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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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Form 10-K

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

THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31,
2003

Commission File Number: 0-23736



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Guilford Pharmaceuticals Inc.

(Exact name of registrant as specified in its
charter)


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

6611 Tributary Street

Baltimore, Maryland 21224


(410) 631-6300


(Address and telephone number of principal
executive offices)


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

None


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

Common Stock, $.01 par value


Title of Class


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

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

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

As of June 30, 2003, the aggregate market
value of the approximately 28,931,279 shares of common
stock of the Registrant issued and outstanding on such date,
excluding approximately 2,044,013 shares held by affiliates
of the Registrant, was approximately $119,917,206. This figure
is based on the closing sales price of $4.46 per share of the
Registrants common stock as reported on The NASDAQ®
National Market on June 30, 2003.

As of
March 11, 2004, approximately 33,930,333 shares of common
stock of the Registrant were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

Portions of the
Registrants Notice of Annual Meeting and Proxy Statement
to be filed no later than 120 days following
December 31, 2003 are incorporated by reference into
Part III.



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TABLE OF CONTENTS

|         |    |  |  |                                                                                                        |  |  |    | 
|-------- | -- |  |  | ------------------------------------------------------------------------------------------------------ |  |  | -- | 
|Item     |    |  |  | Page                                                                                                  
|         |    |  |  |                                                                                                       
|PART I  
|         | 1  |  |  | Business                                                                                               |  |  | 2  | 
|         | 1A |  |  | Executive Officers and Other
    Significant Employees of the Registrant                               |  |  | 20 | 
|         | 2  |  |  | Properties                                                                                             |  |  | 22 | 
|         | 3  |  |  | Legal Proceedings                                                                                      |  |  | 22 | 
|         | 4  |  |  | Submission of Matters to a
    Vote of Security Holders                                                |  |  | 22 | 
|PART II 
|         | 5  |  |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |  |  | 22 | 
|         | 6  |  |  | Selected Consolidated
    Financial Data                                                               |  |  | 23 | 
|         | 7  |  |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |  |  | 25 | 
|         | 7A |  |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |  |  | 57 | 
|         | 8  |  |  | Financial Statements and
    Supplementary Data                                                        |  |  | 58 | 
|         | 9  |  |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |  |  | 58 | 
|         | 9A |  |  | Controls and Procedures                                                                                |  |  | 58 | 
|PART III
|         | 10 |  |  | Directors and Executive
    Officers of the Registrant                                                 |  |  | 59 | 
|         | 11 |  |  | Executive Compensation                                                                                 |  |  | 59 | 
|         | 12 |  |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |  |  | 59 | 
|         | 13 |  |  | Certain Relationships and
    Related Transactions                                                     |  |  | 60 | 
|         | 14 |  |  | Principal Accountant Fees
    and Services                                                             |  |  | 60 | 
|PART IV 
|         | 15 |  |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                   |  |  | 61 | 
|EX-21.01
|EX-23.01
|EX-31.01
|EX-21.02
|EX-32.01
|EX-32.02



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FORWARD LOOKING STATEMENTS

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

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

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




PART I




Item 1.     Business.

Overview

Guilford is a pharmaceutical company engaged in
the research, development and commercialization of proprietary
pharmaceutical products that target the hospital and neurology
markets. We market and sell proprietary pharmaceutical products
within our targeted markets, conduct clinical research to expand
the labeled indications for our marketed products, and develop
new product candidates. We also collaborate with other
pharmaceutical companies to support the sales and marketing of
our products and the clinical development of our products and
product candidates.

During 2003, as part of our effort to implement
our strategy, we were successful in expanding the approved uses
of GLIADEL® Wafer to include use at the time of initial
surgery for malignant glioma, acquired AGGRASTAT®
Injection, a hospital-based, anti-platelet aggregation
medication from Merck & Co., Inc., completed Phase II
clinical trials for our AQUAVAN® Injection product
candidate in conscious sedation and initiated a Phase II
clinical trial of GPI 1485, our product candidate for
Parkinsons disease and peripheral nerve injury, for
treatment of post-prostatectomy erectile dysfunction. We
supported these activities, in part, through a number of capital
raising activities, including the completion during the second
and third quarters of 2003, of a $69.4 million convertible
debt offering, a $42 million revenue interest agreement
with Paul Royalty Fund, L.P. and Paul Royalty Fund II,
L.P., and a $27.3 million private placement of our common
stock to certain institutional investors.

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

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

Marketed Products

We currently have two marketed products:
GLIADEL® Wafer and AGGRASTAT® Injection. GLIADEL®
Wafer provides targeted, site specific chemotherapy for the
treatment of malignant glioma at the

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time of initial surgery, and for recurrent
glioblastoma multiforme. AGGRASTAT® Injection is an
inhibitor of platelet aggregation approved for the treatment of
acute coronary syndrome.


The following table summarizes our marketed
products:

|                     |  |                                                                                                                            |  |                                                                                                     
|-------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------
|Marketed Product(1)  |  | Indication/Condition                                                                                                       |  | Status                                                                                              
|                     |  |                                                                                                                            |  |                                                                                                     
|GLIADEL® Wafer       |  | Recurrent glioblastoma multiforme                                                                                          |  | Currently approved for sale in the United States
    and in 25 other countries throughout the world.
|                     |  | Newly diagnosed malignant glioma as an adjunct to
    surgery and radiation (also referred to as first-line
    therapy) |  | Currently approved for sale in the United States
    and Canada.(2)                                 
|AGGRASTAT® Injection |  | Acute coronary syndrome                                                                                                    |  | Marketed by Guilford in the United States and by
    Merck & Co., Inc. in the rest of the world.    



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Marketed means that a product is
    being sold and marketed under applicable regulatory approval.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(2) | In November 2002, we withdrew an application
    submitted to the European Agency for the Evaluation of Medicinal
    Products, or the EMEA, to approve GLIADEL® Wafer for
    first-line therapy in Europe because we were waiting
    for the FDA to respond to a similar application filed in the
    United States. In February 2003, the FDA responded favorably to
    our application and, therefore, we resubmitted this application
    to the EMEA during September 2003, and we expect to be notified
    of the EMEAs decision regarding expanding the label for
    GLIADEL® Wafer during 2004.

Product Candidates

Our product pipeline consists of product
candidates in various stages of clinical and preclinical
development. AQUAVAN® Injection, a prodrug of propofol, is
in Phase II clinical trials for procedural sedation during
brief diagnostic or therapeutic procedures. GPI 1485, our lead
neuroimmunophilin ligand compound, is in Phase II clinical
trials for the treatment of Parkinsons disease and
peripheral nerve injury. DOPASCAN® Injection is in Phase
III clinical trials as an imaging agent to diagnose and monitor
the progression of Parkinsons disease. Our preclinical
research programs include the development of NAALADase inhibitor
compounds, through our corporate partner, Pfizer, Inc., for
neuropathic pain, and on our own for prostate cancer, drug
addiction and traumatic brain and spinal cord injury and the
development of PARP inhibitor compounds for cancer
chemosensitization and radiosensitization.

The following table summarizes our clinical
development programs for our products and product candidates:

|                                             |  |                                                                                                                 |  |             
|-------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ------------
|Clinical Development                         |  |                                                                                                                 |  |             
|Programs(1)                                  |  | Indication/Condition                                                                                            |  | Status      
|                                             |  |                                                                                                                 |  |             
|AQUAVAN® Injection                           |  | Procedural sedation for patients undergoing
    colonoscopy or other brief diagnostic or therapeutic procedures |  | Phase II    
|GPI 1485 (our lead neuroimmunophilin ligand) |  | Parkinsons disease; peripheral nerve injury                                                                    |  | Phase II    
|DOPASCAN® Injection                          |  | Imaging agent to diagnose and monitor
    Parkinsons disease.                                                  |  | Phase III(2)
|AGGRASTAT® Injection                         |  | Percutaneous Coronary Intervention                                                                              |  | Phase III(3)

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Clinical Development means that the
    product is being used in clinical trials.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | MAP Medical Technologies Oy, or MAP, our
    corporate partner in Europe for this technology, has informed us
    that it submitted an application to receive regulatory approval
    in Finland for DOPASCAN® Injection in April 2002. It
    expects the Finnish regulatory authorities to respond to this
    application during 2004. Daiichi Radioisotope Laboratories,
    Ltd., or DRL, our corporate partner in Japan for this
    technology, has informed us that it applied for marketing
    approval in Japan with the Japanese Health Authority in 2003,
    and it expects this agency to respond to its application during
    2004.
|   
|(3) | Currently, AGGRASTAT® Injection does not
    have a label indication for immediate use in a cardiac
    catheterization laboratory in percutaneous coronary
    intervention, or PCI, settings. In order to expand
    AGGRASTAT® Injections label to include PCI, we expect
    to initiate a Phase III clinical trial of AGGRASTAT®
    Injection in the PCI setting in 2004.                                                                                                                                                                                                                                                                    

The following table summarizes our key research
programs:

|                          |  |                                                                               |  |             |  |                                 
|------------------------- |  | ----------------------------------------------------------------------------- |  | ----------- |  | --------------------------------
|Pre-Clinical and Research |  |                                                                               |  |             |  | Collaborative                   
|Programs(1)               |  | Indication                                                                    |  | Status      |  | Partner                         
|                          |  |                                                                               |  |             |  |                                 
|NAALADase inhibitors      |  | Neuropathic pain                                                              |  | Research    |  | Pfizer, Inc.                    
|                          |  | Prostate cancer                                                               |  | Preclinical |  |                                
|                          |  | Drug addiction                                                                |  | Preclinical |  | National Institute of Drug Abuse
|PARP inhibitors           |  | Head and spinal cord injury                                                   |  | Preclinical |  |                                
|                          |  | Cancer chemosensitization and radiosensitization                              |  | Research    |  |                                
|GPI 1485                  |  | HIV-related dementia and neuropathy                                           |  | Preclinical |  |                                
|Cyclophilin ligands       |  | Ischemia, HIV and age-related macular
    degeneration and multiple sclerosis |  | Research    |  |                                



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|    |                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Pre-clinical means testing in vitro
    and in animal models, pharmacology and toxicology testing,
    product formulation and process development.
    Research means initial research related to specific
    molecular targets, synthesis of new chemical entities and assay
    development for the identification of lead compounds.

Marketed Products

GLIADEL® Wafer

General

GLIADEL® Wafer is a proprietary cancer
chemotherapy product approved for the treatment of malignant
glioma (brain cancer) at the time of initial surgery, as an
adjunct to surgery and radiation, and for the treatment of
recurrent glioblastoma multiforme, a rapidly fatal form of
malignant brain cancer. It is a biodegradable polymer containing
BCNU (carmustine), a cancer chemotherapeutic drug, and is
designed to provide targeted, site specific chemotherapy. We
estimate that there are 11,000 cases of malignant glioma in the
United States each year. After a surgeon resects a brain tumor,
up to eight wafers are implanted in the cavity that remains.
Once implanted, the wafers gradually dissolve, delivering high
concentrations of BCNU directly to the tumor site for an
extended period of time. By inserting the wafer directly at the
site of the tumor, the physician can minimize exposure to BCNU
throughout the body and reduce or alleviate many of the side
effects associated with intravenous chemotherapy.

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In 1996, the U.S. Food and Drug Administration
(FDA) approved GLIADEL® Wafer for use as an adjunct to
surgery to prolong survival in patients with recurrent
glioblastoma multiforme, or GBM. Also in 1996, we entered into
agreements with Aventis (then Rhône-Poulenc Rorer) granting
it marketing rights to GLIADEL® Wafer in the U.S. and
clinical development and marketing rights in the rest of the
world (excluding Scandinavia, where the product is distributed
and marketed by Orion Pharma under an agreement with us entered
into in 1995, and later, Japan). Between 1996 and October 2000,
Aventis obtained regulatory approval for GLIADEL® Wafer for
this indication in over 21 countries, including France,
Germany, the United Kingdom, Spain, Canada, South Korea and
Israel.

In October 2000, we reacquired Aventis
marketing rights to GLIADEL® Wafer for 300,000 shares
of our common stock then valued at approximately
$8 million. Aventis continued to market GLIADEL® Wafer
for a transition period ending December 31, 2000, after
which we have been solely responsible for the marketing, sale
and distribution of GLIADEL® Wafer except in Scandinavia,
where the product continues to be sold by Orion Pharma.

In April 2001, we submitted a supplemental New
Drug Application (sNDA) for GLIADEL® Wafer, seeking to
expand the label for the product to include use in initial
surgery for malignant glioma. In March 2002, the FDA sent us a
not approvable letter indicating concerns regarding the survival
benefit associated with GLIADEL® Wafer treatment during
initial surgery. In response to the FDAs letter, we agreed
with the FDA on the protocol and methods for collecting and
analyzing long-term follow up data for the purpose of reapplying
for a first surgery approval. On September 19, 2002, we
presented the results of this analysis to the FDA. On
February 25, 2003, the FDA approved our amended sNDA.

We pay a royalty to Massachusetts Institute of
Technology (MIT) on sales of GLIADEL® Wafer pursuant
to the license agreement under which we acquired the underlying
technology for the product. During 2003, we recognized
approximately $0.8 million in royalty expense to MIT.

Manufacturing
and Raw Materials

We currently manufacture GLIADEL® Wafer
using a proprietary process at our 18,000 square foot
facility in Baltimore, Maryland, which includes areas designated
for packaging, quality assurance, laboratory and warehousing.
This facility was initially inspected by the FDA in October
1995, and it was re-inspected by the FDA in February 1999 and in
September 2002. Also, in October 1999, we were inspected by the
Medicines Control Agency, the United Kingdoms regulatory
authority. The facilities we are currently using for
manufacturing enable us to produce up to 8,000 GLIADEL®
Wafer treatments (each consisting of eight wafers) annually. We
have a second clean room facility, which we expect would allow
us to increase our GLIADEL® Wafer manufacturing capacity to
20,000 treatments annually. We are currently manufacturing
GLIADEL® Wafer at 15% of capacity per year; and therefore,
we believe that our capacity to manufacture GLIADEL® Wafer
will satisfy patient demand for the product.

We believe that the various materials used in
GLIADEL® Wafer are readily available and will continue to
be available at reasonable prices. We have an adequate supply of
BCNU, the active chemotherapeutic ingredient in GLIADEL®
Wafer, to meet our expected demand for the product.
Nevertheless, failure of any supplier to provide sufficient
quantities of raw material for GLIADEL® Wafer in accordance
with the FDAs current Good Manufacturing Practice (cGMP)
regulations could cause delays in our ability to sell the
product.

AGGRASTAT®
Injection

General

AGGRASTAT® Injection is a glycoprotein GP
IIb/ IIIa receptor antagonist, indicated for the treatment of
acute coronary syndrome (ACS) including patients who are to be
medically managed and those undergoing percutaneuous
transluminal coronary angioplasty (PTCA) or atherectomy.
ACS includes unstable angina, which is characterized by chest
pain when one is at rest, and non-ST elevation myocardial
infarction (NSTEMI). GP IIb/ IIIa receptor antagonists,
including AGGRASTAT® Injection, block the ability of

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platelets to aggregate, thereby inhibiting the
formation of blood clots and reducing the potential for cardiac
ischemia.


AGGRASTAT® Injection was developed by Merck
& Co., Inc. (Merck) and was approved by the FDA in May 1998.
We acquired the rights to AGGRASTAT® Injection in the
United States and its territories from Merck in October 2003,
for $84 million plus certain royalty payments to Merck,
based on our net sales of the product. We financed
$42 million of the purchase price through a revenue
interest agreement with Paul Royalty Fund, L.P. and Paul Royalty
Fund, II, L.P. (collectively, PRF). Under this agreement, PRF
provided us with $42 million and we will provide PRF with a
percentage of our revenues of GLIADEL® Wafer,
AGGRASTAT® Injection, and in certain circumstances, other
products, until 2012. This revenue interest agreement is
described in more detail in Item 7 of this annual report
entitled, Managements Discussion and Analysis of
Financial Condition and Results of Operations.

Manufacturing
and Raw Materials

We have entered into an exclusive supply
agreement with Merck for the manufacture and supply of the
active pharmaceutical ingredient (API) of AGGRASTAT®
Injection. AGGRASTAT® Injection finished product is sold in
100 ml and 250 ml pre-mixed bags and 50 ml vials.
Merck has agreed to supply us with the finished product of
AGGRASTAT® Injection, through its contract manufacturers,
Baxter (for bags) until August 2007 and Ben Venue (for vials)
and through the end of 2004, or earlier, if we negotiate direct
contractual relationships with those manufacturers.

Commercial Operations

Our commercial operations are comprised of 63
full time sales and marketing specialists, encompassing medical
affairs, sales operations, sales training and marketing
personnel. This function includes a 49 member United States
field sales force, 3 marketing specialists, 5 medical affairs
specialists, and 6 people dedicated to additional sales and
marketing related functions. They are responsible for the direct
sales and marketing of GLIADEL® Wafer and AGGRASTAT®
Injection throughout the United States and the sales and
marketing of GLIADEL® Wafer outside the United States,
through a network of specialty pharmaceutical distributors. We
established our commercial operations capabilities in connection
with our reacquisition of commercial rights to GLIADEL®
Wafer, during the fourth quarter of 2000 and the first quarter
of 2001. In order to assist in the distribution of GLIADEL®
Wafer in the United States, we engaged Cord Logistics Inc., in
November 2000, to handle fulfillment of customer orders.

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

Through our acquisition of AGGRASTAT®
Injection, we have leveraged our commercial operations
capabilities across two marketed products. We also expect our
experience in commercial operations to benefit us when product
candidates in our pipeline, such as AQUAVAN® Injection, are
able to be marketed following FDA approval.

In 2003, 2002 and 2001, sales of GLIADEL®
Wafer generated revenues of $19.2 million,
$14.5 million, and $20.4 million, respectively, which
represented 70%, 99%, and 99% of our total revenues,
respectively. Approximately 69% of our sales of GLIADEL®
Wafer in 2002 and approximately 76% in 2003 were made to
Specialty Pharmaceuticals Distribution (SPD), a division of
Cardinal Health, Inc. (formerly known as National Specialty
Services, Inc.) under a distribution agreement with SPD. Because
we acquired AGGRASTAT® Injection in October 2003, we only
generated revenues from this product for November and December
2003. For those two months, AGGRASTAT® Injection generated
revenues of $2.5 million, representing 9% of our total
revenues for 2003.

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Clinical Development Programs

AQUAVAN®
Injection

AQUAVAN® Injection is a novel
sedative/hypnotic. We are currently studying AQUAVAN®
Injection for procedural sedation during brief diagnostic and
therapeutic medical procedures. Procedural sedation is
mild to moderate sedation in which patients are
lethargic, but responsive to stimulation and are able to
maintain their own airways. Procedural sedation is generally
used in non-invasive procedures lasting under two hours, for
example, various endoscopy procedures, cardiac procedures,
biopsies, insertions or removals of lines, tubes or catheters
and other minor surgical procedures.

Our clinical trials with AQUAVAN® Injection
have studied its use in connection with elective colonoscopy. In
November 2003, we announced that we had completed a preliminary
analysis from a Phase II, open label, multi-center adaptive dose
ranging study of AQUAVAN® Injection, used in combination
with fentanyl citrate, to provide mild sedation in healthy
patients aged 18-60 undergoing elective colonoscopy. The
analysis we submitted to the FDA suggests that AQUAVAN®
Injection provides rapid onset and rapid recovery from
sedation/anesthesia in a convenient dosing regimen and without
serious adverse effects. We also conducted a confirmatory Phase
II study of AQUAVAN® Injection to evaluate the fixed dose
identified in our dose ranging study. Pending agreement with the
FDA, we expect to begin a Phase III clinical trial program
studying AQUAVAN® Injection for procedural sedation during
2004, in as many as four separate indications.

We licensed the rights to AQUAVAN® Injection
from ProQuest Pharmaceuticals Inc. (ProQuest) during the first
quarter of 2000. AQUAVAN® Injection is a prodrug of a
widely-used anesthetic, propofol. A prodrug is a compound that
is converted in the body into an active drug. AQUAVAN®
Injection, is water-soluble and converts to propofol in the body
upon intravenous administration. As a result of the bodys
conversion of AQUAVAN® Injection into propofol, low,
therapeutically effective levels of propofol are released while
avoiding the high levels of propofol seen after injection with
the FDA approved propofol lipid emulsion. In addition, the
administration of propofol lipid emulsion can cause other
complications.

Since we licensed AQUAVAN® Injection from
ProQuest, we have also conducted four Phase I clinical studies
in Europe in healthy volunteers, one Phase I clinical study in
the United States and a Phase II clinical trial of AQUAVAN®
Injection in patients undergoing coronary artery surgery. This
second Phase II study, took place in Europe and was the first
use of AQUAVAN® Injection in surgical patients. The purpose
of the study was to evaluate the safety, tolerability and
efficacy of AQUAVAN® Injection, compared to DIPRIVAN®
Injectable Emulsion (i.e., the branded formulation of propofol),
for use in pre-operative sedation, anesthesia induction and
maintenance, and post-operative ICU sedation in patients
undergoing coronary artery bypass surgery. We announced the
results of this clinical trial in November 2003. These results
suggest that AQUAVAN® Injection could be used to provide
total intravenous anesthesia for complex medical and surgical
procedures in high risk patients. There were no drug-related
serious adverse events in either the AQUAVAN® Injection or
DIPRIVAN® Injectable Emulsion treatment groups.

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

GPI 1485/
Neuroimmunophilin Ligand Program

GPI 1485 is our investigational new drug that
belongs to a class of small molecule compounds called
neuroimmunophilin ligands. It is orally administered and, in
preclinical experiments, has been shown to repair and regenerate
damaged nerves without affecting normal healthy nerves.
GPI 1485 and other neuroimmunophilin ligands may have
application in the treatment of a broad range of diseases and
conditions, including Parkinsons disease, spinal cord
injury, brain trauma, and peripheral nerve injuries. We are
currently studying GPI 1485 for use in connection with the
treatment of Parkinsons disease and post-prostatectomy
erectile dysfunction, a condition caused by peripheral nerve
injury at the time of surgery.

Parkinsons disease is a chronic,
progressive degenerative disorder that affects over one million
people in the United States. While the exact cause of the
disease is not known, physicians have observed that patients
with the disease experience a progressive deterioration of
dopamine nerve cells located in a specific region of the brain.
The loss of these nerve cells is believed to contribute to the
symptoms of Parkinsons disease, which

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include the loss of muscle tone and coordination,
tremors, and non-motor symptoms, such as changes in appetite,
cognition, sleep and mood. In October 2003, we announced that we
completed enrollment in a Phase II clinical trial studying
GPI 1485, compared to placebo, in slowing the rate of
decline of dopamine transporters. This trial is a multi-center,
randomized, double-blind, placebo-controlled evaluation of the
safety, pharmacokinetics and efficacy of GPI 1485 in 212
patients with mild to moderate Parkinsons disease.
Clinical endpoints in the trial include changes in the daily
amount of anti-Parkinsonian medication administered, clinical
symptoms (using the Unified Parkinsons disease Rating
Scale), cognitive function, sleep, mood and quality of life. We
have designed this trial to follow-up on the findings from a
previous Phase II study of GPI 1485 completed in 2001. We
expect the current ongoing study to be completed in 2005.


In November 2003, we announced that we had
initiated a Phase II clinical trial with GPI 1485 for
the treatment of post-prostatectomy erectile dysfunction (PPED).
In PPED, sexual dysfunction occurs as a result of compression or
stretch injury to nerve fibers that surround the prostate and
which are responsible for trapping blood flow to sustain a
penile erection. Unfortunately, a high proportion of men
undergoing radical prostate surgery may experience side effects
from their surgery including urinary incontinence and sexual
dysfunction, which is frequently unresponsive to currently
available drug therapies, including VIAGRA®. GPI 1485
represents a novel approach to the treatment of PPED by
potentially promoting the protection and regeneration of
peripheral nerves that may sustain injury during radical
prostate surgery.

History of
Neuroimmunophilin Ligand Program

Our neuroimmunophilin ligand program, originated
from observations first made in the laboratory of
Dr. Solomon Snyder, Director of the Department of
Neuroscience at Johns Hopkins and one of our directors and
founders, that certain proteins that exist within a cell, known
as immunophilins, are enriched 10-40 fold in certain
areas of the central nervous system. The Johns Hopkins
scientists went on to discover that commonly used
immunosuppressive drugs can promote nerve growth. We have
exclusively licensed rights to patent applications relating to
this research from Johns Hopkins. Our scientists, together with
their academic collaborators, further demonstrated that the
pathway leading to nerve regeneration could be separated from
the immunosuppressant pathway. As a result of this basic
research, Guilford scientists discovered GPI 1485 and many other
proprietary neuroimmunophilin ligands, which are neurotrophic,
i.e., regenerate nerves, in animal models of various disease
states without being immunosuppressive, are orally-bioavailable
and are able to cross the blood-brain barrier.

In August 1997, we entered into a collaboration
with Amgen Inc. to develop and commercialize a broad class of
neuroimmunophilin ligands, referred to as FKBP neuroimmunophilin
ligands, as well as any other compounds that may have resulted
from the collaboration, for all human therapeutic and diagnostic
applications. During 1998, Amgen nominated GPI 1485, which it
called NIL-A, as the lead compound in the program,
initially targeting Parkinsons disease. During 1999, Amgen
filed an Investigational New Drug, or IND, application with the
FDA and commenced human trials with NIL-A, focusing on safety,
tolerability and pharmacokinetic study in healthy subjects.
NIL-A entered Phase II testing in patients with
Parkinsons disease during 2000. In July 2001, we announced
results of this six-month Phase II, randomized, double
blind, placebo-controlled evaluation of the safety,
pharmacokinetics and efficacy of NIL-A in patients with mild to
moderate Parkinsons disease. The results of the evaluation
suggest that NIL-A at doses of up to 1,000 mg taken orally four
times a day for six months is well tolerated, but does not
produce a significant reversal of the motor symptoms of
Parkinsons disease.

In September 2001, Amgen terminated the
collaboration and, thereafter, returned all rights to the
neuroimmunophilin technology to us, including certain clinical
trial supplies for which we paid $0.2 million. After we
regained the rights to this technology, we continued to analyze
the results of Amgens Phase II trial and determined that
the trial suggested that oral administration of GPI 1485 may
retard the loss of dopamine transporters.

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

DOPASCAN®
Injection

DOPASCAN® Injection is our product candidate
for the diagnosis and monitoring of Parkinsons disease to
which we obtained exclusive patent rights from the Research
Triangle Institute (RTI) in Research Triangle Park, North
Carolina, where it was invented. DOPASCAN® Injection is
administered intravenously in trace quantities and allows
physicians to obtain images and measure the density of dopamine
neurons in the brain. Dopamine neurons are highly concentrated
in a specialized area of the brain. These neurons degenerate
significantly in patients with Parkinsons disease.
Parkinsons disease affects more than one million patients
in the United States.

We have entered into an agreement with Daiichi
Radioisotope Laboratories, Ltd., or DRL, a leading Japanese
radiopharmaceutical company, to develop and commercialize
DOPASCAN® Injection in Japan, Korea and Taiwan. DRL has
informed us that it completed a Phase III clinical trial with
the product in July 2002, filed an application for regulatory
approval in June 2003, with the Japanese Health Authority, and
expects to be informed about the status of that application
during 2004. In January 2002, we sublicensed European rights for
the development and commercialization of DOPASCAN®
Injection to MAP, a division of Schering AG located in Finland.
MAP has informed us that it submitted an application to receive
regulatory approval in Finland for DOPASCAN® Injection in
April 2002. It expects the Finnish regulatory authorities to
respond to this application during 2004.

In May 2002, we sublicensed DOPASCAN®
Injection for research purposes to Molecular Neuroimaging LLC,
or MNI, a privately held company based in New Haven, Connecticut
that specializes in the use of brain imaging technologies for,
among other purposes, the analysis of clinical trials of
pharmaceutical product candidates targeting neurodegenerative
diseases. During the term of our agreement, MNI has also agreed
to provide us with favorable pricing for its services (including
the administration of DOPASCAN® Injection) for any clinical
trials for our product candidates. Presently, we have engaged
MNI to provide its services for our clinical trial of GPI 1485
for Parkinsons disease.

We currently do not have a clinical development
program for DOPASCAN® Injection in the United States; and
therefore, do not expect to be applying to the FDA to market and
sell DOPASCAN® Injection.

AGGRASTAT®Injection

In October 2003, we acquired rights to
AGGRASTAT® Injection in the U.S. and its territories from
Merck. Between 1999 and 2001 Merck conducted a Phase III
clinical trial in order to obtain a label for immediate
percutaneous coronary intervention in a cardiac catheterization
laboratory, or PCI. In that trial, called TARGET, Merck
attempted to show AGGRASTAT® Injection was not inferior to
ReoPro (abciximab), the drug believed to be most effective in
the PCI setting, but failed to do so. Based on several other
trials that have been conducted since TARGET, it is now believed
that the dose of AGGRASTAT® Injection used in TARGET was
not sufficient. Based on these data, we plan to conduct a
clinical study with AGGRASTAT® Injection using an
appropriately higher dose, for the purpose of expanding the
label to include use in the PCI setting. We expect to begin this
trial by the third quarter of 2004.

Pre-Clinical and Research Programs

NAALADase
Inhibitor Compounds

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

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events, ultimately leading to cell injury or
death. Our NAALADase inhibitor program is aimed at developing a
commercial drug to block excessive glutamate release.


In several animal models of diabetic neuropathy
and neuropathic pain, our NAALADase inhibitors appear to
normalize pain sensitivity, increase nerve conduction velocity
and prevent nerve degeneration. Initially, we selected GPI 5693
as a lead NAALADase inhibitor compound and commenced Phase I
clinical studies with this compound in early 2001 for the
treatment of neuropathic pain and the underlying disease process
associated with diabetic peripheral neuropathy. This Phase I
Study, conducted in Europe, evaluated the safety, tolerability
and pharmacokinetics of the compound in healthy subjects and
suggested that it may be well tolerated at dose levels up to
750mg per day. During 2001 and 2002, our scientists identified
second-generation NAALADase inhibitor compounds, which appear to
be up to 100 times more potent than GPI 5693 in pre-clinical
studies. The increased potency of these second-generation
compounds may permit a lower dose of these compounds to provide
the same or greater therapeutic effect than higher dosages of
less potent compounds, thereby reducing the potential for side
effects.

In May 2003, we entered into an agreement
granting Pfizer the exclusive right to develop NAALADase
inhibitors worldwide, for which Pfizer paid us $5 million upon
the execution of the agreement, and was to pay us $10 million on
or before March 31, 2004. If Pfizer does not pay the additional
$10 million by that date, we may elect to have all rights to the
NAALADase inhibitor technology revert to us. Under the terms of
the agreement, Pfizer is to conduct and pay for all costs
associated with research, development, manufacturing and
commercialization of any products that may emerge from the
agreement. As part of the agreement, we would be eligible to
receive royalties on future product sales and milestone payments
related to the successful development and commercialization of a
NAALADase inhibitor. The schedule of milestone payments under
the agreement outlines a total of $42 million to be paid for
each compound developed through commercialization, as well as
one additional set of milestone payments totaling $20 million
for an additional indication for the same compound, if Pfizer
continues the development and commercialization of any compounds
under the agreement. We are currently discussing with Pfizer the
status of the collaboration, including whether they will make
the $10 million payment under our agreement, or whether
there are other mutually agreeable terms and conditions under
which we would agree to continue the collaboration.

