited to, announcements by
the Company or its competitors of clinical results, technological innovations,
product sales, new products or product candidates, developments or disputes
concerning patent or proprietary rights, regulatory developments affecting the
Company's products, as well as market conditions for emerging growth companies
and biopharmaceutical companies, economic and other internal and external
factors and period-to-period fluctuations in results of operations.

   UNCERTAINTY REGARDING PATENTS AND PROPRIETARY TECHNOLOGY.  The Company's
success will depend in part on its ability to obtain, maintain and enforce
patent protection for its products and processes or license rights to patents,
maintain trade secret protection and operate without infringing upon the
proprietary rights of others.  The degree of patent protection afforded to
pharmaceutical and biotechnological inventions is uncertain, and a number of
Guilford's product candidates are subject to this uncertainty.  Guilford is
aware of a company which has asserted in a public filing that it has patent
applications claiming the use of certain of its immunosuppressive compounds and
certain multidrug resistance compounds for nerve growth applications.  Such
other company has also publicly claimed holding patents and patent applications
relating to compounds which it claims are useful in nerve growth applications.
While the Company does not believe that its neurotrophic compounds infringe on
such company's patents, no assurance can be given as to the ability of
Guilford's patents and patent applications to adequately protect its
neurotrophic product candidates, or that Guilford's neurotrophic product
candidates will not infringe or be dominated by this company's patents or
patent applications, if issued, or those of any other company.  There can be no
assurance that any patent applications filed by, or assigned or licensed to,
the Company will be granted, that the Company will develop additional products
or processes that are patentable, or that any patents issued to, or licensed
by, the Company will provide the Company with any competitive advantages or
adequate protection for its products.  In addition, there can be no assurance
that any existing or future patents or intellectual property issued to, or
licensed by, the Company will not subsequently be challenged, invalidated or
circumvented by others.

   Guilford's policy is to control the disclosure and use of its know-how and
trade secrets under confidentiality agreements with employees, consultants and
other parties.  There can be  no assurance, however, that its confidentiality
agreements will be honored, that others will not independently develop
equivalent or competing technology, that disputes will not arise concerning the
ownership of intellectual property or the applicability of confidentiality
obligations, or that disclosure of Guilford's trade secrets will not occur.  To
the extent that consultants or other research collaborators use intellectual
property owned by others in their work with the Company, disputes may also
arise as to the rights to related or resulting intellectual property.





                                       23
<PAGE>   24
   Guilford supports and collaborates in research conducted in universities and
in governmental research organizations.  There can be no assurance that the
Company will have or be able to acquire exclusive rights to the inventions or
technical information derived from such collaborations or that disputes will
not arise as to rights in derivative or related research programs conducted by
the Company.  In addition, in the event of a contractual breach by the Company,
certain of the Company's collaborative research contracts provide for the
return of technology rights (including any patents or patent applications) to
the contract sponsors.

   Questions of infringement of intellectual property rights, including patent
rights, may involve highly technical and subjective analyses.  There can be no
assurance that any of the Company's existing or future products or technologies
do not or will not infringe the rights of other parties, that such other
parties may not in the future initiate legal action against the Company to
enforce their claims or that, if such actions are brought, the Company would be
successful in defending itself.

   If the Company is required to defend against charges of infringement of
patent or proprietary rights of third parties or to protect its own patent or
proprietary rights against third parties, including its neurotrophic product
candidates, the Company may incur substantial costs and could lose rights to
develop or market certain products or be required to pay monetary damages or
royalties to license proprietary rights from third parties.  In response to
actual or threatened litigation, the Company may seek licenses from third
parties or attempt to redesign its products or processes to avoid infringement;
however, there can be no assurance that the Company will be able to obtain
licenses on acceptable terms, or at all, or redesign its products or processes.
In addition to being a party to patent infringement litigation, the Company
could be required to participate in patent interference proceedings declared by
the U.S. Patent and Trademark Office, which would be expensive and
time-consuming, even if the Company were to prevail in such a proceeding.  The
Company may also be forced to initiate legal proceedings to protect its patent
position or other proprietary rights.  These proceedings typically are costly,
protracted, and offer no assurance of success.  Furthermore, under the
Company's collaboration with Amgen, Amgen is responsible for the preparation,
filing, prosecution, maintenance and defense of patent applications and patents
relating to technology covered by the Amgen Agreements, and there can be no
assurance that Amgen will pursue such activities in the same manner or as
vigorously as the Company would if it had such responsibility.  Furthermore,
Amgen has the option to take the lead in bringing actions to enforce patent
rights subject to the Amgen Agreements and to defend against third party
infringement suits regarding the Neuroimmunophilin Technology.  While Amgen and
Guilford have agreed to consult with each other on such matters, in the event
of disagreement, Amgen's decisions shall control.

   DEPENDENCE ON LICENSES OF INTELLECTUAL PROPERTY.  The Company has licensed
certain intellectual property from third parties, including certain
intellectual property underlying GLIADEL, DOPASCAN and the Neuroimmunophilin
Technology.  Under the terms of its license agreements, the Company is
obligated to exercise diligence, achieve certain milestones, and expend minimum
amounts of resources in bringing potential products to market and make certain
royalty, milestone and patent cost reimbursement payments. In addition, each of
these agreements contains certain record keeping and reporting obligations.
Each agreement is terminable by either party, upon notice, if the other party
defaults in its obligations.  There can be no assurance that the Company will
be able to meet its obligations under these agreements on a timely basis, or at
all or that these obligations will not conflict with those under the Company's
other corporate collaborations.  Should the Company default under any of these
agreements, the Company may lose its right to market and sell any products
based on the licensed technology.  In such event, the Company's business,
financial condition and results of operations would be materially and adversely
affected.  The agreements also require the Company to pay a royalty to these
parties on sales of GLIADEL and, if successfully developed, milestone and/or
royalty payments in connection with DOPASCAN or other compounds developed and
commercialized under the Neuroimmunophilin Technology.

   RIGHTS WITH RESPECT TO GOVERNMENT SUPPORTED RESEARCH.  Aspects of the
technology licensed under the Company's license agreements may be subject to
certain rights held by the U.S. government (the "Government Rights").  These
rights include a non-exclusive, royalty-free, worldwide license to practice or
have practiced such inventions for any governmental purpose.  In addition, the
United States government has the right to grant licenses which may be exclusive
under any of such inventions to a third-party if it determines 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 government also has the right to take title to a subject invention if there
is failure to disclose the invention and elect title within specified time
limits. In addition, the 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. Provisions recognizing these Government Rights
are contained in the Company's principal technology license agreements.

   The Company has entered into a contract with the U.S. Army, funded by the
Office of National Drug Control Policy, to provide certain financial support
for research being conducted by Guilford on a potential cocaine inhibitor. That
contract permits the U.S. government to obtain unlimited rights in data
developed in the course of performing under the contract in the event the
Company fails to make use


                                       24
<PAGE>   25
of the data within five years after termination of the contract in conducting
further laboratory investigation and/or clinical trials toward the development
of a commercial product to combat drug abuse.

   UNCERTAINTY OF PRECLINICAL AND CLINICAL TRIAL RESULTS.  Before obtaining
regulatory approval for the commercial sale of any of its product candidates,
the Company must demonstrate through preclinical and clinical trials that the
product is safe and effective for use in the clinical indication for which
approval is sought.  The Company and RPR commenced a Phase III clinical trial
for GLIADEL in December, 1997 for initial surgery for malignant glioma, and the
Company intends to carry out a Phase III clinical trial for DOPASCAN.  There
can be no assurance that the results of these trials will be successful, and
adverse results from either of these trials would have a material adverse
effect on the Company's business, financial condition and results of
operations.  There can be no assurance that the Company will be permitted to
undertake or continue clinical trials for any of its product candidates, or, if
permitted, that such products will be demonstrated to be safe and effective.
Moreover, the results from preclinical studies and early clinical trial may not
be predictive of results that will be obtained in later stage clinical trials.
There can be no assurance that the Company's present or future clinical trials
will demonstrate the safety and efficacy of any product candidates or will
result in any necessary regulatory approval to market products.

   GOVERNMENT REGULATION AND PRODUCT APPROVALS.  The Company's research,
preclinical development and clinical trials and the manufacturing and marketing
of its product candidates are subject to extensive regulation by numerous
governmental authorities in the United States and other countries, including,
but not limited to, the FDA and the DEA.  Except for GLIADEL, none of the
Company's product candidates has received marketing clearance from the FDA, and
and except with respect to GLIADEL in a very limited number of foreign
countries, none has received clearance from any other foreign regulatory
authority for commercial sale.  As a condition to approval of the Company's
product candidates under development, the FDA could require additional
preclinical, clinical or other studies.  Any such requirement for the Company
to perform additional preclinical, clinical or other studies or purchase data
from other companies could have a material adverse effect on the Company's
business, financial condition and results of operations.

   In order to obtain FDA approval of a new drug product for an indication, the
Company must demonstrate to the satisfaction of the FDA that the product is
safe and effective for its intended use and that the product is capable of
being manufactured in accordance with applicable regulatory standards.  There
can be no assurance that the Company will be able to satisfy the foregoing
requirements with respect to any of its drug product candidates or with respect
to the proposed new labeling of GLIADEL for malignant glioma at the time of
initial surgery, that the FDA will approve any of its drug product candidates
or such labeling or that, if such product candidates or such new labeling is
approved, the FDA will approve the full scope of uses and labeling sought by
the Company and its corporate partner, RPR.  Failure to obtain regulatory drug
approvals on a timely basis could have a material adverse effect on the
Company's business, financial condition and results of operations.  Once FDA
approval is obtained, the FDA may also require post-marketing testing and
surveillance to monitor the record of the approved product and continued
compliance with regulatory requirements.  In addition, 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.

   The process of obtaining FDA and other required approvals or licenses and of
meeting other regulatory requirements to test and market drugs, including
controlled substances and radiolabeled drugs, is rigorous and lengthy and has
required, and will continue to require, the expenditure of substantial
resources.  All of the Company's product candidates will need to be the subject
of further clinical and other studies.  Unsatisfactory clinical trial results
and other delays in obtaining regulatory approvals or licenses would prevent
the marketing of products developed by the Company, and pending the receipt of
such approvals or licenses and the meeting of other regulatory requirements,
the Company will not receive product revenues or royalties.

   The Company hopes to capitalize on current FDA regulations and the new
provisions of the FDA Modernization Act of 1997, as applicable, that permit
fast track approval or treatment use of, and cost recovery for, certain
experimental drugs.  The FDA's fast track accelerated or expedited regulations
are limited to drug products intended to treat seriously debilitating or
life-threatening diseases and that provide meaningful therapeutic benefit to
patients over existing treatments or that are for diseases for which no
satisfactory or alternative therapy exists, among other requirements.  The
FDAMA contains certain provisions patterned after the accelerated approval
regulations and other provisions pertaining to expanded access, i.e. treatment
uses.  Since some of the new statutory provisions and current FDA relations are
different from each other, it is unclear how they will apply, if at all, to the
Company's drug candidates. There can be no assurance that the Company's drug
candidates will qualify for fast track approvals or for treatment use and cost
recovery.

   Controlled drug products and radiolabeled drugs are subject to special
regulations in addition to those applicable to other drugs.  Certain of the
Company's products and product candidates (including DOPASCAN) are or may be
subject to regulation by the DEA as controlled substances and other federal
agencies as radiolabeled drugs. The failure to continue to obtain exceptions
from DEA for shipment abroad or other activities could have a material adverse
effect on the Company. The Company has obtained registrations for its
facilities from the DEA and exceptions from the DEA with respect to various of
its activities involving DOPASCAN, including the shipment of certain quantities
of a precursor of this product candidate to an overseas collaborative partner.
However, there can be no





                                       25
<PAGE>   26
assurance that such exceptions will be sufficient to cover future activities of
the Company, will not be revoked, or that other requirements to test,
manufacture and market controlled substances or radiolabeled drugs can be
satisfied, or that the Company will be able to obtain additional necessary
approvals or licenses to meet state, federal and international regulatory
requirements to manufacture and distribute such products. The FDAMA requires
FDA to issue and finalize within one and one-half years regulations governing
the approval of radiolabeled drugs.  It is unclear how these and other
provisions may affect the potential for approval of DOPASCAN.

   NOVEL ALTERNATIVE TECHNOLOGIES AND THERAPEUTIC APPROACHES.  Many of the
Company's product development efforts represent novel alternative therapeutic
approaches and new technologies used, among other things, in the diagnosis and
monitoring of Parkinson's disease, the promotion of nerve growth and the
prevention of neuronal damage, and have not been widely studied.  There is no
assurance that these approaches and technologies will be successful. Moreover,
the Company is applying these approaches and technologies to discover new
treatments for conditions that are also the subject of research and development
efforts by numerous other companies. The Company's competitors may succeed in
developing technologies or products that are more efficacious or cost-effective
than those of the Company.  Rapid technological change or developments by
others may result in the Company's technology or product candidates becoming
obsolete or noncompetitive.

   COMPETITION AND TECHNOLOGICAL CHANGE.  The Company is involved in evolving
technological fields in which developments are expected to continue at a rapid
pace. Guilford's future success depends upon maintaining its ability to compete
in the research, development and commercialization of products and technologies
in its 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 the Company and represent
significant competition for the Company. Acquisitions of competing companies by
large pharmaceutical companies or other companies could enhance financial,
marketing and other resources available to these competitors.  These
competitors may develop products which are superior to those under development
by the Company  The Company is 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, the treatment and prevention of neuronal damage, and the treatment of
cocaine addiction. There can be no assurance that developments by others will
not render the Company's products or technologies noncompetitive or obsolete,
or that the Company will be able to keep pace with technological developments.