Under the terms of the agreement, we retained the
right to continue the development of NAALADase inhibitors for
prostate cancer, head and spinal cord injury and drug addiction.
We are currently pursuing the development of GPI 5693 for
prostate cancer and drug addiction.

We have 38 U.S. patents and corresponding foreign
counterparts protecting our NAALADase technology.

PARP
Inhibitor Compounds

Poly(ADP-ribose) polymerase, or PARP, is an
abundant nuclear enzyme found in most eukaryotic tissues. Upon
activation by DNA damage, PARP synthesizes poly(ADP-ribose) from
nicotinamide adenine dinucleotide (NAD). As a component of the
DNA base excision repair system, PARP plays a major role in
facilitating DNA repair and maintaining genomic integrity. In
cancer treatment, high PARP activity is believed to enable tumor
cells to counteract the chemotherapy and radiation therapy by
repairing DNA damage. In animal testing, PARP inhibition
enhances the activity of radiotherapy, as well as a wide
spectrum of chemotherapeutic agents. In ischemia,
over-activation of PARP mediates necrosis by depleting NAD and
ATP. In animal testing, PARP inhibition provides neuroprotection
in stroke and myocardial ischemia models.

Our scientists have synthesized several families
of potent orally bioavailable small molecule PARP inhibitors
that are efficacious in rodent models of cancer and ischemia.
Our lead compound, GPI 15427, is highly brain penetrable and has
shown robust chemo- and radio-sensitization in several brain
cancer and ischemia models. We are currently conducting
preclinical toxicology and pharmacokinetic characterization of
GPI 15427 for clinical development.

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Neuroimmunophilin
ligands and other neurotrophic and cytoprotective small
molecules

In September 2003, the NIH awarded a
$5.5 million four-year program project grant to the Johns
Hopkins University and us to study the effects of GPI 1485 in
HIV neuropathy and dementia. These studies include cell culture
neurotoxicity assays, animal experiments, and culminate in a
human clinical study, which we expect will begin in 2005.
Additional GPI 1485 preclinical studies including protection
from sensorineural hearing loss, stimulation of hair growth, and
neuroprotective and neuroregenerative mechanistic studies are
ongoing.

Our scientists have also developed potent, novel,
orally-active small molecule ligands of cyclophilin that may be
neuroprotective and neuroregenerative. These compounds have
shown neuroprotection and neurite outgrowth in animal models of
neurodegeneration. These activities may be mediated by the
actions of cyclophilin ligands on maintaining mitochondrial
viability and function. Cyclophilin ligands might be useful in
the treatment of cerebral and heart ischemia, age-related
macular degeneration, HIV and multiple sclerosis.

Exploratory
Research

We have several promising early stage programs in
the neuroprotection and cancer therapeutic areas. Our scientists
are pursuing two strategies for inhibition of neuronal death in
neurodegenerative diseases. One strategy targets enzymes, such
as serine racemase, involved in regulating the activity of the
neurotransmitter glutamic acid. Glutamate is a major
neurotransmitter in the nervous system, but is neurotoxic in
excessive amounts, and elevated levels of glutamate have been
implicated in a variety of nervous system disease states. In a
second approach, our scientists are developing compounds that
inhibit cell death caused by signals from the mitochondria in
cells. Mitochondria are the batteries that produce
energy in the form of ATP in cells, and are important mediators
of neuronal death in neurodegenerative diseases. Our scientists
have discovered novel series of potent compounds that inhibit
mitochondrial death signaling, and are pursuing the development
of drug-like small molecules based on these discoveries. In the
cancer area, we have discovered novel compounds that modulate
the activity of the protein p53, a major protector of cells
against cancer. By increasing p53 activity, these compounds
inhibit cancer cell growth in a variety of cancer cell lines.
Our scientists are also engaged in structure-based drug design
targeting a class of proteins called molecular chaperones whose
activity is increased in cancer cells.

Reorganization

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

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

Government Regulation and Product
Testing

All domestic prescription pharmaceutical
manufacturers are subject to extensive regulation by the federal
government, principally the FDA and, to a lesser extent, by
state and local governments as well as foreign governments if
products are marketed abroad. Biologics and controlled drug
products, such as vaccines and narcotics, and radiolabeled
drugs, are often regulated more stringently than are other
drugs. The Federal Food, Drug, and Cosmetic Act and other
federal statutes and regulations govern or influence the
development, testing, manufacture, labeling, storage, approval,
advertising, promotion, sale and distribution of prescription
pharmaceutical products. Pharmaceutical manufacturers are also
subject to certain inspection, registration,

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


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

Full Clinical
Testing Requirements

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

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

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

Clinical trials for new drugs typically are
conducted in three phases, are subject to detailed protocols and
must be conducted in accordance with the FDAs regulations
concerning good clinical practices (GCPs). Clinical trials
involve the administration of the investigational drug product
to human subjects. Each protocol indicating how the clinical
trial will be conducted in the United States must be submitted
for review to the

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FDA as part of the IND. The FDAs review of
a study protocol does not necessarily mean that, if the study is
successful, it will constitute proof of efficacy or safety.
Further, each clinical study must be conducted under the
auspices of an independent institutional review board (IRB)
established pursuant to FDA regulations. The IRB considers,
among other factors, ethical concerns and informed consent
requirements. The FDA or the IRB may require changes in a
protocol both prior to and after the commencement of a trial.
There is no assurance that the IRB or the FDA will permit a
study to go forward or, once started, to be completed. Clinical
trials may be placed on hold at any time for a variety of
reasons, particularly if safety concerns arise, or regulatory
requirements are not met.


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

Reports of results of the pre-clinical studies
and clinical trials for non-biological drugs are submitted to
the FDA in the form of an NDA for approval of marketing and
commercial shipment.

The median FDA approval time for an NDA is
currently about 15 months for new drugs, although clinical
development, reviews, or approvals of treatments for cancer and
other serious or life-threatening diseases may be accelerated,
expedited or fast-tracked. In addition, approval times can vary
widely among the various reviewing branches of the FDA. The
approval process may take substantially longer if, among other
things, the FDA has questions or concerns about the safety
and/or efficacy of a product. In general, the FDA requires at
least two properly conducted, adequate and well-controlled
clinical studies demonstrating safety and efficacy with
sufficient levels of statistical assurance. In certain limited
cases the FDA may consider one clinical study sufficient. The
FDA also may request long-term toxicity studies or other studies
relating to product safety or efficacy. For example, the FDA may
require additional clinical tests following NDA approval to
confirm product safety and efficacy (Phase IV clinical
tests) or require other conditions for approval. Notwithstanding
the submission of such data, the FDA ultimately may decide that
the application does not satisfy its regulatory criteria for
approval.

The full NDA process for newly marketed
non-biological drugs, such as GPI 1485, NAALADase Inhibitors and
AQUAVAN® Injection those being developed by us, including
neuroimmunophilin ligand products and inhibitors of NAALADase,
can take a number of years and involves the expenditure of
substantial resources. There can be no assurance that any
approval will be granted on a timely basis, or at all, or that
we will have sufficient resources to carry such potential
products through the regulatory approval process.

Other
Regulation

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

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In addition to the requirements for product
approval, before a pharmaceutical product may be marketed and
sold in certain foreign countries the proposed pricing for the
product must be approved as well. Products may be subject to
price controls and/or limits on reimbursement. The requirements
governing product pricing and reimbursement vary widely from
country to country and can be implemented disparately at the
national level. The European Union generally provides options
for its fifteen Member States to restrict the range of medicinal
products for which their national health insurance systems
provide reimbursement.

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

Intellectual Property Rights

As of December 31, 2003, we owned or had
licensed rights to more than 160 U.S. patents and more
than 150 foreign patents. In addition, we owned or had
licensed more than 600 pending applications worldwide. We also
own registered trademarks to AGGRASTAT®, AQUAVAN®,
DOPASCAN®, GLIADEL® and PACLIMER®. The following
charts identify the number of patents and patent applications
that protect or relate to our marketed products, product
candidates and key research programs, and whether those patents
or patent applications are issued (or filed) in the United
States or internationally.

United
States Patent Portfolio

|                     |  |              |    |                     |  |  |    | 
|-------------------- |  | ------------ | -- | ------------------- |  |  | -- | 
|                     |  |              |    | # of pending patent
|Technology           |  | # of Patents |    | applications       
|                     |  |              |    |                    
|GLIADEL® Wafer       |  |              | 3  |                     |  |  |   | 
|AGGRASTAT® Injection |  |              | 10 |                     |  |  | 1  | 
|AQUAVAN® Injection   |  |              | 1  |                     |  |  | 2  | 
|GPI 1485             |  |              | 4  |                     |  |  | 9  | 
|DOPASCAN® Injection  |  |              | 10 |                     |  |  | 5  | 
|NAALADase Inhibitors |  |              | 38 |                     |  |  | 10 | 
|PARP Inhibitors      |  |              | 18 |                     |  |  | 11 | 
|Cyclophilins         |  |              | 4  |                     |  |  | 7  | 

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International
Patent Portfolio

|                     |  |              |    |                     |  |  |    | 
|-------------------- |  | ------------ | -- | ------------------- |  |  | -- | 
|                     |  |              |    | # of pending patent
|Technology           |  | # of Patents |    | applications       
|                     |  |              |    |                    
|GLIADEL® Wafer       |  |              | 36 |                     |  |  |   | 
|AGGRASTAT® Injection |  |              |   |                     |  |  |   | 
|AQUAVAN® Injection   |  |              | 2  |                     |  |  | 22 | 
|GPI 1485             |  |              | 5  |                     |  |  | 42 | 
|DOPASCAN® Injection  |  |              | 36 |                     |  |  | 11 | 
|NAALADase Inhibitors |  |              | 19 |                     |  |  | 89 | 
|PARP Inhibitors      |  |              | 4  |                     |  |  | 24 | 
|Cyclophilins         |  |              | 3  |                     |  |  | 34 | 

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

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

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

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

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

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

Technology
Licensing Agreements

In March 1994, we entered into an agreement (the
GLIADEL® Wafer Agreement) with Scios Inc.
pursuant to which we licensed from Scios exclusive worldwide
rights to numerous U.S. patents and patent

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applications and corresponding international
patents and patent applications for polyanhydride biodegradable
polymer technology for use in the field of tumors of the central
nervous system and cerebral edema. GLIADEL® Wafer is
covered under this license by two U.S. patents and certain
related international patents and patent applications. The
patent rights in the U.S. will expire in 2006. In April 1994,
Scios assigned all of its rights and obligations under the
GLIADEL® Wafer Agreement to MIT.


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

In June 1996, we entered into a license agreement
with MIT and Johns Hopkins regarding a patent application
covering biodegradable polymers for use in connection with the
controlled local delivery of certain chemotherapeutic agents
(including paclitaxel (TAXOL®) and camptothecin). Under
this agreement, we are obligated to make certain annual and
milestone payments to MIT and to pay royalties based on any
sales of products incorporating the technology licensed to us.
Furthermore, under the terms of the agreement, we have committed
to spend minimum amounts to develop the technology and to meet
certain development milestones, including filing a New Drug
Application for this technology by June 25, 2006. Our
failure to perform these obligations could result in losing our
rights to such technology. In addition, the underlying patents
are subject to march-in rights of the U.S.
government described below.

In July 1996, we entered into a license agreement
with Johns Hopkins that currently covers several U.S. patents
respecting certain PPEs developed at Johns Hopkins and patent
applications for additional PPEs. This agreement, among other
things, requires us to pay certain processing, maintenance
and/or up-front fees, milestone payments and royalties, a
portion of proceeds from sublicenses, and fees and costs related
to patent prosecution and maintenance and to spend minimum
yearly amounts for, and meet deadlines regarding development of
this technology, including filing a New Drug Application for
this technology by July 18, 2006. If we fail to meet these
requirements, the agreement could be terminated. In the event of
termination of these licenses, we would lose our rights to the
use of the licensed technology. In addition, the underlying
patents are subject to march-in rights of the U.S. government.

We have entered into exclusive license agreements
with Johns Hopkins, to patents covering the neurotrophic use of
neuroimmunophilin ligands. We have also entered into exclusive
license agreements with Johns Hopkins regarding the rights to
the inhibition of PARP and other technologies for
neuroprotective uses. These agreements require us to pay, among
other things, certain processing, maintenance, and/ or up-front
fees, milestone payments and royalties, a portion of proceeds
from sublicenses, and fees and costs related to patent
prosecution and maintenance and to spend minimum amounts for,
and meet deadlines regarding, development of the technologies.
In the event of termination of these licenses, we would lose our
rights to use the licensed technology.

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

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

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to develop products related to the licensed
technology and to meet certain performance milestones. Our
failure to perform our obligations under the RTI Agreement in
the future could result in termination of the license, and loss
of our right to use this technology.


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

United States
Government Rights

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

Competition

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

We are aware of several competing approaches for
the treatment of malignant glioma, including using radioactive
seeds for interstitial radiotherapy, increasing the permeability
of the blood-brain barrier to chemotherapeutic agents,
sensitizing cancer cells to chemotherapeutic agents using gene
therapy and developing chemotherapeutics directed to specific
receptors in brain tumors. Furthermore, our patent protection
for GLIADEL® Wafer ends in 2006. At that time, others may
try to copy the wafer and enter the market as a generic drug
through applicable FDA procedures.

There are two other GP IIb/IIIa inhibitors that
compete with AGGRASTAT® Injection: INTEGRELIN®
Injection; and ReoPro®. ReoPro®, which is marketed by
Eli Lilly, was the first to come to market and is used
predominantly at the time of percuteaneous coronary intervention
(PCI). Currently, ReoPro has about a 30% dollar share of the
IIb/IIIa market. INTEGRELIN® Injection, which is marketed
through a co-promotion between Millennium and Schering, has a
broader indication than ReoPro® allowing the product to

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be used both at the time of PCI, as well as prior
to PCI. INTEGRELIN® Injection is currently the market
leader in the IIb/IIIa market with approximately 60% of the
dollar share. In some medical institutions, Angiomax® is
being used as a replacement for IIb/IIIa inhibitors in PCI but
that use is generally limited to low-risk and elective PCI
patients.


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

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

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

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

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

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

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Research and Development Expenses

Our research and development expenses were
$33.6 million, $46.1 million, and $54.3 million
for the years ended December 31, 2003, 2002 and 2001,
respectively. These expenses were divided between our research
and development platforms in the following manner:

|                            |  |                         |      |      |  |      |      |  |  |   |      | 
|--------------------------- |  | ----------------------- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                            |  |                        
|                            |  | Years ended December 31
|                            |  |                        
|                            |  | 2003                    |      | 2002 |  | 2001
|                            |  |                         |      |      |  |     
|                            |  |                        
|                            |  | ($ in millions)        
|Pharmaceutical technologies |  | $                       | 21.8 |      |  | $    | 20.8 |  |  | $ | 24.5 | 
|Biopolymer technologies     |  |                         | 1.4  |      |  |      | 5.0  |  |  |   | 8.6  | 
|Indirect expenses           |  |                         | 10.4 |      |  |      | 20.3 |  |  |   | 21.2 | 
|                            |  |                         |      |      |  |      |      |  |  |   |      | 
|                            |  | $                       | 33.6 |      |  | $    | 46.1 |  |  | $ | 54.3 | 
|                            |  |                         |      |      |  |      |      |  |  |   |      | 

Pharmaceutical
Technologies

Our pharmaceutical technologies research and
development costs increased in 2003 compared to 2002 due to
increased expenditures of $3.8 million in connection with
further clinical development of GPI 1485, our lead
neuroimmunophilin ligand compound. This increased spending was
partially offset by reduced expenditures of $2.2 million in
our AQUAVAN® project as we incurred preparation and
initiation costs in 2002 which related to the Phase II
colonoscopy clinical trial in progress during fiscal year 2003.
Additionally, in 2002, we made a $0.8 million milestone
payment to ProQuest, the licensor of the AQUAVAN®
technology.

Our pharmaceutical technology research and
development expenses decreased in 2002, compared to 2001,
primarily due to a decrease in expenses in our NAALADase
inhibitor program resulting from the completion of our Phase I
clinical trials of GPI 5693 (a lead NAALADase inhibitor
compound). The decrease in spending on our NAALADase inhibitors
was partially offset by an increase in spending on our FKBP
neuroimmunophilin ligand technology and our AQUAVAN®
Injection program.

Biopolymer
Technologies

Our biopolymer technology research and
development expenses decreased in 2003 compared to 2002 due to a
decision made as part of the corporate restructuring in the
third quarter of 2002 to focus our research and development
activities on our pharmaceutical technologies. Currently, we do
not plan to conduct additional research or clinical testing on
our biopolymer technologies; instead we are pursuing strategic
alternatives to further develop these technologies.

Our biopolymer technology research and
development expenses decreased in 2002, compared to 2001, due to
a decrease in expenses incurred in connection with the clinical
development of both PACLIMER® Microspheres and Lidocaine-PE
(formerly LIDOMER Microspheres). The decrease in clinical
development expenses resulted from the completion of our
clinical trials for PACLIMER® Microspheres (ovarian cancer)
and Lidocaine-PE (post surgical pain) during the first quarter
of 2002. In connection with our corporate restructuring in the
third quarter of 2002, we terminated the clinical trial for
PACLIMER® Microspheres (lung cancer).

Indirect
Expenses

Our indirect research and development expenses
decreased in the year ended 2003 compared to 2002 primarily as a
result of the full year impact of the restructuring efforts
taken in the third quarter of 2002. Of this decrease,
$4.3 million related to the reduction in employee costs,
$4.1 million in facility and equipment expenses, and the
remainder related to certain non-core project and other indirect
costs. Our indirect research and development expenses decreased
for the year ended 2002 compared to 2001 as a result of the
reduced workforce and the associated overhead costs.

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Product Liability and Insurance

Product liability risk is inherent in the
testing, manufacture, marketing and sale of GLIADEL® Wafer,
AGGRASTAT® Injection and our product candidates, and there
can be no assurance that we will be able to avoid significant
product liability exposure. We have primary product liability
coverage of $5 million and excess coverage of
$5 million for a total of $10 million in liability
insurance coverage, covering clinical trials and product sales.
There can be no assurance that this or any future insurance
coverage obtained by us will be adequate or that claims will be
covered by our insurance. Our insurance policies provide
coverage on a claims-made basis and are subject to annual
renewal. Product liability insurance varies in cost, can be
difficult to obtain and may not be available to us in the future
on acceptable terms, or at all.

Employees

At December 31, 2003, we employed 266
individuals. Of these 266 employees, 144 were employed in the
areas of research and product development, the quality control
of AGGRASTAT® Injection and in the manufacturing and
quality control of GLIADEL® Wafer. The remaining 122
employees performed selling, general and administrative
functions, including sales and marketing, executive, finance and
administration, legal and business development. None of our
employees are currently represented by a labor union. To date,
we have not experienced work stoppages related to labor issues
and we believe our relations with our employees are good.

Hiring and retaining qualified personnel are
important factors for our future success. There can be no
assurance that we will be able to continue to hire qualified
personnel and, if hired, that we will be able to retain these
individuals.

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

|                            |  |     |    |          |  |                                                                                     
|--------------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------------------
|Name                        |  | Age |    | Position
|                            |  |     |    |         
|Craig R. Smith, M.D.        |  |     | 58 |          |  | Chairman of the Board of Directors, President and
    Chief Executive Officer       
|Andrew R. Jordan            |  |     | 56 |          |  | Executive Vice President, Finance and
    Administration and Chief Financial Officer
|John P. Brennan             |  |     | 61 |          |  | Senior Vice President, Technical Operations                                         
|Thomas C. Seoh              |  |     | 46 |          |  | Senior Vice President, Corporate and Commercial
    Development                     
|Nancy J. Linck, Ph.D., J.D. |  |     | 62 |          |  | Senior Vice President, Chief Legal and Compliance
    Officer                       
|William C. Vincek, Ph.D.    |  |     | 56 |          |  | Senior Vice President, Development                                                  
|Margaret M. Contessa        |  |     | 55 |          |  | Senior Vice President, Human Resources                                              
|Barbara S. Slusher, Ph.D.   |  |     | 39 |          |  | Senior Vice President, Research, Animal Sciences,
    & Toxicology                  
|Denise D. Battles           |  |     | 48 |          |  | Vice President, Corporate Quality                                                   
|Michael Kelly               |  |     | 39 |          |  | Vice President, Commercial Operations                                               
|Asher M. Rubin              |  |     | 33 |          |  | Vice President, General Counsel and Secretary                                       
|Russell P. Wesdyk           |  |     | 41 |          |  | Vice President, Business Development                                                

Craig R. Smith, M.D., Chairman of the Board of
Directors, President and Chief Executive Officer,age 58, joined the Company as a
Director when the Company was founded in July 1993.
Dr. Smith was elected President and Chief Executive Officer
in August 1993 and Chairman of the Board in January 1994. Prior
to joining the Company, Dr. Smith was Senior Vice President
for Business and Market Development at Centocor, Inc., a
biotechnology company. Before joining Centocor, Dr. Smith
served on the Faculty of the Department of Medicine at Johns
Hopkins Medical School. Dr. Smith received his M.D. from
the State University of New York at Buffalo in 1972 and received
training in Internal Medicine at Johns Hopkins Hospital from
1972 to 1975.

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Andrew R. Jordan, Executive Vice President,
Finance and Administration, Chief Financial Officer and
Treasurer,age 56, joined the Company
as Vice President, Secretary, Treasurer and Chief Financial
Officer in September 1993. In January 1997, he became Senior
Vice President, Finance and Administration, Chief Financial
Officer and Treasurer and in February 2003, he was promoted to
Executive Vice President. Prior to joining the Company,
Mr. Jordan held various positions with KPMG LLP, a public
accounting firm, including partner since 1983.

John P. Brennan, Senior Vice President,
Technical Operations,age 61, joined
the Company as Vice President, Operations in January 1994 and
became Senior Vice President, Technical Operations in January
1997.

Thomas C. Seoh, Senior Vice President,
Corporate and Commercial Development,age 46, joined the Company in April
1995, as Vice President, General Counsel and Secretary. In
August 1999, he was promoted to Senior Vice President. In
February 2001, he became Senior Vice President, Corporate
Development, General Counsel and Secretary and in February 2002
he became Senior Vice President, Corporate and Commercial
Development and Strategic Planning.

Nancy J. Linck, Ph.D., J.D., Senior Vice
President, Chief Legal and Compliance Officer,age 62, joined the Company as Vice
President, Intellectual Property in November 1998. In February
2001, Dr. Linck was promoted to Senior Vice President,
Intellectual Property and Deputy General Counsel. Dr. Linck
became Senior Vice President, General Counsel and Secretary in
February 2002. In February 2004, Dr. Linck became Senior
Vice President, Chief Legal and Compliance Officer. From 1994 to
1998, Dr. Linck was Solicitor for the U.S. Patent and
Trademark Office, where she acted as general counsel for the
Commissioner of Patents and Trademarks. Since 1995,
Dr. Linck has served as an Adjunct Professor of Law, first
at George Washington University School of Law and presently at
Georgetown University Law Center.

William C. Vincek, Ph.D., Senior Vice
President, Development,age 56, joined
the Company as Vice President, Corporate Quality in August 1997.
In August 1999, he became Vice President, Pharmaceutical &
Chemical Development. In February 2002, Dr. Vincek was
promoted to Senior Vice President, Pharmaceutical and Chemical
Development.

Margaret M. Contessa, Senior Vice President,
Human Resources,age 55, joined
Guilford as Vice President, Human Resources in November 2000. In
February 2002, Ms. Contessa was promoted to Senior Vice
President, Human Resources. Prior to joining Guilford, from
March 1998 to January 1999, Ms. Contessa was Vice President,
Human Resources of Witco Corporation, a manufacturer of
specialty chemicals located in Greenwich, Connecticut.

Barbara S. Slusher, Ph.D., Senior Vice
President, Research, Animals, & Toxicology,age 39, joined Guilford in January
1995 as Principal Scientist and Group Leader in Research and
Development. Dr. Slusher was promoted to Senior Vice
President, Research, Animals & Toxicology in August 2002
after being named Vice President, Biology in February 2000.

Denise D. Battles, Vice President, Corporate
Quality,age 48, joined Guilford in
August 1994 as Director of Quality Assurance and became Senior
Director of Product Compliance in August 1997. Ms. Battles
was promoted to Vice President of Corporate Quality in August
1999.

Michael Kelly, Vice President, Commercial
Operations,age 39, joined the Company
in December 2002. Prior to joining the Company he held various
positions with Viropharma Incorporated, most recently as Vice
President of Sales from January 2001 through December 2002, and
before that as Vice President of Marketing from January 2000
through December 2000. In 1997, Mr. Kelly joined Viropharma as
Executive Director of Marketing.

Asher M. Rubin, Vice President, General
Counsel and Secretary,age 33, joined
the Company in October 2000, as Senior Corporate Counsel and
Assistant Secretary. He was promoted to Associate General
Counsel and Assistant Secretary in August 2001, to Deputy
General Counsel and Assistant Secretary in February 2002, and to
Vice President, Deputy General Counsel and Secretary in February
2003. In February 2004, Mr. Rubin was promoted to Vice
President, General Counsel and Secretary. Prior to joining the
Company,

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Mr. Rubin was an associate with the law firm
of Miles & Stockbridge P.C., in Baltimore, Maryland from
February 1997 through October 2000.


Russell P. Wesdyk, Vice President, Business
Development, age 41,Mr. Wesdyk joined the Company in July 2002, as Senior
Director, Business Development and was promoted to Vice
President, Business Development in February 2004. Prior to
joining the Company, Mr. Wesdyk was employed at
Bristol-Myers Squibb Co., from 1985 through 2002, where he held
a variety of senior management positions, most recently as
Director, Corporate Development.

Item 2.     Properties

In August 1994, we entered into a lease for an
approximately 83,000 square foot building in Baltimore, Maryland
that currently serves as our headquarters, which we expanded in
1998 to approximately 90,000 square feet. We currently occupy
23,000 square feet for office space, 18,000 square feet for
manufacturing space for GLIADEL® Wafer, and 49,000 square
feet of research and development laboratories. The initial term
of the lease expires in June 2005. Thereafter, we may exercise
two five-year renewal options, or we may exercise a purchase
option any time after the ninth year of the lease for the
then-current fair market value.

In February 1998, we entered into an operating
lease with a trust affiliated with First Union National Bank for
the construction and occupancy of a new laboratory and office
facility, consisting of approximately 77,000 square feet. We
took possession of this facility in June 1999. In May 2003, we
acquired this facility and presently are the owner/occupant of
the facility. This facility is adjacent to our headquarters in
Baltimore, Maryland.

See Managements Discussion and
Analysis of Financial Condition and Results of Operations 
Liquidity and Capital Resources for a more complete
description of the Companys arrangements with First Union.
In addition, see Leases footnote 13 in our Notes To Consolidated
Financial Statements.

Item 3.     Legal
Proceedings

None.

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

No matters were submitted to a vote of our
security holders during the last quarter of our fiscal year
ended December 31, 2003.




PART II






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

Our common stock trades on The NASDAQ®
National Market under the symbol GLFD. As of
March 2, 2004, there were approximately 210 holders of
record of our common stock and more than 14,500 beneficial
holders. We have never declared or paid any cash dividends and
do not intend to do so for the foreseeable future. Under our
various loan and lease agreements with certain financial
institutions, we may not declare, during the term of those
agreements, any cash dividends on our common stock without the
prior written consent of these financial institutions and, in
certain cases, the Maryland Industrial Development Financing
Authority.

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

|               |  |      |       |     |  |   |      | 
|-------------- |  | ---- | ----- | --- |  | - | ---- | 
|               |  | High |       | Low
|               |  |      |       |    
|2002           |  |      |       |     |  |   |      | 
|First Quarter  |  | $    | 12.35 |     |  | $ | 7.12 | 
|Second Quarter |  |      | 7.94  |     |  |   | 5.17 | 
|Third Quarter  |  |      | 6.29  |     |  |   | 3.50 | 
|Fourth Quarter |  |      | 5.19  |     |  |   | 3.18 | 
|              
|2003           |  |      |       |     |  |   |      | 
|First Quarter  |  | $    | 3.91  |     |  | $ | 2.76 | 
|Second Quarter |  |      | 6.04  |     |  |   | 4.02 | 
|Third Quarter  |  |      | 7.20  |     |  |   | 4.49 | 
|Fourth Quarter |  |      | 7.86  |     |  |   | 5.73 | 

Recent Sales
of Unregistered Securities

On October 16, November 16, and
December 16, 2003, we issued 647 shares, 775 shares and 838
shares of our common stock, respectively, to Burns McClellan
Inc. (Burns McClellan), in consideration for Burns
McClellan providing us with investor relations/public relations
services. In connection with these issuances, we relied on the
exemption from registration under the Securities Act of 1933
provided in Section 4(2) of the Act.

As part of the financing of our acquisition of
AGGRASTAT® Injection from Merck and Co., Inc., on
October 28, 2003, we issued to Paul Royalty Fund, L.P. and
certain of its affiliated entities five-year warrants to
purchase 300,000 shares of our common stock at an exercise price
of $9.15 per share. The securities were issued in a private
offering pursuant to Regulation D under the Securities Act of
1933.

On December 11, 2003, we issued 4,807,326
shares of our common stock to selected institutional and
accredited investors for net proceeds of approximately
$25.8 million. The purchase price per share was $5.67. We
also issued 7-year warrants to the investors to purchase 961,465
shares of common stock at an exercise price of $7.55 per share.
The securities were issued in a private offering pursuant to
Regulation D under the Securities Act of 1933.




Item 6.     Selected
Consolidated Financial Data

The following selected consolidated financial
data for each of the years in the five-year period ended
December 31, 2003 have been derived from our consolidated
financial statements, which have been audited by KPMG LLP, our
independent auditors. Our consolidated financial statements as
of December 31, 2003 and 2002, and for each of the years in
the three-year period ended December 31, 2003, including
the footnotes to these financial statements, are included
elsewhere in this annual report, beginning on page F-2. The
information set forth below should be read in conjunction with
our consolidated financial statements and the

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related footnotes, as well as
Managements Discussion and Analysis of Financial
Condition and Results of Operations, beginning on
page 25 of this annual report.


|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                          |  |                                      
|                                                                          |  | Years Ended December 31              
|                                                                          |  |                                      
|                                                                          |  | 1999                                  |         | 2000 |  | 2001 |         | 2002 |  | 2003
|                                                                          |  |                                       |         |      |  |      |         |      |  |     
|                                                                          |  |                                      
|                                                                          |  | (In thousands, except per share data)
|STATEMENT OF OPERATIONS DATA:                                             |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total revenues                                                            |  | $                                     | 21,561  |      |  | $    | 18,056  |      |  | $    | 20,534  |   |  | $ | 14,665  |   |  | $ | 27,605  |  
|Costs and expenses:                                                       |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cost of sales                                                             |  |                                       | 2,308   |      |  |      | 1,358   |      |  |      | 2,836   |   |  |   | 2,836   |   |  |   | 4,110   |  
|Research and development                                                  |  |                                       | 41,922  |      |  |      | 46,900  |      |  |      | 54,272  |   |  |   | 46,103  |   |  |   | 33,624  |  
|Selling, general and administrative                                       |  |                                       | 11,281  |      |  |      | 14,004  |      |  |      | 29,273  |   |  |   | 29,005  |   |  |   | 32,076  |  
|Intangible amortization                                                   |  |                                       |        |      |  |      | 140     |      |  |      | 840     |   |  |   | 840     |   |  |   | 1,912   |  
|Merger costs                                                              |  |                                       |        |      |  |      | 1,403   |      |  |      |        |   |  |   |        |   |  |   |        |  
|Acquired in-process research and development(1)                           |  |                                       |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   | 8,093   |  
|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total costs and expenses                                                  |  |                                       | 55,511  |      |  |      | 63,805  |      |  |      | 87,221  |   |  |   | 78,784  |   |  |   | 79,815  |  
|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Operating loss                                                            |  |                                       | (33,950 | )    |  |      | (45,749 | )    |  |      | (66,687 | ) |  |   | (64,119 | ) |  |   | (52,210 | )
|Other income (expense), net                                               |  |                                       | 7,082   |      |  |      | 7,247   |      |  |      | 6,370   |   |  |   | 4,849   |   |  |   | (1,737  | )
|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Loss before the cumulative effect of an
    accounting change             |  |                                       | (26,868 | )    |  |      | (38,502 | )    |  |      | (60,317 | ) |  |   | (59,270 | ) |  |   | (53,947 | )
|Cumulative effect of an accounting change                                 |  |                                       |        |      |  |      | (8,625  | )    |  |      |        |   |  |   |        |   |  |   |        |  
|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net loss                                                                  |  | $                                     | (26,868 | )    |  | $    | (47,127 | )    |  | $    | (60,317 | ) |  | $ | (59,270 | ) |  | $ | (53,947 | )
|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Basic and diluted loss per common
    share(2):                           |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Loss before the cumulative effect of an
    accounting change             |  | $                                     | (1.31   | )    |  | $    | (1.64   | )    |  | $    | (2.14   | ) |  | $ | (1.99   | ) |  | $ | (1.82   | )
|Cumulative effect of an accounting change                                 |  |                                       |        |      |  |      | (0.36   | )    |  |      |        |   |  |   |        |   |  |   |        |  
|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net loss                                                                  |  | $                                     | (1.31   | )    |  | $    | (2.00   | )    |  | $    | (2.14   | ) |  | $ | (1.99   | ) |  | $ | (1.82   | )
|                                                                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Basic and dilutive equivalent shares
    outstanding(2)                   |  |                                       | 20,475  |      |  |      | 23,517  |      |  |      | 28,249  |   |  |   | 29,805  |   |  |   | 29,689  |  
|                                                                         
|BALANCE SHEET DATA:                                                       |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash, cash equivalents and restricted and
    unrestricted investments(3) |  | $                                     | 144,718 |      |  | $    | 109,450 |      |  | $    | 154,738 |   |  | $ | 101,803 |   |  | $ | 101,943 |  
|Total assets(3)                                                           |  |                                       | 164,242 |      |  |      | 135,633 |      |  |      | 181,841 |   |  |   | 121,086 |   |  |   | 221,323 |  
|Long-term debt, excluding current portion                                 |  |                                       | 7,152   |      |  |      | 5,130   |      |  |      | 4,137   |   |  |   | 3,720   |   |  |   | 88,885  |  
|Revenue interest obligation                                               |  |                                       |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   | 42,155  |  
|Total stockholders equity                                                |  |                                       | 144,980 |      |  |      | 116,829 |      |  |      | 157,629 |   |  |   | 99,258  |   |  |   | 67,200  |  



---

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



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As part of the purchase price allocation of
    AGGRASTAT® Injection, the Company recorded a charge to
    write-off acquired in-process research and development of
    approximately $8.1 million. The in-process research and
    development represents an estimate of the fair value of
    purchased in-process technology for a project that, as of the
    acquisition date, had not reached technological feasibility and
    no alternative future use.
|   
|(2) | For information concerning the calculation of
    loss per share, see Note 3, to the footnotes to our Notes to
    Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                            
|   
|(3) | Includes restricted investments of
    $21.4 million, $18.3 million, $16.5 million,
    $18.6 million and $21.7 million at December 31,
    1999, 2000, 2001, 2002, and 2003, respectively. See Note 9 to
    the footnotes to our consolidated financial statements.                                                                                                                                                                                            

24



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##### Table of Contents








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

As you read this Managements Discussion and
Analysis, you may find it helpful to refer to our consolidated
financial statements beginning on page F-2 of this annual
report. These consolidated financial statements present the
results of our operations for 2003, 2002 and 2001 as well as our
financial position at December 31, 2003 and 2002. We
analyze and explain the annual changes in the specific line
items set forth in our consolidated statements of operations.
This analysis may be important to you in making decisions about
your investment in Guilford Pharmaceuticals Inc.

Overview

Guilford is a pharmaceutical company engaged in
the research, development and commercialization of proprietary
pharmaceutical products that target the hospital and neurology
markets. We market and sell proprietary pharmaceutical products
within our targeted markets, conduct clinical research to expand
the labeled indications for our marketed products, and develop
new product candidates. We also collaborate with other
pharmaceutical companies to support the sales and marketing of
our products and the clinical development of our products and
product candidates.

We currently have two marketed products:
GLIADEL® Wafer; and AGGRASTAT® Injection.
GLIADEL® Wafer provides targeted, site specific
chemotherapy for the treatment of malignant glioma at the time
of initial surgery, in conjunction with radiation and
chemotherapy, and for the treatment of recurrent glioblastoma
multiforme. AGGRASTAT® Injection is an inhibitor of
platelet aggregation approved for the treatment of acute
coronary syndrome, or ACS.

Our product pipeline consists of product
candidates in various stages of clinical and preclinical
development. AQUAVAN® Injection, a prodrug of propofol, is
in Phase II clinical trials for procedural sedation during brief
diagnostic or therapeutic procedures. GPI 1485, our lead
neuroimmunophilin ligand compound, is in Phase II clinical
trials for the treatment of Parkinsons disease and
peripheral nerve injury. DOPASCAN® Injection, an imaging
agent used to diagnose and monitor the progression of
Parkinsons disease, is in registration in Japan and
Finland by our corporate collaborators. Our preclinical research
programs include the development of NAALADase inhibitor
compounds, through our corporate partner, Pfizer, Inc., for
neuropathic pain, and on our own for prostate cancer, drug
addiction and traumatic brain and spinal cord injury and the
development of PARP inhibitor compounds for cancer
chemosensitization and radiosensitization.

We have financed our operations since inception
in July of 1993, primarily through the issuance of equity
securities, convertible subordinated notes, revenues from the
sales of GLIADEL® and more recently AGGRASTAT®,
funding pursuant to collaborative and partnering agreements and
proceeds from loans or other borrowings. Until such time as we
become substantially profitable, any or all of these financing
vehicles or others may be utilized to assist the Companys
capital requirements.

Acquisition of AGGRASTAT® Injection
(AGGRASTAT®) from Merck and Co., Inc.

On October 28, 2003, we acquired the rights
to AGGRASTAT® Injection (AGGRASTAT®), from
Merck and Co., Inc. (Merck), in the United States
and its territories and possessions (which include Puerto Rico,
the U. S. Virgin Islands and Guam), for a purchase price of
$84 million, plus a royalty based on the net sales of
AGGRASTAT®. In connection with the acquisition of
AGGRASTAT®, we entered into an agreement with Merck through
2014, to supply us with our requirements of AGGRASTAT®.
AGGRASTAT®, a glycoprotein GP IIb/ IIIa receptor
antagonist, is used for the treatment of acute coronary syndrome
(ACS) including unstable angina, which is characterized by chest
pain at rest, and non-ST elevation myocardial infarction
(NSTEMI).

In order to finance the acquisition, we used
$42.0 million of working capital and entered into a
$42.0 million revenue interest financing arrangement with
Paul Royalty Fund, L.P. and Paul Royalty Fund II, L.P., or PRF,
pursuant to a revenue interest assignment agreement. For more
information on the revenue interest obligation, see the
Liquidity and Capital Resources section.

25



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##### Table of Contents



Results of Operations

Overview of 2003

In fiscal 2003, our primary goal was to expand
our hospital-based commercial portfolio and to increase top line
revenues in order to accelerate our transition to profitability.
To this end, in 2003 we acquired the rights to AGGRASTAT®
from Merck in the United States and its territories and
possessions and obtained FDA approval to expand the label of
GLIADEL® for use at the time of initial surgery for
malignant glioma as an adjunct to surgery and radiation.

With the acquisition of AGGRASTAT® Injection
we gained an established hospital product with extensive
clinical data and the potential for market and product growth.
Our strategy is to use an active and focused marketing effort to
increase sales and build market share for AGGRASTAT®. In
order to begin putting this strategy into effect, in 2003 we
planned the re-launch of the marketing of AGGRASTAT® for
the treatment of ACS, which in recent years has declined in
hospital usage as a GP IIb/ IIIa receptor antagonist. In
addition, in 2003 we began preparations for the initiation of a
Phase III clinical program studying AGGRASTAT® for use in
percutaneous coronary intervention, or PCI, in order to try and
expand the label for the product. Through both the expansion of
our marketing efforts for the use of AGGRASTAT® to treat
ACS and our efforts to expand AGGRASTAT®s label for
use in PCI, we hope to achieve our goal of significantly
expanding top line revenues through a broader hospital-based
commercial portfolio.

Our acquisition of AGGRASTAT® also is
intended to enhance promotional activities for our other
marketed product, GLIADEL® Wafer, as well as help establish
an infrastructure for the future launch of AQUAVAN®
Injection, pending successful completion of clinical trials and
regulatory review. By increasing our portfolio of marketed
products, we hope to leverage the expertise and capabilities of
our highly specialized, clinically focused sales force in the
sale of pharmaceuticals for use in hospital settings. We believe
the expansion of our line of marketed pharmaceutical products
will provide the economies necessary to effectively cross-market
our products and create enhanced brand recognition, each of
which are drivers of revenue growth.

Revenues

During 2003, 2002, and 2001, we recognized
revenues of $27.6 million, $14.7 million, and
$20.5 million, respectively. These revenues consisted of
the following:

|         |                                                  |                 |      |      |  |      |      |      |  |   |      |      | 
|-------- | ------------------------------------------------ | --------------- | ---- | ---- |  | ---- | ---- | ---- |  | - | ---- | ---- | 
|         |                                                  | 2003            |      | 2002 |  | 2001
|         |                                                  |                 |      |      |  |     
|         |                                                  |                
|         |                                                  | ($ in millions)
|REVENUES |                                                  |                 |      |      |  |      |      |      |  |   |      |     
|         | GLIADEL® Wafer net product sales                 |                 | $    | 19.2 |  |      | $    | 14.5 |  |   | $    | 20.4 | 
|         | AGGRASTAT® net product sales                     |                 |      | 2.5  |  |      |      |     |  |   |      |     | 
|         | Revenues from license fees, milestones and other |                 |      | 5.9  |  |      |      | 0.2  |  |   |      | 0.1  | 
|         |                                                  |                 |      |      |  |      |      |      |  |   |      |     
|TOTAL    |                                                  | $               | 27.6 |      |  | $    | 14.7 |      |  | $ | 20.5 |     
|         |                                                  |                 |      |      |  |      |      |      |  |   |      |     

Revenue  GLIADEL® Wafer
product sales

GLIADEL® Wafer, or GLIADEL®, net sales
were $19.2 million, $14.5 million, and
$20.4 million for the years ended December 31, 2003, 2002
and 2001, respectively. During this time, we sold GLIADEL®
(i) directly to a specialty distributor, (ii) directly
to hospitals, (iii) by drop shipment to hospitals pursuant
to purchase orders from wholesalers, (iv) to distributors
located outside the United States for resale by those
distributors in non-United States markets, and (v) directly
to a corporation for use in clinical trials.

The increase in 2003 net sales year over year is
primarily attributable to FDA approval in February 2003 of the
expanded label of GLIADEL® for use at the time of initial
surgery for malignant glioma as an adjunct to surgery and
radiation. Sales in 2001 were higher than sales in 2002 due to
sales to our distributors in 2001, in anticipation that we would
receive approval from the FDA to expand the label for
GLIADEL® Wafer to

26



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##### Table of Contents



include use at the time of first surgery for
malignant glioma. In March 2002, the FDA informed us that the
expanded label was not approvable. Consequently, physician
demand for the product did not increase, resulting in an
imbalance between units in the distribution channel and pull
through demand. Because the supply of the product in the
distribution channel had increased in excess of demand and the
first surgery approval was no longer viewed as imminent or
assured, we chose, during the second half of 2002 to reduce the
sale of product to our specialty distributor in order to more
closely align the number of units in the distribution channel
with demand under the more limited product label for recurrent
surgery.


GLIADEL® net sales to customers within the
United States were approximately $18.1 million,
$14.1 million, and $20.1 million (94%, 97% and 99% of
total revenues) for the years ended December 31, 2003,
2002, and 2001, respectively. The remaining units were sold
outside the United States, including Europe, Canada, South
America, Israel and Australia, either through distributors or
direct to hospitals.

|                             |                         |                 |      |      |  |      |      |      |  |   |      |      | 
|---------------------------- | ----------------------- | --------------- | ---- | ---- |  | ---- | ---- | ---- |  | - | ---- | ---- | 
|                             |                         | 2003            |      | 2002 |  | 2001
|                             |                         |                 |      |      |  |     
|                             |                         |                
|                             |                         | ($ in millions)
|                             |                         |                
|Specialty Distributors Sales |                         | $               | 14.5 |      |  | $    | 10.1 |      |  | $ | 4.2  |     
|Direct Hospital Sales        |                         |                 | 3.6  |      |  |      | 3.3  |      |  |   | 13.1 |     
|GLIADEL Advantage Program    |                         |                 |     |      |  |      | 0.7  |      |  |   | 2.8  |     
|International Sales          |                         |                 | 1.1  |      |  |      | 0.4  |      |  |   | 0.3  |     
|                             |                         |                 |      |      |  |      |      |      |  |   |      |     
|                             | Total Net Product Sales |                 | $    | 19.2 |  |      | $    | 14.5 |  |   | $    | 20.4 | 
|                             |                         |                 |      |      |  |      |      |      |  |   |      |     

During the years ended December 31, 2003,
2002, and 2001 approximately $14.5 million (1,405 units),
$10.1 million (985 units), and $4.2 million (430
units), respectively, were sold to a specialty distributor.
During the third quarter of 2001 we decided to sell
GLIADEL® through specialty distributors. At the time of the
specialty distributors initial orders in 2001, we provided
extended payment terms of up to 120 days. During 2003 and
2002, all specialty distributor sales were made to Specialty
Pharmaceuticals Distribution (SPD) (formerly known
as National Specialty Services, Inc.), a division of Cardinal
Health, Inc. In 2001, we sold to SPD and another specialty
distributor. SPD has nationwide marketing and distribution
capabilities that complement our sales and marketing efforts.
Additionally, when we make sales to SPD, they are responsible
for shipping the product that they purchase to hospital
pharmacies, thereby reducing our overall distribution costs.
Without this distributor, we would incur separate shipping costs
from our logistical distributor for each shipment of the product
to hospital pharmacies and other end-users. SPD receives
discounts on its purchases of GLIADEL® based on its
expected sales to end-users and the amount of capital it has
committed to the product as of the date of its purchases. We
have the ability to accept or reject purchase orders from SPD at
our sole discretion. For the years ended December 31, 2003,
2002 and 2001, our specialty distributors sold 1,426, 1,015 and
214 units, respectively, to hospitals and wholesalers. It is our
general practice to have our sales representatives direct
hospital pharmacies to SPD for purchases of the product.

Additionally, for the first six months of 2002,
we engaged in an enhanced marketing initiative with SPD that
ended on June 30, 2002. Of the treatments sold to SPD
during the six month period ended June 30, 2002, 94% (650
units) were sold in connection with this marketing initiative.
This marketing initiative included mailing information about
GLIADEL® to prospective customers, telemarketing activity
and working with our sales representatives to set up customer
accounts. This marketing initiative cost approximately $201,000
for the six-month period ended June 30, 2002. We did not
operate a similar marketing initiative during 2003 or 2001.

For the years ended December 31, 2003, 2002,
and 2001, approximately $3.6 million, $3.3 million, and
$13.1 million, of GLIADEL® net U.S. sales,
respectively, resulted from sales directly to hospitals or drop
shipments to hospitals pursuant to purchase orders from
wholesalers. Included in the $3.6 million for the year
ended December 31, 2003 are approximately $0.3 million in
sales to a corporation for use in a competitive clinical trial.
Substantially all of these sales to hospitals and wholesalers
included our normal payment terms including discounts for early
payment.

27



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##### Table of Contents



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

Revenue 
AGGRASTAT® product sales

For the year ended December 31, 2003, we
recognized net sales of AGGRASTAT® of approximately
$2.5 million, which represents net sales from
October 28, 2003 when we acquired the rights to
AGGRASTAT® from Merck. During this time period, we sold
AGGRASTAT® directly to several wholesalers. Three
wholesalers accounted for approximately $2.3 million of net
sales of AGGRASTAT®. In preparation for the re-launch of a
marketing campaign for AGGRASTAT® in the United States, we
have increased the size of our sales force and completed a
training program for the entire sales and marketing team. These
re-launch efforts will focus on expanding the ACS market.

Revenue 
Other

We entered into an exclusive license agreement
with Pfizer, on May 7, 2003, for a novel class of potential
drugs called NAALADase inhibitors. Under the terms of the
agreement, Pfizer will have exclusive rights to develop our
NAALADase inhibitors worldwide, and will conduct and pay for all
costs associated with research, development, manufacturing, and
commercialization of any products that may result from this
agreement. As part of the agreement, we are eligible to receive
royalties on future product sales and milestone payments related
to the successful development and commercialization of a
NAALADase inhibitor. Upon signing the agreement, we received a
$5.0 million payment from Pfizer. Under the terms of the
agreement, we do not have continuing involvement relating to the
contract as defined by SAB 101. As a result, the payment was
recognized as Revenues from license fees and
milestones in the second quarter of 2003. During the year,
we also recorded a $0.6 million milestone payment from DRL,
our partner in Japan for Dopascan® Injection, related to
the filing of an application for regulatory approval to market
the product in Japan.

Cost of Sales and Gross Margin

Our cost of sales for the years ended
December 31, 2003, 2002 and 2001, were $4.1 million,
$2.8 million and $2.8 million, respectively. The $1.3
million increase in cost of sales for the year ended
December 31, 2003 compared to the year ended
December 31, 2002 was primarily the result of increased
unit sales for GLIADEL®.

GLIADEL® cost of sales includes the cost of
materials, labor and overhead. For the years ended
December 31, 2003 and 2002, gross profit percentage (net
product sales less cost of sales as a percent of net product
sales) was 79% and 80%, respectively. Cost of sales for the year
ended December 31, 2003 was negatively affected by the
write-off of approximately $0.4 million of inventory, which
we determined did not meet product specifications through
regular quality control testing. We also established an
additional reserve for spoiled or damaged inventory of
approximately $0.2 million based upon our historical
experience. Gross profit percentage was 86% for the year ended
December 31, 2001. Gross profit percentage for the year
ended December 31, 2002 was lower than for the year ended
December 31, 2001 because of decreased production volumes
in 2002 compared to 2001, when volumes were increased to support
expected higher demand driven by an anticipated first surgery
approval for GLIADEL®.

The cost to manufacture GLIADEL® can vary
materially with production volume. To the extent that production
levels increase or decrease in the future, we anticipate that
the unit cost to manufacture GLIADEL® may decrease or
increase, respectively. As a result, we would expect the cost of
product sales of GLIADEL®, and accordingly, gross profit
percentage, to fluctuate from year to year.

For the manufacture of AGGRASTAT®, we have
entered into an exclusive supply agreement with Merck for the
manufacture and supply of the active pharmaceutical ingredient,
or API, of AGGRASTAT®

28



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##### Table of Contents



until December 31, 2014. Merck has agreed to
supply us with the finished product of AGGRASTAT®, through
its contract manufacturers, Baxter for bags until August 2006,
and Ben Venue for vials through the end of 2004. We may
negotiate direct contractual relationships with these
manufacturers in the future. AGGRASTAT® cost of sales for
the year ended December 31, 2003 was $0.2 million.


Research and Development Expenses

Beginning in fiscal year 1999, the Company began
recording research and development costs under two platforms,
pharmaceutical technologies and biopolymer technologies. From
January 1, 1999, through December 31, 2003, the Company
incurred, in the aggregate, costs of $104.9 million for its
pharmaceutical technologies platform, $34.1 million for its
biopolymer technologies platform, and $83.8 million of
indirect expenses. Our research and development projects are
currently focused on pharmaceutical research and development.
For our biopolymer technologies, we have chosen to pursue
potential corporate partnerships or other strategic alternatives
in order to further their research and development, rather than
develop these projects ourselves. The following chart sets forth
our projects in each of these areas and the stage to which each
has been developed:

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

For each of our research and development
projects, we incur both direct and indirect expenses. Direct
expenses include salaries and other costs of personnel, raw
materials and supplies. We may also incur third party costs
related to these projects, such as contract research, consulting
and clinical development costs. Indirect expenses, such as
facility and equipment costs, utilities, general research and
development management and other administrative overhead are
allocated to research and development generally based on, among
other things, the extent to which our general research and
development efforts make use of facilities, non-project
personnel and other resources. Because of the uncertainties
involved in progressing through pre-clinical and clinical
testing, and the time and cost involved in obtaining regulatory
approval and in establishing collaborative arrangements, among
other factors, we cannot reasonably estimate the future expenses
and timing necessary to complete our research and development
projects as well as estimating the period in which material net
cash inflows from significant projects are expected to commence.

Our research and development expenses were
divided between our research and development platforms in the
following manner:

|                            |  |                         |      |      |  |      |      |  |  |   |      | 
|--------------------------- |  | ----------------------- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                            |  |                        
|                            |  | Years ended December 31
|                            |  |                        
|                            |  | 2003                    |      | 2002 |  | 2001
|                            |  |                         |      |      |  |     
|                            |  |                        
|                            |  | ($ in millions)        
|Pharmaceutical technologies |  | $                       | 21.8 |      |  | $    | 20.8 |  |  | $ | 24.5 | 
|Biopolymer technologies     |  |                         | 1.4  |      |  |      | 5.0  |  |  |   | 8.6  | 
|Indirect expenses           |  |                         | 10.4 |      |  |      | 20.3 |  |  |   | 21.2 | 
|                            |  |                         |      |      |  |      |      |  |  |   |      | 
|                            |  | $                       | 33.6 |      |  | $    | 46.1 |  |  | $ | 54.3 | 
|                            |  |                         |      |      |  |      |      |  |  |   |      | 

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Pharmaceutical
Technologies

Our pharmaceutical technologies research and
development costs increased in 2003 compared to 2002 due to
increased expenditures of $3.8 million in connection with
further clinical development of GPI 1485, our lead
neuroimmunophilin ligand compound. This increased spending was
partially offset by reduced expenditures of $2.2 million in
our AQUAVAN® project as we incurred preparation and
initiation costs in 2002 which related to the Phase II
colonoscopy clinical trial in progress during fiscal year 2003.
Additionally, in 2002, we made a $0.8 million milestone
payment to ProQuest, the licensor of the AQUAVAN®
technology.

Our pharmaceutical technology research and
development expenses decreased in 2002, compared to 2001,
primarily due to a decrease in expenses in our NAALADase
inhibitor program resulting from the completion of our Phase I
clinical trials of GPI 5693 (a lead NAALADase inhibitor
compound). The decrease in spending on our NAALADase inhibitors
was partially offset by an increase in spending on our FKBP
neuroimmunophilin ligand technology and our AQUAVAN®
Injection program.

Biopolymer
Technologies

Our biopolymer technology research and
development expenses decreased in 2003 compared to 2002 due to a
decision made as part of the corporate restructuring in the
third quarter of 2002 to focus our research and development
activities on our pharmaceutical technologies. Currently, we do
not plan to conduct additional research or clinical testing on
our biopolymer technologies; instead we are pursuing strategic
alternatives to further develop these technologies.

Our biopolymer technology research and
development expenses decreased in 2002, compared to 2001, due to
a decrease in expenses incurred in connection with the clinical
development of both PACLIMER® Microspheres and Lidocaine-PE
(formerly LIDOMER Microspheres). The decrease in clinical
development expenses resulted from the completion of our
clinical trials for PACLIMER® Microspheres (ovarian cancer)
and Lidocaine-PE (post surgical pain) during the first quarter
of 2002. In connection with our corporate restructuring in the
third quarter of 2002, we terminated the clinical trial for
PACLIMER® Microspheres (lung cancer).

Indirect
Expenses

Our indirect research and development expenses
decreased in the year ended 2003 compared to 2002 primarily as a
result of the full year impact of the restructuring efforts
taken in the third quarter of 2002. Of this decrease,
$4.3 million related to the reduction in employee costs,
$4.1 million in facility and equipment expenses, and the
remainder related to certain non-core project and other indirect
costs. Our indirect research and development expenses decreased
for the year ended 2002 compared to 2001 as a result of the
reduced workforce and the associated overhead costs.

Selling, General and Administrative
Expenses

Our selling, general and administrative
(SG&A) expenses excluding intangible
amortization were $32.1 million, $29.0 million, and
$29.3 million for the years ended December 31, 2003,
2002 and 2001, respectively. For the year ended
December 31, 2003, the costs incurred to market, sell and
distribute GLIADEL® and AGGRASTAT® were
$14.3 million compared to $13.8 million for the year
ended December 31, 2002. The increase in expense year over
year resulted primarily from the commencement of selling and
marketing activities related to the AGGRASTAT® product line
which was purchased in the fourth quarter of 2003. For the year
ended December 31, 2002, the costs incurred to market, sell
and distribute GLIADEL® were $13.8 million compared to
$15.3 million for the year ended December 31, 2001.
The decrease in expense was largely attributable to
GLIADEL® sales and marketing start up costs incurred in
2001 that did not recur in 2002.

During October 2000, the Company entered into a
three-year agreement (the Cardinal Agreement) with
Cardinal Health Sales and Marketing Services
(Cardinal) to provide Guilford with sales
representatives for its GLIADEL® product. Included in our
costs to market, sell and distribute GLIADEL® was

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


Costs and expenses associated with our general
and administrative functions were $17.8 million,
$15.2 million and $14.0 million for the years ended
December 31, 2003, 2002 and 2001, respectively. The
increase for the year ended December 31, 2003 from 2002
results from increased employee costs of approximately
$2.0 million and recruiting and relocation efforts due to
the acquisition of the AGGRASTAT® product line to expand
the sales force and the research and development teams in
preparation for a Phase III clinical trial of AGGRASTAT®.
The increase for the year ended December 31, 2002 from 2001
was largely attributable to a restructuring charge of
$1.3 million, of which $1.2 million consisted of
employee severance costs, including severance pay, related
payroll taxes and insurance and outplacement services. The
remaining $0.1 million represented the costs of
decommissioning certain research and development laboratories.
Our general and administrative functions include the areas of
executive management, finance and administration, investor and
public relations, corporate development, human resources and
legal. Additionally, we include the costs to prepare, file and
prosecute domestic and international patent applications and for
other activities to establish and preserve our intellectual
property rights in our general and administrative expenses. For
each function, we may incur direct expenses such as salaries,
supplies and third-party consulting and other external costs.
Indirect costs such as facilities, utilities and other
administrative overhead are also allocated to selling, general
and administrative expenses.

Intangible
Amortization

Intangible amortization was $1.9 million,
$0.8 million and $0.8 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Intangible
amortization increased from fiscal year 2002 to 2003 as a result
of the AGGRASTAT® product rights acquisition in the fourth
quarter of 2003. Intangible amortization for the years ended
December 31, 2003, 2002 and 2001 included $0.8 million
related to the reacquisition of GLIADEL® rights in October
2000.

Acquired in  process research
and development

As part of the acquisition of AGGRASTAT®, we
engaged a third-party to appraise the value of the intangible
assets acquired. Based upon this appraisal, we allocated
$8.1 million of the purchase price of the AGGRASTAT®
product rights in the fourth quarter of 2003 to acquired
in-process research and development. This allocation represented
the estimated fair value based on risk-adjusted cash flows
pertaining to the incomplete research and development of
AGGRASTAT® for use in PCI. At the date of acquisition, the
development of these projects had not yet reached technological
feasibility and the research and development in progress had no
alternative future uses. Accordingly, the acquired in-process
research and development was charged to expense as of the date
of the acquisition. This item is described in more detail in
Note 2 to the footnotes to our consolidated financial
statements.

Other Income and Expense

Other income and expense consists primarily of
income on our investments and interest expense on our debt and
other financial obligations. Our investment income was
$3.0 million, $5.4 million and $6.9 million for
the years ended December 31, 2003, 2002 and 2001,
respectively. The decrease in investment income in 2003 compared
to 2002 results primarily from overall lower yields on invested
capital and lower average investment balances maintained during
the periods. The decrease in investment income in 2002 compared
to 2001 was primarily due to lower interest rates and investment
balances maintained during those periods.

We incurred interest expense of
$3.2 million, $0.5 million and $0.5 million for the
years ended December 31, 2003, 2002 and 2001. The increase
in interest expense in 2003 compared to 2002 is primarily
attributable to the $69.4 million 5% convertible
subordinated notes offering and the $18.8 million term loan

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arrangement with Wachovia Bank, National
Association. Additional interest expense for 2003, and interest
expense for 2002 and 2001, resulted from (i) loans from a
commercial bank that helped fund the construction of our
manufacturing, administrative, and research and development
facilities and the purchase of certain furniture and equipment,
(ii) capital leases entered into for the purchase of
computer equipment, and (iii) a note payable to a
commercial bank primarily used to repay a $2.4 million note
payable to Cardinal pursuant to the Cardinal Agreement.


We incurred revenue interest expense of
$1.6 million related to the PRF revenue interest obligation
for the year ended December 31, 2003. Revenue interest
expense was calculated using the interest method, which resulted
in an imputed interest rate equivalent to the internal rate of
return on future royalty payments. These future royalty payments
are based on the estimated future revenues. We will periodically
review estimated future revenues and make adjustments as
necessary.

Liquidity and Capital Resources

Overview

Our primary cash requirements are (i) to
fund our research and development programs, (ii) to support
our sales and marketing efforts, (iii) to obtain regulatory
approval, (iv) to prosecute, defend and enforce any patent
claims and other intellectual property rights, (v) to fund
general corporate overhead, and (vi) to support our debt
service requirements and contractual obligations.

We have financed our operations since inception
primarily through the issuance of equity securities, convertible
subordinated notes, revenues from the sales of GLIADEL® and
more recently AGGRASTAT®, funding pursuant to collaborative
agreements and proceeds from loans or other borrowings. In
evaluating alternative sources of financing we consider, among
other things, the dilutive impact, if any, on our stockholders,
the ability to leverage stockholder returns through debt
financing, the particular terms and conditions of each
alternative financing arrangement and our ability to service our
obligations under such financing arrangements. In 2003, we
engaged in four financing transactions: a $69.4 million 5%
convertible note offering, a $42.0 million revenue interest
obligation and warrant offering associated with the
AGGRASTAT® product acquisition, a $27.3 million equity
private placement and an $18.8 million term loan agreement.

In May 2003, we entered into an agreement
granting Pfizer the exclusive right to develop NAALADase
inhibitors worldwide, for which Pfizer paid us $5 million
upon the execution of the agreement, and was to pay us
$10 million on or before March 31, 2004. If Pfizer
does not pay the additional $10 million by that date, we
may elect to have all rights to the NAALADase inhibitor
technology revert to us. Under the terms of the agreement,
Pfizer is to conduct and pay for all costs associated with
research, development, manufacturing and commercialization of
any products that may emerge from the agreement. As part of the
agreement, we would be eligible to receive royalties on future
product sales and milestone payments related to the successful
development and commercialization of a NAALADase inhibitor. The
schedule of milestone payments under the agreement outlines a
total of $42 million to be paid for each compound developed
through commercialization, as well as one additional set of
milestone payments totaling $20 million for an additional
indication for the same compound, if Pfizer continues the
development and commercialization of any compounds under the
agreement. We are currently discussing with Pfizer the status of
the collaboration, including whether they will make the
$10 million payment under our agreement, or whether there
are other mutually agreeable terms and conditions under which we
would agree to continue the collaboration.