   Any product candidate that the Company develops and for which it gains
regulatory approval, including GLIADEL, must then compete for market acceptance
and market share.  For certain of the Company's product candidates, an
important factor will be the timing of market introduction of competitive
products.  Accordingly, the relative speed with which the Company 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 capabilities of the Company's collaborators, product efficacy
and safety, timing and scope of regulatory approval, product availability,
marketing and sale capabilities, reimbursement coverage, the amount of clinical
benefit of the Company's product candidates relative to their cost, method of
administration, price and patient protection.  There can be no assurance that
the Company's competitors will not develop more effective or more affordable
products or achieve earlier product development completion, patent protection,
regulatory approval or product commercialization than the Company.  The
achievement of any of these goals by the Company's competitors could have a
material adverse effect on the Company's business, financial conditions and
results of operations.

   FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING.  The Company will
require substantial funds in order to continue its research and development
programs and preclinical and clinical testing and to manufacture and, where
applicable, market its products.  The Company's capital requirements depend on
numerous factors, including the progress of its research and development
programs, the progress of preclinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights, competing technological and market developments, changes in the
Company's existing research relationships, the ability of the Company to
establish collaborative arrangements, the development of collaborative and
licensing agreements and other arrangements and the progress of manufacturing
scale-up efforts.

   The Company believes that its existing resources will be sufficient to fund
the Company's activities at least for the next twelve months.  There can be no
assurance, however, that changes in the Company's research and development and
commercialization plans or other factors affecting the Company's operating
expenses including potential acquisitions will not result in the expenditure of
these resources before that time. The Company anticipates that it will fund
future capital requirements through a combination of revenues generated under
its agreements with RPR relating to GLIADEL, public or private financings (as
necessary), additional collaborative or other research and development
agreements, commercialization and marketing arrangements with corporate
partners or other potential sources. The Company's ability to raise future
capital on acceptable terms is dependent on conditions in the public and
private equity markets and the performance of the Company, as well as the
overall performance of other companies in the biopharmaceutical and





                                       26
<PAGE>   27
biotechnology sectors.  There can be no assurance that required future
financing arrangements will be available on acceptable terms, or at all.

   LIMITED CLINICAL AND REGULATORY COMPLIANCE CAPABILITIES.  The Company has
limited resources in the areas of product testing and regulatory compliance,
and thus will have to expend capital to acquire and expand such capabilities,
reach collaborative arrangements with third parties to provide these
capabilities or contract with third parties to provide these capabilities in
order to carry its products through the necessary regulatory approvals and
prepare its product candidates for commercialization and marketing.

   REIMBURSEMENT UNCERTAINTY.  Sales of the Company's product candidates will
depend in part on the availability of reimbursement from third-party health
care payors, such as government and private insurance plans.  Reimbursement
policies for GLIADEL remain uncertain.  No assurance can be given that any
reimbursement will be available at all or will be available at price levels
sufficient to realize an appropriate return on the Company's investment in
GLIADEL or other products in development.

   RISK OF PRODUCT LIABILITY.  The Company may potentially become subject to
large liability claims and significant defense costs as a result of the design,
manufacture or marketing of, or the conduct of clinical trials involving, its
products.  A product liability related claim or recall could have a material
adverse effect on the Company.  The Company currently maintains only $10
million of product liability insurance covering clinical trials and product
sales, and there can be no assurance that such or any future insurance coverage
obtained by the Company will be adequate or that claims, if any, will be
covered by the Company's insurance.  Product liability insurance varies in
cost, can be difficult to obtain and may not be available in the future on
terms acceptable to the Company, if at all.  An inability to obtain or maintain
sufficient insurance coverage at an acceptable cost or otherwise protect
against potential product liability claims could prevent or inhibit the
clinical development and/or commercialization of any products developed by the
Company.

   DEPENDENCE ON QUALIFIED PERSONNEL AND CONSULTANTS.  The Company is highly
dependent on the principal members of its management and scientific staff,
including the Company's Chief Executive Officer, Craig R. Smith, M.D., and
member of the Company's Board of Directors and  Chairman of the Company's
Scientific Advisory Board, Solomon H. Snyder, M.D.  The loss by the Company of
the services of either of these individuals or other members of its senior
management could have a material adverse effect on the Company's business,
financial condition and results of operations.  Although the Company has
entered into a consulting agreement with Dr. Snyder and an employment
agreement with Dr. Smith that provide for the protection of the Company's
proprietary rights, either Dr. Snyder or Dr. Smith may terminate his
relationship with the Company at any time.  Accordingly, there can be no
assurance that either of these individuals or other employees or consultants
will remain with the Company or that, in the future, these employees or
consultants will not organize, or become employed by or associated with
companies competitive with the Company.

   The Company's planned activities will require individuals with expertise in
many areas including, without limitation, preclinical testing, clinical trial
management, regulatory affairs, manufacturing and business development.  These
activities will require the addition of new personnel, including management
personnel and the development of additional expertise by existing management
personnel.  Recruiting and retaining qualified personnel, collaborators,
advisors and consultants will be critical to the Company's activities, and
there can be no assurance that the Company will be able to attract and retain
the personnel necessary for the development of the Company's business.  There
is significant competition for experienced scientists from numerous
pharmaceutical, biotechnology and health care companies and academic and other
research institutions.  The inability to hire such personnel or to develop such
expertise could have a material adverse effect on the Company's operations.  In
addition, the Company is dependent on collaborators at research institutions
and its Scientific Advisory Board members and consultants.

   LACK OF SALES AND MARKETING EXPERIENCE.  The Company currently has not
established a sales force, and the Company has no experience in marketing or
selling a product in a commercial setting.  In the event the Company decides to
establish an in-house sales force, there can be no assurance its efforts will
be successful.  In addition, if the Company succeeds in bringing additional
products to market, it will compete with many other companies that currently
have extensive and well-funded marketing and sales operations.  There can be no
assurance that the Company's marketing and sales efforts would compete
successfully against such other companies.

   HAZARDOUS AND RADIOACTIVE MATERIALS; ENVIRONMENTAL MATTERS; ANIMAL TESTING.
Research and development processes sponsored by the Company involve the
controlled use of hazardous and radioactive materials.  The Company and its
collaborative partners are subject to international, federal, state and local
laws and regulations governing the use, manufacture, storage, handling and
disposal of hazardous and radioactive materials.  The Company believes that the
safety procedures relating to its in-house research and development and
manufacturing efforts comply in all material respects with the standards
prescribed by such laws and regulations.  However, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
Moreover, there can be no assurance that the Company's collaborative partners
are in compliance with such standards or that the Company and its collaborative
partners will be in compliance with such standards in the future.  In such
event, the business, operations or finances of the Company may be materially
adversely affected, and the Company and/or its collaborative partners could be
held liable for damages, fines or other


                                       27
<PAGE>   28
liability, and any such liability could exceed the resources of the Company.
Although the Company believes that it is and will continue to be in compliance
in all material respects with applicable environmental laws and regulations and
currently does not expect to make material capital expenditures for
environmental control facilities in the near term, there can be no assurance
that the Company will not be required to incur significant costs to comply with
environmental laws and regulations in the future or that the operations,
business or assets of the Company will not be materially adversely affected by
current or future environmental laws or regulations.  In addition, much of the
research and development efforts sponsored by the Company involves use of
laboratory animals.  The Company may be adversely affected by changes in laws,
regulations or accepted clinical procedures or by social pressures that would
restrict the use of animals in testing or by actions against the Company or its
collaborators by groups or individuals opposed to such testing.

   SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION AND EXCHANGE RIGHTS.  As of
March 17, 1998, the Company had approximately 19,445,145 shares of common stock
outstanding.  As of that date, there were options to purchase approximately an
aggregate of 3,139,288 shares of common stock and warrants to purchase
1,012,934 shares outstanding. A significant portion of the outstanding common
stock and shares issuable upon exercise of outstanding options are freely
tradable.  Holders of the Company's common stock and warrants (representing
approximately an aggregate of 1,853,029 shares), including Amgen, have demand
and/or piggyback registration rights.  The foregoing registration rights may be
exercised at any time and would permit the resale of some or all of such shares
in the public market.  If the Company were required to include shares in a
Company-initiated registration pursuant to the exercise of registration rights,
the sale of such shares could have a material adverse effect on the Company's
ability to raise additional capital.  No prediction can be made as to the
effect, if any, that sales of shares of the Company's common stock or the
availability of such shares for sale will have on the market prices of the
common stock of the Company prevailing from time to time.  The possibility that
substantial amounts of the Company's common stock may be sold in the public
market may adversely affect prevailing market prices for its common stock and
could impair the Company's ability to raise capital through the sale of its
equity securities.

   ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK.  The Company's Amended and
Restated Certificate of Incorporation, as amended, and the Delaware General
Corporation Law contain certain provisions, including the requirements of
Section 203 of the Delaware General Corporation Law, that may delay or prevent
an attempt by a third party to acquire control of the Company.  The Company has
adopted a stockholder rights plan intended to deter hostile or coercive
attempts to acquire the Company through the distribution of rights to
stockholders enabling those stockholders to acquire shares of the Company's
common stock, or that of an acquirer, at a substantial discount to the public
market price should any person or group acquire more than 20% of the Company's
common stock without approval of the Board of Directors under certain
circumstances.  The Company has reserved 300,000 shares of Series A Junior
Participating Preferred Stock for issuance in connection with the stockholder
rights plan. The Company is authorized to issue an additional 4,700,000 shares
of Preferred stock in one or more series, having terms fixed by the Board of
Directors without a stockholder vote.  No shares of preferred stock of the
Company are currently outstanding.  While the 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.

   ABSENCE OF DIVIDENDS.  The Company has never declared or paid any cash
dividends on its common stock and does not intend to do so for the foreseeable
future. In addition, the Company is prohibited from paying any cash dividends
under the terms of its current loan and lease agreements.

   YEAR 2000 COMPLIANCE.  The Company uses a significant number of computer
software programs and operating systems in its internal operations, including
applications used in financial business systems, manufacturing processes and
various administrative functions.  To the extent that these systems contain
source code that is unable to appropriately interpret the upcoming calendar
year "2000", some level of modification or even the possible replacement of
such source code or application may be necessary.  The Company is in the
process of identifying the software applications that may not be "Year 2000"
compliant.  Based upon the information known at this time about the Company's
current systems, there can be no assurance that the Company will be able to
address the "Year 2000" issues in a timely manner.





                                       28
<PAGE>   29
                                    PART II

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

     The Company's Common Stock is listed on the Nasdaq(R) National Market
under the symbol "GLFD." The following table sets forth the range of high and
low sale prices for the Common Stock as reported on the Nasdaq(R) National
Market for the periods indicated below.

<TABLE>
<CAPTION>
                                                          High            Low
                                                          ----            ---
 <S>                                                   <C>            <C>
 1995
 First Quarter  . . . . . . . . . . . . . . . .         $  4.25        $  2.96
 Second Quarter . . . . . . . . . . . . . . . .            4.25           3.17
 Third Quarter  . . . . . . . . . . . . . . . .            9.42           4.17
 Fourth Quarter . . . . . . . . . . . . . . . .           11.00           7.50

 1996
 First Quarter  . . . . . . . . . . . . . . . .           16.58          10.33
 Second Quarter . . . . . . . . . . . . . . . .           23.83          13.33
 Third Quarter  . . . . . . . . . . . . . . . .           19.92          11.58
 Fourth Quarter . . . . . . . . . . . . . . . .           23.25          16.50

 1997
 First Quarter  . . . . . . . . . . . . . . . .           29.00          20.75
 Second Quarter . . . . . . . . . . . . . . . .           27.00          20.25
 Third Quarter  . . . . . . . . . . . . . . . .           30.63          20.75
 Fourth Quarter . . . . . . . . . . . . . . . .           32.00          18.38

 1998
 First Quarter (through March 17, 1998) . . . .           23.75          17.63
</TABLE>

     As of March 17, 1998, there were approximately 196 holders of record of
the Company's common stock and in excess of 400 beneficial stockholders.

     The Company has never declared or paid any cash dividends and does not
intend to do so for the foreseeable future. The Company currently intends to
retain all earnings, if any, to finance the development of its business. Under
the Company's various loan and lease agreements with certain financial
institutions, the Company may not declare, during the term of these agreements,
any cash dividends on its common stock without the prior written consent of
these financial institutions and, in certain cases,  the Maryland Industrial
Development Financing Authority.





                                       29
<PAGE>   30
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA.

     The following selected consolidated financial data with respect to the
Company for the period from inception on July 14, 1993 through December 31,
1993 and for each of the years in the four year period ended December 31, 1997
have been derived from the Company's consolidated financial statements which
have been audited by KPMG Peat Marwick LLP, the Company's independent auditors.
The Company's consolidated financial statements as of December 31, 1996 and
1997, and for each of the years in the three year period ended December 31,
1997, including the Notes thereto, are included elsewhere in this annual
report. The information set forth below should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.