Our cash, cash equivalents and investments were
$101.9 million and $101.8 million at December 31, 2003
and 2002, respectively. Of this amount, $21.7 million is
restricted as collateral for certain of our loans and other
financial lease obligations.

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Sources and Uses of Cash

Operating
Activities

Cash used in operating activities was
$35.2 million and $50.0 million in 2003 and 2002,
respectively. Net changes in assets and liabilities provided
cash of $2.2 million in 2003 mainly due to an increase in
accounts payable and other liabilities partially offset by an
increase in accounts receivable and prepaid expenses. The
increase in accounts payable and other liabilities relates to
the timing of our research and development activity and
professional services supporting our transactional activity. The
change in accounts receivable results from the timing of sales
and the subsequent cash receipt thereof. Specifically, 76% and
69% of GLIADEL® product sales in 2003 and 2002,
respectively, were made to a specialty distributor. Depending on
the timing of the sales to the specialty distributor and
associated payment, which is traditionally within 30 days,
the Companys accounts receivable will increase or decrease
for comparative reporting periods. At December 31, 2003 and
2002, the Company had approximately $1.0 million and
$0.0 million, respectively, in accounts receivable
outstanding relating to the specialty distributor. These relate
to sales made in December. Additionally, with the acquisition of
AGGRASTAT®, during the transition phase, Merck bills and
collects on net sales for the Company. The Companys
receivable balance will fluctuate dependent on the timing of
Mercks payment to the Company on the Companys
receivables. At December 2003, the Company had an accounts
receivable balance of approximately $1.4 million relating
to AGGRASTAT® due on January 15, 2004. At
December 31, 2002, the Company had no AGGRASTAT®
accounts receivable balance as the product was acquired during
2003. Prepaid expenses fluctuate period to period depending on
the timing of preparation and initiation of clinical trials. We
are often required to prepay contract research organizations for
services prior to the initiation of work performed. In 2002, net
changes in assets and liabilities provided $3.7 million of
cash as a result of decreased accounts receivable and prepaid
expenses partially offset by decreased accounts payable and
other liabilities. Fluctuations in operating items vary period
to period due to, among others, timing of sales and the
subsequent cash receipts thereof, and research and development
activities such as clinical trial preparation and initiations.

Investing and
Financing Activities

In December 2003, we completed a private
placement of 4.8 million shares of our common stock at a
price of $5.67 per share and received net proceeds of
approximately $25.8 million. In conjunction with this
transaction, the investors received seven-year warrants to
purchase 1.0 million shares of our common stock at an
exercise price of $7.55 per share. The proceeds of the financing
will be used primarily to undertake a Phase III clinical
trial to establish a percutaneous coronary intervention, or PCI,
label for AGGRASTAT®.

On October 28, 2003, we acquired the rights
to AGGRASTAT® from Merck and Co., Inc., or Merck, in the
United States and its territories, for a purchase price of
$84 million, plus a royalty based on net sales of
AGGRASTAT®. From the closing until December 31, 2006,
we do not pay royalties on net sales less than $40 million.
On net sales above $40 million prior to December 31, 2006,
and beginning on January 1, 2007, on all sales of
AGGRASTAT®, we will pay royalties ranging from 5% to 20% of
AGGRASTAT® net sales, based upon our achievement of certain
net sales thresholds. In connection with the acquisition of
AGGRASTAT®, we entered into an agreement with Merck, to
supply us with our requirements of the active pharmaceutical
ingredient of AGGRASTAT® through 2014. Additionally, until
June 28, 2003, Merck has agreed to provide us with certain
services related to the transition of AGGRASTAT® from Merck
to us.

In order to finance the acquisition, we used
$42.0 million of working capital and entered into a
$42.0 million revenue interest financing arrangement with
Paul Royalty Fund, L.P. and Paul Royalty Fund II Holdings,
L.P., or PRF, pursuant to a revenue interest assignment
agreement (the Revenue Agreement). Under our
arrangement with PRF, from October 28, 2003, through
December 31, 2006, PRF is entitled to receive 10% of our
GLIADEL® and AGGRASTAT® annual net sales up to
$75 million, and 2.5% of those annual net sales in excess
of $75 million, and from January 1, 2007, through
December 31, 2012 (the end of the term of the financing
arrangement with PRF), these percentages are 17.5% and 3.5%,
respectively. If GLIADEL® and AGGRASTAT® net sales are
less than $48.3 million, $60.2 million, or
$80.6 million in 2004, 2005, and 2006, respectively, then
PRF will receive the higher of the minimum payments for such
years

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described below or 12.5% of combined
GLIADEL® and AGGRASTAT® net sales. If combined
GLIADEL® and AGGRASTAT® annual net sales are less than
$75 million in any of 2007 through 2012, then PRF will
receive the higher of the minimum payments for such years
described below, or 22.5% of combined GLIADEL® and
AGGRASTAT® net sales. During each year of the term of the
arrangement with PRF, PRF will be entitled to receive a portion
of revenues from products that we may acquire in the future, or
of AQUAVAN® Injection and GPI 1485 (each product candidates
of the Company), in the case that our calculated annual
obligation(s) to make royalty payments under the Revenue
Agreement (based upon the combined net sales of GLIADEL®
and AGGRASTAT®) are less than $6.4 million for 2004,
$7.6 million for 2005, $8.3 million for 2006,
$15.3 million for 2007, $15.5 million for 2008,
$15.8 million for 2009, $16.0 million for 2010 or
$15.9 million for 2011 and 2012, respectively. We will pay
PRF minimum royalties of $5.0 million in 2004,
$6.3 million in 2005, $7.5 million in 2006,
$10.0 million in each of 2007-2009 and $12.5 million
in each of 2010-2012. PRF is also entitled to receive portions
of amounts payable to us on the resolution of future
intellectual property disputes involving GLIADEL® and
AGGRASTAT® and on the divestiture, if any, of ex-North
American marketing rights to GLIADEL®. In addition to its
revenue interest in our products or future products, as the case
may be, PRF received five-year warrants to purchase 300,000
shares of our common stock at an exercise price of $9.15 per
share.


As part of our financing arrangement with PRF,
PRF has been granted a security interest in the assets related
to GLIADEL® Wafer and AGGRASTAT® Injection. As a
result of this security interest, we may not be free to utilize
those assets at our discretion, such as selling or licensing
rights to part or all of those assets, without first obtaining
the permission of PRF. This requirement could delay, hinder or
condition our ability to enter into corporate partnerships or
strategic alliances with respect to these assets.

Also in connection with our arrangement with PRF,
we have pledged cash and cash equivalents, such as marketable
securities, to PRF, initially in the amount of
$11.25 million (such pledged amount representing the next
eight quarters of minimum payments to PRF) as additional
evidence of our liquidity. We may maintain this pledged account
at our discretion; however, if we do not maintain this account,
we will be required to maintain at least $20 million of net
working capital during the term of the agreement. If we do not
maintain the pledged account or we do not have $20 million
of net working capital, then PRF may exercise a right to require
us to repurchase its revenue interest at a purchase price that
reflects a return to PRF on its investment (but is reduced by
amounts previously paid to PRF). Regardless of the reason for
which PRF may be entitled to require us to repurchase its
revenue interest (in addition to the liquidity events discussed
above, PRF may also require us to repurchase its revenue
interest if (1) we fail to make our minimum payments to
them, (2) we sell GLIADEL® and AGGRASTAT® (with
PRF having partial rights to make us repurchase its interest in
the event of the sale of one, but not both products),
(3) upon the occurrence of a bankruptcy or similar event,
or (4) upon a change of control of us), the repurchase
amount may never exceed three and a half times PRFs
initial investment, or $147 million.

Our total long-term debt increased a net
$127.5 million to $134.4 million at December 31,
2003, compared to $6.9 million at December 31, 2002.
This increase is primarily due to the issuance of
$69.4 million in 5% convertible subordinated notes in June
and July 2003, our $42.2 million revenue interest
obligation and the $18.8 million term loan entered into in
May 2003. Principal repayments for the period were
$4.4 million.

On June 17, 2003, we issued $60 million
(principal amount at maturity) of convertible subordinated notes
(Notes) due July 1, 2008. Interest on the Notes
accrues at 5% per annum and is payable semi-annually on January
1 and July 1 of each year, commencing on January 1, 2004.
The sale of these Notes resulted in our receiving net proceeds
of approximately $51.9 million, after taking into account
stock repurchases made in connection with the offering and
various transaction expenses. The Notes are convertible at the
option of the holder at any time prior to maturity into shares
of our common stock at a conversion price of $6.24 per share. We
have the option to redeem the Notes on or after July 6,
2006, but prior to July 6, 2007, for 102.00% of the
principal amount. If we elected to redeem the Notes on or after
July 6, 2007, until the maturity date, the redemption price
would be 101.00% of the principal amount. The agreement with the
initial purchasers of the Notes granted them an option, until
July 26, 2003, to purchase up to an additional
$20 million of Notes. On July 30, 2003, the initial
purchasers exercised this option in part, and purchased an
additional $9.4 million of Notes, resulting in additional
net proceeds of approximately $9.0 million.

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On May 7, 2003, we entered into a 5-year
$18.8 million term loan agreement with Wachovia Bank,
National Association. With the proceeds of this loan, we
acquired our dedicated research and development facility, land
and building. As part of the agreement, we have effectively
fixed interest expense on this indebtedness at 5.36%. The
agreement requires monthly principal payments, which during the
five-year term will be approximately $940,000 per year. The
unpaid principal balance of the loan is due in 5 years.
Under the terms of the loan, we are required to establish a
restricted cash collateral account in the amount of the unpaid
principal balance of the loan ($18.3 million at
December 31, 2003). Additionally, as a result of the loan
agreement, we are no longer required to maintain an unrestricted
cash balance of $40 million which was a requirement under
the prior financing arrangement related to the facility.

Prior to May 7, 2003, we had financed our
research and development facility as an operating lease. As a
result, certain assets and liabilities of the facility were not
consolidated in our financial statements. At December 31,
2002, the lessors net investment in the facility was
approximately $18.8 million and we were required to maintain
cash collateral equal to approximately 74% of the remaining
balance of the lessors net investment in the facility. We
maintained cash collateral of $13.8 million as of
December 31, 2002, which was included in the consolidated
balance sheets as Investments-restricted. In addition to the
cash collateral requirement, we were subject to various other
affirmative and negative covenants, the most restrictive of
which required us to maintain unrestricted cash, cash
equivalents, and investments in the aggregate equal to
$40 million.

In May 2002, we borrowed $3.0 million from a
commercial bank, in order to repay the note payable to Cardinal.
This indebtedness is payable in four equal annual installments
of principal beginning April 30, 2003, with the final
payment due on April 30, 2006. In May 2003, we entered into
an interest rate swap agreement effectively fixing the interest
rate of this debt at 2.78%. Interest payments are due quarterly.
In connection with this indebtedness, we are required to
maintain with the commercial bank, restricted cash, in the
amount of the unpaid principal balance of this indebtedness
($2.2 million at December 31, 2003).

We fund capital additions through either lease
arrangements or direct purchases utilizing our existing cash. To
the extent possible, we finance property and equipment
requirements by obtaining capital leases. We funded capital
expenditures of $19.9 million, $1.8 million and
$0.8 million for the years ended December 31, 2003,
2002, and 2001, respectively. Of the capital expenditures funded
during the year ended December 31, 2003, $1.1 million were
funded pursuant to capital equipment lease arrangements and
$18.8 million were acquired through the use of our cash.

In October 2002, we entered into a new master
lease agreement to provide up to $1.0 million for computer
and equipment financing for a period of one year. Our previous
master lease agreement, entered into in August 2001, expired on
June 2002. The term of each operating lease varies from 24 to 48
months based upon the type of equipment being leased. As of
December 31, 2003, the Company had leased approximately
$0.4 million in equipment under this master lease
agreement. In connection with our various lease arrangements, we
are required to maintain restricted cash in the amount of
$1.1 million.

During 2002, we terminated our agreement with
Cardinal Health to provide us with a contract sales force. The
termination has led to a dispute regarding amounts owed to
Cardinal at the termination date. Cardinal asserted that it was
owed approximately $0.8 million. In 2003, its affiliate
Specialty Pharmaceuticals Distribution, or SPD, offset the
amount of Cardinals claim against an existing trade
receivable from SPD to us. We do not believe we had any
remaining obligations to Cardinal at December 31, 2002
relative to the agreement, however, in 2003 we have recorded a
reserve in the amount of $0.8 million for the SPD account
receivable that was not paid when due.

We have an agreement with SPD to whom we sell
GLIADEL® that permits either us or SPD to terminate the
agreement upon 60 days prior written notice. Under the
terms of our agreement with SPD, if the agreement is terminated,
we have an obligation to repurchase any remaining treatments of
GLIADEL® that it may have in its inventory. As of
December 31, 2003, we believe that SPD had approximately
$2.0 million of GLIADEL® in its inventory.

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Future Cash Needs

Historically, we have financed our operations
primarily through the issuance of equity securities, revenue
from the sale of GLIADEL®, funding pursuant to
collaborative agreements and proceeds from loans and other
borrowings, and during the second and third quarters of 2003,
the issuance of convertible debt securities. During the fourth
quarter of 2003, we financed the acquisition of AGGRASTAT®
through a revenue interest financing arrangement. Our future
capital requirements and liquidity will depend on many factors,
including but not limited to, revenues from the sale of
GLIADEL® and AGGRASTAT®, progress of our research and
development programs, progress of pre-clinical and clinical
testing, time and cost involved in obtaining regulatory
approval, the cost of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property
rights, changes in our existing research relationships,
competing technological and marketing developments, ability to
establish collaborative arrangements, ability to enter into
licensing agreements and contractual arrangements with others,
conversion of long-term convertible notes, the costs of
servicing debt, the costs of product in-licensing, and
substantial future expenditures we expect to make to increase
sales of AGGRASTAT®. Because of the risks and uncertainties
involved in the following:



| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | The amount of our sales of GLIADEL® and
    AGGRASTAT®;                                                                        
|
| |  | The outcomes and costs of pre-clinical testing
    and clinical trials and the time when those outcomes will be
    determined;
|
| |  | Obtaining future corporate partnerships;                                                                                       
|
| |  | The time and expense of obtaining regulatory
    approval;                                                                     
|
| |  | Competing products potentially coming to market;
    and                                                                       
|
| |  | Obtaining freedom to operate for our patented
    technologies.                                                                

We cannot reasonably estimate when we may incur
significant future expenses.

We believe that our existing resources will be
sufficient to fund our activities through at least the next
twelve months. However, we expect to need significantly greater
capital in the near future in order to achieve our business
objectives. The source, timing and availability of this funding
will depend on market conditions, interest rates and other
factors. This funding may be sought through various sources,
including debt and equity offerings, corporate collaborations,
bank borrowings, lease arrangements relating to fixed assets, or
other financing methods. There can be no assurance that
additional capital will be available on favorable terms, if at
all.

If adequate funds are not available, we may be
required to:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | Delay, curtail or eliminate one or more of our
    research or development programs;    
|
| |  | Reduce the scope of our efforts to market and
    sell GLIADEL® and/or AGGRASTAT®;      
|
| |  | Reduce our workforce;                                                                   
|
| |  | Reduce our facilities;                                                                  
|
| |  | Reduce the scope of our intellectual property
    protection; or                        
|
| |  | License or transfer rights to our research or
    development programs to third parties.

If we are required to do one or more of the
foregoing due to insufficient funds, then it may have the effect
of delaying our ability to generate additional revenues from any
of our products or product candidates. We may also have to
outsource one or more of our programs in order to continue its
development, resulting in increased costs.

36



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##### Table of Contents



Contractual Commitments

The following are contractual commitments at
December 31, 2003 associated with debt obligations, lease
obligations and our research and development projects (in
thousands):

|                                         |  |                        |         |         |  |           |        |           |  |          |        |  |  |   |         |  |  |   |        | 
|---------------------------------------- |  | ---------------------- | ------- | ------- |  | --------- | ------ | --------- |  | -------- | ------ |  |  | - | ------- |  |  | - | ------ | 
|                                         |  |                       
|                                         |  | Payments Due By Period
|                                         |  |                       
|Contractual Commitments(1)               |  | Total                  |         | <1 Year |  | 1-3 Years |        | 4-5 Years |  | >5 years
|                                         |  |                        |         |         |  |           |        |           |  |         
|Long-term debt                           |  | $                      | 91,333  |         |  |           | 2,858  |           |  | $        | 3,502  |  |  | $ | 84,913  |  |  | $ | 60     | 
|Capital lease obligations                |  |                        | 946     |         |  |           | 536    |           |  |          | 410    |  |  |   |        |  |  |   |       | 
|Revenue Interest Obligation(2)           |  |                        | 86,300  |         |  |           | 5,000  |           |  |          | 13,800 |  |  |   | 20,000  |  |  |   | 47,500 | 
|Operating leases                         |  |                        | 2,430   |         |  |           | 1,661  |           |  |          | 769    |  |  |   |        |  |  |   |       | 
|Research and development arrangements(3) |  |                        | 10,344  |         |  |           | 6,843  |           |  |          | 3,349  |  |  |   | 152     |  |  |   |       | 
|                                         |  |                        |         |         |  |           |        |           |  |          |        |  |  |   |         |  |  |   |        | 
|Total contractual commitments            |  | $                      | 191,353 |         |  | $         | 16,898 |           |  | $        | 21,830 |  |  | $ | 105,065 |  |  | $ | 47,560 | 
|                                         |  |                        |         |         |  |           |        |           |  |          |        |  |  |   |         |  |  |   |        | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This table does not include any milestone
    payments under agreements we have entered into in relation to
    our in-licensed technology, as the timing and likelihood of such
    payments are not known. Also, minimum annual research
    expenditures pursuant to such license agreements have been
    excluded from this table as we expect to spend those amounts as
    we progress the development of the underlying technologies. In
    the aggregate, these minimum annual research expenditures are
    approximately $1.0 million and typically apply to all years
    prior to regulatory approval of a product incorporating the
    licensed technology. Similarly, we have excluded the royalty
    payments due to Merck in connection with the AGGRASTAT®
    acquisition, as the amount and timing are not determinable.
    Under the terms of the asset agreement with Merck, Merck is
    entitled to royalty payments on net sales of AGGRASTAT®
    through October 23, 2016. The royalty payments to be paid
    to Merck are calculated as follows:

Calendar Year 2004, 2005 and 2006



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | 0% on AGGRASTAT® Net Sales up to $40,000,000;                                           
| | 10% on AGGRASTAT® Net Sales in excess of
    $40,000,000 and less than $50,000,000;     
| | 12% on AGGRASTAT® Net Sales in excess of
    $50,000,000 and less than $75,000,000;     
| | 14% on AGGRASTAT® Net Sales in excess of
    $75,000,000 and less than $100,000,000; and

20% on AGGRASTAT® Net Sales over
$100,000,000.


Calendar Year 2007 and succeeding Calendar Years



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | 5% on AGGRASTAT® Net Sales up to $28,000,000;                                           
| | 10% on AGGRASTAT® Net Sales in excess of
    $28,000,000 and less than $50,000,000;     
| | 12% on AGGRASTAT® Net Sales in excess of
    $50,000,000 and less than $75,000,000;     
| | 14% on AGGRASTAT® Net Sales in excess of
    $75,000,000 and less than $100,000,000; and
| | 20% on AGGRASTAT® Net Sales over
    $100,000,000.                                      



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | We granted PRF a revenue interest in
    GLIADEL® Wafer, AGGRASTAT® Injection, and certain
    other products which provides for PRF to receive 10% on the
    first $75.0 million of GLIADEL® Wafer and
    AGGRASTAT®, annual net sales, plus 2.5% for net sales
    exceeding $75.0 million through December 31, 2006.
    From January 1, 2007 through December 31, 2012, the
    percentages increase to 17.5% on the first $75.0 million in
    annual net sales, plus 3.5% on any net sales exceeding $75.0
    million. In addition, PRF receives a revenue interest in other
    Guilford products to the extent that specified future
    GLIADEL® Wafer and AGGRASTAT®, net sales are not
    achieved. At a minimum, we will pay PRF $5.0 million in
    2004, $6.3 million in 2005, $7.5 million in 2006,
    $10.0 million in each of 2007-2009 and $12.5 million in
    each of 2010-2012. Though actual payments to PRF under the
    agreement may be higher, we have included the minimum payments
    as contractual commitments.
|   
|(3) | Research and development arrangements include
    commitments that we have entered into at December 31, 2003,
    to engage third parties to perform various aspects of our
    research and development efforts subsequent to December 31,
    2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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Critical Accounting Policies and
Estimates

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

Revenue Recognition.Revenue from sales of GLIADEL®
and AGGRASTAT®, is recognized when all four of the
following criteria are met: (i) we have persuasive evidence
that an arrangement exists, (ii) the price is fixed and
determinable, (iii) title has passed and
(iv) collection is reasonably assured.

Our primary customer for GLIADEL® is
Specialty Pharmaceuticals Distribution (or SPD), a specialty
pharmaceutical distributor who sells directly to hospitals.
Product demand by this distributor during a given period may not
correlate with prescription demand for the product in that
period. As a result, we periodically evaluate SPDs
inventory position. If we believe these levels are too high
based on prescription demand, we will either not accept purchase
orders from or ship additional product to SPD until these levels
are reduced, or we will defer recognition of revenue if we
determine that there is excess channel inventory for our
products. We have three primary wholesalers for AGGRASTAT®,
AmerisourceBergen Corporation, Cardinal Health, Inc. and
McKesson Corporation, who sell directly to hospitals. Product
demand during a given period may not correlate with prescription
demand for the product in that period.

Provisions for sales discounts, and estimates for
chargebacks, rebates, damaged product returns, and exchanges for
expired product are established as a reduction of product sales
revenues at the time such revenues are recognized. We establish
these revenue reductions as our best estimate at the time of
sale based on historical experience, adjusted to reflect known
changes in the factors that impact such reserves.

Research and Development Expenses.For each of our research and
development projects, we incur both direct and indirect
expenses. Direct expenses include salaries and other costs of
personnel, raw materials and supplies. We may also incur third
party costs related to these projects, such as contract
research, consulting and clinical development costs. Indirect
expenses, such as facility and equipment costs, utilities,
general research and development management and other
administrative overhead are allocated to research and
development generally based on, among other things, the extent
to which our general research and development efforts make use
of facilities, non-project personnel and other resources. We
accrue clinical trial expenses based on estimates of work
performed and completion of certain milestones. Accrued clinical
costs are subject to revisions as trials progress to completion.
Revisions are charged to expense in the period in which the
facts that give rise to the revision become known (a change in
estimate). Expense of other contracted research arrangements or
activities are charged to operations either under the terms of
the contract, milestones or in some instances pro rata over the
term of the agreement. Based on the facts and circumstances, we
select the method which we believe best aligns the expense
recognition with the work performed.

Intangible Assets.When we purchase products we classify
the purchase price, including expenses and assumed liabilities,
as intangible assets. The purchase price may be allocated to
product rights, trademarks, patents and other intangibles using
the assistance of valuation experts. We estimate the useful
lives of the assets by considering the remaining life of the
patents, competition by products prescribed for similar
indications, estimated future introductions of competing
products, and other related factors. The factors that drive the
estimate of the life of the asset are often uncertain.

Long-lived assets.We review our property and intangible
assets for possible impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be
recoverable. Assumptions and estimates used in the evaluation of
impairment may affect the carrying value of long-lived assets,
which could result in impairment charges in future periods. Such
assumptions include projections of future cash flows and, in
some cases, the current fair value of the asset. In addition,
our depreciation and amortization policies reflect judgments on
the estimated useful lives of assets.

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Revenue Interest Obligation.Our $42.2 million revenue
interest obligation was recorded as debt as the Company has
significant continuing involvement in the generation of the cash
flows due to PRF. Monthly revenue interest payments made to PRF
will reduce the future obligation. The obligation will be
amortized under the effective interest method. The effective
interest method results in an imputed interest rate equivalent
to PRFs internal rate of return on future revenue interest
payments. These future revenue interest payments are based on
estimated future revenues. We will periodically review estimated
future revenues and update the imputed interest rate as
necessary.

New Accounting Pronouncements

In April 2003, the Financial Accounting and
Standards Board (FASB) issued Statement of Financial
Accounting Standard No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities
(SFAS No. 149). This Statement amends and
clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under Statement of Financial Accounting
Standard 133 Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 149 was effective
for contracts entered into or modified after June 30, 2003,
for hedging relationships designated after June 30, 2003,
and to certain preexisting contracts. The adoption of SFAS
No. 149 did not have a material impact on our financial
statements.

In May 2003, the FASB issued Statement of
Financial Accounting Standard No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and Equity (SFAS No. 150).
This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equities. SFAS
No. 150 was effective for financial instruments entered
into or modified after May 31, 2003, and is otherwise
effective July 1, 2003. The adoption of SFAS No. 150
did not have an impact on our financial statements as we do not
have any instruments that are within the scope of this statement.

In December 2003, the FASB issued FASB
Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities
(FIN 46R), which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an
entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, which was issued in January 2003.
We will be required to apply FIN 46R to variable interests
in variable interest entities created after December 31,
2003. We do not have any variable interests in variable interest
entities.

Risk Factors

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

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

We may not be able to achieve or sustain
significant revenues or earn a profit in the future. Since we
were founded in July 1993, with the sole exception of 1996, we
have not earned a profit in any year. Our losses for the years
ended December 31, 2003, 2002 and 2001, were
$53.9 million, $59.3 million, and $60.3 million,
respectively. Our losses result mainly from the significant
amount of money that we have spent on research, development and
clinical trial activities. As of December 31, 2003, we had
an accumulated deficit of approximately $303.5 million. We
expect to have significant additional losses over the next
several years due to expenses associated with our product
candidates related to research, development and clinical trial
activities, applying for and obtaining meaningful patent
protection and establishing freedom to commercialize and
applying for and receiving regulatory approval for our drug
product candidates.

39



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Our product candidates are in research or various
stages of pre-clinical and clinical development. Except for
GLIADEL® Wafer and AGGRASTAT® Injection, none of our
products or product candidates may be sold to the public. Nearly
all of our past revenues have come from:



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

Presently, we expect to receive significant
revenue only from sales of GLIADEL® Wafer,
AGGRASTAT® Injection and from milestone and royalty
payments, if any, received as a result of our recent license
agreement with Pfizer relating to our NAALADase inhibitors. We
do not expect that the revenue from these sources will be
sufficient to support all our anticipated future activities. We
do not expect to generate revenue from sales of our product
candidates for the next several years, if ever, because of the
significant risks associated with pharmaceutical product
development.

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



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to successfully market, sell,
    distribute and obtain additional regulatory approvals for
    GLIADEL® Wafer and AGGRASTAT® Injection;                                                 
|
| |  | the achievement by Pfizer of development
    milestones and the successful development, regulatory approval,
    marketing and sales of products derived from our NAALADase
    inhibitors;          
|
| |  | the successful development of our other product
    candidates either on our own, or together with future corporate
    partners with whom we enter into collaborative or license
    agreements; and
|
| |  | the ability to in-license or acquire additional
    products in our targeted markets.                                                                                                                

We will require substantial funds in addition
to our existing working capital to develop our product
candidates and otherwise to meet our business
objectives.

We will require substantial funds in addition to
our existing working capital to develop our product candidates
and otherwise to meet our business objectives. We have never
generated enough revenue during any period since our inception
to cover our expenses and have spent, and expect to continue to
spend, substantial funds to continue our research and
development and clinical programs and to support our sales and
marketing efforts. We cannot be certain that we will be able to
raise additional capital when we need it, on terms favorable to
us, or at all. If we cannot raise additional capital in a timely
manner, then we may not be able meet our business objectives.

Our current business objectives require us to
license, partner or strategically finance one or more of our
development programs, or otherwise alter our business objectives
based on our capital resources.

Consistent with our strategy and subject to our
current capital resources, we will depend on either corporate
collaborations, strategic financings or both, in order to
develop one or more of our product candidates through to
commercialization. If we are not able to complete one of these
transactions for one or more of our development programs, then
we may have to alter or curtail our business objectives based on
our capital resources. If we do so, it could result in delaying
the progress of pre-clinical research or clinical trials, and
consequently, the eventual commercialization of a marketed
product based on one of these programs, or eliminating one or
more research or development programs from our business
objectives.

We will depend on GLIADEL® Wafer and
AGGRASTAT®Injection for
revenues.

Our short-term prospects depend heavily on sales
of GLIADEL® Wafer and AGGRASTAT® Injection, our
commercial products. For the year ended December 31, 2003,
GLIADEL® Wafer accounted for approximately 89% of our net
product sales revenue. GLIADEL® Wafer was launched
commercially in the United States by Aventis and its
predecessors in February 1997 after having received approval
from the FDA

40



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in September 1996. We do not know whether the
product will ever gain broader market acceptance. If
GLIADEL® Wafer fails to gain broader market acceptance, the
revenues we receive from sales of GLIADEL® Wafer would be
unlikely to increase.


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

On February 25, 2003, we received FDA
approval to also market GLIADEL® Wafer for patients
undergoing initial surgery, also known as first line therapy, in
the United States for malignant glioma in conjunction with
surgery and radiation. We estimate that the total number of
patients undergoing initial surgery in the United States is
between approximately 7,000 and 9,000 per year. In the second
quarter of 2003 we instituted a new sales and marketing effort
for GLIADEL® Wafer for initial surgery. We cannot assure
you, however, that we will be successful in this effort or in
achieving sales of GLIADEL® Wafer for use in initial
surgeries.

In addition, in January 2002 we submitted
applications for approval to market GLIADEL® Wafer in
Europe for patients undergoing initial surgery for malignant
glioma. In November 2002, we withdrew those applications, while
we were waiting for the FDA to respond to a similar application
in the United States. We resubmitted these European applications
in November 2003. Presently GLIADEL® Wafer is approved for
the recurrent GBM market in only 21 countries, including France,
Spain, Germany and the U.K. GLIADEL® Wafer is currently
approved for first line therapy only in the United States and
Canada. If we are not able to obtain additional approvals, the
market for GLIADEL® Wafer would remain limited outside of
the United States, which reduces the potential sales of
GLIADEL® Wafer. Regardless of the number of foreign
regulatory approvals that we have received, international sales
to date comprised less than 6% of worldwide sales of
GLIADEL® Wafer for the year ended December 31, 2003.

We acquired AGGRASTAT® Injection from Merck
on October 28, 2003. AGGRASTAT® Injection is a
glycoprotein GP IIb/ IIIa receptor antagonist used for the
treatment of acute coronary syndrome (ACS) including
unstable angina, which is characterized by chest pain when one
is at rest, and non-ST elevation myocardial infarction (NSTEMI).
Prior to acquiring AGGRASTAT® Injection, we have never
marketed and sold a product for cardiovascular conditions. We
cannot assure you that we will be successful in our efforts to
market and sell AGGRASTAT® Injection.

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

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



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

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

41



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##### Table of Contents



common stock to decrease. For example, the
trading price of our common stock from January 1, 2002 to
December 31, 2003 ranged from $2.65 to $12.55.