<TABLE>
<CAPTION>
                                           JULY 14, 1993
                                        (DATE OF INCEPTION)                       YEARS ENDED DECEMBER 31,
                                          TO DECEMBER 31,   -------------------------------------------------------------
                                               1993             1994             1995            1996             1997
                                        ------------------  -------------   -------------   -------------    ------------
   <S>                                       <C>              <C>            <C>              <C>             <C>
   STATEMENT OF OPERATIONS DATA:
       Total revenues................         $   --           $   --         $    586         $28,020          $23,828
         Costs and Expenses:
            Cost of sales                         --               --               --              --            2,585
            Research and
       development...................          1,061            2,869            9,688          18,761           30,293
            General and
       administrative................            367            2,369            4,367           6,736            9.076
     Compensation -- warrants........             --              991               --              --               --
                                        ------------------  -------------   -------------   -------------    ------------
            Total costs and
            expenses.................          1,428            6,229           14,055          25,497           41,954
                                        ------------------  -------------   -------------   -------------    ------------

     Operating income (loss) ........         (1,428)          (6,229)         (13,469)          2,523          (18,126)
       Other income (expense),
         net.........................             15              332              832           2,550            6,689
                                        ------------------  -------------   -------------   -------------    ------------
       Net income (loss).............        $(1,413)         $(5,897)       $ (12,637)        $ 5,073        $ (11,437)
                                        ------------------  -------------   -------------   -------------    ------------
       Basic earnings (loss) per
        common share (1).............        $ (0.67)         $ (1.45)       $   (1.72)        $  0.39          $ (0.65)
                                        ------------------  -------------   -------------   -------------    ------------
       Average common shares
        outstanding (1)..............          2,111            4,067            7,354          13,001           17,570
       Diluted earnings (loss)
        per common share (1).........        $ (0.67)         $ (1.45)      $    (1.72)        $  0.35        $   (0.65)
                                        ------------------  -------------   -------------   -------------    ------------
       Average common and
        dilutive equivalent shares
        outstanding (1)..............          2,111            4,067            7,354          14,634           17,570
</TABLE>


<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                        ---------------------------------------------------------------------------------
                                              1993               1994            1995            1996             1997
                                        ------------------  -------------   -------------   -------------    ------------
 <S>                                          <C>              <C>              <C>            <C>            <C>
   BALANCE SHEET DATA:
   Cash, cash equivalents and
     investments (2) ................         $2,562           $11,834          $19,454        $77,439         $160,219

   Total assets (2)..................          3,258            14,562           26,048         93,659          180,081

   Long-term debt....................             --             1,431            4,696         10,905           10,926

   Total stockholders' equity........          2,887            11,421           17,773         75,877          158,294
</TABLE>

----------

(1)  For information concerning the calculation of earnings (loss) per share,
     see Note 2 of Notes to Consolidated Financial Statements.

(2)  Includes restricted investments of $1.2 million, $3.6 million, $10.1
     million, and $12.1 million at December 31, 1994, 1995, 1996 and December
     31, 1997, respectively.  See Note 6 of Notes to Consolidated Financial
     Statements.





                                       30
<PAGE>   31
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

     The following discussion is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this annual report.  The forward-looking statements
contained in this annual report, include, but are not limited to, those
concerning application for international regulatory clearances and labeling
expansion for GLIADEL, polymer product line extensions, the commencement and
completion of the research program relating to the Company's FKBP-based
neuroimmunophilin ligand technology and other technologies, clinical
development activities, including without limitation commencement and conduct
of clinical trials related to GLIADEL, the Company's strategic plans,
anticipated expenditures and the need for additional funds, all of which
involve significant risks and uncertainties. The Company's actual results may
differ significantly from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in the section herein captioned "Risk
Factors" and elsewhere in this annual report.

GENERAL

     Guilford is a biopharmaceutical company engaged in the development and
commercialization of novel products in two principal areas: (i) targeted and
controlled drug delivery products for the treatment of cancer and other
diseases; and (ii) therapeutic and diagnostic products for neurological
diseases and conditions.

     The Company anticipates that its future revenues will come primarily from
two sources: (i) transfer payments and/or royalties related to sales of GLIADEL
and other products that may be developed in the future, including products
developed under the Amgen collaboration, and (ii) milestone, rights and other
payments made under the Company's current and any future collaboration
agreements relating to the research, development and/or commercialization of
the Company's technologies.  The Company is eligible for certain milestone and
other payments in the future under its collaborations with RPR and Amgen if
certain regulatory and/or development objectives are attained and views these
potential payments as significant future revenue opportunities.  As noted  in
the section herein captioned "Risk Factors" and elsewhere in this annual
report, there can be no assurance, however, that the Company will be successful
in its efforts to enter into future collaborations for the research,
development and/or commercialization of its technologies or will receive any or
all of the milestone payments for which it is eligible under its existing or
any future collaborations.

     Through December 31, 1996, substantially all the Company's revenues had
been recognized as non-refundable research and development or rights and
milestone payments under the Company's collaborations.  While the Company
reported net income of $5.1 million for fiscal 1996, the Company incurred net
operating losses from its inception through the first quarter of 1996 and again
in the fourth quarter of 1996.  For the year ended December 31, 1997, the
Company incurred a net loss of $11.4 million.  Through December 31, 1997, the
Company had an accumulated deficit of $26.3 million.

     In addition to revenues related to GLIADEL, the Company's only other
significant revenues recognized in fiscal year 1997 consist of the one-time,
non-refundable signing fee of $15 million from Amgen and $1.125 million in
payments from Amgen related to certain research activities conducted at
Guilford.  Pursuant to the Amgen Agreements, effective October 1, 1997, Amgen
agreed to pay up to $13.5 million in the aggregate, payable quarterly over
three years, to support research activities at the Company relating to the
Neuroimmunophilin Technology, with an option to fund a fourth year of research,
or under certain conditions, to terminate the research program after two years.
In addition, in the future the Company may be entitled to certain
non-refundable, milestone payments in the event certain development milestones
are achieved by Amgen and to royalties on future product sales, if any. As
noted in the section herein captioned "Risk Factors" and elsewhere in this
annual report, whether the Company will ever recognize future revenues in the
form of milestone payments and royalties under the Amgen Agreement is subject
to significant risk and uncertainty, and there can be no assurance that the
Company will recognize significant revenues, if any, from these sources in the
future.

     The Company was not profitable in 1997, and there can be no assurance that
the Company will ever achieve or sustain profitability in the future.
Furthermore, the Company expects to experience quarter-to-quarter and
year-to-year fluctuations in its operating results based upon the timing and
amount of sales of GLIADEL, the timing and realization of milestone and other
payments under the Company's agreements with RPR and Amgen and other existing
and potential collaborations, expenditures relating to the Company's research
and development, clinical and manufacturing activities, and the extent and
timing of costs related to the Company's patenting activities and other
activities undertaken in connection with the preservation and extension of the
Company's intellectual property rights.

     The Company expects that expenses related to research and product
development, preclinical testing, clinical trials, regulatory matters,
operations, manufacturing and general and administrative expenses will continue
to increase as the Company commercializes GLIADEL through its marketing
partners and conducts research and development activities to develop its other
technologies and potential products.  The Company has experienced substantial
personnel growth since its inception. At December 31, 1997 the Company had 198
full-time employees as compared to 140 full-time employees at December 31,
1996. The Company's ability to achieve consistent profitability in


                                       31
<PAGE>   32
the future will depend, among other things, upon future sales of GLIADEL as
well as the Company's ability, either alone or with others, to develop its
product candidates successfully including any product candidates identified
pursuant to activities under the collaboration with Amgen, conduct clinical
trials, obtain required regulatory clearances, manufacture at reasonable cost
and successfully market its product candidates and enter into collaborative
arrangements and license agreements on acceptable terms.  For discussion of
these and other risks, see the section herein captioned "Risk Factors".

RESULTS OF OPERATIONS

Years Ended December 31, 1997, 1996 and 1995

     In 1997, the Company recognized $23.8 million in revenues, consisting
primarily of the one-time, non-refundable signing payment of $15 million from
Amgen, $1.125 million from Amgen to fund research at Guilford related to the
Neuroimmunophilin Technology, and revenues from product sales and royalties
relating to GLIADEL as well as amounts reimbursed by RPR relating to the
Company's efforts to develop a high dose GLIADEL product.  In 1996, the Company
recognized $28.0 million in revenues, primarily consisting of a total of $27.5
million in non-recurring milestone payments made by RPR in June and September
1996. In 1995, the Company recognized $0.6 million in revenues, primarily
consisting of a non-refundable license fee payment pursuant to the Company's
agreement with DRL related to DOPASCAN.

     Revenues from GLIADEL sales consist of two main components: (i) transfer
price payments related to sales of product directly to RPR and (ii) royalty
payments made by RPR to the Company on product sales to end-users.  GLIADEL was
commercially launched in the United States by RPR on February 25, 1997.  The
majority of the revenues from GLIADEL in each of the first two quarters of 1997
consisted of transfer price payments related to sales of GLIADEL to RPR in
order for RPR to build up an initial inventory of the product.  The reduction
in revenues related to GLIADEL sales in the second half of 1997 as compared to
the first half of 1997 primarily resulted from the reduction in the level of
transfer payments made by RPR from $3.8 million in the first half of 1997 to
$1.9 million in  the second half of 1997, reflecting a stabilization in RPR's
current inventory requirements for GLIADEL.  This decrease in GLIADEL revenues
was partially offset by an increase in royalties recognized on end-user sales
from $650,000 in royalties in the first half of 1997 to $972,000 in the second
half of 1997.  As noted in the section herein captioned "Risk Factors" and
elsewhere in this annual report, future GLIADEL sales are subject to a number
of risks and uncertainties, and there can be no assurance that GLIADEL sales
will generate significant revenues for the Company.

     Cost of sales for the year ended December 31, 1997 were $2.6 million.
Included in this amount is approximately $281,000 representing royalty payments
made to a third party  from which the Company has licensed certain technologies
related to GLIADEL and certain costs specifically related to the commercial
product launch of GLIADEL in the United States. As GLIADEL was commercially
launched in the United States in February 1997, the Company did not incur cost
of sales prior to 1997.  To the extent GLIADEL production levels increase, the
Company expects that per unit product costs may decrease as economies of scale
are achieved.  There can be no assurance, however, that GLIADEL product sales
will ever reach levels necessary for the Company to realize significant costs
savings related to manufacturing economies of scale.

     Research and development expenses increased to $30.3 million as compared
to $18.8 million in 1996 and $9.7 million in 1995.  The increase of $11.5
million in research and development costs from 1996 to 1997 was primarily
attributable to expenses related to increased personnel costs, contracted
research, consulting, laboratory supplies, and in addition royalties owed to a
third-party licensor of certain technology relating to contract revenues
recognized under the Amgen Agreements. In 1997, the Company continued to
accelerate its neuroimmunophilin, pre-synaptic glutamate inhibitor, polymer,
and other research and development programs, continued to fund development
activities at the third party manufacturer for DOPASCAN, and continued with
Phase I clinical trials for a high dose formulation of GLIADEL.  The increase
in research and development costs from 1995 to 1996 of $9.1 million was
primarily attributable to expenses related to increased personnel costs and
contracted research, consulting and laboratory supplies. During 1996, the
Company accelerated its neuroimmunophilin, neurotrophic and addictive
therapeutics research and development programs, initiated and completed
enrollment of a multi-center Phase II clinical trial in the United States for
DOPASCAN, finalized preparation of its new drug application for GLIADEL
(submitted in February 1996) and prepared for the commercial launch of GLIADEL.
In addition, in 1997 and 1996 research and development expenses included
charges relating to certain consulting agreements entered into in April 1996,
consisting of non-cash compensation expense of $985,000 and $1.2 million,
respectively, and cash compensation expense of $244,000 and $135,000,
respectively.  These agreements are intended to enhance the Company's ability
to develop new polymer technologies and products for the delivery of
chemotherapeutics in indications where local tumor recurrence is likely and
controlled release may be more effective than current therapies.  The Company
expects it will be required to record varying amounts of non-cash compensation
charges in research and development expenses through 2001 relating to these
agreements of up to an additional $1.2 million in the aggregate. The Company
anticipates that its research and development expenses will continue to
increase in future periods.

     General and administrative expenses increased to $9.1 million in 1997 as
compared to $6.7 million in 1996 and $4.4 million in 1995. The increases in
general and administrative expenses of $2.4 million from 1996 to 1997 and of
$2.3 million from 1995 to 1996 were


                                       32
<PAGE>   33
attributable to higher personnel costs related to an increase in the number of
employees necessary to support the Company's research and development and
commercialization activities. Additionally, indirect personnel costs, including
recruiting and relocation costs, have increased as the total number of such
employees has increased.  Increases in costs related to patenting and other
activities related to establishment and preservation of the Company's
intellectual property rights and costs related to operations as a public
company also contributed to increased general and administrative expenditures
over these periods.  The Company anticipates that its general and
administrative expenses will continue to increase in future periods.

     Other income and expense relates primarily to interest income and interest
expense. Interest income increased to $7.5 million in 1997 compared to $3.1
million in 1996 and $0.8 million in 1995.  The increase in 1997 was primarily
attributable to an increase in the average invested capital in 1997 as compared
to the prior periods.  The increase in average invested capital was primarily
due to the public sale of the Company's Common Stock in April, 1997, the
one-time, non-refundable signing fee of $15 million paid by Amgen in August
1997 and the sale of shares of Company common stock and warrants to Amgen for
$20 million consummated in October, 1997.  The increase in 1996 as compared to
1995 was primarily attributable to an increase in the average invested capital
resulting from the Company's equity offering in March, 1996 and from revenues
from RPR.  In 1997, 1996 and 1995, the Company incurred interest expense of
$0.8 million, $0.5 million and $0.2 million, respectively, relating to
borrowings under its loan agreements with First Union (formerly Signet Bank)
providing for the construction of manufacturing, administrative and research
and development facilities and the purchase of related equipment.


LIQUIDITY AND CAPITAL RESOURCES

     The Company's cash and investments were $160.2 million at December 31,
1997. Included in this amount is $12.1 million of restricted cash held as
collateral with respect to certain of the Company's indebtedness. The Company
had incurred an accumulated deficit at December 31, 1997 of $26.3 million and
expects to continue to incur additional operating losses from time to time in
the future.

     The Company incurred capital expenditures of $6.4 million in 1997 as
compared to $9.1 million in 1996 and $3.7 million in 1995.  These capital
expenditures were related to the construction of the Company's GLIADEL
manufacturing facility and related tenant improvements for research and
development laboratories and administrative offices. Additionally, other
purchases included capital equipment, including laboratory and manufacturing
equipment, and computer hardware and software to support the Company's
activities.

     In 1997, the Company utilized its $5.0 million operating lease arrangement
with General Electric Capital Corporation to lease certain equipment.  In
March, 1998, the Company entered into master equipment lease arrangements for
up to an aggregate of $10.75 million, pursuant to which the Company expects to
lease additional equipment, including computer hardware and software, furniture
and fixtures.  Depending on the type of equipment covered and certain other
factors, the term of any lease entered into under these arrangement can range
from two to four years.  Such financing, along with the Company's internal
resources as well as external sources of funds, is expected to provide for the
Company's equipment needs for the foreseeable future.