We may not be able to generate sufficient cash
to satisfy our existing and future debt obligations.

Our ability to pay the required interest and
principal payments on our debt depends on the future performance
of our business. As of December 31, 2003, we had total
long-term debt and revenue interest obligations of $134.4
million of which $16.9 million is due in 2004. We will
require substantial funds to service our debt obligations and to
operate our business in the future, including to fund research
and development activities, pre-clinical and clinical testing,
to manufacture our products and to make acquisitions.

The following are the Companys contractual
commitments at December 31, 2003 associated with debt
obligations, lease obligations and research and development
projects for the next 12 months (in thousands):

|                                         |  |      |        | 
|---------------------------------------- |  | ---- | ------ | 
|Contractual Commitments(1)               |  | 2004
|                                         |  |     
|Long-term debt                           |  | $    | 2,858  | 
|Capital lease obligations                |  |      | 536    | 
|Revenue Interest Obligation(2)           |  |      | 5,000  | 
|Operating leases                         |  |      | 1,661  | 
|Research and development arrangements(3) |  |      | 6,843  | 
|                                         |  |      |        | 
|Total contractual commitments            |  | $    | 16,898 | 
|                                         |  |      |        | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This table does not include any milestone
    payments under agreements we have entered into in relation to
    our in-licensed technology, as the timing and likelihood of such
    payments are not known. Also, minimum annual research
    expenditures pursuant to such license agreements have been
    excluded from this table as we expect to spend those amounts as
    we progress the development of the underlying technologies. In
    the aggregate, these minimum annual research expenditures are
    approximately $1.0 million and typically apply to all years
    prior to regulatory approval of a product incorporating the
    licensed technology. Similarly, we have excluded the royalty
    payments due to Merck in connection with the AGGRASTAT®
    acquisition, as the amount and timing are not determinable.                                                                                                                                                                                           
|   
|(2) | We granted PRF a revenue interest in
    GLIADEL® Wafer, AGGRASTAT®, and certain other products
    which provides for PRF to receive 10% on the first
    $75.0 million of GLIADEL® Wafer and AGGRASTAT®,
    annual net sales, plus 2.5% for net sales exceeding
    $75.0 million through December 31, 2006. From
    January 1, 2007 through December 31, 2012, the
    percentages increase to 17.5% on the first $75.0 million in
    annual net sales, plus 3.5% on any net sales exceeding $75.0
    million. In addition, PRF receives a revenue interest in other
    Guilford products to the extent that specified future
    GLIADEL® Wafer and AGGRASTAT®, net sales are not
    achieved. At a minimum, we will pay PRF $5.0 million in
    2004, $6.3 million in 2005, $7.5 million in 2006,
    $10.0 million in each of 2007-2009 and $12.5 million
    in each of 2010-2012. Though actual payments to PRF under the
    agreement may be higher, we have included the minimum payments
    as contractual commitments.
|   
|(3) | Research and development arrangements include
    commitments that we have entered into at December 31, 2003,
    to engage third parties to perform various aspects of our
    research and development efforts subsequent to December 31,
    2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

We have a history of net losses. Our historical
financial results have been, and we anticipate that our future
financial results will be, subject to fluctuations. Unless we
are able to substantially increase our profitability and cash
flow from operations compared to historical levels or obtain
refinancing, we cannot assure you that our business will
generate sufficient cash flow from operations or that future
capital will be available to us in amounts sufficient to enable
us to pay our debt, or to fund our other liquidity needs. If we
are unable to meet our debt service obligations or fund our
other liquidity needs, we may be required to restructure or
refinance our debt or seek additional equity capital or we may
be required to sell assets. We cannot assure you that if and
when required to do so we will be able to accomplish those
actions on satisfactory terms, or at all.

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

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

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



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

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

Furthermore, market volatility may adversely
affect the market price of our common stock, which could limit
our ability to raise capital or make acquisitions of products or
technology.

The large number of shares of common stock
eligible for future sale upon conversion of our convertible
notes could depress our stock price.

Upon conversion of our $69,354,000 principal
amount of notes at their conversion price of $6.24,
approximately 11,114,423 shares of common stock would be
issuable. Our stock price could be depressed significantly if
the holders of the notes decide to convert their notes and sell
the common stock issued thereby or are perceived by the market
as intending to sell them. These sales also might make it more
difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate.

We have limited sales experience, and we
expect to incur significant expense in marketing, selling and
distributing GLIADEL®Wafer
and AGGRASTAT® Injection.

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

The success of our Pfizer collaboration is
dependent on a number of factors, most of which are outside of
our control.

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Regulatory and development milestone payments as
well as royalty amounts on product sales payable to us under our
collaboration with Pfizer depend on a number of factors. Many of
these factors are not within our control, including:



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | the selection of one or more appropriate lead
    compounds;                                     
|
| |  | successful design and completion of pre-clinical
    and clinical development activities;        
|
| |  | application for and obtaining regulatory
    clearances to market potential products;            
|
| |  | commercialization of products; and                                                               
|
| |  | the successful preservation and extension of
    intellectual property rights licensed to Pfizer.

All of these activities are subject to
significant risks and uncertainties. Moreover, under the terms
of our collaboration with Pfizer, we have no control over their
development activities regarding the NAALADase inhibitors, which
have been left to the sole discretion of Pfizer. Our agreement
with Pfizer also does not specify a binding timetable for
achieving development and commercialization goals with respect
to the NAALADase inhibitors. If Pfizer decides to conduct
clinical trials on a product candidate resulting from our
collaboration, Pfizer still may not be able successfully to
complete those clinical trials and then receive clearance from
the FDA or foreign regulatory authorities to market and sell any
such products.

Even if Pfizer is able to obtain all regulatory
approvals necessary to market a product resulting from our
collaboration, our agreement does not specify any minimum sales
requirements for Pfizer. This means that any royalty amounts
payable to us in the future will depend entirely on the sales
and marketing efforts of Pfizer, activities over which we will
have no control. In addition, our agreement with Pfizer does not
prevent Pfizer from pursuing technologies for product candidates
competitive with the NAALADase inhibitors now or in the future.
Accordingly, we cannot assure you that we will earn any
additional payments under the Pfizer agreement or that any
amounts earned will be significant.

We do not have manufacturing capabilities for
commercial quantities of any of our product
candidates.

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

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

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

The efforts of government and insurance
companies, health maintenance organizations and other payors of
health care costs to contain or reduce costs of health care may
affect our future revenues and profitability. These efforts may
also affect the future revenues and profitability of our
potential customers, suppliers and collaborative partners, in
turn affecting demand for our products. For example, in certain
foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. In the United
States, given recent federal and state government initiatives
directed at lowering the total cost of health care, the U.S.
Congress and state legislatures will likely continue to focus on
health care reform, the cost of prescription

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pharmaceuticals and on the reform of the Medicare
and Medicaid systems. While we cannot predict whether any such
legislative or regulatory proposals will be adopted, the
announcement or adoption of such proposals could have a negative
effect on our business and operating results.


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

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

A significant portion of our sales of
GLIADEL® Wafer are to Specialty Pharmaceuticals
Distribution (formerly known as National Specialty Services,
Inc.), a specialty pharmaceutical distributor.

Approximately 69% of our sales of GLIADEL®
Wafer in 2002, and approximately 76% in 2003, were made to
Specialty Pharmaceuticals Distribution, or SPD, a nationwide
specialty pharmaceutical distributor. We have an agreement with
SPD regarding its purchase of the product that permits either us
or SPD to terminate the agreement upon 60 days prior
written notice. We have no assurance that SPD will not exercise
its rights to terminate its agreement with us at any time. If
SPD does terminate the agreement, there can be no assurance that
we will be able to enter into an arrangement with another
specialty distributor for the purchase and sale of GLIADEL®
Wafer. Additionally, under the terms of our agreement with SPD,
if the agreement is terminated, we have an obligation to
repurchase any remaining treatments of GLIADEL® Wafer that
SPD may have in its inventory. As of December 31, 2003, we
believe that SPD had approximately $2.0 million of
GLIADEL® Wafer in its inventory.

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

We cannot be certain that we will be able to
maintain or increase sales of AGGRASTAT® Injection, nor can
we be certain that we will be able expand the labeled
indications for AGGRASTAT® Injection.

When we purchased AGGRASTAT® Injection from
Merck and Co., Inc., Merck had not been actively promoting the
product in the United States. Our strategy for reintroducing
AGGRASTAT® Injection into the United States marketplace
involves actively promoting the product and, subject to an
understanding with the FDA, conducting an additional clinical
trial for AGGRASTAT® Injection, in order to try to expand
its labeled indications. We cannot be certain that our promotion
of the product will let us maintain or lead to increased sales
based on the products current indication. Additionally, we
cannot be certain that we will be able to reach an understanding
with the FDA as to an appropriate clinical trial design in order
to expand its indications, that we will be able to fully enroll
the clinical trial or that if conducted the clinical trial will
be successful. If it is successful, we cannot be certain that
the expanded indication will lead to increased sales or market
share.

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We depend and will continue to depend upon
Merck to supply us with finished product until we establish
relationships directly with certain manufacturers for
AGGRASTAT®Injection, and at
that time, we will continue to depend on Merck to supply us with
the active ingredient for AGGRASTAT® Injection.

Merck is obligated to supply us with the active
pharmaceutical ingredient, or API, for AGGRASTAT® Injection
until 2014. AGGRASTAT® Injection is sold as a finished
product in both vials and bags, which are manufactured and
filled for Merck by third parties, known as contract
manufacturers. Mercks contractual relationships with these
third party suppliers last until December 31, 2004, for
vials, and until August 18, 2007, for bags. Under our
agreement with Merck, we are entitled to enter into direct
relationships with these contract manufacturers to obtain
quantities of finished product of AGGRASTAT® Injection. If
we do not enter into direct relationships with these contract
manufacturers prior to 18 months after the date that we
acquired the product from Merck, we may continue to receive
quantities of finished product through Merck, although without
remedies against the contract manufacturers if they fail to
supply Merck with the finished product that we need to purchase.
We also may enter into relationships with other contract
manufacturers if we are unable to enter into direct
relationships with Mercks manufacturers; however, we will
not be able to do this before January 1, 2005, for vials,
or August 19, 2007, for bags. If Merck is not able to
provide us with API or finished product, as applicable, then we
may be entitled to money damages under certain circumstances,
but we may not be able to procure alternative sources of either
API or finished product. Because we depend upon this
relationship with Merck for both the finished product and key
ingredient of AGGRASTAT® Injection, the limited duration of
Mercks obligation to us, and the potential lack of an
alternative provider may adversely affect the operation of our
business.

Merck is providing us with certain transition
services until June 28, 2004, without which we may not be
able to successfully integrate
AGGRASTAT®Injection into our
business.

Merck is obligated to provide us with certain
transition services from October 28, 2003, until
June 28, 2004, including warehousing of finished product,
accounts receivable management, billing, collection and
recordkeeping. If Merck does not provide us with these services,
or does not provide these services in a timely or professional
manner, we may not be able to successfully integrate
AGGRASTAT® Injection into our business, which may result in
our not achieving sales of AGGRASTAT® Injection that we
expect.

We may not be able to successfully perform the
services for us that Merck is presently performing for us as
transition services.

When Merck is no longer providing us with
transition services, we will be required to perform those
services on our own. We have never performed these services
before with respect to AGGRASTAT® Injection. If we are not
able to perform these services successfully, it may negatively
affect our ability to sell the product, or manage the
recordkeeping, billings and collections, among other things,
associated with the sales of the product.

The amount of inventory of AGGRASTAT®
Injection at pharmaceutical wholesalers may negatively affect
our sales of the product.

AGGRASTAT® Injection was sold by Merck to
pharmaceutical wholesalers, among other customers. These
wholesalers buy quantities of products to resell to hospitals
pharmacies and other end users. Oftentimes, when they think that
a pharmaceutical company may increase the price of a product,
they order additional quantities of the product, in order to
purchase under existing sales and marketing programs, or at the
lower price. When we purchased AGGRASTAT® Injection from
Merck, we could not be certain what quantity of AGGRASTAT®
Injection wholesalers were maintaining. The amount of inventory
of the product that pharmaceutical wholesalers had at the time
that we acquired the product or currently have, could negatively
affect our sales of the product.

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Paul Royalty Funds is entitled to a portion of
our revenues, which may limit our ability to fund some of our
operations. If we do not achieve certain sales targets for
GLIADEL®Wafer and
AGGRASTAT® Injection, Paul Royalty Funds may be
entitled to a greater percentage of our revenues, revenues from
future products we may acquire or certain of our product
candidates.

Under the terms of our Revenue Interest
Assignment Agreement with Paul Royalty Fund, L.P. and Paul
Royalty Fund Holdings II, who we refer to as Paul Royalty Funds
or PRF, from October 28, 2003, through December 31,
2006, PRF is entitled to receive 10% of the Companys
GLIADEL® Wafer and AGGRASTAT® Injection combined
annual net sales up to $75 million, and 2.5% of those
combined annual net sales in excess of $75 million, and
from January 1, 2007, through December 31, 2012 (the
end of the term of the financing arrangement with PRF), these
percentages are 17.5% and 3.5%, respectively. If combined
GLIADEL and AGGRASTAT annual net sales are less than
$48.3 million, $60.2 million, or $80.6 million in
2004, 2005, and 2006, respectively, then PRF will receive the
higher of the minimum payments for such years described below or
12.5% of combined GLIADEL and AGGRASTAT net sales. If GLIADEL
and AGGRASTAT net sales are less than $75 million in any of
the years 2007 through 2012, then PRF will receive the higher of
the minimum payments for such years described below, or 22.5% of
combined GLIADEL and AGGRASTAT net sales. During each year of
the term of the arrangement with PRF, PRF will be entitled to
receive a portion of revenues from products that the Company may
acquire in the future, or of AQUAVAN® Injection and GPI
1485 (each a product candidate of the Company), in the case that
the Companys calculated annual obligation(s) to make
royalty payments under the Revenue Interest Assignment Agreement
(based upon the combined net sales of GLIADEL and AGGRASTAT) are
less than $6.4 million for 2004, $7.6 million for
2005, $8.3 million for 2006, $15.3 million for 2007,
$15.5 million for 2008, $15.8 million for 2009,
$16.0 million for 2010, or $15.9 million for 2011 and
2012, respectively. The Company will pay PRF minimum royalties
of $5.0 million in 2004, $6.3 million in 2005,
$7.5 million in 2006, $10.0 million in each of
2007-2009 and $12.5 million in each of 2010-2012. PRF is
also entitled to receive portions of amounts payable to the
Company on the resolution of future intellectual property
disputes involving GLIADEL or AGGRASTAT and on any future sale
of ex-North American marketing rights to GLIADEL. In addition to
its revenue interest in the Companys products or future
products, as the case may be, PRF received five-year warrants to
purchase 300,000 shares of the Companys common stock at an
exercise price of $9.15 per share.

Under certain circumstances, Paul Royalty
Funds may require us to repurchase its revenue interest, the
payment of which may significantly deplete our cash resources or
limit our ability to enter into significant business
transactions.

PRF may be entitled to require us to repurchase
its revenue interest under the following circumstances:
(1) if we fail to maintain an escrow account funded with
eight quarters of minimum payments to PRF or fail to maintain at
least $20 million of net working capital, (2) if we
fail to make our minimum payments to PRF, (3) if we sell
GLIADEL® Wafer and AGGRASTAT® Injection (with PRF
having partial rights to make us repurchase its interest in the
event of the sale of one, but not both products), (4) upon
the occurrence of a bankruptcy or similar event, or (5) upon
certain conditions related to a change of control of us. The
repurchase amount guarantees PRF a return in an amount over its
initial investment and is reduced based on payments that we have
previously made to PRF prior to the time that its interest is
repurchased, but the repurchase price may never exceed three and
a half times PRFs initial investment, or
$147 million. The exercise of this repurchase right may
significantly impair our ability to fund our operations.
Additionally, because PRF would be entitled to exercise this
repurchase right upon a change of control of us, or upon the
sale of GLIADEL® Wafer or AGGRASTAT® Injection, we may
not be able to effect a business transaction that would have one
of these results.

We have pledged our assets related to
GLIADEL®Wafer and
AGGRASTAT® Injection to Paul Royalty Funds;
therefore, we may not be free to utilize those assets at our
discretion.

PRF has been granted a security interest in the
intellectual property assets related to GLIADEL® Wafer and
AGGRASTAT® Injection, which in the aggregate accounted for
all of the Companys net product

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revenue of $21.7 million for the year ended
December 31, 2003. As of December 31, 2003, the
intangible assets related to Gliadel® Wafer and
AGGRASTAT® Injection were $82.8 million, or
approximately 37% of total assets. We, therefore, may not be
free to utilize those assets at our discretion, such as selling
or outlicensing rights to part or all of those assets, without
first obtaining the permission of PRF. This requirement could
delay, hinder or condition, our ability to enter into corporate
partnerships or strategic alliances with respect to these assets.


The integration of
AGGRASTAT®Injection into our
business and our clinical development plans for
AGGRASTAT® Injection and AQUAVAN® will
require significant additional capital.

In order (1) to successfully integrate
AGGRASTAT® Injection into our business, which includes
expanding our commercial operations, (2) to conduct
clinical trials to expand the labeled indication of
AGGRASTAT® Injection, and (3) to conduct a Phase III
clinical trial of AQUAVAN®, we will require significant
additional capital resources within the next eighteen months.
This additional financing may take the form of an offering of
debt or equity, and that offering could be material in size. If
we conduct a primary equity offering, the issuance of the
additional shares of common stock may be dilutive to our
existing stockholders and may have a negative effect on the
market price of our stock. We do not know if those capital
resources will be available to us. If they are not available, we
may not be able to successfully execute on these business
objectives or on any other business or operational goals.

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

The research, development and commercialization
of pharmaceutical drugs involve significant risk. Before a drug
can be commercialized, we, or a future corporate partner will
have to:



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

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

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



| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our new approaches will not result in any
    products that gain market acceptance;                                                                                                          
|
| |  | a product candidate will prove to be unsafe or
    ineffective, or will otherwise fail to receive and maintain
    regulatory clearances necessary for development and marketing;            
|
| |  | a product, even if found to be safe and
    effective, could still be difficult to manufacture on the scale
    necessary for commercialization or otherwise not be economical
    to market;
|
| |  | a product will unfavorably interact with other
    types of commonly used medications, thus restricting the
    circumstances in which it may be used;                                       

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| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | third parties may successfully challenge our
    proprietary rights protecting a product;                 
|
| |  | proprietary rights of third parties will preclude
    us from manufacturing or marketing a new product; or
|
| |  | third parties will market superior or more
    cost-effective products.                                   

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

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

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



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

In trying to attract corporate partners, we face
serious competition from other small pharmaceutical companies
and the in-house research and development staffs of larger
pharmaceutical companies. If we are unable to enter into such
arrangements with corporate partners, our ability to proceed
with the research, development, manufacture and/or sale of
product candidates may be limited. We may not be successful in
attracting corporate partners, or collaborators, over other
companies because (i) their research programs may be more
attractive to a collaborator, (ii) their stage in the
research process may be more advanced, (iii) they may have
synergies with the collaborators existing research
programs, or (iv) they may agree to terms and conditions of
the collaboration that are more favorable to the collaborator
than we would otherwise agree. It is common practice in many
corporate partnerships in our industry for the larger partner to
have responsibility for conducting pre-clinical studies and
human clinical trials and/or preparing and submitting
applications for regulatory approval of potential pharmaceutical
products. It is possible that this will be the case with future
arrangements of ours. If one of our collaborative partners fails
to develop or commercialize successfully any of our product
candidates, we may not be able to remedy this failure and it
could negatively affect our business.

Furthermore, larger pharmaceutical companies
often explore multiple technologies and products for the same
medical conditions. Therefore, they are likely to develop or
enter into collaborations with our competitors for products
addressing the same medical conditions targeted by our
technologies. Our collaborators may, therefore, be pursuing
alternative technologies or product candidates in order to
develop treatments for the diseases or disorders targeted by our
collaborative arrangements. Depending on how other product
candidates advance, a corporate partner may slow down or abandon
its work on our product candidates or terminate its
collaborative arrangement with us in order to focus on these
other prospects. We are currently not aware if Pfizer, our only
large pharmaceutical partner at this time, is pursuing
alternative technologies, either through its own research and
development capabilities or through other corporate
collaborations, for the treatment of neuropathic pain, in
addition to the collaboration that we have with Pfizer on our
NAALADase inhibitor technology.

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

Any success that we have will depend in large
part on our ability to obtain, maintain and enforce intellectual
property protection for our products and processes and to
license patent rights from third parties.

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

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would be difficult for a corporate partner to
justify the time and money that is necessary to complete the
development of a product.


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

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

We are aware of at least one company that has
asserted publicly that it has submitted patent applications
claiming the use of certain of its immunosuppressive compounds
and multi-drug resistance compounds for nerve growth
applications. That company also stated that it has issued U.S.
patents and pending U.S. applications which claim compounds that
may be useful in nerve growth applications. We cannot give any
assurance as to the ability of our patents and patent
applications to adequately protect our neurotrophic product
candidates. Also, our neurotrophic product candidates may
infringe or be dominated by patents that have issued or may
issue in the future to third parties.

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

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

We rely on confidentiality agreements to
maintain trade secret protection which may not be adhered to or
effective.

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



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

We may not be able to acquire exclusive rights
to inventions or information resulting from work performed under
consulting or collaboration agreements.

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

We support and collaborate in research conducted
in universities, such as Johns Hopkins, and in governmental
research organizations, such as the National Institutes of
Health. We may not be able to acquire exclusive rights to the
inventions or technical information that result from work
performed by personnel at these organizations. Also, disputes
may arise as to which party should have rights in research
programs that we

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conduct on our own or in collaboration with
others that are derived from or related to the work performed at
a university or governmental research organization. In addition,
in the event of a contractual breach by us, some of our
collaborative research contracts provide that we must return the
technology rights, including any patents or patent applications,
to the contracting university or governmental research
organization.


Our products may now or in the future infringe
upon the proprietary rights of others, which could result in
considerable litigation costs or the loss of the right to use or
develop products.

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

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

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

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

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



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

In addition, these license agreements require us
to abide by record-keeping and periodic reporting obligations.
Each licensor has the power to terminate its agreement if we
fail to meet our obligations. If we cannot meet our obligations
under these license agreements, we may lose access to our key
technology.

If licensed patents covering our products or
product candidates are infringed, we generally have the right,
but not the obligation, to bring suit against the infringing
party. If we choose to bring suit against an infringing party,
the licensor of the technology is generally required to
cooperate with the enforcement of the patents that we have
licensed. If we do not choose to bring suit against an
infringing party, rights to enforce the licensed patents
generally revert to the licensor. Proceeds received from the
successful enforcement of our patent rights are generally split
between us and the licensor, with the party bringing the suit
receiving the more significant portion of those proceeds.

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

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

In addition, our U.S. patent protection for
GLIADEL® Wafer, which as of December 31, 2003, has
accounted for approximately 89% of our product sales revenue,
expires in 2006. From and after that time, there can be no
assurance that others will not enter the market with a generic
copy of GLIADEL® Wafer. The availability of such a generic
copy could negatively impact our revenues from GLIADEL®
Wafer.

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

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



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

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

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

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

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

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

We are subject to extensive governmental
regulation, which may result in increased costs and significant
delays in, or ultimate denial of, approval for our product
candidates.

Our research, pre-clinical development and
clinical trials, and the manufacturing and marketing of our
product candidates are subject to extensive regulation by
numerous governmental authorities in the United States and other
countries, including the FDA and the DEA. Except for
GLIADEL® Wafer and

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AGGRASTAT® Injection, none of our product
candidates has received marketing clearance from the FDA or any
foreign regulatory authority.


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

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



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | we will not be able to satisfy the FDAs
    requirements with respect to any of our drug product candidates;
    or                        
|
| |  | even if the FDA does approve our product
    candidates, the FDA will approve less than the full scope of
    uses or labeling that we seek.

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

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

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

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

Because controlled drug products and
radio-labeled drugs are subject to special regulations in
addition to those applicable to other drugs, the DEA and the
Nuclear Regulatory Commission, or NRC, may regulate some of our
products and product candidates, including DOPASCAN®
Injection, as controlled substances and as radio-labeled drugs.
The NRC licenses persons who use nuclear materials and
establishes standards for radiological health and safety. The
DEA is responsible for compliance activities for companies
engaged in the manufacture, distribution and dispensing of
controlled substances, including the equipment and raw materials
used in their manufacture and packaging in order to prevent such
substances from being diverted into illicit channels of
commerce. Registration is required and other activities
involving controlled substances are subject to a variety of
record-keeping and security requirements, and to permits and
authorizations and other requirements. States often have
requirements for controlled substances as well. The DEA grants
certain exceptions from the requirements for permits and
authorizations to export or import materials related to or
involving controlled substances. Our potential future inability
to obtain exceptions from the DEA for shipment abroad or other
activities could have a negative effect on us.

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

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

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

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

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

Acquisitions of competing companies by large
pharmaceutical companies or other companies could enhance the
financial, marketing and other resources available to these
competitors. These competitors may develop products that are
superior to those we are developing. We are aware of the
development by other companies and research scientists of
alternative approaches to:



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | the treatment of malignant glioma;                             
|
| |  | the treatment of acute cardiovascular conditions;              
|
| |  | the diagnosis of Parkinsons disease;                          
|
| |  | the development of a water soluble formulation of
    propofol;
|
| |  | the promotion of nerve growth and repair; and                  
|
| |  | the treatment and prevention of neuronal damage.               

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

Our products must compete with others to gain
market acceptance.

For the treatment of malignant glioma,
GLIADEL® Wafer competes with traditional systemic
chemotherapy, radioactive seeds, radiation catheters,
TEMODAR® Capsules, a chemotherapy product manufactured by
Schering Corporation, and other experimental protocols.
AGGRASTAT® Injection competes directly with
INTEGRELIN® Injection, marketed by Millennium
Pharmaceuticals, and ReoPro®, marketed by Eli Lilly, for
the inhibition of platelet aggregation.

Any product candidate that we develop and for
which we gain regulatory approval must then compete for market
acceptance and market share. An important factor will be the
timing of market introduction of

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competitive products. Accordingly, the relative
speed with which we and competing companies can develop
products, complete the clinical testing and approval processes,
and supply commercial quantities of the products to the market
will be an important element of market success.


Significant competitive factors include:



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | capabilities of our collaborators;                                                  
|
| |  | product efficacy and safety;                                                        
|
| |  | timing and scope of regulatory approval;                                            
|
| |  | product availability;                                                               
|
| |  | awareness and acceptance of our products by
    physicians;                         
|
| |  | marketing and sale capabilities;                                                    
|
| |  | reimbursement coverage from insurance companies
    and others;                     
|
| |  | the amount of clinical benefit of our product
    candidates relative to their cost;
|
| |  | the method of administering a product;                                              
|
| |  | price; and                                                                          
|
| |  | exclusivity, through patent protection or FDA
    regulations.                      

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

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

We may potentially become subject to large
liability claims and significant defense costs as a result of
the design, manufacture or marketing of our products, including
GLIADEL® Wafer and AGGRASTAT® Injection, or the
conduct of clinical trials involving our products. We currently
maintain only $10 million of product liability insurance
covering clinical trials and product sales. This existing
coverage or any future insurance coverage we obtain may not be
adequate. Furthermore, our insurance may not cover a claim made
against us. Product liability insurance varies in cost. It can
be difficult to obtain, and we may not be able to purchase it in
the future on terms acceptable to us, or at all. We also may not
be able to otherwise protect against potential product liability
claims. Product liability claims and/or the failure to obtain
adequate product liability insurance could prevent or inhibit
the clinical development and/or commercialization of any
products we are developing.

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

We depend heavily on the principal members of our
management and scientific staff, including Craig R. Smith, M.D.,
our Chairman, President and Chief Executive Officer. We have key
man life insurance covering Dr. Smith. Dr. Smith has
extensive experience in the pharmaceutical industry and provides
us with unique access to his contacts in the scientific
community. The loss of the services of Dr. Smith or other
members of our senior management team could have a negative
effect on our business.

We have entered into an employment agreement with
Dr. Smith, which provides protection for our proprietary
rights. Nevertheless, he may terminate his relationship with us
at any time. Accordingly, we cannot be sure that Dr. Smith
will remain with us.

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Recruiting and retaining qualified personnel,
collaborators, advisors and consultants will be critical to our
activities. Our planned activities will require personnel and
consultants with expertise in many areas including:



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

We may not be able to attract and retain
personnel or consultants with these expertise. Furthermore, many
pharmaceutical, biotechnology and health care companies and
academic and other research institutions compete intensely for
personnel and consultants with these expertise. If we are not
able to hire these personnel or consultants, it could have a
negative effect on us.

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

Our research and development processes involve
the controlled use of hazardous and radioactive materials. We
and our partners are subject to extensive laws governing the
use, manufacture, storage, handling and disposal of hazardous
and radioactive materials. There is a risk of accidental
contamination or injury from these materials. Also, we cannot
control whether our collaborative partners comply with the
governing standards. If we or our partners do not comply with
the governing laws and regulations, we could face significant
fines and penalties that could have a negative effect on our
business, operations or finances. In addition, we and/or our
collaborative partners could be held liable for damages, fines
or other liabilities, which could exceed our resources.

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

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

Effecting a change of control of Guilford
would be difficult, which may discourage offers for shares of
our common stock, which may prevent or frustrate any attempt by
shareholders to change our direction or management.

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



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | our Board of Directors approves of the
    transaction before the third party acquires 15% of our common
    stock;

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

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

Our certificate of incorporation also authorizes
us to issue up to 5,000,000 shares of preferred stock in one or
more different series with terms fixed by the Board of
Directors. Stockholder approval is not necessary to issue
preferred stock in this manner. Issuance of these shares of
preferred stock could have the effect of making it more
difficult for a person or group to acquire control of us, as
well as prevent or frustrate any attempt by shareholders to
change our direction or management. No shares of our preferred
stock are currently outstanding. While our Board of Directors
has no current intentions or plans to issue any preferred stock,
issuance of these shares could also be used as an anti-takeover
device.

Our agreement with Paul Royalty Funds gives Paul
Royalty Funds the right to cause us to repurchase its interests
at substantial prices in the event of, among other things, a
change in control. Our convertible notes are also subject to
repurchase, as the option of the holders, upon a change in
control.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

A substantial portion of our assets are
investment grade debt instruments such as direct obligations of
the U.S. Treasury, securities of federal agencies which carry
the direct or implied guarantee of the U.S. government, bank
certificates of deposit and corporate securities, including
commercial paper and corporate debt instruments. The market
value of such investments fluctuates with current market
interest rates. In general, as rates increase, the market value
of a debt instrument would be expected to decrease. The opposite
is also true. To minimize such market risk, we have in the past
and, to the extent possible, will continue in the future to hold
such debt instruments to maturity at which time the debt
instrument will be redeemed at its stated or face value. Due to
the short duration and nature of these instruments, we do not
believe that we have a material exposure to interest rate risk
related to our investment portfolio. The investment portfolio at
December 31, 2003 was $98.5 million and yield to maturity
was approximately 1.6%. The weighted-average return on our
investments during the year ended December 31, 2003 was
approximately 1.9%.