     In February 1998, in order to meet the Company's future facilities needs,
the Company entered into an operating lease with a trust affiliated with First
Union for an approximately 72,500 square foot facility to be constructed on a
lot adjacent to the Company's current headquarters in Baltimore, Maryland in
order to support the Company's future research, development and administrative
activities over the next several years.  During the construction period, the
Company will act as construction agent for the trust, responsible for
performing all duties associated with the development of the property and
anticipates that the facility will be ready for occupancy prior to the end of
the second quarter of 1999.  The lease expires in February, 2005 and the
Company anticipates that the lease payments for this facility will not exceed
$2.0 million annually.  At the expiration of the lease term, the Company has
two options under its agreement with the trust.  The Company can purchase the
property for an amount equal to any and all unamortized acquisition and
construction costs as well as accrued but unpaid interest and similar costs
incurred by the trust as part of its acquisition and construction activities
related to the property (the"Termination Amount"), or the Company can sell the
property on behalf of the trust, which is then obligated to apply the proceeds
from such sale against repayment of the Termination Amount.  If such sale
proceeds are insufficient to cover the entire Termination Amount, the Company
is then obligated to repay any such shortfall subject to a total cap on such
payments equal to 83% of the Termination Amount.  In addition, the Company may,
with the consent of First Union, enter into a new lease arrangement.

     The Company has available up to $7.5 million under a loan agreement with
RPR respecting expansion of the Company's GLIADEL and polymer manufacturing
capacity.  As of January 2, 1997, $4.0 million was available under the loan
agreement; the remainder is available no earlier than 12 nor later than 18
months following funding of the initial tranche. Any principal amounts borrowed
under this loan agreement are due five years from the date borrowed and will
carry an interest rate equal to the lowest rate paid by RPR from time to time
on its most senior indebtedness.  No amounts were outstanding under this loan
at December 31, 1997.  The Company has not yet determined whether to draw on
the capital available under its loan agreement with RPR to fund the expansion
of the Company's manufacturing facilities.





                                       33
<PAGE>   34
     The Company will require substantial funds in order to continue its
research and development programs and preclinical and clinical testing, to
manufacture and, where applicable, market its products and to meet its future
facilities needs. The Company's capital requirements depend on numerous
factors, including the progress of its research and development programs, the
progress of preclinical and clinical testing, the time and costs involved in
obtaining regulatory approvals, the cost of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property rights, competing
technological and market developments, changes in the Company's existing
research relationships, the ability of the Company to establish collaborative
arrangements, the development of collaborative and licensing agreements and
other arrangements and the progress of manufacturing scale-up efforts.

     The Company believes that its existing resources, including the proceeds
from the sale of common stock and warrants to Amgen in October, 1997 and the
interest earned thereon, will be sufficient to fund the Company's activities
for at least the next 12 months.  There can be no assurance, however, that
changes in the Company's research and development and commercialization plans
or other factors affecting the Company's operating expenses including potential
acquisitions, and anticipated capital expenditures will not result in the
expenditure of these proceeds and the Company's other resources before that
time.

     The Company anticipates that it will fund future capital requirements
through a combination of its existing working capital, revenues (including
product sales, royalty income, and milestones/licensing fees) generated under
its agreements with RPR relating to GLIADEL and Amgen relating to the
Neuroimmunophilin Technology, public or private equity or debt financing (as
necessary), additional collaborative or other research and development
agreements, commercialization and marketing arrangements with corporate
partners or other potential sources. The Company's ability to raise future
capital on acceptable terms is dependent on conditions in the public and
private equity markets and the performance of the Company, as well as the
overall performance of other companies in the biopharmaceutical and
biotechnology sectors. There can be no assurance that any required future
financing arrangements will be available on acceptable terms, or at all.

     The Company has assessed and continues to assess the impact of the "Year
2000" issue on its reporting systems and operations.  The Year 2000 issue
exists because many computer systems and applications currently use two-digit
date fields to designate a year.  As the century date occurs, date sensitive
systems will recognize the year 2000 as 1900 or not at all.  This inability to
recognize or properly treat the year 2000 may cause the Company's systems to
process critical financial and operational information incorrectly.  The
Company does not expect the costs associated with becoming Year 2000 compliant
will be material.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable.





                                       34
<PAGE>   35
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                         GUILFORD PHARMACEUTICALS INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                            PAGE
                                                            ----

        Independent Auditors' Report . . . . . . . . .       36

        Consolidated Balance Sheets  . . . . . . . . .       37

        Consolidated Statements of Operations  . . . .       38

        Consolidated Statements of Stockholders'
         Equity  . . . . . . . . . . . . . . . . . . .       39

        Consolidated Statements of Cash Flows  . . . .       40

        Notes to Consolidated Financial
         Statements  . . . . . . . . . . . . . . . . .       41





                                       35
<PAGE>   36
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders of
Guilford Pharmaceuticals Inc.:

     We have audited the accompanying consolidated balance sheets of Guilford
Pharmaceuticals Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.

KPMG Peat Marwick LLP

Baltimore, Maryland
February 13, 1998





                                       36
<PAGE>   37
                        GUILFORD PHARMACEUTICALS INC.
                               AND SUBSIDIARIES



                         Consolidated Balance Sheets
                      (in thousands, except share data)

<TABLE>
<CAPTION>
                                                            DECEMBER 31, 1997        DECEMBER 31, 1996
                                                          ----------------------   ----------------------
<S>                                                         <C>                      <C>
                      ASSETS
                      ------
Current assets:
    Cash and cash equivalents                               $            24,980      $            16,560
    Short-term investments                                               27,946                   20,097
    Short-term investments - restricted                                   2,428                    1,608
    Accounts receivable                                                     606                      376
    Inventories                                                           1,342                    1,533
    Other current assets                                                    494                      435
                                                          ----------------------   ----------------------
               Total current assets                                      57,796                   40,609
Investments                                                              95,174                   30,653
Investments - restricted                                                  9,691                    8,521
Property and equipment, net                                              17,153                   13,455
Other assets                                                                267                      421
                                                          ----------------------   ----------------------
                                                            $           180,081      $            93,659
                                                          ======================   ======================

       LIABILITIES AND STOCKHOLDERS' EQUITY
       ------------------------------------
Current liabilities:
   Accounts payable                                         $             2,743      $             2,038
   Current portion of long-term debt                                      2,159                    1,481
   Accrued expenses and other current liabilities                         4,834                    3,358
   Deferred income                                                        1,125                        -
                                                          ----------------------   ----------------------
      Total current liabilities                                          10,861                    6,877

Long-term liabilities:
   Long-term debt, net of current portion                                10,926                   10,905
                                                          ----------------------   ----------------------

      Total liabilities                                                  21,787                   17,782

Stockholders' equity:
   Preferred stock, par value $.01 per share
        Authorized 4,700,000 shares,  none issued                             -                        -
   Series A junior participating preferred stock,
        par value $.01 per share. Authorized 300,000
        shares, none issued                                                   -                        -
   Common stock, par value $.01 per share.
        Authorized 40,000,000 shares
        19,387,946 and 13,979,490 issued and
        outstanding at December 31, 1997
        and December 31, 1996                                               194                      140
   Additional paid-in capital                                           185,205                   90,880
   Accumulated deficit                                                  (26,311)                 (14,874)
   Notes receivable on common stock                                         (60)                    (129)
   Unrealized gain on available for sale securities                         426                       62
   Treasury stock, at cost                                                 (878)                       -
   Deferred compensation                                                   (282)                    (202)
                                                          ----------------------   ----------------------
            Total stockholders' equity                                  158,294                   75,877
                                                          ----------------------   ----------------------
                                                            $           180,081      $            93,659
                                                          ======================   ======================
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      37
<PAGE>   38
                        GUILFORD PHARMACEUTICALS INC.
                               AND SUBSIDIARIES



                    Consolidated Statements Of Operations
                      (in thousands, except share data)



<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                        1997            1996             1995
                                                                -------------------------------------------------
<S>                                                               <C>               <C>            <C>
Revenues:
    Contract revenues                                             $      15,000     $    27,600    $         556
    Net product sales                                                     5,741               -                -
    License fees and royalties                                            1,628               -                -
    Revenues under collaborative agreements                               1,459             420               30
                                                                -------------------------------------------------
       Total revenues                                                    23,828          28,020              586

Costs and Expenses:
    Cost of sales                                                         2,585               -                -
    Research and development                                             30,293          18,761            9,688
    General and administrative                                            9,076           6,736            4,367
                                                                -------------------------------------------------
       Total costs and expenses                                          41,954          25,497           14,055
                                                                -------------------------------------------------
Operating income (loss)                                                 (18,126)          2,523          (13,469)
Other income (expense):
    Interest income                                                       7,477           3,070              823
    Interest expense                                                       (837)           (528)            (190)
    Other income                                                             49               8              199
                                                                -------------------------------------------------
          Net income (loss)                                       $     (11,437)    $     5,073    $     (12,637)
                                                                =================================================


Basic earnings (loss) per common share                            $       (0.65)    $      0.39    $       (1.72)
                                                                =================================================

Average common shares outstanding                                        17,570          13,001            7,354
                                                                =================================================


Diluted earnings (loss) per common share                          $       (0.65)    $      0.35    $       (1.72)
                                                                =================================================

Average common and dilutive equivalent
  shares outstanding                                                     17,570          14,634            7,354
                                                                =================================================
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                      38
<PAGE>   39
                        GUILFORD PHARMACEUTICALS INC.
                               AND SUBSIDIARIES






<TABLE>
<CAPTION>
                                                                                COMMON STOCK
                                                                                ------------            ADDITIONAL
                                                                            NUMBER                       PAID-IN
                                                                          OF SHARES      AMOUNT          CAPITAL
                                                                          ---------      ------          -------
<S>                                                                    <C>             <C>             <C>
BALANCE, JANUARY 1, 1995                                                  3,657,315    $       37      $     19,048
Issuance of common stock in follow-on public offering at $6.50*
  per share, net of offering costs                                        3,000,000            30            17,901
Other issuances of common stock                                              63,286             1               280
Exercise of warrants by Scios Inc.                                           72,464                             166
Equity proceeds from Gell Pharmaceuticals relating to the put option                                            726
Amortization of deferred compensation
Reduction in notes receivable on common stock
Net loss for the year
                                                                        ------------  ------------    --------------
BALANCE, DECEMBER 31, 1995                                                6,793,065    $       68      $     38,121
Issuance of common stock in follow-on public offering at $20.00*
  per share, net of offering costs                                        2,300,000            23            42,880
Other issuances of common stock                                             226,595             2             7,679
Three-for-two stock split                                                 4,659,830            47               (47)
Equity proceeds from Gell Pharmaceuticals relating to the put option                                          1,076
Amortization of stock option compensation                                                                     1,171
Amortization of deferred compensation
Reduction in notes receivable on common stock
Unrealized gain on available for sale securities
Net income for the year
                                                                        ------------  ------------    --------------
BALANCE, DECEMBER 31, 1996                                               13,979,490    $      140      $     90,880
Issuance of common stock in follow-on public offering
   at $20.00 per share, net of offering costs                             3,737,500            37            70,429
Other issuances of common stock                                           1,670,956            17            22,911
Purchase of 9,360 shares of common stock
Amortization of stock option compensation                                                                       985
Amortization of deferred compensation
Reduction in notes receivable on common stock
Unrealized gain on available for sale securities
Net loss for the year
                                                                        ------------  ------------    --------------
BALANCE, DECEMBER 31, 1997                                               19,387,946    $      194      $    185,205
                                                                        ============  ============    ==============
<CAPTION>
                                                                                                  NOTES         UNREALIZED
                                                                                                RECEIVABLE        GAIN ON
                                                                             ACCUMULATED        ON COMMON      AVAILABLE FOR
                                                                               DEFICIT            STOCK       SALE SECURITIES
                                                                               -------            -----       ---------------
<S>                                                                        <C>               <C>                <C>
BALANCE, JANUARY 1, 1995                                                   $     (7,310)     $      (149)       $          -
Issuance of common stock in follow-on public offering at $6.50*
  per share, net of offering costs
Other issuances of common stock
Exercise of warrants by Scios Inc.
Equity proceeds from Gell Pharmaceuticals relating to the put option
Amortization of deferred compensation
Reduction in notes receivable on common stock                                                         10
Net loss for the year                                                           (12,637)
                                                                          --------------    --------------     --------------
BALANCE, DECEMBER 31, 1995                                                 $    (19,947)     $      (139)       $          -
Issuance of common stock in follow-on public offering at $20.00*
  per share, net of offering costs
Other issuances of common stock
Three-for-two stock split
Equity proceeds from Gell Pharmaceuticals relating to the put option
Amortization of stock option compensation
Amortization of deferred compensation
Reduction in notes receivable on common stock                                                         10
Unrealized gain on available for sale securities                                                                          62
Net income for the year                                                           5,073
                                                                          --------------    --------------     --------------
BALANCE, DECEMBER 31, 1996                                                 $    (14,874)     $      (129)       $         62
Issuance of common stock in follow-on public offering
   at $20.00 per share, net of offering costs
Other issuances of common stock
Purchase of 9,360 shares of common stock
Amortization of stock option compensation
Amortization of deferred compensation
Reduction in notes receivable on common stock                                                         69
Unrealized gain on available for sale securities                                                                         364
Net loss for the year                                                           (11,437)
                                                                          --------------    --------------     --------------
BALANCE, DECEMBER 31, 1997                                                 $    (26,311)     $       (60)       $        426
                                                                          ==============    ==============     ==============
<CAPTION>
                                                                                                                   TOTAL
                                                                            TREASURY           DEFERRED         STOCKHOLDERS'
                                                                         STOCK, AT COST      COMPENSATION          EQUITY
                                                                          ---------------   --------------     --------------
<S>                                                                        <C>               <C>                <C>
BALANCE, JANUARY 1, 1995                                                   $           -     $       (205)      $     11,421
Issuance of common stock in follow-on public offering at $6.50*
  per share, net of offering costs                                                                                    17,931
Other issuances of common stock                                                                      (237)                44
Exercise of warrants by Scios Inc.                                                                                       166
Equity proceeds from Gell Pharmaceuticals relating to the put option                                                     726
Amortization of deferred compensation                                                                 112                112
Reduction in notes receivable on common stock                                                                             10
Net loss for the year                                                                                                (12,637)
                                                                          ---------------   --------------     --------------
BALANCE, DECEMBER 31, 1995                                                 $           -     $       (330)      $     17,773
Issuance of common stock in follow-on public offering at $20.00*
  per share, net of offering costs                                                                                    42,903
Other issuances of common stock                                                                                        7,681
Three-for-two stock split                                                                                                  -
Equity proceeds from Gell Pharmaceuticals relating to the put option                                                   1,076
Amortization of stock option compensation                                                                              1,171
Amortization of deferred compensation                                                                 128                128
Reduction in notes receivable on common stock                                                                             10
Unrealized gain on available for sale securities                                                                          62
Net income for the year                                                                                                5,073
                                                                          ---------------   --------------     --------------
BALANCE, DECEMBER 31, 1996                                                 $           -     $       (202)      $     75,877
Issuance of common stock in follow-on public offering
   at $20.00 per share, net of offering costs                                                                         70,466
Other issuances of common stock                                                                      (331)            22,597
Purchase of 9,360 shares of common stock                                            (878)                               (878)
Amortization of stock option compensation                                                                                985
Amortization of deferred compensation                                                                 251                251
Reduction in notes receivable on common stock                                                                             69
Unrealized gain on available for sale securities                                                                         364
Net loss for the year                                                                                                (11,437)
                                                                          ---------------   --------------     --------------
BALANCE, DECEMBER 31, 1997                                                 $        (878)    $       (282)      $    158,294
                                                                          ===============   ==============     ==============
</TABLE>