Certain of our debt, primarily the
$18.3 million in borrowings from Wachovia Bank, was
established with interest rates which fluctuate with market
conditions. As a hedge against such fluctuations in interest
rates, we have entered into certain interest rate swap
agreements with a commercial bank (counter party),
to exchange substantially all of our variable rate financial
obligations for fixed rate obligations. As of December 31,
2003, our total long-term debt, including the revenue interest
obligation, was approximately $134.4 million. With respect
to $21.4 million of this debt, we were obligated to pay
variable interest rates of LIBOR plus between 1/2% and 3/4%. The
interest rate swap agreements had a total notional principal
amount of approximately $21.4 million as of
December 31, 2003. Pursuant to these interest rate swap
agreements, we pay a fixed rate of interest to the counter party
and receive from the counter party a variable rate of interest.
The differential to be paid or received as interest rates change
is charged or credited, as appropriate to operations.
Accordingly, we had fixed interest rates on our
December 31, 2003 financial obligations between 2.78% and
5.36%. These interest rate swap agreements have approximately
the same maturity dates as the financial obligations and expire
on various dates through May 2008. We do not speculate on the
future direction of interest rates nor do we use these
derivative financial instruments for trading purposes. In the
event of non-performance by the counter party, we could be
exposed to market risk related to interest rates.

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The aggregate fair value of these interest rate
swap agreements was a liability of approximately
$1.1 million at December 31, 2003. Current market
pricing models were used to estimate these fair values.




Item 8.     Financial
Statements and Supplementary Data

The information required by this item is
incorporated by reference to the financial statements listed in
Items 15(a) of Part IV of this Form 10-K.




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

None.




Item 9A.     Controls
and Procedures

a) Evaluation of Disclosure Controls and
Procedures.Under the supervision and with the participation
of our management, including the Chief Executive Officer and the
Chief Financial Officer, we have evaluated the effectiveness of
the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15 promulgated under the
Securities Exchange Act of 1934, as amended, as of the end of
the period covered by this report (the Evaluation
Date). Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer have concluded that, as
of the Evaluation Date, these controls and procedures were, in
design and operation, effective to assure that the information
required to be included in this report has been properly
collected, processed, and timely communicated to those
responsible in order that it may be included in this report.

b) Changes in Internal Control over
Financial Reporting.There have been no changes in our
internal control over financial reporting during the fourth
quarter of our fiscal year ended December 31, 2003, that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

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PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Information concerning our directors is
incorporated by reference from the information to be contained
under the captions Board of Directors and
Section 16(a) Beneficial Ownership Reporting
Compliance, in our 2004 Proxy Statement. Information
concerning our executive officers is contained in Item 1A.
of Part I.

As part of our system of corporate governance,
our board of directors has adopted a code of ethics that is
specifically applicable to our Chief Executive Officer and
senior financial officers. This code of ethics is available on
our website at http://www.guilfordpharm.com.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item is hereby
incorporated by reference from the information to be contained
under the caption Executive Compensation in our 2004
Proxy Statement.






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

Except for the Equity Compensation Plan
information set forth below, the information required by this
item is hereby incorporated by reference from the information to
be contained under the caption Beneficial Ownership of
Common Stock in our 2004 Proxy Statement.

Securities Authorized for Issuance Under
Equity Compensation Plans

|                                                               |       |                   |           |                   |  |                      |       |       |  |  |           |           | 
|-------------------------------------------------------------- | ----- | ----------------- | --------- | ----------------- |  | -------------------- | ----- | ----- |  |  | --------- | --------- | 
|                                                               |       |                   |           |                   |  | Number of           
|                                                               |       |                   |           |                   |  | securities          
|                                                               |       | Number of         |           |                   |  | remaining for       
|                                                               |       | securities to be  |           | Weighted-average  |  | future issuance     
|                                                               |       | issued upon       |           | exercise price    |  | under equity        
|                                                               |       | exercise of       |           | of and rights     |  | compensation        
|                                                               |       | outstanding       |           | outstanding       |  | plans (excluding    
|                                                               |       | options, warrants |           | options, warrants |  | securities reflected
|                                                               |       | and rights        |           | and rights        |  | in column (A))      
|                                                               |       |                   |           |                   |  |                     
|                                                               |       | (A)               |           | (B)               |  | (C)                 
|Equity compensation plans approved by security
    holders     |       |                   | 3,820,004 | (1)               |  | $                    | 12.60 |       |  |  | 1,853,910 |          
|Equity compensation plans not approved by
    security holders |       |                   | 2,172,993 | (2)               |  | $                    | 14.96 |       |  |  | 0         |          
|                                                               |       |                   |           |                   |  |                      |       |       |  |  |           |          
|                                                               | Total |                   |           | 5,992,997         |  |                      | $     | 13.45 |  |  |           | 1,853,910 | 
|                                                               |       |                   |           |                   |  |                      |       |       |  |  |           |          



---



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

59



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##### Table of Contents



Equity Compensation Plans Not Approved by
Security Holders

The disclosure required by paragraph (d)(3)
of Item 201 of Regulation S-K for the 1998 Plan and
the Consultants Option Arrangements is incorporated herein
by reference from Note 17 to our Notes To Consolidated
Financial Statements set forth on pages F-24 through F-27 of
this annual report, under the headings, Employee Share
Option and Restricted Share Plans,and,
Consultants,respectively.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this item is hereby
incorporated by reference from the information to be contained
under the caption Other Relationships,
Beneficial Ownership of Common Stock, and
Certain Relationships and Related Party
Transactions, and Employment Agreements in our
2004 Proxy Statement.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information required by this item is hereby
incorporated by reference from the information to be contained
under the caption Independent Public Accountants in
our 2004 Proxy Statement.

60



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##### Table of Contents






PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a)(1) Financial Statements

The following Financial Statements are included
in this report:

|                                                                                                                        |  |        |     | 
|----------------------------------------------------------------------------------------------------------------------- |  | ------ | --- | 
|                                                                                                                        |  | Page #
|                                                                                                                        |  |       
|Independent Auditors Report                                                                                            |  |        | F-1 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                        |  |        | F-2 | 
|Consolidated Statements of Operations for the
    Years Ended December 31, 2003, 2002 and 2001                          |  |        | F-3 | 
|Consolidated Statements of Changes in
    Stockholders Equity for the Years Ended December 31,
    2003, 2002 and 2001 |  |        | F-4 | 
|Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2003, 2002, and 2001                         |  |        | F-5 | 
|Notes to Consolidated Financial Statements                                                                              |  |        | F-6 | 

(a)(2) Financial Statements Schedules

The following Schedules are filed as part of this
report:

|                                                    |  |  |     | 
|--------------------------------------------------- |  |  | --- | 
|Independent Auditors Report                        |  |  | S-1 | 
|Schedule II  Valuation and
    Qualifying Accounts |  |  | S-2 | 

(a)(3) Exhibits

The following exhibits are filed as part of this
report:

|        |        |             |  |                                                                                                                                                                                                                          
|------- | ------ | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 3.01A  |             |  | Amended and Restated Certificate
        of Incorporation of the Company (incorporated by reference to the Registrants
        Registration Statement on Form S-1 (No. 33-76938)).                                      
|        | 3.01B  |             |  | Certificate of Amendment of
        Amended and Restated Certificate of Incorporation dated April 1,
        1997 (incorporated by reference to the Registrants current Report
        on Form 8-K filed April 4, 1997).
|        | 3.01C  |             |  | Certificate of Amendment of
        Amended and Restated Certificate of Incorporation dated May 19, 1998
        (incorporated by reference to the Registrants Form 10-K for
        the year ended December 31, 2002). 
|        | 3.02   |             |  | Amended and Restated Bylaws
        as of February 2003 (incorporated by reference to the Registrants
        Form 10-K for the year ended December 31, 2002).                                                          
|        | 4.01   |             |  | Specimen Stock Certificate
        (incorporated by reference to the Registrants Registration Statement
        on Form S-1 (No. 33-76938)).                                                                            
|        | 4.02A  |             |  | Stockholder Rights Agreement
        dated September 26, 1995 (incorporated by reference to the Registrants
        Form 8-K filed October 10, 1995).                                                                   
|        | 4.02B  |             |  | Form of Amendment No. 1
        to Stockholder Rights Agreement (incorporated by reference to the Registrants
        Form 8-K, filed October 20, 1998).                                                                
|        | 10.01A |             |  | 1993 Employee Share Option
        and Restricted Share Plan (1993 Option Plan) (incorporated
        by reference to the Registrants Registration Statement on Form S-1
        (No. 33-76938)).                     
|        | 10.01B |             |  | Amendment to 1993 Option Plan
        (incorporated by reference to the Registrants Registration Statement
        on Form S-1 (No. 33-94530)).                                                                         
|        | 10.01C |             |  | Amendment to 1993 Option Plan
        (incorporated by reference to the Registrants Form 10-Q for
        the quarter ended June 30, 1996).                                                                             
|        | 10.01D |             |  | Amendment to 1993 Option Plan
        (incorporated by reference to the Registrants Form 10-K for
        the year ended December 31, 1996).                                                                            

61



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|        |        |             |  |                                                                                                                                                                                                                                                                                                            
|------- | ------ | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 10.01E |             |  | Amendment to 1993 Option Plan
        (incorporated by reference to the Registrants Registration Statement
        on Form S-8 (No. 333-56092))                                                                                                                                                           
|        | 10.01F |             |  | Amendment to 1993 Option Plan
        (incorporated by reference to the Registrants Form 10-K for
        the year ended December 31, 2002).                                                                                                                                                              
|        | 10.01G |             |  | Form of Stock Option Agreement
        under the 1993 Option Plan (incorporated by reference to the Registrants
        Form 10-K for the year ended December 31, 2002).                                                                                                                                  
|        | 10.02A |             |  | 1998 Employee Share Option
        and Restricted Share Plan, as amended (1998 Option Plan) (incorporated
        by reference to the Registrants Form S-8 (No. 333-30814)).                                                                                                                            
|        | 10.02B |             |  | Amendment to 1998 Option Plan
        (incorporated by reference to the Registrants Form 10-K for
        the year ended December 31, 1998).                                                                                                                                                              
|        | 10.02C |             |  | Form of Stock Option Agreement
        under the 1998 Option Plan (incorporated by reference to the Registrants
        Form 10-K for the year ended December 31, 2002).                                                                                                                                  
|        | 10.03A |             |  | Guilford Pharmaceuticals Inc.
        Directors Stock Option Plan (Directors Plan) (incorporated
        by reference to the Registrants Registration Statement on Form S-1
        (No. 33-76938)).                                                                                                  
|        | 10.03B |             |  | Amendment to Directors
        Plan (incorporated by reference to the Registrants Form 10-K
        for the year ended December 31, 1998).                                                                                                                                                               
|        | 10.03C |             |  | Amendment to Directors
        Plan (incorporated by reference to the Registrants Form 10-Q
        for the quarter ended March 31, 1999).                                                                                                                                                               
|        | 10.03D |             |  | Form of Stock Option Agreement
        under the Directors Plan (incorporated by reference to the Registrants
        Form 10-K for the year ended December 31, 2002).                                                                                                                                   
|        | 10.04  |             |  | Guilford Pharmaceuticals Inc.
        2001 Stock Purchase Plan (incorporated by reference to the Registrants
        Registration Statement on Form S-8 (No. 333-71218)).                                                                                                                                 
|        | 10.05  |             |  | Guilford Pharmaceuticals Inc.
        2002 Employee Stock Purchase Plan (incorporated by reference to the Registrants
        Form 10-K for the year ended December 31, 2002).                                                                                                                            
|        | 10.06  |             |  | Guilford Pharmaceuticals Inc.
        2002 Stock Option and Incentive Plan and form of stock option agreements
        (2002 Option Plan) (incorporated by reference to the Registrants
        Form 10-K for the year ended December 31, 2002).                                                        
|        | 10.07  |             |  | Employment Agreement between
        the Company and Craig R. Smith, M.D (incorporated by reference to the
        Registrants Registration Statement on Form S-1 (No. 33-76938)).                                                                                                                        
|        | 10.08  |             |  | Employment Agreement between
        the Company and Andrew R. Jordan (incorporated by reference to the Registrants
        Registration Statement on Form S-1 (No. 33-76938)).                                                                                                                           
|        | 10.09  |             |  | Amendments to employment agreements
        between the Company and each of Andrew R. Jordan and Craig R. Smith (incorporated
        by reference to the Registrants Form 10-Q for the quarter ended
        September 30, 1996).                                                                        
|        | 10.10  |             |  | Form of Change in Control
        Severance Agreement (incorporated by reference to the Form 10-Q for
        the quarter ended September 30, 1998).                                                                                                                                                       
|        | 10.11  |             |  | Form of Severance Agreement
        (incorporated by reference to the Registrants Form 10-K for
        the year ended December 31, 2002).                                                                                                                                                                
|        | 10.12  |             |  | Form of Director and Officer
        Indemnification Agreement (incorporated by reference to the Registrants
        Registration Statement on Form S-1 (No. 33-76938)).                                                                                                                                  
|        | 10.13  |             |  | Form of Tax Indemnity Agreement
        (incorporated by reference to the Registrants Registration Statement
        on Form S-1 (No. 33-76938)).                                                                                                                                                         
|        | 10.14  |             |  | Consulting Agreement, dated
        July 23, 1999, between the Company and Solomon H. Snyder, M.D. (incorporated
        by reference to Form 10-Q for the quarter ended June 30, 1999).                                                                                                                   
|        | 10.15A |            |  | License Agreement, effective
        March 18, 1994, between the Company and Research Triangle Institute,
        a not-for-profit Corporation existing under the laws of North Carolina
        (incorporated by reference to the Registrants Registration Statement
        on Form S-1 (No. 33-76938)).
|        | 10.15B |             |  | Appendix A to RTI Agreement
        (incorporated by reference to the Registrants Registration Statement
        on Form S-1 (No. 33-76938)).                                                                                                                                                             

62



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|        |        |             |  |                                                                                                                                                                                                                                                                                                                                                                            
|------- | ------ | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 10.16 |             |  | License Agreement, dated March 15, 1994,
    between the Company and Scios Nova (incorporated by reference to
    the Registrants Registration Statement on Form S-1
    (No. 33-76938)).                                                                                                                                                                                 
|        | 10.17 |             |  | License Agreement, dated December 20, 1993,
    between the Company and The Johns Hopkins University
    (incorporated by reference to the Registrants Registration
    Statement on Form S-1 (No. 33-76938)).                                                                                                                                                            
|        | 10.18 |             |  | Amended and Restated License Agreement, effective
    November 25, 1998, between the Company and The Johns
    Hopkins University (incorporated by reference to the
    Registrants Form 10-K filed March 30, 1999).                                                                                                                                                      
|        | 10.19 |             |  | License Agreement, dated December 9, 1995,
    by and between the Company and Daiichi Radioisotope
    Laboratories, Ltd (incorporated by reference to the
    Registrants Form 10-K for the year ended December 31,
    1995).                                                                                                                                           
|        | 10.20 |             |  | License and Distribution Agreement, dated
    October 13, 1995, by and between the Company and Orion
    Corporation Farmos (incorporated by reference to the
    Registrants Form 10-K/ A for the year ended December
    31, 1995).                                                                                                                                     
|        | 10.21  |             |  | License, Development and Commercialization
    Agreement dated March 2, 2000, between the Company and
    ProQuest Pharmaceuticals Inc. (incorporated by reference to the
    Registrants Form 10-Q for the quarter ended
    March 31, 2000).                                                                                                                            
|        | 10.22  |             |  | Distribution Agreement, dated September 27,
    2001, between the Company and National Specialty Services, Inc.
    (incorporated by reference to the Registrants
    Form 10-Q for the quarter ended March 31, 2002).                                                                                                                                                    
|        | 10.23  |             |  | Lease Agreement, dated August 30, 1994,
    between Crown Royal, L.P. and the Company (incorporated by
    reference to the Registrants Form 10-Q for the
    quarter ended September 30, 1994).                                                                                                                                                                          
|        | 10.24A |             |  | Loan and Financing Agreement between the Maryland
    Economic Development Corporation (MEDCO), the
    Company and Signet Bank/ Maryland (Signet)
    (L&F Agreement) (incorporated by reference to
    the Registrants Form 10-K for the year ended December
    31, 1994).                                                                                       
|        | 10.24B |             |  | Amendment No. 1, dated June 30, 1998,
    to L&F Agreement (incorporated by reference to the
    Form 10-Q for the quarter ended June, 1998) (incorporated
    by reference to the Registrants Form 10-K for the
    year ended December 31, 1994).                                                                                                                       
|        | 10.25  |             |  | Leasehold Deed of Trust by and between the
    Company and Janice E. Godwin and Ross Chaffin (as trustees) for
    the benefit of MEDCO and Signet (incorporated by reference to
    the Registrants Form 10-K for the year ended
    December 31, 1994).                                                                                                                 
|        | 10.26A |             |  | Insurance Agreement between the Maryland
    Industrial Development Financing Authority and Signet
    (Insurance Agreement) (incorporated by reference to
    the Registrants Form 10-K for the year ended
    December 31, 1994).                                                                                                                                     
|        | 10.26B |             |  | Letter, dated April 2, 1996, amending
    Insurance Agreement (incorporated by reference to the
    Registrants Form 10-K for the year ended December 31,
    1996).                                                                                                                                                                                                      
|        | 10.26C |             |  | Amendment No. 2, dated June 29, 1998,
    to Insurance Agreement (incorporated by reference to the
    Registrants Form 10-Q for the quarter ended
    June 30, 1998).                                                                                                                                                                                                    
|        | 10.27  |             |  | Security Agreement, dated as of February 5,
    1998, between First Security Bank, National Association
    (First Security), not individually, but solely as
    the Owner Trustee under the Guilford Real Estate Trust 1998-1
    (the Trust) and First Union (incorporated by
    reference to the Registrants Form 10-K for the year ended
    December 31, 1997).
|        | 10.28  |             |  | Amended and Restated Trust Agreement, dated as of
    February 5, 1998 between the Several Holders from time to
    time parties thereto and the Trust (incorporated by reference to
    the Registrants Form 10-K for the year ended
    December 31, 1997).                                                                                                             
|        | 10.29  |             |  | Agency Agreement, dated as of February 5,
    1998, between the Company and the Trust (incorporated by
    reference to the Registrants Form 10-K for the year
    ended December 31, 1997).                                                                                                                                                                              

63



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|        |        |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | ------ | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 10.30  |             |  | Credit Agreement, dated as of February 5,
    1998, among the Trust, the Several Holders from time to time
    parties thereto and First Union (incorporated by reference to
    the Registrants Form 10-K for the year ended
    December 31, 1997).                                                                                                                                                                                
|        | 10.31  |             |  | Participation Agreement, dated as of
    February 5, 1998, among the Company, the Trust, the various
    and other lending institutions which are parties hereto from
    time to time, as Holders, the various and other lending
    institutions which are parties hereto from time to time, as
    Lenders, and First Union (incorporated by reference to the
    Registrants Form 10-K for the year ended
    December 31, 1997).
|        | 10.32  |             |  | Lease Agreement, dated as of February 5,
    1998, between the Trust and the Company (incorporated by
    reference to the Registrants Form 10-K for the year
    ended December 31, 1997).                                                                                                                                                                                                                                          
|        | 10.33  |             |  | MIDFA Agreement, dated June 29, 1998, by and
    between MIDFA, First Security, the Company and First Union
    (incorporated by reference to the Registrants
    Form 10-Q for the quarter ended June 30, 1998).                                                                                                                                                                                                                    
|        | 10.34  |             |  | Insurance Agreement, dated June 29, 1998, by
    and between MIDFA and First Union (incorporated by reference to
    the Registrants Form 10-Q for the quarter ended
    June 30, 1998).                                                                                                                                                                                                                                             
|        | 10.35  |             |  | Term Loan, dated April 30, 1996, as amended
    on December 6, 1996, by and between the Company and Signet
    Bank (incorporated by reference to the Registrants
    Form 10-K for the year ended December 31, 1996.                                                                                                                                                                                                                
|        | 10.36 |             |  | Asset Transfer and License Agreement between the
    Company and Merck & Co., Inc., dated as of October 28,
    2003 (incorporated by reference to the Registrants
    Form 8-K, filed November 12, 2003).                                                                                                                                                                                                                           
|        | 10.37 |             |  | Supply Agreement between the Company and Merck
    Sharp Dohme (Ireland) Limited, dated as of October 28, 2003
    (incorporated by reference to the Registrants
    Form 8-K, filed November 12, 2003).                                                                                                                                                                                                                             
|        | 10.38  |             |  | Transition Services Agreement between the Company
    and Merck & Co., Inc., dated as of October 28, 2003
    (incorporated by reference to the Registrants Form 8-K,
    filed November 12, 2003).                                                                                                                                                                                                                                  
|        | 10.39 |             |  | Revenue Interest Assignment Agreement by among
    the Company, Artery, LLC, GPI Holdings, Inc., Paul Royalty Fund,
    L.P., and Paul Royalty Fund Holdings II, dated as of
    October 28, 2003 (incorporated by reference to the
    Registrants Form 8-K, filed November 12, 2003).                                                                                                                                              
|        | 21.01  |             |  | Subsidiaries of Registrant (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                          
|        | 23.01  |             |  | Consent of KPMG LLP (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 31.01  |             |  | Certification of Chief Executive Officer Pursuant
    to Rule 13a-14(a) under the Securities Exchange Act of 1934
    as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002 (filed herewith)                                                                                                                                                                                                                       
|        | 31.02  |             |  | Certification of Chief Financial Officer Pursuant
    to Rule 13a-14(a) under the Securities Exchange Act of 1934
    as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002 (filed herewith)                                                                                                                                                                                                                       
|        | 32.01  |             |  | Certification of Chief Executive Officer Pursuant
    to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
    906 of the Sarbanes-Oxley Act of 2002 (filed herewith)                                                                                                                                                                                                                                                             
|        | 32.02  |             |  | Certification of Chief Financial Officer Pursuant
    to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
    906 of the Sarbanes-Oxley Act of 2002 (filed herewith)                                                                                                                                                                                                                                                             



---



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

(b) Reports on Form 8-K.

64



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##### Table of Contents



On November 6, 2003, the Company filed a
current report on Form 8-K, the purpose of which was to
disclose the Companys financial results for the fiscal
quarter ended September 30, 2003

On November 12, 2003, the Company files a
current report on Form 8-K, the purpose of which was to
disclose the Companys acquisition of the product rights to
AGGRASTAT® Injection from Merck and Co., Inc. in the United
States and its territories. The Form 8-K further disclosed
a revenue interest financing agreement entered into with Paul
Royalty Capital.

65



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##### Table of Contents



SIGNATURES

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



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



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

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

March 15, 2004

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

|                                                                 |  |                                                                                                                                        |  |               
|---------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                                        |  | Title                                                                                                                                  |  | Date          
|                                                                 |  |                                                                                                                                        |  |               
|                                                                
|/s/ CRAIG R. SMITH, M.D.Craig R. Smith, M.D.                     |  | President, Chief Executive Officer and Director
    (Principal Executive Officer)                                                      |  | March 15, 2004
|                                                                
|/s/ ANDREW R. JORDANAndrew R. Jordan                             |  | Executive Vice President, Chief Financial Officer
    and Treasurer (Principal Financial Officer and Principal
    Accounting Officer) |  | March 15, 2004
|                                                                
|/s/ GEORGE L. BUNTING, JR.George L. Bunting, Jr.                 |  | Director                                                                                                                               |  | March 15, 2004
|                                                                
|/s/ JOSEPH R. CHINNICIJoseph R. Chinnici                         |  | Director                                                                                                                               |  | March 15, 2004
|                                                                
|/s/ BARRY M. FOXBarry M. Fox                                     |  | Director                                                                                                                               |  | March 15, 2004
|                                                                
|/s/ ELIZABETH M. GREETHAMElizabeth M. Greetham                   |  | Director                                                                                                                               |  | March 15, 2004
|                                                                
|/s/ JOSEPH R. KLEIN, IIIJoseph R. Klein, III                     |  | Director                                                                                                                               |  | March 15, 2004
|                                                                
|/s/ RONALD M. NORDMANNRonald M. Nordmann                         |  | Director                                                                                                                               |  | March 15, 2004
|                                                                
|/s/ SOLOMON H. SNYDER, M.D.Solomon H. Snyder, M.D.               |  | Director                                                                                                                               |  | March 15, 2004
|                                                                
|/s/ W. LEIGH THOMPSON, M.D., PH.D.W. Leigh Thompson, M.D., Ph.D. |  | Director                                                                                                                               |  | March 15, 2004
|                                                                
|/s/ DAVID C. UPRICHARD, PH.D.David C. UPrichard, Ph.D.         |  | Director                                                                                                                               |  | March 15, 2004

66



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##### Table of Contents



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
(the Company) as of December 31, 2003 and 2002,
and the related consolidated statements of operations, changes
in stockholders equity, and cash flows for each of the
years in the three-year period ended December 31, 2003.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Guilford Pharmaceuticals
Inc. and subsidiaries as of December 31, 2003 and 2002, and
the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2003,
in conformity with accounting principles generally accepted in
the United States of America.

/s/ KPMG LLP

Philadelphia, Pennsylvania

March 12, 2004


F1



---



##### Table of Contents



GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED BALANCE SHEETS

|                                          |                                                                                                                                                             |                            |         |          |         |   |         |          |        | 
|----------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | -------- | ------- | - | ------- | -------- | ------ | 
|                                          |                                                                                                                                                             |                           
|                                          |                                                                                                                                                             | December 31,              
|                                          |                                                                                                                                                             |                           
|                                          |                                                                                                                                                             | 2003                       |         | 2002    
|                                          |                                                                                                                                                             |                            |         |         
|                                          |                                                                                                                                                             |                           
|                                          |                                                                                                                                                             | (in thousands,            
|                                          |                                                                                                                                                             | except share data)        
|ASSETS                                    |                                                                                                                                                             |                            |         |          |         |   |         |         
|Current assets:                           |                                                                                                                                                             |                            |         |          |         |   |         |         
|                                          | Cash and cash equivalents                                                                                                                                   |                            | $       | 29,939   |         |   | $       | 14,777   |       
|                                          | Investments                                                                                                                                                 |                            |         | 50,261   |         |   |         | 68,454   |       
|                                          | Accounts receivable, net                                                                                                                                    |                            |         | 3,460    |         |   |         | 768      |       
|                                          | Inventories                                                                                                                                                 |                            |         | 2,504    |         |   |         | 2,993    |       
|                                          | Prepaid expenses and other current assets                                                                                                                   |                            |         | 1,787    |         |   |         | 907      |       
|                                          |                                                                                                                                                             |                            |         |          |         |   |         |         
|                                          |                                                                                                                                                             | Total current assets       |         |          | 87,951  |   |         |          | 87,899 | 
|Investments  restricted                  |                                                                                                                                                             |                            | 21,743  |          |         |   | 18,572  |         
|Property and equipment, net               |                                                                                                                                                             |                            | 22,395  |          |         |   | 6,534   |         
|Intangible assets, net                    |                                                                                                                                                             |                            | 82,796  |          |         |   | 6,589   |         
|Other assets                              |                                                                                                                                                             |                            | 6,438   |          |         |   | 1,492   |         
|                                          |                                                                                                                                                             |                            |         |          |         |   |         |         
|                                          |                                                                                                                                                             | $                          | 221,323 |          |         | $ | 121,086 |         
|                                          |                                                                                                                                                             |                            |         |          |         |   |         |         
|                                         
|LIABILITIES AND STOCKHOLDERS
    EQUITY  |                                                                                                                                                             |                            |         |          |         |   |         |         
|Current liabilities:                      |                                                                                                                                                             |                            |         |          |         |   |         |         
|                                          | Accounts payable                                                                                                                                            |                            | $       | 8,549    |         |   | $       | 6,279    |       
|                                          | Current portion of long-term debt                                                                                                                           |                            |         | 3,394    |         |   |         | 3,200    |       
|                                          | Accrued payroll related costs                                                                                                                               |                            |         | 4,538    |         |   |         | 1,700    |       
|                                          | Accrued contracted services                                                                                                                                 |                            |         | 1,909    |         |   |         | 3,308    |       
|                                          | Accrued expenses and other current liabilities                                                                                                              |                            |         | 3,590    |         |   |         | 2,096    |       
|                                          |                                                                                                                                                             |                            |         |          |         |   |         |         
|                                          |                                                                                                                                                             | Total current liabilities  |         |          | 21,980  |   |         |          | 16,583 | 
|Long-term debt, excluding current portion |                                                                                                                                                             |                            | 88,885  |          |         |   | 3,720   |         
|Revenue interest obligation               |                                                                                                                                                             |                            | 42,155  |          |         |   |        |         
|Other liabilities                         |                                                                                                                                                             |                            | 1,103   |          |         |   | 1,525   |         
|                                          |                                                                                                                                                             |                            |         |          |         |   |         |         
|                                          |                                                                                                                                                             | Total liabilities          |         |          | 154,123 |   |         |          | 21,828 | 
|                                          |                                                                                                                                                             |                            |         |          |         |   |         |         
|Stockholders equity:                     |                                                                                                                                                             |                            |         |          |         |   |         |         
|                                          | Preferred stock, par value $0.01 per share;
    authorized 4,700,000 shares, none issued                                                                    |                            |         |         |         |   |         |         |       
|                                          | Series A junior participating preferred
    stock, par value $0.01 per share; authorized 300,000 shares,
    none issued                                    |                            |         |         |         |   |         |         |       
|                                          | Common stock, par value $0.01 per share;
    authorized 75,000,000 shares, 34,908,076 and 29,980,063 issued
    at December 31, 2003 and 2002, respectively |                            |         | 349      |         |   |         | 300      |       
|                                          | Additional paid-in capital                                                                                                                                  |                            |         | 377,168  |         |   |         | 350,352  |       
|                                          | Accumulated deficit                                                                                                                                         |                            |         | (303,538 | )       |   |         | (249,591 | )     
|                                          | Accumulated other comprehensive loss                                                                                                                        |                            |         | (1,485   | )       |   |         | (691     | )     
|                                          | Note receivable from officer                                                                                                                                |                            |         | (85      | )       |   |         | (85      | )     
|                                          | Treasury stock, at cost: 1,055,816 and 79,030
    shares at December 31, 2003 and 2002, respectively                                                        |                            |         | (5,209   | )       |   |         | (1,027   | )     
|                                          |                                                                                                                                                             |                            |         |          |         |   |         |         
|                                          |                                                                                                                                                             | Total stockholders equity |         |          | 67,200  |   |         |          | 99,258 | 
|                                          |                                                                                                                                                             |                            |         |          |         |   |         |         
|                                          |                                                                                                                                                             | $                          | 221,323 |          |         | $ | 121,086 |         
|                                          |                                                                                                                                                             |                            |         |          |         |   |         |         

See accompanying notes to consolidated financial
statements.

F2



---



##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                    |                                                  |                                       |         |        |        |      |         |        |        |   |         |        |        | 
|----------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                    |                                                  |                                      
|                                                                                    |                                                  | Years Ended December 31,             
|                                                                                    |                                                  |                                      
|                                                                                    |                                                  | 2003                                  |         | 2002   |        | 2001
|                                                                                    |                                                  |                                       |         |        |        |     
|                                                                                    |                                                  |                                      
|                                                                                    |                                                  | (in thousands, except per share data)
|Revenues:                                                                           |                                                  |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                    | Net product sales                                |                                       | $       | 21,717 |        |      | $       | 14,538 |        |   | $       | 20,360 |       
|                                                                                    | Revenues from license fees, milestones and other |                                       |         | 5,888  |        |      |         | 127    |        |   |         | 174    |       
|                                                                                    |                                                  |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                    |                                                  | Total revenues                        |         |        | 27,605 |      |         |        | 14,665 |   |         |        | 20,534 | 
|Costs and Expenses:                                                                 |                                                  |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                    | Cost of sales                                    |                                       |         | 4,110  |        |      |         | 2,836  |        |   |         | 2,836  |       
|                                                                                    | Research and development                         |                                       |         | 33,624 |        |      |         | 46,103 |        |   |         | 54,272 |       
|                                                                                    | Selling, general and administrative              |                                       |         | 32,076 |        |      |         | 29,005 |        |   |         | 29,273 |       
|                                                                                    | Intangible amortization                          |                                       |         | 1,912  |        |      |         | 840    |        |   |         | 840    |       
|                                                                                    | Acquired in-process research and development     |                                       |         | 8,093  |        |      |         |       |        |   |         |       |       
|                                                                                    |                                                  |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                    |                                                  | Total costs and expenses              |         |        | 79,815 |      |         |        | 78,784 |   |         |        | 87,221 | 
|                                                                                    |                                                  |                                       |         |        |        |      |         |        |        |   |         |       
|Operating loss                                                                      |                                                  |                                       | (52,210 | )      |        |      | (64,119 | )      |        |   | (66,687 | )     
|Other Income (Expense):                                                             |                                                  |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                    | Investment and other income                      |                                       |         | 3,002  |        |      |         | 5,350  |        |   |         | 6,870  |       
|                                                                                    | Revenue interest expense                         |                                       |         | (1,557 | )      |      |         |       |        |   |         |       |       
|                                                                                    | Interest expense                                 |                                       |         | (3,182 | )      |      |         | (501   | )      |   |         | (500   | )     
|                                                                                    |                                                  |                                       |         |        |        |      |         |        |        |   |         |       
|Net loss                                                                            |                                                  | $                                     | (53,947 | )      |        | $    | (59,270 | )      |        | $ | (60,317 | )     
|                                                                                    |                                                  |                                       |         |        |        |      |         |        |        |   |         |       
|Basic and diluted loss per common share:                                            |                                                  | $                                     | (1.82   | )      |        | $    | (1.99   | )      |        | $ | (2.14   | )     
|                                                                                    |                                                  |                                       |         |        |        |      |         |        |        |   |         |       
|Weighted-average shares outstanding to compute
    basic and diluted loss per share |                                                  |                                       | 29,689  |        |        |      | 29,805  |        |        |   | 28,249  |       

See accompanying notes to consolidated financial
statements.

F3



---



##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

(in thousands, except share data)

|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |        |  
|------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------- | ---------- | ---------- |  | ------- | --- | ----------- |  | ------------- | ------- | ------- |  | -------------- | -------- | ------------ |  | ------------- | ------ | ------ | - | - | --- | - |  | - | ------ | - |  | - | ---- | - |  | - | ------- | ------ | -
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |             
|                                                                    |                                                           | Common Stock                      |            |            |  |         |     | Accumulated |  | Note          |         |         |  |                |          |             
|                                                                    |                                                           |                                   |            | Additional |  |         |     | Other       |  | Receivable    |         |         |  |                |          | Total       
|                                                                    |                                                           | Number of                         |            |            |  | Paid-in |     | Accumulated |  | Comprehensive |         | From    |  | Treasury       |          | Deferred     |  | Stockholders
|                                                                    |                                                           | Shares                            |            | Amount     |  | Capital |     | Deficit     |  | Income (Loss) |         | Officer |  | Stock, at Cost |          | Compensation |  | Equity       
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |              
|                                                                    |                                                           |                                  
|                                                                    |                                                           | (In thousands, except share data)
|Balance, January 1, 2001                                            |                                                           |                                   | 24,318,982 |            |  | $       | 243 |             |  | $             | 250,858 |         |  | $              | (130,004 | )            |  | $             | (823   | )      |   | $ | (60 | ) |  | $ | (3,277 | ) |  | $ | (108 | ) |  | $ | 116,829 |       
|Comprehensive loss:                                                 |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Net loss                                                            |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                | (60,317  | )            |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   | (60,317 | )     
|Other comprehensive loss:                                           |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|                                                                    | Cumulative effect of a change in accounting
    principle |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        | 83     |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         | 83     |  
|                                                                    | Unrealized loss on interest rate swap agreements          |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        | (1,146 | ) |   |     |   |  |   |        |   |  |   |      |   |  |   |         | (1,146 | )
|                                                                    | Unrealized gain on available-for-sale securities          |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        | 1,434  |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         | 1,434  |  
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|                                                                    | Total other comprehensive loss                            |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         | 371    |  
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Total comprehensive loss                                            |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  | $ | (59,946 | )     
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Issuances of common stock                                           |                                                           |                                   | 5,509,358  |            |  |         | 55  |             |  |               | 98,710  |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   | 98,765  |       
|Exercise of stock options                                           |                                                           |                                   | 146,723    |            |  |         | 2   |             |  |               | 1,726   |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   | (385   | ) |  |   |      |   |  |   | 1,343   |       
|Distribution of 24,946 shares of treasury stock
    to 401(k) Plan  |                                                           |                                   |            |            |  |         |     |             |  |               | 150     |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   | 323    |   |  |   |      |   |  |   | 473     |       
|Stock option compensation                                           |                                                           |                                   |            |            |  |         |     |             |  |               | 109     |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   | 109     |       
|Amortization of deferred compensation                               |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   | 56   |   |  |   | 56      |       
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Balance, December 31, 2001                                          |                                                           |                                   | 29,975,063 |            |  | $       | 300 |             |  | $             | 351,553 |         |  | $              | (190,321 | )            |  | $             | (452   | )      |   | $ | (60 | ) |  | $ | (3,339 | ) |  | $ | (52  | ) |  | $ | 157,629 |       
|Comprehensive loss:                                                 |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Net loss                                                            |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                | (59,270  | )            |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   | (59,270 | )     
|Other comprehensive loss:                                           |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|                                                                    | Unrealized loss on interest rate swap agreements          |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        | (452   | ) |   |     |   |  |   |        |   |  |   |      |   |  |   |         | (452   | )
|                                                                    | Unrealized gain on available-for-sale securities          |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        | 217    |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         | 217    |  
|                                                                    | Equity adjustment from foreign currency
    translation   |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        | (4     | ) |   |     |   |  |   |        |   |  |   |      |   |  |   |         | (4     | )
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|                                                                    | Total other comprehensive loss                            |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         | (239   | )
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Total comprehensive loss                                            |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  | $ | (59,509 | )     
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Exercise of stock options                                           |                                                           |                                   | 5,000      |            |  |         |     |             |  |               | 19      |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   | 19      |       
|Distribution of 71,693 shares of treasury stock
    to 401(k) plan  |                                                           |                                   |            |            |  |         |     |             |  |               | (390    | )       |  |                |          |              |  |               |        |        |   |   |     |   |  |   | 932    |   |  |   |      |   |  |   | 542     |       
|Distribution of 99,986 shares of treasury stock
    to ESPP plans   |                                                           |                                   |            |            |  |         |     |             |  |               | (775    | )       |  |                |          |              |  |               |        |        |   |   |     |   |  |   | 1,299  |   |  |   |      |   |  |   | 524     |       
|Distribution of 6,197 shares of treasury stock to
    consultant    |                                                           |                                   |            |            |  |         |     |             |  |               | (55     | )       |  |                |          |              |  |               |        |        |   |   |     |   |  |   | 81     |   |  |   |      |   |  |   | 26      |       
|Extension of note receivable to officer                             |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   | (25 | ) |  |   |        |   |  |   |      |   |  |   | (25     | )     
|Amortization of deferred compensation                               |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   | 52   |   |  |   | 52      |       
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Balance, December 31, 2002                                          |                                                           |                                   | 29,980,063 |            |  | $       | 300 |             |  | $             | 350,352 |         |  | $              | (249,591 | )            |  | $             | (691   | )      |   | $ | (85 | ) |  | $ | (1,027 | ) |  | $ |     |   |  | $ | 99,258  |       
|Comprehensive loss:                                                 |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Net loss                                                            |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                | (53,947  | )            |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   | (53,947 | )     
|Other comprehensive loss:                                           |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|                                                                    | Unrealized gain on interest rate swap agreements          |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        | 510    |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         | 510    |  
|                                                                    | Unrealized loss on available-for-sale securities          |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        | (1,304 | ) |   |     |   |  |   |        |   |  |   |      |   |  |   |         | (1,304 | )
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|                                                                    | Total other comprehensive loss                            |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         | (794   | )
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Total comprehensive loss                                            |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  | $ | (54,741 | )     
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Issuances of common stock                                           |                                                           |                                   | 4,868,713  |            |  |         | 48  |             |  |               | 25,888  |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   | 25,936  |       
|Issuance of warrants                                                |                                                           |                                   |            |            |  |         |     |             |  |               | 1,226   |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   | 1,226   |       
|Purchase of 1,100,000 million shares for
    treasury stock         |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   | (5,280 | ) |  |   |      |   |  |   | (5,280  | )     
|Exercise of stock options                                           |                                                           |                                   | 59,300     |            |  |         | 1   |             |  |               | 254     |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   | 255     |       
|Distribution of 110,537 shares of treasury stock
    to 401(k) plan |                                                           |                                   |            |            |  |         |     |             |  |               | (489    | )       |  |                |          |              |  |               |        |        |   |   |     |   |  |   | 975    |   |  |   |      |   |  |   | 486     |       
|Distribution of 12,677 shares of treasury stock
    to consultant   |                                                           |                                   |            |            |  |         |     |             |  |               | (63     | )       |  |                |          |              |  |               |        |        |   |   |     |   |  |   | 123    |   |  |   |      |   |  |   | 60      |       
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       
|Balance, December 31, 2003                                          |                                                           |                                   | 34,908,076 |            |  | $       | 349 |             |  | $             | 377,168 |         |  | $              | (303,538 | )            |  | $             | (1,485 | )      |   | $ | (85 | ) |  | $ | (5,209 | ) |  | $ |     |   |  | $ | 67,200  |       
|                                                                    |                                                           |                                   |            |            |  |         |     |             |  |               |         |         |  |                |          |              |  |               |        |        |   |   |     |   |  |   |        |   |  |   |      |   |  |   |         |       

See accompanying notes to consolidated financial
statements.

F4



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |        |         |  
|------------------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | - | ------- | ------ | ------- | -
|                                                                                |                                                                 |                                                        
|                                                                                |                                                                 | Years Ended December 31,                               
|                                                                                |                                                                 |                                                        
|                                                                                |                                                                 | 2003                                                    |         | 2002   |         | 2001
|                                                                                |                                                                 |                                                         |         |        |         |     
|                                                                                |                                                                 |                                                        
|                                                                                |                                                                 | (in thousands, except share data)                      
|Cash Flows From Operating
    Activities:                                       |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|Net loss                                                                        |                                                                 | $                                                       | (53,947 | )      |         | $    | (59,270 | )      |         | $ | (60,317 | )     
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|Realized (gains)/losses on sale of
    available-for-sale securities            |                                                                 |                                                         | (153    | )      |         |      | (394    | )      |         |   | 478     |       
|Depreciation and amortization                                                   |                                                                 |                                                         | 6,582   |        |         |      | 5,433   |        |         |   | 4,855   |       
|Non-cash compensation expense                                                   |                                                                 |                                                         | 546     |        |         |      | 620     |        |         |   | 638     |       
|Non-cash imputed revenue interest expense                                       |                                                                 |                                                         | 1,500   |        |         |      |        |        |         |   |        |       
|Acquired in-process research and development                                    |                                                                 |                                                         | 8,093   |        |         |      |        |        |         |   |        |       
|Changes in assets and liabilities:                                              |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|                                                                                | Accounts receivable, net, prepaid expenses and
    other assets |                                                         |         | (3,662 | )       |      |         | 4,963  |         |   |         | (4,460 | )      
|                                                                                | Inventories                                                     |                                                         |         | 489    |         |      |         | (306   | )       |   |         | (519   | )      
|                                                                                | Accounts payable and other liabilities                          |                                                         |         | 5,337  |         |      |         | (1,004 | )       |   |         | 3,204  |        
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|                                                                                |                                                                 | Net cash used in operating activities                   |         |        | (35,215 | )    |         |        | (49,958 | ) |         |        | (56,121 | )
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|Cash Flows From Investing
    Activities:                                       |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|Purchases of property and equipment                                             |                                                                 |                                                         | (18,766 | )      |         |      | (282    | )      |         |   | (286    | )     
|Purchase of intangible assets                                                   |                                                                 |                                                         | (86,212 | )      |         |      |        |        |         |   |        |       
|Maturities and sales of available-for-sale
    securities                       |                                                                 |                                                         | 106,964 |        |         |      | 83,425  |        |         |   | 77,192  |       
|Purchases of available-for-sale securities                                      |                                                                 |                                                         | (93,374 | )      |         |      | (72,428 | )      |         |   | (97,546 | )     
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|                                                                                |                                                                 | Net cash provided by (used in) investing
    activities |         |        | (91,388 | )    |         |        | 10,715  |   |         |        | (20,640 | )
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|Cash Flows From Financing
    Activities:                                       |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|Net proceeds from issuances of common stock                                     |                                                                 |                                                         | 26,191  |        |         |      | 19      |        |         |   | 100,108 |       
|Purchase of treasury stock                                                      |                                                                 |                                                         | (5,280  | )      |         |      |        |        |         |   |        |       
|Proceeds from sale of treasury stock                                            |                                                                 |                                                         |        |        |         |      | 524     |        |         |   |        |       
|Proceeds from issuances of long-term debt                                       |                                                                 |                                                         | 88,527  |        |         |      | 3,389   |        |         |   | 3,733   |       
|Proceeds from revenue interest obligation                                       |                                                                 |                                                         | 42,000  |        |         |      |        |        |         |   |        |       
|Debt issuance costs                                                             |                                                                 |                                                         | (5,230  | )      |         |      |        |        |         |   |        |       
|Principal payments on debt and revenue interest
    obligation                  |                                                                 |                                                         | (4,443  | )      |         |      | (6,696  | )      |         |   | (3,102  | )     
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|                                                                                |                                                                 | Net cash (used in) provided by financing
    activities |         |        | 141,765 |      |         |        | (2,764  | ) |         |        | 100,739 |  
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|Net (decrease) increase in cash and cash
    equivalents                        |                                                                 |                                                         | 15,162  |        |         |      | (42,007 | )      |         |   | 23,978  |       
|Cash and cash equivalents at the beginning of
    year                          |                                                                 |                                                         | 14,777  |        |         |      | 56,784  |        |         |   | 32,806  |       
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|Cash and cash equivalents at the end of
    year                                |                                                                 | $                                                       | 29,939  |        |         | $    | 14,777  |        |         | $ | 56,784  |       
|                                                                                |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|Supplemental disclosures of cash flow
    information:                          |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|Net interest paid                                                               |                                                                 | $                                                       | 859     |        |         | $    | 447     |        |         | $ | 500     |       
|Non-cash investing and financing activities:                                    |                                                                 |                                                         |         |        |         |      |         |        |         |   |         |       
|Capital lease obligations pursuant to leases for
    certain equipment          |                                                                 | $                                                       | 1,086   |        |         | $    | 1,475   |        |         | $ | 510     |       



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | During 2002, the Company converted a $2,473
    payable to Cardinal to a note payable.

See accompanying notes to consolidated financial
statements.

F5



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(1) Organization and Description of
Business

Guilford Pharmaceuticals Inc. (together with its
subsidiaries, Guilford or the Company)
is a fully integrated pharmaceutical company located in
Baltimore, Maryland, engaged in the research and development of
products that target the hospital and neurology markets.
Additionally, the Company sells, markets and distributes
proprietary pharmaceutical products.

(2) Acquisition of Assets

On October 28, 2003, the Company acquired
the rights to AGGRASTAT® Injection
(AGGRASTAT®), from Merck and Co., Inc.
(Merck), in the United States and its territories,
for a purchase price of $84 million, plus a royalty based
on net sales of AGGRASTAT® and transaction fees of
approximately $2.2 million, pursuant to an Asset Transfer
and License Agreement (the Asset Agreement) through
2016. From the closing until December 31, 2006, the Company
does not pay royalties on net sales less than $40 million.
On net sales above $40 million prior to December 31,
2006, and beginning on January 1, 2007, on all net sales of
AGGRASTAT®, the Company pays royalties ranging from 5% to
20%, based upon the Companys achievement of certain net
sales thresholds. In connection with the acquisition of
AGGRASTAT®, the Company entered into an agreement with
Merck through 2014, to supply the Company with its requirements
of AGGRASTAT® (the Supply Agreement).
Additionally, until June 28, 2004, Merck has agreed to
provide the Company with certain services related to the
transition of AGGRASTAT® from Merck to the Company pursuant
to a transition services agreement (the Transition
Agreement). AGGRASTAT®, a glycoprotein GP IIb/ IIIa
receptor antagonist, is used for the treatment of acute coronary
syndrome (ACS) including unstable angina, which is
characterized by chest pain when one is at rest, and non-ST
elevation myocardial infarction (NSTEMI).

In order to finance the acquisition, the Company
used $42.0 million of working capital and entered into a
$42.0 million revenue interest financing arrangement with
Paul Royalty Fund, L.P. and certain of its affiliated entities
(collectively, PRF) pursuant to a revenue interest
assignment agreement (the Revenue Agreement). For
information on the revenue interest obligation, see Note 10
PRF Revenue Interest Obligation.

(3) Summary of Significant Accounting
Policies and Practices

Principles of
Consolidation

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

Segment
Information

The Company operates in one industry segment,
which includes research, development, and commercialization of
novel products for the life sciences industry. The Company is
managed and operated as one business. A single management team
that reports to the Chief Executive Officer comprehensively
manages the entire business. The Company does not operate
separate lines of business or separate business entities with
respect to its product or product candidates. The Company
operates primarily from its corporate headquarters located
within the United States and derives revenues primarily from its
sales to customers within the United States. During the year
ended December 31, 2003, approximately six percent of
revenue was from customers outside of the United States.
Accordingly, the Company does not prepare discrete financial
information with respect to separate geographic or product areas
and does not have separately reportable segments as defined by
Statement of Financial Accounting Standards (SFAS)
No. 131, Disclosure about Segments of an Enterprise and
Related Information.

F6



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Cash
Equivalents

The Company had cash equivalents of
$26.5 million and $13.6 million at December 31,
2003 and 2002, respectively, which consisted of money market
funds. The Company classifies all highly liquid investments with
an original maturity of three months or less at the time of
purchase as cash equivalents.

Investments

Investment securities at December 31, 2003
and 2002 consist of direct obligations of the U.S. government
and U.S. government agencies, asset-backed securities and
corporate debt securities. The Company classifies investments at
the time of purchase as either available-for-sale or
held-to-maturity. Investments in securities that are classified
as available-for-sale are carried at their fair values.
Unrealized holding gains and losses on available-for-sale
securities are excluded from current earnings (loss) and
are reported as a separate component of stockholders
equity as Accumulated other comprehensive income
(loss). Realized gains and losses on available-for-sale
securities are determined on a specific identification basis.
Held-to-maturity securities are those securities for which the
Company has the ability and intent to hold the security until
maturity. All of the Companys investments in 2003 and 2002
were classified as available for sale. Dividends and interest
income are recognized when earned, regardless of the type of
security.

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

Investment in
Equity Securities  Cost Method

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

Interest Rate
Swap Agreements

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

Inventories

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

F7



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

Property and
Equipment

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

Intangible
Assets

Intangible assets, net of accumulated
amortization, includes the cost to reacquire the rights to
market, sell and distribute GLIADEL® from Aventis S.A.
(Aventis) (See Note 8), and the patent, trademark,
customer contracts and related customer relationship costs
related to the product rights acquisition of AGGRASTAT®
from Merck during the fourth quarter of 2003 (See Note 8). The
Company is amortizing the intangible assets using the
straight-line method over periods varying between 10 to
13 years depending on the intangible asset acquired.

Impairment of
Long-Lived Assets

Effective January 1, 2002, the Company
adopted SFAS 142, Goodwill and Other Intangible Assets.
SFAS 142 requires goodwill and other intangible assets with
indefinite lives to no longer be amortized; but instead tested
for impairment at least annually. In addition, the standard
includes provisions for the reclassification of certain existing
intangibles as goodwill and reassessment of the useful lives of
existing recognized intangibles. The adoption of SFAS 142 did
not have an impact on the Companys consolidated financial
statements.

The Company accounts for long-lived assets in
accordance with the provisions of SFAS No. 144,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. SFAS No. 144
requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets held and
used is measured by a comparison of the carrying amount of an
asset to future net undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to
sell.

Revenue
Recognition

Revenue from sales of GLIADEL® and
AGGRASTAT® is recognized when all four of the following
criteria are met (i) the Company has persuasive evidence
that an arrangement exists, (ii) the price is fixed and
determinable, (iii) title has passed, and
(iv) collection is reasonably. The Companys credit
and exchange policy includes provisions for return of its
product that (i) has expired, or (ii) was damaged in
shipment.

F8



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys historical return rate is
applied to its unit sales to provide an allowance for future
product returns The product return rate is periodically updated
to reflect actual experience.

The primary customer for GLIADEL® is
Cardinal Specialty Pharmaceuticals Distribution (or SPD) which
sells directly to hospitals. Product demand by this distributor
during a given period may not correlate with prescription demand
for the product in that period. As a result, the Company
periodically evaluates the distributors inventory position. If
the Company believes these levels are too high based on
prescription demand, it will either not accept purchase orders
from or ship additional product to the distributor until these
levels are reduced or it will defer recognition of revenue if it
determines that there is excess channel inventory for the
product. During the quarter ended September 30, 2003, the
Company deferred $0.7 million of sales related to excess
GLIADEL® channel inventory. The deferred revenue was
recognized in the fourth quarter.

The Company has three primary wholesalers for
AGGRASTAT®, AmerisourceBergen Corporation, Cardinal Health,
Inc. and McKesson Corporation, who sell directly to hospitals.
Product demand during a given period may not correlate with
prescription demand for the product in the period.

Collaborative research revenue is recognized, up
to the contractual limits, when the Company meets its
performance obligations under the respective agreements.
Payments received that relate to future performance are deferred
and recognized as revenue at the time such future performance
has been accomplished. Non-refundable upfront fee arrangements
that contain an element of continuing involvement are deferred
and recognized as revenue over the involvement period. Contract
and 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. On May 7, 2003, the Company entered into an
exclusive license agreement with Pfizer Inc. for a novel class
of potential drugs called NAALADase inhibitors. As part of the
agreement, the Company is eligible to receive royalties on
future product sales and milestone payments related to the
successful development and commercialization of a NAALADase
inhibitor. Upon signing the agreement, the Company received a
$5.0 million payment from Pfizer. Under the terms of the
agreement, the Company does not have continuing involvement
relating to the contract. As a result, the payment was
recognized as Revenues from license fees, milestones and
other in the second quarter of 2003. Also in the second
quarter of 2003, the Company recognized a $0.6 million
milestone payment from Daiichi Radioisotope Laboratories, Ltd.,
or DRL, its partner in Japan for DOPASCAN® Injection,
related to the filing of an application for regulatory approval
to market the technology in Japan.

Research and
Development and Royalty Expenses

Internal research and development costs are
expensed as incurred. Third party research and development costs
are expensed as performed. For each of the Companys
research and development projects, the Company incurs both
direct and indirect expenses. Direct expenses include salaries
and other costs of personnel, raw materials and supplies. The
Company may also incur third party costs related to these
projects, such as contract research, consulting and clinical
development costs. Indirect expenses, such as facility and
equipment costs, utilities, general research and development
management and other administrative overhead are allocated to
research and development generally based on, among other things,
the extent to which its general research and development efforts
make use of facilities, non-project personnel and other
resources. The Company reviews and accrues clinical trials
expenses based on estimates of work performed and completion of
certain milestones. The Company believes that this method best
aligns the expenses it records with the efforts it expends.
Accrued clinical costs are subject to revisions as trials
progress to completion. Revisions are charged to expense in the
period in which the facts that give rise to the revision become
known. Royalty expense related to product sales is recognized
concurrently with the recognition of product revenue and
included as part of cost of sales. Royalty expense from
third-party sales is expensed concurrent with such revenue
recognition and is offset against royalty revenue related to
third-party sales.

F9



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Revenue
Interest Expense

Related to the revenue interest financing entered
into with PRF, the $42.2 million revenue interest obligation was
recorded as debt as the Company has significant continuing
involvement in the generation of the cash flows due to PRF.
Monthly revenue interest payments made to PRF will reduce the
future obligation. The obligation will be amortized under the
effective interest method. The effective interest method results
in an imputed interest rate equivalent to PRFs internal
rate of return on future revenue interest payments. These future
revenue interest payments are based on estimated future
revenues. The Company will periodically review estimated future
revenues and update the imputed interest rate as necessary.

Accounting
for Income Taxes

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

Stock-Based
Compensation

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

|                                                                                                                      |                                 |                        |         |       |   |      |         |       |   |   |         |       |  
|--------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ---------------------- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                      |                                 |                       
|                                                                                                                      |                                 | Year Ended December 31
|                                                                                                                      |                                 |                       
|                                                                                                                      |                                 | 2003                   |         | 2002  |   | 2001
|                                                                                                                      |                                 |                        |         |       |   |     
|                                                                                                                      |                                 |                       
|                                                                                                                      |                                 | (In Thousands)        
|Net loss, as reported                                                                                                 |                                 | $                      | (53,947 | )     |   | $    | (59,270 | )     |   | $ | (60,317 | )    
|Add:  Total stock-based employee
    compensation expense determined under fair value based method
    for all awards |                                 |                        | (11,911 | )     |   |      | (13,542 | )     |   |   | (16,540 | )    
|                                                                                                                      |                                 |                        |         |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                                    |                                 | $                      | (65,858 | )     |   | $    | (72,812 | )     |   | $ | (76,857 | )    
|                                                                                                                      |                                 |                        |         |       |   |      |         |       |   |   |         |      
|Loss per share:                                                                                                       |                                 |                        |         |       |   |      |         |       |   |   |         |      
|                                                                                                                      | Basic and diluted  as reported |                        | $       | (1.82 | ) |      | $       | (1.99 | ) |   | $       | (2.14 | )
|                                                                                                                      |                                 |                        |         |       |   |      |         |       |   |   |         |      
|                                                                                                                      | Basic and diluted  pro forma   |                        | $       | (2.22 | ) |      | $       | (2.44 | ) |   | $       | (2.72 | )
|                                                                                                                      |                                 |                        |         |       |   |      |         |       |   |   |         |      

F10



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Comprehensive
Income (Loss)

Under SFAS No. 130, Reporting
Comprehensive Income,the Company is required to display
comprehensive income (loss) and its components as part of
the Companys full set of financial statements. The purpose
of reporting comprehensive income (loss) is to report a
measure of all changes in equity of an enterprise that result
from recognized transactions and other economic events of the
period, except those resulting from investments by owners and
distributions to owners. The measurement and presentation of net
income (loss) did not change. Comprehensive income
(loss) is comprised of net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss)
includes certain changes in equity of the Company that are
excluded from net income (loss). Comprehensive income
(loss) for years ended December 31, 2003, 2002 and
2001 has been reflected in the Consolidated Statements of
Changes in Stockholders Equity.

Earnings
(Loss) per Share

Basic earnings (loss) per share
(EPS) is computed by dividing earnings
(loss) by the weighted-average number of shares outstanding
for the period. The computation of diluted EPS is similar to
basic EPS except that the weighted-average number of shares
outstanding for the period is increased to include the number of
additional shares that would have been outstanding if the
dilutive potential common shares had been issued. Potential
common shares are excluded if the effect on earnings
(loss) per share is antidilutive. At December 31,
2003, 2002 and 2001, there were approximately 12,401,429,
263,000 and 332,000 instruments, respectively, that were
considered anti-dilutive and accordingly were excluded in the
earnings per share calculation. Included in December 31,
2003, are 11,114,423 instruments related to the Companys
convertible subordinated notes.

Fair Value of
Financial Instruments

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

Concentration
of Credit Risk

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

The Company has an exposure to credit risk in its
trade accounts receivable from sales of GLIADEL® and
AGGRASTAT®. The Company began selling GLIADEL® on
January 1, 2001, primarily in the United States, to
hospitals directly and through wholesalers, and to specialty
distributors. The Company began selling AGGRASTAT® in the
fourth quarter of 2003 in the United States and its territories
to hospitals through wholesalers.

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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Uncertainties

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

Use of
Estimates

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

Reclassifications

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

New
Accounting Standards

In April 2003, the Financial Accounting and
Standards Board (FASB) issued Statement of Financial
Accounting Standard No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities (SFAS No. 149). This Statement
amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement of
Financial Accounting Standard 133 Accounting for
Derivative Instruments and Hedging Activities. SFAS
No. 149 was effective for contracts entered into or
modified after June 30, 2003, for hedging relationships
designated after June 30, 2003, and to certain preexisting
contracts. The adoption of SFAS No. 149 did not have a
material impact on the Companys financial statements.

In May 2003, the FASB issued Statement of
Financial Accounting Standard No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and Equity (SFAS No. 150).
This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equities. SFAS
No. 150 was effective for financial instruments entered
into or modified after May 31, 2003, and is otherwise
effective July 1, 2003. The adoption of SFAS No. 150
did not have an impact on the Companys financial
statements as the Company does not have any instruments that are
within the scope of this Statement.

In December 2003, the FASB issued FASB
Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities
(FIN 46R), which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an
entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, which was issued in January 2003.
The Company will be required to apply FIN 46R to variable
interests in variable interest entities created after
December 31, 2003. The Company does not have any variable
interests in variable interest entities.

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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(4) Investments

Investments in marketable securities as of
December 31, 2003 and 2002 are as follows (in thousands):

|                                                                |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|--------------------------------------------------------------- |  | ---- | ------ | ---------- |  | ---------- | --- | ----- |  | - | ---- | - |  | - | ------ | 
|                                                                |  |      |        | Gross      |  | Gross      |     |      
|                                                                |  |      |        | Unrealized |  | Unrealized |     |      
|                                                                |  |      |        | Holding    |  | Holding    |     | Fair 
|                                                                |  | Cost |        | Gains      |  | (Losses)   |     | Value
|                                                                |  |      |        |            |  |            |     |      
|2003                                                            |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|Available-for-sale                                              |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|U.S. Government Backed Securities                               |  | $    | 24,598 |            |  | $          | 106 |       |  | $ | (206 | ) |  | $ | 24,498 | 
|Corporate Debt Securities                                       |  |      | 25,064 |            |  |            | 32  |       |  |   | (388 | ) |  |   | 24,708 | 
|Other Debt Securities                                           |  |      | 1,075  |            |  |            |    |       |  |   | (20  | ) |  |   | 1,055  | 
|Restricted Money Market and Certificate of
    Deposit Accounts |  |      | 21,743 |            |  |            |    |       |  |   |     |   |  |   | 21,743 | 
|                                                                |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|                                                                |  | $    | 72,480 |            |  | $          | 138 |       |  | $ | (614 | ) |  | $ | 72,004 | 
|                                                                |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|2002                                                            |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|Available-for-sale                                              |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|U.S. Government Backed Securities                               |  | $    | 57,897 |            |  | $          | 629 |       |  | $ |     |   |  | $ | 58,526 | 
|Corporate Debt Securities                                       |  |      | 23,646 |            |  |            | 210 |       |  |   |     |   |  |   | 23,856 | 
|Other Debt Securities                                           |  |      | 1,655  |            |  |            |    |       |  |   | (11  | ) |  |   | 1,644  | 
|Restricted Money Market Account                                 |  |      | 3,000  |            |  |            |    |       |  |   |     |   |  |   | 3,000  | 
|                                                                |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 
|                                                                |  | $    | 86,198 |            |  | $          | 839 |       |  | $ | (11  | ) |  | $ | 87,026 | 
|                                                                |  |      |        |            |  |            |     |       |  |   |      |   |  |   |        | 

At December 31, 2003 and 2002, investments
of $21.7 million and $18.6 million, respectively are
classified as Investments-restricted in the
accompanying consolidated balance sheets (see Note 9).