*Per share prices are pre-stock split

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      39
<PAGE>   40
                         GUILFORD PHARMACEUTICALS INC.
                                AND SUBSIDIARIES


                     Consolidated Statements Of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                         YEAR ENDED DECEMBER 31,
                                                                              1997              1996              1995
                                                                              ----              ----              ----
<S>                                                                     <C>                <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                    $     (11,437)     $      5,073      $    (12,637)
   Adjustments to reconcile net income (loss) to net cash
      provided by (used in) operating activities:
      Depreciation and amortization                                             2,735             1,102               567
      Noncash compensation expense                                              1,236             1,309               122
   Changes in assets and liabilities:
      Accounts receivable                                                        (230)                -                 -
      Collaborative research receivable                                             -               180              (556)
      Inventory                                                                   191            (1,533)                -
      Other current assets                                                        (59)             (144)             (177)
      Other assets                                                                154              (130)                4
      Accounts payable                                                            705               398               428
      Accrued expenses and other liabilities                                    1,476             1,712             1,177
      Deferred income                                                           1,125                 -                 -
                                                                     -----------------  ----------------  ----------------
         Net cash provided by (used in) operating activities                   (4,104)            7,967           (11,072)
                                                                     -----------------  ----------------  ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Investment in purchases of property and equipment                           (6,433)           (9,101)           (3,706)
   Maturities of held-to-maturity investments                                  42,619            48,368            40,071
   Maturities of available-for-sale investments                                57,499                 -                 -
   Purchases of held-to-maturity investments                                  (42,249)          (56,557)          (47,470)
   Purchases of available-for-sale investments                               (132,204)          (36,076)                -
   Restricted investments                                                         339            (1,358)                -
                                                                     -----------------  ----------------  ----------------
         Net cash (used in) investing activities                              (80,429)          (54,724)          (11,105)
                                                                     -----------------  ----------------  ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from issuances of common stock                                 93,063            50,584            18,113
   Purchase of treasury stock                                                    (878)                -                 -
   Proceeds from bond and term loan issuances                                   1,843             7,867             3,558
   Equity proceeds from Gell Pharmaceuticals, Inc.
     relating to the put option                                                     -             1,076               726
   Payment of notes receivable on common stock                                     69                 -                 -
   Principal payments on bond payable                                            (941)             (470)                -
   Principal payments on term loan payable                                       (203)                -                 -
                                                                     -----------------  ----------------  ----------------
         Net cash provided by financing activities                             92,953            59,057            22,397
                                                                     -----------------  ----------------  ----------------
Net increase in cash and cash equivalents                                       8,420            12,300               220
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR                             16,560             4,260             4,040
                                                                     -----------------  ----------------  ----------------
CASH AND CASH EQUIVALENTS AT THE END OF YEAR                            $      24,980      $     16,560      $      4,260
                                                                     =================  ================  ================

Supplemental disclosures of cash flow information:
    Net interest paid                                                   $         828      $        470      $        165
    Unrealized gain on available-for-sale securities                              364                62                 -
    Issued shares of common stock in lieu of cash bonus                             -                 -                28
    Issuances of common stock to executive officers                                 -                 -               237
    Collateral transferred from unrestricted to restricted
      investments, net                                                  $       1,170      $      5,129      $      2,490
                                                                     =================  ================  ================
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                      40
<PAGE>   41
                         GUILFORD PHARMACEUTICALS INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 1997, 1996 and 1995


(1)  ORGANIZATION AND BUSINESS ACTIVITIES

     Guilford Pharmaceuticals Inc. (together with its subsidiaries, "Guilford"
or the "Company") is a biopharmaceutical company engaged in the development and
commercialization of novel products in two principal areas: (i) targeted and
controlled drug delivery systems using proprietary biodegradable polymers for
the treatment of cancer and other diseases; and (ii) therapeutic and diagnostic
products for neurological diseases and conditions.

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

     The consolidated financial statements include the accounts of Guilford
Pharmaceuticals Inc. and subsidiaries, all of which are wholly-owned. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

Cash and cash equivalents

     Highly liquid investments with a maturity of three months or less at the
date of purchase are classified as cash equivalents.

Investments

     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. Changes in
the fair values of available-for-sale securities are recognized as a separate
component of stockholders' equity as unrealized gains and losses.  Realized
gains and losses from the sale of available-for-sale securities are determined
on a specific identification basis.  Held-to-maturity securities are carried at
cost adjusted for amortized premium or discount.

     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 would
result in a reduction in the carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is established.
Dividends and interest income are recognized when earned.





                                      41
<PAGE>   42
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.

Property and equipment

     Property and equipment are recorded at cost, including interest on funds
borrowed to finance construction of real property.  Depreciation and
amortization are provided using 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 costs and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in the
statements of operation. Expenditures for repairs and maintenance are expensed
as incurred.

Revenue recognition

     Product sales are recognized at the time the product is certified and
shipped. Title of the goods passes to the buyer upon shipment.  Sales are
reported net of estimated discounts, rebates, chargebacks and product returns.

     Royalty revenue is recognized at such time as the Company's sales,
marketing and distribution partner(s) ships product(s) and the title passes to
third parties.

     Collaborative research revenue is recognized, up to the contractual
limits, when the Company meets its performance obligations under the respective
agreements. Contract and non-refundable licensing revenue is recognized when
milestones are met and the Company's significant performance obligations have
been satisfied in accordance with the terms of 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.

Research and development, patent and royalty costs

     Research and development, patent, and royalty costs are expensed as
incurred.  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 as incurred 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 will be in effect when the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits, which are
not expected to be realized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period that such tax rate changes
are enacted.





                                      42
<PAGE>   43
Stock-based compensation

     Prior to January 1, 1996, the Company accounted for its share option plans
in accordance with the provisions of APB No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related interpretations. As such, compensation
expense is recorded on the date of grant if the market value at the date of
grant exceeds the exercise price. Compensation expense is amortized and charged
against earnings over the respective vesting periods. Under the Company's share
option plans, share options are granted to employees at an exercise price that
equals the current fair market value at the date of grant. On January 1, 1996,
the Company adopted the SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), which permits companies to continue to apply the provisions of
APB 25 related to employee share options. Under SFAS 123, the Company is
required to provide pro forma net earnings (loss) and pro forma earnings (loss)
per share footnote disclosures for employee stock option grants as if the
fair-value based method defined in SFAS 123 had been applied. Stock-based
awards issued to non-employees are accounted for under the fair-value based
method defined in SFAS 123 (see note 11).

Earnings (loss) per share

     Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
per Share", which replaces the presentation of Primary and Fully Diluted
earnings per share ("EPS") with that of Basic EPS and Diluted EPS. Basic EPS is
computed by dividing earnings (loss) available to common stockholders by the
weighted-average number of common 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 common 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.
All prior period EPS data have been restated to reflect Basic and Diluted EPS.
The following table presents the computations of basic and diluted EPS:

<TABLE>
<CAPTION>
                                                     1997             1996            1995
                                                     ----             ----            ----
                                                        (in thousands, except share data)
<S>                                               <C>              <C>             <C>
Net earnings (loss) applicable to
common stockholders                               $ (11,437)       $   5,073       $ (12,637)
                                                  ==========       =========       ==========

Weighted-average shares outstanding                  17,570           13,001           7,354

Employee stock options                                  -                751            -
Warrants and put options                                -                882            -
                                                  ----------       ---------       ----------
Dillutive potential common shares                       -              1,633            -
                                                  ----------       ---------       ----------
Total weighted-average diluted shares (1)            17,570           14,634           7,354
                                                  ==========       =========       ==========

Basic EPS                                         $    (.65)       $     .39       $   (1.72)
                                                  ==========       =========       ==========
Diluted EPS                                       $    (.65)       $    . 35       $   (1.72)
                                                  ==========       =========       ==========
</TABLE>


(1) At December 31, 1997 and 1995, there were 1,692,458 and 539,075
instruments, respectively, that were considered antidilutive and accordingly
excluded in the above calculation.





                                      43
<PAGE>   44
Impairment of long-lived assets

     The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the carrying amount of a long-lived
asset may not be recoverable. Such asset is deemed impaired and written down to
its fair value if expected future cash flows are less than its carrying amount.

Fair value of financial instruments

     The fair value of financial instruments is determined by reference to
various market data and other valuation techniques, as appropriate. The fair
values of financial instruments approximate their recorded value.

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 at the time of purchase and places restrictions
on their terms and concentrations by type and issuer. The Company has not
realized any significant losses on its investments.

Year 2000 date conversion

  The Company has established policies and procedures for the identification,
evaluation, and implementation of potential changes to existing systems and
applications necessary to achieve a year 2000 date conversion with no
disruption to business operations.  Management does not believe that costs
associated with the conversion will be material to the results of operations or
financial position of the Company.

Uncertainties

    The Company is subject to certain risks common to companies within the
biotechnology industry. These include, but are not limited to, development by
competitors of new technological innovations, dependence on key personnel,
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), health care containment initiatives and product liability
and compliance with government regulations and agencies, including the U.S.
Food and Drug Administration.

Use of estimates

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





                                      44
<PAGE>   45
Significant Customer and Product

The Company sells only one product, GLIADEL, a novel treatment for recurrent
malignant gliablastome multiforme, the most fatal form of brain cancer. The
Company markets, sells and distributes its product through two customers who
are larger pharmaceutical companies.  In 1997, approximately 98% of sales were
with one of these customers. The Company expects that future sales will also be
derived largely from the same customer and will be relying upon that customer's
ability to obtain regulatory clearance where necessary and then market, sell
and distribute the product.

Reclassifications

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

 .





                                      45
<PAGE>   46
(3) INVESTMENTS

     Investments in marketable securities as of December 31, 1997 and 1996 are
as follows:

<TABLE>
<CAPTION>
                                                           Gross               Gross
                                                         Unrealized         Unrealized
                                                          Holding             Holding                Fair
                1997                   Costs               Gains              Losses                Value
                ----                   -----               -----              ------                -----
                                                                (in thousands)
     <S>                             <C>                 <C>                <C>                  <C>
     Available-for-sale:
        U.S. Treasury Securities     $  97,499           $    458           $    (89)            $  97,868
        Corporate Debt Securities        6,990                 13                 (5)                6,998
        Other Debt Securities            6,292                 49                  -                 6,341
                                     ---------           --------           ---------            ---------
                                     $ 110,781           $    520           $    (94)            $ 111,207
                                     ---------           --------           ---------            ---------

     Held-to-maturity:
        U.S. Treasury Securities     $  20,162           $     24           $     (4)            $  20,182
        Corporate Debt Securities        3,870                  7                 (4)                3,873
                                     ---------           --------           ---------            ---------
                                     $  24,032           $     31           $     (8)            $  24,055
                                     ---------           --------           ---------            ---------
                                     $ 134,813           $    551           $   (102)            $ 135,262
                                     =========           ========           =========            =========

                1996
                ----

     Available-for-sale:
        U.S. Treasury Securities     $  33,459           $    167           $   (106)            $  33,520
        Corporate Debt Securities        1,190                  4                 (1)                1,193
        Other Debt Securities            1,427                 13                (15)                1,425
                                     ---------           --------           ---------            ---------
                                     $  36,076           $    184           $   (122)            $  36,138
                                     ---------           --------           ---------            ---------
     Held-to-maturity:
        U.S. Treasury Securities     $  23,051           $     83           $    (88)            $  23,046
        Corporate Debt Securities        1,690                 18                 (2)                1,706
                                     ---------           --------           ---------            ---------
                                     $  24,741           $    101           $    (90)            $  24,752
                                     ---------           --------           ---------            ---------
                                     $  60,817           $    285           $   (212)            $  60,890
                                     =========           ========           =========            =========
</TABLE>





                                      46
<PAGE>   47
     Maturities of debt securities classified as available-for-sale and
held-to-maturity were as follows at December 31, 1997 and 1996 (maturities of
mortgage-backed securities and collateralized mortgage obligations have been
presented based upon estimated cash flows, assuming no change in the current
interest rate environment):

<TABLE>
<CAPTION>
                                          December 31, 1997                       December 31, 1996
                                          -----------------                       -----------------
                                     Amortized             Fair              Amortized              Fair
                                       Cost               Value                Cost                Value
                                       ----               -----                ----                -----
                                            (in thousands)                          (in thousands)
     <S>                             <C>                <C>                  <C>                  <C>
     Available-for-sale
        Due in 1 year or less        $  10,584          $  10,572            $  9,177             $  9,291
        Due in 1-2 years                41,489             41,694              14,945               14,885
        Due in 2-5 years                58,708             58,941              11,954               11,962
                                     ---------          ---------            --------             --------
                                     $ 110,781          $ 111,207            $ 36,076             $ 36,138
                                     ---------          ---------            --------             --------

     Held-to-maturity
        Due in 1 year or less        $  22,009          $  22,033            $ 20,935             $ 20,975
        Due in 1-2 years                 2,023              2,022               3,806                3,777
                                     ---------          ---------            --------             --------
                                     $  24,032          $  24,055            $ 24,741             $ 24,752
                                     ---------          ---------            --------             --------
                                     $ 134,813          $ 135,262            $ 60,817             $ 60,890
                                     =========          =========            ========             ========
</TABLE>


(4) 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
(FIFO) method.  Inventories are shown net of applicable reserves and
allowances.  Inventories consist of the following:


<TABLE>
<CAPTION>
                                   December 31,
                             ---------------------
                               1997          1996
                             -------       -------
                                (in thousands)
 <S>                         <C>           <C>
 Inventory:

  Raw materials              $   386       $   600
  Work in process                497           432
  Finished goods                 459           501
                             -------       -------
                             $ 1,342       $ 1,533
                             =======       =======
</TABLE>



     Inventories includes products and materials that may be either available
for sale and/or production or utilized internally in the Company's development
activities.  Inventories identified for development activities are expensed
immediately upon designation as intended for such use.





                                      47
<PAGE>   48
(5) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

<TABLE>
<CAPTION>
                                                                 December 31,
                                                        -----------------------------
                                                           1997               1996
                                                        ---------           ---------
                                                                (in thousands)
  <S>                                                   <C>                 <C>
  Property and Equipment:
     Laboratory equipment                               $   4,779           $   1,322
     Manufacturing equipment                                2,299               1,677
     Computer and office equipment                          3,825               2,126
     Leasehold improvements                                 7,773               9,767
     Construction in process                                2,925                 276
                                                        ---------           ---------
                                                        $  21,601           $  15,168
     Less accumulated depreciation and amortization        (4,448)             (1,713)
                                                        ---------           ---------
                                                        $  17,153           $  13,455
                                                        =========           =========

  Accrued Expenses and Other Current Liabilities:
     Consulting and contracted research costs           $     862           $     935
     Legal and professional                                   665                 231
     Payroll and related costs                              2,000               1,238
     Other current liabilities                              1,307                 954
                                                        ---------           ---------
                                                        $   4,834           $   3,358
                                                        =========           =========
</TABLE>


(6) INDEBTEDNESS

     Long-term debt at December 31, 1997 and 1996 consists of the following:


<TABLE>
<CAPTION>
                                                                               December 31,
                                                                     --------------------------------
                                                                        1997                  1996
                                                                     ---------              ---------
                                                                              (in thousands)
     <S>                                                              <C>                    <C>
     Borrowings under bond financing arrangement,
     payable in monthly installments of $78,000, plus interest
     at LIBOR + .75% (6.75% at December 31,1997),
     with final payment due December, 2004                            $  6,588               $   7,530

     Borrowings under term loan, payable in monthly
     installments of $101,515, plus interest
     at LIBOR + .625% (6.625% at December 31, 1997),
     with final payment due April, 2003                                  6,497                   4,856
                                                                      --------               ---------

     Total long-term debt                                             $ 13,085               $  12,386

     Less current installments                                          (2,159)                 (1,481)
                                                                      --------               ---------

     Long-term debt, excluding current installments                   $ 10,926               $  10,905
                                                                      ========               =========
</TABLE>





                                      48
<PAGE>   49
Bond financing arrangement

     In 1994, the Company entered into a $8 million bond financing arrangement
with a commercial bank. The bond was issued by the Maryland Economic
Development Corporation and 50% of the outstanding borrowings are guaranteed by
the Maryland Industrial Development Financing Authority.

Term loan agreement

     In 1996, the Company entered into a term loan agreement, as amended, with
a commercial bank for up to $6.7 million. During 1997, the Company borrowed
$1.8 million, the remaining available principal amount under the term loan
agreement. The outstanding principal balance was $6.5 million and $4.9 million
at December 31, 1997 and 1996, respectively.

Restrictive covenants

     The aforementioned debt agreements contain restrictions which require the
Company to meet certain financial covenants. Under the bond financing
arrangement, the Company is required to maintain cash collateral equal to
approximately 50% of the outstanding principal balance, $3.2 million and $3.7
million at December 31, 1997 and 1996, respectively. In accordance with the
term loan agreement, the Company is required to maintain cash collateral equal
to 100% of the outstanding principal balance, $6.5 million and $4.9 million at
December 31, 1997 and 1996, respectively. The cash collateral is included in
the accompanying consolidated balance sheets as "Investments-restricted". In
addition to the cash collateral, the Company may not declare any dividends on
its common stock without prior written consent.

(7) LEASES

     The Company has several non-cancelable operating leases for equipment and
buildings. Rent expense for operating leases was approximately $1.5 million, $
 .7 million and $.5 million at December 31, 1997, 1996 and 1995, respectively.

     The Company's future minimum lease payments under these non-cancelable
operating leases for years subsequent to December 31, 1997 are as follows:

<TABLE>
<CAPTION>
                                                        Amount
                             Year                   (in thousands)
                        --------------              --------------
                        <S>                            <C>
                        1998                           $ 2,165

                        1999                             1,712

                        2000                             1,146

                        2001                               486

                        2002                               306

                        Beyond 2002                        790
                                                       -------

                                                       $ 6,605
                                                       =======
</TABLE>





                                       49
<PAGE>   50
     Included in the data presented above is a Master Lease Agreement ("Master
Agreement"), which agreement expired December 31, 1997, for financing certain
equipment up to a maximum of $5 million.  Each equipment lease the Company
executes under the Master Agreement is for a term of 49 months and requires the
Company to post an irrevocable letter of credit equal to 70% of the equipment
cost covered by each lease as collateral. Under the terms of the Master
Agreement, the percentage of collateral required for each lease is reduced at
the anniversary of each such equipment lease. The Company had leased  $3.4
million and $2.0 million in equipment as of December 31, 1997 and 1996,
respectively. All of the equipment leased under these agreements has been
accounted for as operating leases.  The Company had set aside $2.4 million and
$1.4 million as collateral to support the letters of credit at December 31,
1997 and 1996, respectively. The collateral is included in the accompanying
consolidated balance sheets under "Short-term investments-restricted".

     Also included above, is a Master Lease Arrangement, related to the land
and building which the Company presently occupies, which expires in July 2005
with options to renew for two five-year periods. The Company has the option to
purchase the building after the ninth year for its then current fair market
value. In addition, the Company has several short-term (18 months or less)
leases to support current research and development activities. The annual
minimum facility rents aggregate approximately $1.3 million.

     In January 1998, the Company entered into a new Master Agreement to
finance up to $10 million of additional capital equipment.  The agreement is
effective until December 31, 1999 (see note 17).

(8)  INCOME TAXES

     As of December 31, 1997, the Company had net operating loss ("NOL")
carryforwards available for federal income tax purposes of approximately $23
million, which expire at various dates between 2008 to 2012, including
approximately $1.7 million acquired in a tax free stock transaction from GELL
Pharmaceuticals Inc. in 1997.  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, 1997, the Company had foreign tax
credit carryforwards of approximately $61,000 expiring in 2000 and 2001, and
general business tax credit carryforwards of approximately $1.7 million
expiring between 2008 and 2012.

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

<TABLE>
<CAPTION>
                                                                1997          1996          1995
                                                              --------      ---------    ----------
                                                                         (in thousands)
     <S>                                                      <C>             <C>         <C>
     Computed "expected" tax expense at statutory rate        $(3,889)        $1,725      $ (4,296)
     State income tax, net of federal benefit                  (  515)           230        (  567)
     Research collaboration revenue                                 -            557            -
     Compensatory stock awards                                   (373)             -            -
     Change in valuation allowance increase (decrease)          4,734         (2,552)        4,849
     Other                                                         43             40            14
                                                              -------        -------      --------
                                                              $    -         $     -      $     -
                                                              =======        =======      ========
</TABLE>





                                       50
<PAGE>   51
     Realization of net deferred tax assets related to the Company's 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 are not likely to be realized in the future,
resulting in net deferred tax assets of approximately $138,000 at December 31,
1997. The change in the valuation allowance was an increase of approximately
$6.6 million in 1997 and a decrease of approximately $2.6 million in 1996.

     Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1997 and 1996 are shown below.

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                      -------------------------
                                                                        1997            1996
                                                                      --------        ---------
                                                                           (in thousands)
     <S>                                                              <C>               <C>
     Deferred tax assets:
          Net operating loss carryforwards                             $ 8,869          $ 3,971
          Research and experimentation credits                           1,710              450
          Compensatory stock grants                                      1,228              861
          Alternative minimum tax credit carryforwards                     138              179
          Accrued expenses                                                 403              257
          Contribution carryover and capitalized start-up costs             51               38
                                                                      --------         --------
                                                                        12,399            5,756
     Deferred tax liabilities:
          Prepaid expenses, depreciation and stock gains                  (215)            (153)
                                                                      --------         --------
          Net deferred tax assets                                       12,184            5,603
          Valuation allowance                                          (12,046)          (5,424)
                                                                      --------         --------
          Net deferred tax assets reported                            $    138         $    179
                                                                      ========         ========
</TABLE>

(9)  CAPITAL TRANSACTIONS

     On October 1, 1997, the Company sold 640,095 shares of common stock to
Amgen Inc. ("Amgen") for $15 million (see note 13).  In addition, the Company
issued for $5 million a five-year warrant to purchase up to 700,000 shares of
the Company's common stock at an exercise price of $35.15 per share.

     In April 1997, the Company completed a follow-on public equity offering of
approximately 3.7 million shares of its common stock providing net proceeds of
approximately $71 million to the Company.

     On October 15, 1996, the Board of Directors declared a three-for-two stock
split. Equity transactions (including number of shares) prior to that date have
been adjusted to reflect the stock split. In June 1996, the Company entered
into a stock purchase agreement with Rhone-Poulenc Rorer Pharmaceuticals Inc.
and its parent corporation (collectively "RPR") (see note 13) whereby, RPR
purchased 281,531 shares of the Company's common stock for $7.5 million. In
March 1996, the Company completed a follow-on public equity offering of
approximately 3.5 million shares of its common stock, providing net proceeds of
approximately $43 million to the Company.

     In August 1995, the Company completed a follow-on public offering of
approximately 4.5 million shares of common stock, providing net proceeds of
approximately $18 million to the Company.





                                       51
<PAGE>   52
(10)  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, 1997, 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 which would result in its
ownership of 20% or more of the Company's common stock. 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 50% or more of the Company's
assets are sold in one or more related transactions, 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.

(11)  SHARE OPTION AND RESTRICTED SHARE PLANS

The 1993 Employee Share Option and Restricted Share Plan

     The 1993 Employee Share Option and Restricted Share Plan, as amended, (the
"1993 Plan"), was established to provide eligible individuals with an
opportunity to acquire or increase an equity interest in the Company and to
encourage such individuals to continue in the employment of the Company. Share
options are granted at the fair market value of the stock on the day
immediately preceding the date of grant or date of initial employment, if
later. Share options are exercisable for a period not to exceed ten years from
the date of grant. In general, share options vest over four years.

     Shares awarded under the restricted share provisions of the 1993 Plan are
valued at the fair market value of the stock on the day immediately preceding
the date of award (date of grant, if later) and require a vesting period
determined by the Board of Directors. Should an individual leave the employment
of the Company for any reason (other than by reason of death or permanent
disability), the award recipient would forfeit their ownership rights for all
share options and restricted shares not otherwise fully vested.

     At December 31, 1997, the maximum share options issuable under the 1993
Plan are 3,435,000, of which up to 300,000 may be issuable under the restricted
share provisions.  At December 31, 1997, there were 1,299,715 share options
available for grant under the 1993 Plan.





                                       52
<PAGE>   53
The Directors' Plan

     The Director's Stock Option Plan (the "Directors' Plan") was established
to provide non-employee directors an opportunity to acquire or increase an
equity interest in the Company. Under the Directors' Plan, 300,000 shares of
common stock are reserved for issuance at an exercise price not less than fair
value of the Company's common stock on the day immediately preceding the date
of grant. Such share options vest 50% at the end of year one and 100% at the
end of year two. Under the Directors' Plan 22,500, 37,500 and 60,000 share
options were granted during 1997, 1996 and 1995, respectively.  As of December
31, 1997, 120,000 share options were outstanding under the Directors' Plan, of
which 78,750 are exercisable as of December 31, 1997.  In 1996, the Company
granted 120,000 options outside of the Directors' Plan to two directors with an
exercise price of $13.54 (market value at date of grant).  Approximately
105,000 share options were fully vested in 1997 and the remaining 15,000 share
options fully vest in 1998.  At December 31, 1997, there were 180,000 share
options available for grant under the Directors' Plan.

Consultants

     In 1996, the Company granted share options to each of two consultants to
purchase up to 225,000  shares of the Company's common stock, valid for 10
years from issuance, with varying exercise prices. Vesting periods are based on
either the passage of time or based upon the achievement of certain milestones,
which, if ever achieved, would result in accelerated vesting of up to 150,000
of the aforementioned share options for each consultant, of which 75,300 were
exercisable as of December 31, 1997. The Company recognized $985,000 and $1.2
million in non-cash compensation expense in accordance with SFAS 123 relating
to the value of such share options (as established using the Black Scholes
pricing model) for the years ended December 31, 1997 and 1996, respectively,
and it expects to charge varying amounts (up to an additional $1.2 million in
the aggregate) of non-cash compensation expense to operations through 2001
relating to such agreements.

     Additional information with respect to the Company's share option plan(s)
activity is summarized as follows:

<TABLE>
<CAPTION>
                                                                Weighted -
                                              Share              Average
                                             Options          Exercise Price
                                          ------------        --------------
     <S>                                   <C>                 <C>
     Balance, January 1, 1995                221,627           $    2.09
     Granted                                 586,725                5.28
     Exercised                               (19,565)               0.77
     Canceled                                ( 6,750)               3.75
                                           ----------          ---------
     Balance, December 31, 1995              782,037                4.47
     Granted                               1,786,740               15.71
     Exercised                               (58,363)               3.02
     Canceled                                 (6,658)              10.82
                                           ----------          ---------
     Balance, December 31, 1996            2,503,756               12.24
     Granted                                 329,600               25.07
     Exercised                              (262,925)               6.58
     Canceled                               (150,511)              13.29
                                           ----------          ---------
     Balance, December 31, 1997            2,419,920           $   14.53
                                           ==========          =========
</TABLE>





                                       53
<PAGE>   54
  Share options outstanding and exercisable by price range are as follows:

<TABLE>
<CAPTION>
                                Options Outstanding                                                 Options Exercisable
       -----------------------------------------------------------------------------        ----------------------------------
                             Outstanding       Weighted Average        Weighted-               Exercisable         Weighted-
           Range of             as of             Remaining             Average                  as of             Average
       Exercise Prices      Dec. 31, 1997      Contractual Life      Exercise Price          Dec. 31, 1997      Exercise Price
       ---------------    -----------------  --------------------   ----------------        ---------------     --------------
        <S>                   <C>                      <C>                <C>                    <C>                <C>
        $ 0.00 - $10.00         553,890                7.2                 $5.10                 326,072             $ 5.39
        $10.01 - $20.00       1,486,279                7.8                $15.47                 347,172             $15.56
        $20.01 - $30.00         379,751                9.3                $24.62                  41,250             $25.29
                             ----------               ----                ------                 -------             ------
                              2,419,920                7.9                $14.53                 714,494             $11.48
                              =========               ====                ======                 =======             ======
</TABLE>



Pro forma option information

     The per share weighted-average fair value of all share options granted
during 1997 and 1996 was $10.00 and $7.21 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:
1997 expected dividend yield 0%, risk-free interest rate of 6.2%, volatility of
40% and an expected life of 4 years; 1996 expected dividend yield 0%, risk-free
interest rate of 6.1%, volatility of 50% and an expected life of 4 years.  The
per share weighted-average fair value of share options granted during 1996 to
consultants was $6.12 using similar assumptions.

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

<TABLE>
<CAPTION>
                                                            1997          1996            1995
                                                        -----------    -----------     ----------
                                                                      in thousands,
                                                                 (except per share data)
     <S>                                <C>              <C>             <C>           <C>
     Net earnings (loss)                As reported      ($11,437)       $ 5,073       ($12,637)
                                        Pro forma        ( 12,532)         4,373       ( 12,740)
     Basic earnings (loss) per share    As reported         (0.65)          0.39          (1.70)
                                        Pro forma           (0.71)          0.34          (1.73)
     Diluted earnings (loss) per share  As reported         (0.65)          0.35          (1.70)
                                        Pro forma           (0.71)          0.30          (1.73)
</TABLE>





                                       54
<PAGE>   55
     Pro forma net earnings (loss) reflects only stock option grants beginning
in 1995. Accordingly, the full impact of calculating compensation cost for
share options under SFAS 123 is not reflected in the pro forma net earnings
(loss) amounts presented above since compensation costs for share options
granted prior to January 1, 1995 is not considered.

(12)  401(k) PROFIT SHARING PLAN

     The Company has a 401(k) Profit Sharing Plan (the "401(k) Plan") available
to all employees meeting certain eligibility criteria which permits
participants to contribute up to 15% of their compensation not to exceed the
limits established by the Internal Revenue Code. The Company may make "matching
contributions" equal to a percentage of a participant's contribution or may
contribute a discretionary amount to the Plan.

     Effective January 1997, the Company has elected to make "matching
contributions" in the Company's common stock equal to 50% of the first 6% of an
employee's salary contributed to such employees 401(k) Plan account. Such
amounts vest 25% per year based on a participant's years of service with the
Company.

(13)  SIGNIFICANT CONTRACTS AND LICENSING AGREEMENTS

Agreements with Amgen Inc.

     In August 1997, the Company entered into an agreement with Amgen (the
"Agreement") respecting the research, development and commercialization of the
Company's FKBP-based neuroimmunophilin ligand technology ("Neuroimmunophilin
Technology") for all human therapeutic and diagnostic applications.  Pursuant
to the terms of the Agreement, Amgen initially paid the Company 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 five-year warrants to purchase up to an additional
700,000 shares of the Company's common stock at an exercise price of $35.15 per
share. In connection with the sale of these securities, the Company granted
Amgen certain demand and "piggyback" registration rights under the applicable
securities laws.

     Under the terms of the Agreement, Amgen agreed to provide the Company up
to $13.5 million over three years in the aggregate to support research
activities relating to the Neuroimmunophilin Technology, with an option to fund
a fourth year of research.

     Additionally, the Agreement provides for certain milestone payments to the
Company, in up to ten different specified clinical indications, in the event
Amgen achieves certain development milestones.  In addition, the Company will
receive royalties on product sales, if any, related to the Neuroimmunophilin
Technology.





                                       55
<PAGE>   56
Agreements with Rhone-Poulenc Rorer Pharmaceuticals Inc.

     In June 1996, the Company entered into a Marketing, Sales and Distribution
Rights Agreement (together with related agreements, the "RPR Agreements") with
RPR granting RPR worldwide marketing rights (excluding Scandinavia) for
GLIADEL. The Company received $15 million upon the signing of these agreements
($7.5 million as an equity investment and $7.5 million as a non-refundable
rights payment). On September 23, 1996, the Company obtained clearance from the
FDA for GLIADEL for recurrent glioblastoma multiforme where surgical tumor
removal is indicated and, accordingly, received a $20 million non-refundable
milestone payment from RPR. RPR is obligated to make up to $40 million in
additional milestone payments, including $7.5 million in the form of an equity
investment, only if the Company achieves certain regulatory approvals. In
addition, RPR may also fund up to $17 million for the development of a
higher-dose GLIADEL product and to fund certain additional clinical studies, if
any, related to GLIADEL. The Company manufactures and supplies GLIADEL to RPR
and receives a transfer price and royalties based on sales.

     Under the RPR Agreements, the Company has the right to borrow up to an
aggregate of $7.5 million under certain conditions, including $4 million which
became available January 2, 1997, and the remainder no earlier than 12 nor
later than 18 months following funding of the initial $4 million. The loan
proceeds are available to provide for expansion of the Company's existing
facility supporting the production of GLIADEL and the construction of a second
facility for the scale-up, production of GLIADEL and other polymer systems. Any
principal amounts borrowed under this loan agreement are due five years from
the date borrowed and will carry an interest rate equal to the lowest rate paid
by of RPR on its most senior indebtedness. Both the principal and interest due
under this agreement may, at the Company's election, be repaid by offsetting
certain amounts due to the Company under the RPR Agreements.  The Company has
not drawn down any of the available funds under the RPR Agreements.

Other contracts and agreements

     In May 1997, the Company entered into a Development and Supply Agreement
(together with related agreements, the "Nordion Agreement") with MDS Nordion
Inc. and MDS Nordion S.A. (collectively "Nordion") for the development and the
exclusive supply of DOPASCAN (R) Injection ("DOPASCAN") for Phase III clinical
trials expected to be conducted by the Company in the United States, Canada and
Europe.  The Nordion Agreement provides for the Company to make certain
milestone payments related to the development work and the purchase of certain
manufacturing equipment aggregating up to $2.0 million, of which the Company
paid or accrued $1.6 million through December 31, 1997.

     In October 1995, the Company entered into a license and distribution
agreement with Orion Corporation Farmos ("Orion Farmos") respecting sales,
marketing and distribution of GLIADEL in Scandinavia and pursuant to which
Orion Farmos paid a licensing fee of $100,000 to the Company in 1996.
Additionally, the Company will receive both a transfer price on materials
shipped to Orion Farmos and royalties on future product sales, if any.





                                       56
<PAGE>   57
     In December 1995, the Company entered into an agreement with Daiichi
Radioisotope Laboratories, Ltd. ("DRL") respecting DOPASCAN in Japan, Taiwan
and Korea for which the Company received a one-time non-refundable license fee
of $555,000. Under this agreement, the Company will receive a milestone payment
upon the filing of the first application for regulatory approval in certain
foreign countries. Additionally the Company receives both a transfer price on
materials shipped to DRL and royalties on future product sales, if any.

     The Company has entered into licensing, technology transfer and
development agreements with The Johns Hopkins University under which it is
required to make certain payments for patent maintenance costs, processing
fees, license payments and development payments aggregating approximately
$643,000 through 2001. The Company has also agreed to spend $500,000 per year
through 2014 with respect to internal research and development activities to
develop such technologies and may be required to make certain payments, as
defined, to The Johns Hopkins University should agreed-upon milestones be
attained. In addition, the Company will be required to pay a royalty on future
net sales of all licensed products, if any, as well as a percentage (as
defined) of royalties received by the Company from sublicensees, if any.

     The Company has also entered into various other licensing, research and
development agreements which commit the Company to fund certain mutually
agreed-upon research and development projects, either on a best efforts basis
or upon attainment of certain performance milestones, as defined, or both, for
various periods unless canceled by the respective parties. Such future amounts
to be paid are approximately $1.9 million through 2001. In addition, the
Company will be required to pay a royalty on future net sales of all licensed
products, if any, as well as a percentage of all royalties received by the
Company from sublicensees, if any.

(14)  GELL PHARMACEUTICALS INC.

     In February 1995, the Company and The Abell Foundation, Inc., a
Baltimore-based not-for-profit corporation ("Abell"), established Gell
Pharmaceuticals Inc. ("Gell"). Gell was formed primarily to track Abell's  $2.5
million equity investment that, in substance, was intended to purchase 750,000
shares of the Company's common stock at the transaction date, which shares had
an approximate fair market value of $2.4 million. Abell received an 80% equity
interest in Gell for $2.5 million with a "put option" to exchange such equity
interest for 750,000 shares of common stock of the Company. Guilford received a
20% equity interest for nominal cash consideration and technology "know-how,"
which had a net carrying value of zero at the transaction date.

     In March 1997, Abell exercised its put option to receive the 750,000
shares of the Company's common stock in exchange for its 80% interest in Gell.
After such date, Gell became a wholly owned subsidiary of the Company and is
included in the accompanying consolidated financial statements.





                                       57
<PAGE>   58
(15)  RELATED PARTY TRANSACTIONS

     In September 1995, the Company entered into a three year consulting
agreement with the Chairman of its Scientific Advisory Board (the "Consultant")
who is also a non-employee director, under which the Consultant is to provide
consulting and advisory services as requested by the Company. The Company is
obligated to pay an annual consulting fee of $150,000 (1st year), $160,000 (2nd
year), and $170,000 (3rd year) and has granted the Consultant 90,000 share
options at fair market value. These options vest one-third upon each
anniversary of the grant date so long as the individual remains a consultant
under the agreement.

     Notes receivable on common stock aggregating $60,000 and $129,750 at
December 31, 1997 and 1996, respectively, represent amounts due from officers
of the Company and are reflected as a reduction from stockholders' equity.

     Scios Inc., a significant stockholder, has billed the Company for certain
services, equipment purchases, and facility rents related to the Company's
research and development activities aggregating $340,835, $295,000 and $233,000
in 1997, 1996 and 1995, respectively.

(16) LEGAL MATTERS

     The Company from time to time is involved in routine legal matters
incidental to its normal operations.  In management's opinion, the resolution
of such matters will not have a material effect on its financial condition or
results of operations.

(17)  SUBSEQUENT EVENT (UNAUDITED)

     Lease Agreement - Facility

     In February 1998, the Company entered into several agreements relating to
the Company's  new research and development facility.  The facility, which is
expected to be approximately 72,000 square feet, is adjacent to the Company's
existing facility in Baltimore and construction costs are estimated not to
exceed $20 million in the aggregate.  The lease term is for a maximum term of
84 months, which includes a construction period of up to 24 months.

     Lease Agreement - Equipment

     In March 1998, the Company entered into Master Lease Agreements to provide
up to $10.8 million in computer and equipment financing, the term of which
expires on December 31, 1999.  The term of each lease may range from 24 to 48
months based upon the type of equipment being financed.





                                       58
<PAGE>   59
    ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

    None.





                                       59
<PAGE>   60
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information concerning the Company's executive officers is contained
in Item 1A of Part I.  The information concerning the Company's directors and
with regard to Item 405 of Regulation S-K is to be contained under the caption
"Election of Directors" in the Company's 1998 Proxy Statement, which will be
filed no later than 120 days following December 31, 1997, and is hereby
incorporated herein by reference.

     The directors and executive officers of the Company as of March 16, 1998
are as follows:

<TABLE>
<CAPTION>
   NAME                        AGE         POSITION
   ----                        ---         --------
<S>                             <C>        <C>
Craig R. Smith, M.D.            52         Chairman of the Board, President, and Chief Executive Officer
John P. Brennan                 55         Senior Vice President, Operations
Andrew R. Jordan                50         Senior Vice President, Chief Financial Officer and Treasurer
David R. Savello, Ph.D.         52         Senior Vice President, Development
Nicholas Landekic               39         Vice President, Business Development
Thomas C. Seoh                  40         Vice President, General Counsel and Secretary
Peter D. Suzdak, Ph.D.          39         Vice President, Research
William C. Vincek, Ph.D.        50         Vice President, Corporate Quality
</TABLE>

   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 the Company's 1998 Proxy Statement, which will be filed no later than 120
days following December 31, 1997.

   ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information required by this item is hereby incorporated by reference
from the information to be contained under the caption "Beneficial Ownership of
Common Stock" in the Company's 1998 Proxy Statement, which will be filed no
later than 120 days following December 31, 1997.  .

   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 the
Company's 1998 Proxy Statement, which will be filed no later than 120 days
following December 31, 1997.





                                       60
<PAGE>   61
                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.


     (a)(1) Financial Statements


   All required financial statements of the registrant as set forth under Item 8
of this report on Form 10-K.

     (a)(2) Financial Statement Schedules

   All schedules are omitted because they are not applicable or the required
information is included in the Consolidated Financial Statements or notes
thereto.

     (a)(3) Exhibits

   The following exhibits are filed with this Form 10-K or incorporated herein
by reference to the document set forth next to the exhibit listed below:

<TABLE>
<CAPTION>
                              EXHIBIT
                               NUMBER                                           DESCRIPTION
                             ------------    ------------------------------------------------------------------------------------
                             <S>             <C>
                             3.01A(1)        Amended and Restated Certificate of Incorporation of the Company.
                             3.01B(13)       Certificate of Amendment to Amended and Restated Certificate of Incorporation
                             3.02A(1)        Amended and Restated By-laws of the Company.
                             3.02B(2)        Amendments to Amended and Restated By-laws of the Company.
                             4.01(1)         Specimen Stock Certificate.
                             4.02(5)         Stockholder Rights Agreement dated September 26, 1995.
                             10.01A(1)       1993 Employee Share Option and Restricted Share Plan ("Option Plan").
                             10.01B(6) (7)   Amendments to Option Plan
                                 (11) (12)
                             10.02(1)        Series A Preferred Stock Purchase Agreement, dated September 30, 1993, as
                                             amended between the Company and holders of its Series A Preferred Stock
                                             ("Series A Agreement").
                             10.02A(4)       Amendment, dated August 25, 1994, to Series A Agreement.
                             10.02B(3)       Amendment, dated February 15, 1995, to Series A Agreement.
                             10.03(1)+       License Agreement, effective March 18, 1994, between the Company and Research
                                             Triangle Institute, a not-for-profit corporation existing under the laws of
                                             North Carolina.
                             10.03A(1)       Appendix A to Exhibit 10.04.
                             10.04(1)+       License Agreement, dated March 15, 1994, between the Company and Scios Nova.
                             10.05(1)        Employment Agreement between the Company and Craig R. Smith, M.D.
                             10.06(1)        Employment Agreement between the Company and Andrew R. Jordan.
                             10.07(1)        Employment Agreement between the Company and John P. Brennan.
                             10.08(12)       Employment Agreement between the Company and David R. Savello, Ph.D.
                             10.09(14)       Employment Agreement between the Company and William C. Vincek, Ph.D.
                             10.10(3)        Employment Agreement between the Company and Peter D. Suzdak.
                             10.11(3)        Employment Agreement between the Company and Nicholas Landekic.
                             10.12(6)        Employment Agreement between the Company and Thomas C. Seoh.
                             10.13(7)        Amendments to certain executive officer employment letter agreements
                             10.14(1)        Restricted Share Agreement, dated February 14, 1994, between the Company and
                                             John P. Brennan.
                             10.15A(1)       Consulting Agreement, dated August 1, 1993, as amended on February 28, 1994,
                                             between the Company and Solomon H. Snyder, M.D (the "Snyder Consulting
                                             Agreement").
                             10.15B(8)       September 1, 1995 amendment to Snyder Consulting Agreement.
                             10.15C          November 19, 1997 amendment to Snyder Consulting Agreement.
                             10.16A(1)+      License Agreement, dated December 20, 1993, between the Company and The Johns
                                             Hopkins University ("JHU Agreement").
                             10.16B(1)       Appendix B to JHU Agreement.
</TABLE>





                                       61
<PAGE>   62
<TABLE>
                             <S>             <C>
                             10.17(1)        Form of Director and Officer Indemnification Agreement.
                             10.18(1)        Form of Tax Indemnity Agreement.
                             10.19A(1)       Guilford Pharmaceuticals Inc. Directors' Stock Option Plan.
                             10.19B(7)(13)   Amendments to Directors' Stock Option Plan
                             10.20(4)        Lease Agreement, dated August 30, 1994, between Crown Royal, L.P. and the
                                             Company.
                             10.21 (13)      Lease Agreement, dated June 9, 1997 between SN Properties, Inc. and the
                                             Company ("Freeport Lease").
                             10.21A          Amendment, dated February 10, 1998, to Freeport Lease.
                             10.22(6)        Subscription and Stockholders Agreement, dated February 17, 1995, among Gell
                                             Pharmaceuticals Inc., the Company and the Abell Foundation, Inc.
                             10.23(3)        Exchange and Registration Rights Agreement, dated February 17, 1995, among
                                             the Company and the Abell Foundation, Inc., and the several holders named in
                                             Appendix I.
                             10.24(3)        Master Services Agreement, dated February 17, 1995, between the Company and
                                             Gell Pharmaceuticals Inc.
                             10.25(3)        Loan and Financing Agreement between the Maryland Economic Development
                                             Corporation ("MEDCO"), the Company and Signet Bank/Maryland ("Signet").
                             10.26(3)        Leasehold Deed of Trust by and between the Company and Janice E. Godwin and
                                             Ross Chaffin (as trustees) for the benefit of MEDCO and Signet.
                             10.27A(3)       Insurance Agreement between the Maryland Industrial Development Financing
                                             Authority and Signet.
                             10.27B (11)     Letter, dated April 2, 1996, amending Insurance Agreement.
                             10.28(8)+       License Agreement, dated December 9, 1995, by and between the Company and
                                             Daiichi Radioisotope Laboratories, Ltd.
                             10.29(9)+       License and Distribution Agreement, dated October 13, 1995, by and between
                                             the Company and Orion Corporation Farmos.
                             10.30(10)+      DOPASCAN Supply Agreement, dated July 10, 1996, by and among the Company and
                                             Nordion International Inc. and Nordion Europe S.A.
                             10.31 (13)      Development and Phase III Clinical Trail Supply Agreement, dated May 22, 1997
                                             between MDS Nordion Inc. and MDS Nordion S.A., on the one hand, and the Company,
                                             on the other.
                             10.32(10)+      Bulk Pharmaceutical Sales Contract, dated September 23, 1994, between the
                                             Company and Aerojet-General Corporation.
                             10.33(10)       Equipment Lease, dated September 18, 1996, between the Company and General
                                             Electric Capital Corporation
                             10.34 (11)      Term Loan, dated April 30, 1996, as amended on December 6, 1996, by and
                                             between the Company and Signet Bank.
                             10.35(7)        Marketing, Sales and Distribution Rights Agreement between Rhone-Poulenc
                                             Rorer Pharmaceuticals Inc. ("RPR"), the Company and GPI Holdings, Inc., dated
                                             June 13, 1996.
                             10.36(7)        Manufacturing and Supply Agreement between RPR and the Company, dated June
                                             13, 1996.
                             10.37(7)        Stock Purchase Agreement between the Company and Rhone-Poulenc Rorer Inc.
                                             ("RPR Inc."), dated June 13, 1996.
                             10.38(7)        Loan Agreement between the Company and RPR Inc., dated June 13, 1996
                             10.39 (13)      Non-Qualified Stock Option Agreement, dated April 1, 1997, with David R.
                                             Savello, Ph.D.
                             10.40+          Collaboration and License Agreement, dated December 15, 1997 and effective as
                                             of August 20, 1997, between Amgen Inc. ("Amgen"), GPI NIL Holdings, Inc. and
                                             the Company.
                             10.41 (14)      Stock and Warrant Purchase Agreement, dated October 1, 1997, between Amgen
                                             and the Company.
                             10.42 (14)      Registration Rights Agreement, dated October 1, 1997, between Amgen and the
                                             Company.
                             10.43 (14)      Warrant, dated October 1, 1997 issued to Amgen
                             10.44           Security  Agreement, dated as of February  5, 1998, between First Secruity
                                             Bank, National Association, not individually, but solely as the Owner Trustee
                                             under the Guilford Real Estate Trust 1998-1 (the "Trust") and First Union.
                             10.45           Amended and  Restated Trust Agreement, dated as of February 5, 1998 between
                                             the Several Holders from time to time parties thereto and the Trust.
                             10.46           Agency Agreement, dated as of February 5, 1998, between the Company and the
                                             Trust.
                             10.47           Credit Agreement, dated as of February 5, 1998, among the Trust, the Several
                                             Holders from time to time parties thereto and First Union.
</TABLE>





                                       62
<PAGE>   63
<TABLE>
                             <S>             <C>
                             10.48           Participation Agreement, dated as of February 5, 1998, among the Company, the
                                             Trust, the various and other lending institutions which are parties hereto
                                             from time to time, as Holders, the various and other lending institutions
                                             which are parties hereto from time to time, as Lenders, and First Union.
                             10.49           Lease Agreement, dated as of February 5, 1998, between the Trust and the
                                             Company.
                             11.01           Statement re: Computation of Per Share Earnings (See Notes to Consolidated Financial
                                             Statements, Note 2)
                             21.01           Subsidiaries of Registrant
                             23.01           Consent of KPMG Peat Marwick LLP.
                             24.01           Power of Attorney (contained in signature page).
                             27.01           Financial Data Schedule
</TABLE>

----------

(1)  Incorporated by reference from the Registrant's Registration Statement on
     Form S-1 (No. 33-76938) declared effective June 16, 1994.

(2)  Incorporated by reference from the Registrant's Registration Statement on
     Form S-8 (No. 333-17833) declared effective December 13, 1996.

(3)  Incorporated by reference from the Registrant's Annual Report on Form 10-K
     for the year ended December 31, 1994.

(4)  Incorporated by reference from the Registrant's Quarterly Report on Form
     10-Q for the quarter ended September 30, 1994.

(5)  Incorporated by reference from the Registrant's Form 8-K filed October 10,
     1995.

(6)  Incorporated by reference from the Registrant's Registration Statement on
     Form S-1 (No. 33-94530) declared effective August 16, 1995.

(7)  Incorporated by reference to the Registrant's Quarterly Report on Form
     10-Q for the quarter ended June 30, 1996.

(8)  Incorporated by reference from the Registrant's Form 10-K, filed February
     23, 1996.

(9)  Incorporated by reference from the Registrant's Form 10-KA, filed March 4,
     1996.

(10) Incorporated by reference from the Registrant's Quarterly Report on
     Form 10-Q for the quarter ended September 30, 1996.

(11) Incorporated by reference from the Registrant's Form 10-K, filed March
     7, 1997.

(12) Incorporated by reference from Registrant's Quarterly Report on Form
     10-Q for the quarter ended March 31, 1997.

(13) Incorporated by reference from Registrant's Quarterly Report on Form
     10-Q for the quarter ended June 30, 1997.

(14) Incorporated by reference from Registrant's Quarterly Report on Form
     10-Q for the quarter ended September 30, 1997.

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



   (b)  Reports on 8-K:

   None





                                       63
<PAGE>   64
                        SIGNATURES AND POWER OF ATTORNEY

   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.


   March 27, 1998
                                    By:  /s/ CRAIG R. SMITH, M.D.
                                       -----------------------------------------
                                         Craig R. Smith, M.D.
                                         President and Chief Executive Officer


   KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints, Craig R. Smith, M.D., Andrew R. Jordan, Thomas
C. Seoh, Jordan P. Karp and Michael J. Silver, and each of them, his or her
true and lawful attorney-in-fact and agents, with full power of substitution
and resubstitution, from such person and in each person's name, place and
stead, in any and all capacities, to sign the report and any and all amendments
to this report, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, full power and authority to do
and perform each and every act and thing requisite and necessary to be done as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, and
any of them, may lawfully do or cause to be done by virtue hereof.

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

<TABLE>
<CAPTION>
           SIGNATURE                                      TITLE                            DATE
           ---------                                      -----                            ----
            <S>                                           <C>                              <C>
                     /s/ CRAIG R. SMITH, M.D.             Chief Executive Officer,         March 27, 1998
           -----------------------------------------      President and Director
                       Craig R. Smith, M.D.               (Principal Executive
                                                          Officer)

                       /s/ ANDREW R. JORDAN               Sr. Vice President, Chief        March 27, 1998
           -----------------------------------------      Financial Officer, and
                         Andrew R. Jordan                 Treasurer (Principal
                                                          Financial Officer and
                                                          Principal Accounting
                                                          Officer)

                   /s/ SOLOMON H. SNYDER, M.D.            Director                         March 27, 1998
           ------------------------------------------
                      Solomon H. Snyder, M.D.

                       /s/ RICHARD L. CASEY               Director                         March 27, 1998
           ------------------------------------------
                         Richard L. Casey

                       /s/ GEORGE L. BUNTING, JR.         Director                         March 27, 1998
           ------------------------------------------
                      George L. Bunting, Jr.

            /s/ W. LEIGH THOMPSON, M.D., Ph.D.            Director                         March 27, 1998
           ------------------------------------------
                  W. Leigh Thompson, M.D., Ph.D.

                   /s/ ELIZABETH M. GREETHAM              Director                         March 27, 1998
           ------------------------------------------
                       Elizabeth M. Greetham
</TABLE>





                                       64