Maturities of investments in marketable
securities classified as available-for-sale as of
December 31, 2003 were as follows (in thousands):

|                   |                       |           |   |        |  |  |   |        | 
|------------------ | --------------------- | --------- | - | ------ |  |  | - | ------ | 
|                   |                       | Amortized |   | Fair  
|                   |                       | Cost      |   | Value 
|                   |                       |           |   |       
|Available-for-sale |                       |           |   |        |  |  |   |       
|                   | Due in 1 year or less |           | $ | 38,356 |  |  | $ | 38,262 | 
|                   | Due in 1-5 years      |           | $ | 34,124 |  |  | $ | 33,742 | 

Included in investment and other income are net
realized gains on disposals of available for-sale securities of
$0.2 million in 2003. Proceeds from the sale of
available-for-sale securities aggregated $106.9 million in
2003, resulting in gross realized gains of $0.5 million and
gross realized losses of $0.3 million.

(5) Accounts Receivable

Accounts receivable consist of the following (in
thousands):

|                                     |  |              |       |      |  |   |     |  
|------------------------------------ |  | ------------ | ----- | ---- |  | - | --- | -
|                                     |  |             
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2003         |       | 2002
|                                     |  |              |       |     
|Trade accounts receivable            |  | $            | 4,276 |      |  | $ | 795 |  
|Less allowance for doubtful accounts |  |              | (816  | )    |  |   | (27 | )
|                                     |  |              |       |      |  |   |     |  
|                                     |  | $            | 3,460 |      |  | $ | 768 |  
|                                     |  |              |       |      |  |   |     |  

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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Accounts receivable at December 31, 2003 and
2002, include amounts due from our customers for their purchases
of GLIADEL®. Sales to the Companys specialty
distributor, hospitals and wholesalers provide for net payments
in 91 days, with certain discounts for early payment. In
addition, accounts receivable at December 31, 2003 includes
amounts due from Merck and Co., Inc., which is providing billing
and collection services during the transition period, from sales
of AGGRASTAT® to wholesalers. Sales to the wholesalers
provide for net payments in 31 days.

The allowance for doubtful accounts at
December 31, 2003, includes $0.8 million relating to a
dispute with Cardinal Health Sales and Marketing Services
(Cardinal) which Specialty Pharmaceuticals
Distribution (SPD), (formerly know as National
Specialty Services, Inc. or NSS), the Companys specialty
pharmaceutical distributor and an affiliate of Cardinal, has
offset against an existing trade receivable to the Company.

(6) Inventories

Inventories consist of the following:

|                |  |                |       |      |  |   |       | 
|--------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                |  |               
|                |  | December 31,  
|                |  |               
|                |  | 2003           |       | 2002
|                |  |                |       |     
|                |  |               
|                |  | (In thousands)
|Raw materials   |  | $              | 191   |      |  | $ | 218   | 
|Work in process |  |                | 275   |      |  |   | 851   | 
|Finished goods  |  |                | 2,038 |      |  |   | 1,924 | 
|                |  |                |       |      |  |   |       | 
|                |  | $              | 2,504 |      |  | $ | 2,993 | 
|                |  |                |       |      |  |   |       | 

(7) Property and Equipment

Property and equipment consist of the following:

|                                               |  |                |         |      |  |   |         |  
|---------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                               |  |               
|                                               |  | December 31,  
|                                               |  |               
|                                               |  | 2003           |         | 2002
|                                               |  |                |         |     
|                                               |  |               
|                                               |  | (In thousands)
|Land                                           |  | $              | 350     |      |  | $ |        |  
|Building                                       |  |                | 18,346  |      |  |   |        |  
|Laboratory equipment                           |  |                | 5,572   |      |  |   | 5,473   |  
|Manufacturing equipment                        |  |                | 2,621   |      |  |   | 2,616   |  
|Computer and office equipment                  |  |                | 6,900   |      |  |   | 6,974   |  
|Leasehold improvements                         |  |                | 16,236  |      |  |   | 16,176  |  
|                                               |  |                |         |      |  |   |         |  
|                                               |  |                | 50,025  |      |  |   | 31,239  |  
|Less accumulated depreciation and amortization |  |                | (27,630 | )    |  |   | (24,705 | )
|                                               |  |                |         |      |  |   |         |  
|                                               |  | $              | 22,395  |      |  | $ | 6,534   |  
|                                               |  |                |         |      |  |   |         |  

In May 2003, the Company acquired the
Companys research and development facility for
$18.7 million which has been allocated between land and
building. Depreciation and amortization expense on property and
equipment amounted to approximately $4.0 million and
$4.1 million for the years ended December 31, 2003 and
2002, respectively. During the year ended December 31,
2003, the Company disposed of approximately $1.1 million of
fully depreciated assets.

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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(8) Intangible Assets and Acquired
In-process Research and Development

On October 28, 2003, the Company acquired
the U.S. product rights, including trademarks and patents, to
AGGRASTAT® Injection from Merck for approximately
$86.2 million, including transaction costs. The Company
recorded intangible assets of $78.1 million with estimated
lives ranging between 11 and 13 years based on a valuation
by a third party and evaluation by the Companys management
and are subject to change. The intangible assets were recorded
as follows:

|                                                          |  |   |        | 
|--------------------------------------------------------- |  | - | ------ | 
|Patents                                                   |  | $ | 53,390 | 
|Trademarks                                                |  |   | 9,750  | 
|Customer contracts and related customer
    relationships |  |   | 14,712 | 
|Other                                                     |  |   | 267    | 
|                                                          |  |   |        | 
|                                                          |  | $ | 78,119 | 
|                                                          |  |   |        | 

In connection with the acquisition and as
calculated by a third-party appraiser, the Company recorded
$8.1 million of the estimated purchase price to acquired
in-process research and development. The fair value was
determined utilizing a present value technique involving a
discounted cash flow analysis. Under this approach, fair value
reflects the present value of the projected free cash flows that
will be generated by the in-process research and development. A
35% risk adjusted discount rate was used in calculating the
present value.

At the date of acquisition, the development of
AGGRASTAT® for use in Percutaneous Coronary Intervention
(PCI) was not complete, had not reached
technological feasibility and had no known alternative future
uses. Consequently, there is considerable uncertainty as to the
technological feasibility of the product for this indication at
the date of acquisition. The Company does not foresee any
alternative future benefit from the acquired in-process research
and development other than specifically related to the PCI
indication under development. Significant technological and
regulatory approval risks are associated with the development of
the product for a PCI indication. Achieving such an indication
will require significant amounts of future time, effort, and
substantial development costs, which will be incurred by the
Company. The efforts required to develop the acquired in-process
research and development into commercially viable products
include the completion of the clinical-trial testing, regulatory
approval and commercialization. The principal risks relating to
achieving the indication under development are the outcomes of
clinical studies and regulatory filings. Since pharmaceutical
products cannot be marketed without regulatory approvals, the
Company will not receive any benefits unless regulatory approval
is obtained. Accordingly, the portion of the purchase price
related to these products under development was allocated to
acquired in-process research and development and was expensed at
the date of acquisition.

In October 2000, the Company entered into a
Rights Reversion Agreement (the Rights Reversion
Agreement) with Aventis, pursuant to which the Company
reacquired the rights to market, sell and distribute
GLIADEL®. In consideration for the reacquisition of these
rights, the Company issued to Aventis 300,000 shares of its
common stock, valued at approximately $8.0 million, assumed the
obligations for product returns subsequent to December 31,
2000, and granted Aventis certain registration rights with
respect to such stock. In accordance with the terms of the
Rights Reversion Agreement, effective January 1, 2001, the
Company has been responsible for all aspects of the worldwide
marketing, sale and distribution of GLIADEL® (except in
Scandinavia where GLIADEL® is distributed by Orion
Corporation Pharma). Upon reacquisition, the Company determined
that this intangible asset had a finite life and would be
amortized over a life of 10 years.

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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Intangible assets consist of the following:

|                              |                                                           |                |        |        |  |   |        |       | 
|----------------------------- | --------------------------------------------------------- | -------------- | ------ | ------ |  | - | ------ | ----- | 
|                              |                                                           |               
|                              |                                                           | December 31,  
|                              |                                                           |               
|                              |                                                           | 2003           |        | 2002  
|                              |                                                           |                |        |       
|                              |                                                           |               
|                              |                                                           | (In thousands)
|GLIADEL®                      |                                                           |                |        |        |  |   |        |      
|                              | Rights reacquisition                                      |                | $      | 8,412  |  |   | $      | 8,412 | 
|                              |                                                           |                |        |        |  |   |        |      
|AGGRASTAT®                    |                                                           |                |        |        |  |   |        |      
|                              | Patents                                                   |                |        | 53,390 |  |   |        |      | 
|                              | Trademarks                                                |                |        | 9,750  |  |   |        |      | 
|                              | Customer contracts and related customer
    relationships |                |        | 14,712 |  |   |        |      | 
|                              | Other                                                     |                |        | 267    |  |   |        |      | 
|                              |                                                           |                |        |        |  |   |        |      
|                              |                                                           |                | 78,119 |        |  |   |       |      
|                              |                                                           |                |        |        |  |   |        |      
|Less accumulated amortization |                                                           |                | (3,735 | )      |  |   | (1,823 | )    
|                              |                                                           |                |        |        |  |   |        |      
|                              |                                                           | $              | 82,796 |        |  | $ | 6,589  |      
|                              |                                                           |                |        |        |  |   |        |      

Amortization expense related to the above
intellectual property is expected to be approximately
$6.9 million a year for 2004, 2005, 2006, 2007 and 2008.

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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(9) Indebtedness

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

|                                                                                                                                                                                                                                                                                       |  |                |        |      |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                                                                                                                                                                                                                                                                       |  |               
|                                                                                                                                                                                                                                                                                       |  | December 31,  
|                                                                                                                                                                                                                                                                                       |  |               
|                                                                                                                                                                                                                                                                                       |  | 2003           |        | 2002
|                                                                                                                                                                                                                                                                                       |  |                |        |     
|                                                                                                                                                                                                                                                                                       |  |               
|                                                                                                                                                                                                                                                                                       |  | (In thousands)
|Convertible subordinated note, 5% interest paid
    semi-annually, principal due July 2008                                                                                                                                                                                             |  | $              | 69,354 |      |  | $ |       |  
|Borrowings under term loan payable to Wachovia
    Bank, National Association, in monthly installments of $78, plus
    interest at LIBOR + 0.5 (1.67% at December 31, 2003), with
    final payment due May 2008                                                                      |  |                | 18,252 |      |  |   |       |  
|Note payable to a commercial bank, interest at
    LIBOR + 0.625 (1.79% at December 31, 2003), principal is
    payable in four equal annual installments beginning in April
    2003. Interest is payable quarterly beginning in July 2002,
    until final principal payment is made |  |                | 2,250  |      |  |   | 3,000  |  
|Borrowings under bond financing arrangement,**
    payable in monthly installments of $78, plus interest at LIBOR +
    0.75% (1.92% at December 31, 2003*), with final payment due
    December 2004.                                                                                 |  |                | 941    |      |  |   | 1,883  |  
|Note payable to the City of Baltimore, interest
    at 2.0% per annum, payable in monthly installments including
    principal and interest, of approximately $5, with final payment
    due December 2009                                                                             |  |                | 370    |      |  |   | 433    |  
|Capital leases***, interest imputed per lease
    schedule at rates of 6.5% to 22% per annum, lease schedules
    expire between January 2004 and December 2004                                                                                                                        |  |                | 946    |      |  |   | 1,024  |  
|Borrowings under term loan,** payable in monthly
    installments of $101, plus interest at LIBOR + 0.625%, with
    final payment made April 2003                                                                                                                                     |  |                |       |      |  |   | 406    |  
|Other note payable in monthly installments of
    $42, including principal and interest (4.0%) with final payment
    due April 2004                                                                                                                                                   |  |                | 166    |      |  |   |       |  
|Other note payable in monthly installments of
    $44, including principal and interest (at 5.5%) with final
    payment made April 2003                                                                                                                                               |  |                |       |      |  |   | 174    |  
|                                                                                                                                                                                                                                                                                       |  |                |        |      |  |   |        |  
|Total long-term debt                                                                                                                                                                                                                                                                   |  |                | 92,279 |      |  |   | 6,920  |  
|Less current portion of long-term debt                                                                                                                                                                                                                                                 |  |                | (3,394 | )    |  |   | (3,200 | )
|                                                                                                                                                                                                                                                                                       |  |                |        |      |  |   |        |  
|Long-term debt, net of current portion                                                                                                                                                                                                                                                 |  | $              | 88,885 |      |  | $ | 3,720  |  
|                                                                                                                                                                                                                                                                                       |  |                |        |      |  |   |        |  



---



|  |            
|- | -----------
|* | See Note 11



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



|    |            
|--- | -----------
|*** | See Note 13

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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Aggregate maturities of long-term debt and
capital leases for each of the five years subsequent to
December 31, 2003, and thereafter are approximately:

|           |  |   |        | 
|---------- |  | - | ------ | 
|2004       |  | $ | 3,394  | 
|2005       |  |   | 2,160  | 
|2006       |  |   | 1,752  | 
|2007       |  |   | 1,003  | 
|2008       |  |   | 83,910 | 
|Thereafter |  |   | 60     | 
|           |  |   |        | 
|Total      |  | $ | 92,279 | 
|           |  |   |        | 

Bond
Financing Arrangement

In 1994, the Company entered into an
$8.0 million bond financing arrangement with a commercial
bank. The bond was issued by the Maryland Economic Development
Corporation. At December 31, 2003, 82% of the outstanding
borrowings is guaranteed by the Maryland Industrial Development
Financing Authority.

Commercial
Loan Agreement

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

Term Loan
Agreement

In May 2003, the Company entered into a five year
$18.8 million term loan agreement with Wachovia Bank,
National Association, the proceeds of which were used to acquire
the Companys research and development facility. As part of
the agreement, the Company has effectively fixed interest
expense on this indebtedness at 5.36%. The agreement requires
monthly principal payments of approximately $940,000 per year.
The unpaid principal on the loan is due in May 2008. Under the
terms of the loan, the Company is required to maintain a
restricted cash collateral account in the amount of the unpaid
principal of the loan, $18.3 million at December 31,
2003. This restricted cash collateral account is included as
Investments-Restricted on the consolidated balance
sheet.

Convertible
Subordinated Notes

In June 2003, the Company issued $60 million
of convertible subordinated notes (Notes) due
July 1, 2008. In July 2003, the initial purchasers of the
Notes exercised an option to purchase an additional
$9.4 million of the Notes under the same terms and
conditions of the initial issuance. Interest on the Notes
accrues at 5% per annum and is payable semi-annually on January
1 and July 1 each year, commencing on January 1, 2004. The
Notes are convertible at the option of the holder at any time
prior to maturity into shares on the Companys common stock
at a conversion price of $6.24 per share. The Company has the
option to redeem the Notes on or after July 6, 2006 but
prior to July 6, 2007 for 102.00% of the principal amount. If
the Company elected to redeem the Notes on or after July 6,
2007, until the maturity date, the redemption price would be
101.00% of the principal amount.

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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The debt agreements referred to above contain
restrictions that require the Company to meet certain financial
covenants. Under the bond financing arrangement, the Company
maintained $0.2 million and $0.3 million at
December 31, 2003 and 2002, respectively, as cash
collateral (approximately 18.2% of the outstanding principal
balance less $100,000). Under the terms of the Wachovia Bank,
National Association term loan, the Company maintained as cash
collateral $18.3 million at December 31, 2003, which
represents the unpaid principal balance of the loan. At
December 31, 2002, the Company maintained as cash
collateral of $0.4 million, equal to 100% of the
outstanding principal balance, in accordance to the term loan
paid in full in April 2003. In accordance with the commercial
loan agreement, the Company maintained cash collateral of
$2.2 million and $3.0 million at December 31,
2003 and 2002, respectively (equal to 100% of the outstanding
principal balance). Total collateral is included in the
accompanying Consolidated Balance Sheets as
Investments-restricted. Other covenants preclude the
Company from declaring any cash dividends on its common stock
without prior written consent.



|     |                                
|---- | -------------------------------
|(10) | PRF Revenue Interest Obligation

On October 28, 2003, the Company acquired
the rights to AGGRASTAT®
Injection (AGGRASTAT®), from Merck and
Co., Inc. (Merck), in the United States and its
territories, for a purchase price of $84 million, plus a
royalty based on net sales of AGGRASTAT®, pursuant to an
Asset Transfer and License Agreement (the Asset
Agreement) through 2016. In order to finance the
acquisition, the Company used $42.0 million of working
capital and entered into a $42.0 million revenue interest
financing arrangement with Paul Royalty Fund, L.P. and certain
of its affiliated entities (collectively, PRF)
pursuant to a revenue interest assignment agreement (the
Revenue Agreement). Interest expense is calculated
using the effective interest method. The effective interest
method results in an imputed interest rate equivalent to
PRFs internal rate of return on estimated future revenue
interest payments. These future revenue interest payments are
based on estimated future revenues. The Company will
periodically review estimated future revenues and update the
imputed rate as necessary.

Under the Companys arrangement with PRF,
from October 28, 2003, through December 31, 2006, PRF
is entitled to receive 10% of the Companys GLIADEL®
Wafer (GLIADEL®) and AGGRASTAT® net sales
up to $75 million, and 2.5% of those annual net sales in
excess of $75 million, and from January 1, 2007,
through December 31, 2012 (the end of the term of the
financing arrangement with PRF), these percentages are 17.5% and
3.5%, respectively. If combined GLIADEL® and
AGGRASTAT® annual net sales are less than
$48.3 million, $60.2 million, or $80.6 million in
2004, 2005, and 2006, respectively, then PRF will receive the
higher of the minimum payments for such years described below or
12.5% of combined GLIADEL® and AGGRASTAT® net sales.
If combined GLIADEL® and AGGRASTAT® annual net sales
are less than $75 million in any of 2007 through 2012, then
PRF will receive the higher of the minimum payments for such
years described below, or 22.5% of combined GLIADEL® and
AGGRASTAT® net sales. During each year of the term of the
arrangement with PRF, PRF will be entitled to receive a portion
of revenues from products that the Company may acquire in the
future, or of AQUAVAN® Injection and GPI 1485 (each product
candidates of the Company), in the case that the Companys
calculated annual obligation(s) to make revenue interest
payments under the Revenue Agreement (based upon the combined
net sales of GLIADEL® and AGGRASTAT®) are less than
$6.4 million for 2004, $7.6 million for 2005,
$8.3 million for 2006, $15.3 million for 2007,
$15.5 million for 2008, $15.8 million for 2009,
$16.0 million for 2010, or $15.9 million for 2011 and
2012, respectively.

The Company will pay PRF minimum payments of
$5.0 million in 2004, $6.3 million in 2005,
$7.5 million in 2006, $10.0 million in each of
2007  2009 and $12.5 million in each of
2010-2012. PRF is also entitled to receive portions of amounts
payable to the Company on the resolution of future intellectual
property disputes involving GLIADEL® or AGGRASTAT® and
on the sale of ex-US marketing rights to

F19



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GLIADEL®. In addition to its revenue
interest in the Companys products or future products, as
the case may be, PRF received five-year warrants to purchase
300,000 shares of the Companys common stock at an
exercise price of $9.15 per share.

As part of the Companys financing
arrangement with PRF, PRF has been granted a security interest
in the assets related to GLIADEL® Wafer and AGGRASTAT®
Injection. As a result of this security interest, the Company
may not be free to utilize those assets at its discretion, such
as selling or outlicensing rights to part or all of those
assets, without first obtaining the permission of PRF. This
requirement could delay, hinder or condition, the Companys
ability to enter into corporate partnerships or strategic
alliances with respect to these assets.

Also in connection with the Companys
arrangement with PRF, the Company has pledged cash and cash
equivalents, such as marketable securities, to PRF, initially in
the amount of $11.25 million (such pledged amount to be in
the amount of the next eight quarters of minimum payments to
PRF) as additional evidence of its liquidity. The Company may
maintain this pledged account at its discretion; however, if the
Company does not, it will be required to maintain at least
$20 million of net working capital during the term of the
agreement. If the Company does not maintain the pledged account
or it does not have $20 million of net working capital,
then PRF may exercise a right to require the Company to
repurchase its revenue interest at a purchase price that
reflects a return to PRF (but is reduced by amounts previously
paid to PRF). Regardless of the reason for which PRF may be
entitled to require the Company to repurchase its revenue
interest (in addition to the liquidity events discussed above,
PRF may also require it to repurchase its revenue interest if
(1) the Company fails to make its minimum payments to them,
(2) the Company sells GLIADEL® and AGGRASTAT®
(with PRF having partial rights to make the Company repurchase
its interest in the event of the sale of one, but not both
products), (3) upon the occurrence of a bankruptcy or
similar event, or (4) upon a change of control of the
Company), the repurchase amount may never exceed three and a
half times PRFs initial investment, or $147 million.



|     |                              
|---- | -----------------------------
|(11) | Interest Rate Swap Agreements

The Company entered into interest rate swap
agreements with a commercial bank (counterparty) to
reduce the impact of fluctuations in market interest rates on
certain financial obligations (see Note 9). These
agreements have a total notional principal amount of
approximately $21.4 million at December 31, 2003.
Pursuant to these interest rate swap agreements, the Company
pays a fixed rate of interest to the counterparty and receives
from the counterparty a variable rate of interest. The
differential to be paid or received as interest rates change is
charged or credited, as appropriate to operations. Accordingly,
the Company has fixed interest rates on its December 31,
2003 financial obligations between 2.78% and 5.36%. These
interest rate swap agreements have approximately the same
maturity dates as the financial obligations and expire on
various dates through May 2008. In the event of non-performance
by the counterparty, the Company could be exposed to market risk
related to interest rates. When the fair value of the agreements
is positive, the counterparty owes the Company, which creates
market risk for the Company. Conversely, when the fair value of
the agreements is negative, the Company owes the counterparty
and, therefore, it does not possess market risk. At
December 31, 2003, the fair value of the interest rate swap
agreements was a liability of $1.1 million, compared to
$1.6 million at December 31, 2002. Current market
pricing models were used to estimate fair values of these
interest rate swap agreements.



|     |              
|---- | -------------
|(12) | Restructuring

On July 30, 2002, the Company announced a
workforce reduction of 58 employees, most of whom worked in
the areas of research and development. As a result of this
reduction, the Company recorded a restructuring charge of
$1.5 million of which $0.2 million was reversed during
the fourth quarter of 2002. The Companys restructuring
plans and associated costs consisted of employee severance costs
including severance

F20



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

pay, related payroll taxes and insurance, and
outplacement services. All terminations and termination benefits
were communicated to the affected employees during the third
quarter of 2002 and severance benefits were paid in full by
August 15, 2003.



|     |       
|---- | ------
|(13) | Leases

In May 2003, the Company acquired the
Companys research and development facility. The Company
entered into a 5-year $18.8 million term loan agreement
with Wachovia Bank, National Association To finance the
acquisition.

Prior to May 2003, the Company had accounted for
the financing arrangement related to the Companys research
and development facility as an operating lease. As a result
certain assets and liabilities of the facility were not
consolidated in the Companys financial statements. Had we
consolidated the financing related to the operating lease, the
pro formaimpact on certain categories of our
consolidated balance sheet at December 31, 2002, and our
net loss for the year ended December 31, 2002, would have
been as follows (in thousands):

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

In October 2002, the Company entered into a new
master lease agreement to provide up to $1.0 million for
computer and equipment financing. The Companys previous
master lease agreement, entered into in August 2001, expired in
June 2002. The term of each operating lease varies from 24 to
48 months based upon the type of equipment being leased. As
of December 31, 2003, the Company had leased approximately
$0.4 million in equipment under this master lease agreement.

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

The Companys future minimum lease payments
under these non-cancelable operating leases (with initial or
remaining lease terms in excess of one year) and future minimum
capital lease payments for years subsequent to December 31,
2003 are as follows (in thousands):

|                                                         |                                                               |         |      |           |  |   |       |       | 
|-------------------------------------------------------- | ------------------------------------------------------------- | ------- | ---- | --------- |  | - | ----- | ----- | 
|                                                         |                                                               | Capital |      | Operating
|                                                         |                                                               | Leases  |      | Leases   
|                                                         |                                                               |         |      |          
|2004                                                     |                                                               | $       | 584  |           |  | $ | 1,661 |      
|2005                                                     |                                                               |         | 425  |           |  |   | 639   |      
|2006                                                     |                                                               |         |     |           |  |   | 130   |      
|2007                                                     |                                                               |         |     |           |  |   |      |      
|                                                         |                                                               |         |      |           |  |   |       |      
|                                                         | Total minimum lease payments                                  |         |      | 1,009     |  |   | $     | 2,430 | 
|                                                         |                                                               |         |      |           |  |   |       |      
|Less amounts representing interest                       |                                                               |         | (63  | )         |  |   |       |      
|                                                         |                                                               |         |      |           |  |   |       |      
|                                                         | Present value of net minimum lease payments                   |         |      | 946       |  |   |       |       | 
|Less current maturities of capital lease
    obligations |                                                               |         | (536 | )         |  |   |       |      
|                                                         |                                                               |         |      |           |  |   |       |      
|                                                         | Capital lease obligations, excluding current
    installments |         | $    | 410       |  |   |       |       | 
|                                                         |                                                               |         |      |           |  |   |       |      

F21



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Rent expense for operating leases was
approximately $2.9 million, $4.8 million, and
$4.4 million for the years ended December 31, 2003,
2002 and 2001, respectively.

The amount of equipment and related accumulated
depreciation recorded under capital leases was $3.6 million
and $2.8 million, respectively at December 31, 2003,
and $2.5 million and $1.6 million, respectively at
December 31, 2002.



|     |             
|---- | ------------
|(14) | Income Taxes

As of December 31, 2003, the Company had net
operating loss (NOL) carryforwards available for
federal income tax purposes of approximately $290 million,
which expire at various dates between 2010 and 2023. 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, 2003, the Company had
tax credit carryforwards of approximately $11.5 million
expiring between 2010 and 2023. Approximately $1.0 million
of the net operating loss carryforwards result from tax
deductions related to equity-based compensation, which when and
if realized will be a credit to additional paid-in capital.

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

|                                                             |  |                |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------ |  | -------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                             |  |               
|                                                             |  | December 31   
|                                                             |  |               
|                                                             |  | 2003           |         | 2002 |  | 2001
|                                                             |  |                |         |      |  |     
|                                                             |  |               
|                                                             |  | (In thousands)
|Computed expected tax benefit at
    statutory rate        |  | $              | (18,342 | )    |  | $    | (20,152 | ) |  | $ | (20,508 | )
|State income tax, net of federal benefit                     |  |                | (2,098  | )    |  |      | (3,330  | ) |  |   | (4,174  | )
|Research and development and other permanent
    differences |  |                | 3,064   |      |  |      |        |   |  |   |        |  
|General business credit generated                            |  |                | (1,130  | )    |  |      | (1,292  | ) |  |   | (1,874  | )
|Other, net                                                   |  |                | 425     |      |  |      | (318    | ) |  |   | 223     |  
|Increase in valuation allowance                              |  |                | 18,081  |      |  |      | 25,092  |   |  |   | 26,333  |  
|                                                             |  |                |         |      |  |      |         |   |  |   |         |  
|                                                             |  | $              |        |      |  | $    |        |   |  | $ |        |  
|                                                             |  |                |         |      |  |      |         |   |  |   |         |  

Realization of 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 deferred tax assets
which may not be realized in the future, resulting in deferred
tax assets being completely reserved for December 31, 2003.
The change in the valuation allowance was an increase of
approximately $18.1 million in 2003, $25.1 million in
2002, and $26.3 million in 2001.

F22



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Significant components of our deferred tax assets
and liabilities as of December 31, 2003 and 2002 are shown
below.

|                          |                                                           |                         |         |          |   |  |         |          |   | 
|------------------------- | --------------------------------------------------------- | ----------------------- | ------- | -------- | - |  | ------- | -------- | - | 
|                          |                                                           |                        
|                          |                                                           | December 31,           
|                          |                                                           |                        
|                          |                                                           | 2003                    |         | 2002    
|                          |                                                           |                         |         |         
|                          |                                                           |                        
|                          |                                                           | (In thousands)         
|Deferred tax assets:      |                                                           |                         |         |          |   |  |         |         
|                          | Net operating loss carryforwards                          |                         | $       | 114,961  |   |  | $       | 97,299   |  
|                          | Research and experimentation credits                      |                         |         | 11,721   |   |  |         | 10,587   |  
|                          | Compensatory stock grants                                 |                         |         | 887      |   |  |         | 342      |  
|                          | Depreciation                                              |                         |         | 1,286    |   |  |         | 1,974    |  
|                          | Amortization                                              |                         |         | 438      |   |  |         |         |  
|                          | Accrued expenses                                          |                         |         | 1,091    |   |  |         | 1,825    |  
|                          | Contribution carryover and capitalized start-up
    costs |                         |         | 249      |   |  |         | 537      |  
|                          | Other                                                     |                         |         | 499      |   |  |         | 616      |  
|                          |                                                           |                         |         |          |   |  |         |         
|                          |                                                           |                         | 131,132 |          |   |  | 113,180 |         
|Deferred tax liabilities: |                                                           |                         |         |          |   |  |         |         
|                          | Prepaid expenses and other                                |                         |         | (374     | ) |  |         | (503     | )
|                          |                                                           |                         |         |          |   |  |         |         
|                          | Net deferred tax assets                                   |                         |         | 130,758  |   |  |         | 112,677  |  
|                          | Valuation allowance                                       |                         |         | (130,758 | ) |  |         | (112,677 | )
|                          |                                                           |                         |         |          |   |  |         |         
|                          |                                                           | Net deferred tax assets |         | $        |  |  |         | $        |  | 
|                          |                                                           |                         |         |          |   |  |         |         



|     |        
|---- | -------
|(15) | Capital

In December 2003, the Company sold 4,807,326
newly issued shares of its common stock to certain institutional
investors in a PIPE (Private Investment in Public Equity
transaction), resulting in net proceeds to the Company of
approximately $25.8 million. In conjunction with this
transaction, the investors received seven-year warrants to
purchase 961,465 shares of the Companys common stock
at an exercise price of $7.55 per share.

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

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

The Company repurchased 1,100,000 and
18,867 shares of its common stock at an aggregate cost of
approximately $5.3 million, and $0.4 million, during
the years ended December 31, 2003 and 2001, respectively.

In October 2003, the Company acquired the rights
to AGGRASTAT® Merck in the United States and its
territories. In order to finance the acquisition, the Company
entered into a $42.0 million revenue interest financing
arrangement with Paul Royalty Fund, L.P. and certain of its
affiliated entities, or PRF. See Note 2 Acquisition
of Assets. In addition to its revenue interest in the
Companys products, PRF received five-year warrants to
purchase 300,000 shares of the Companys common stock
at an exercise price of $9.15 per share.

Warrants granted to Amgen, Inc. in 1997, to
purchase up to 700,000 shares of the Companys common
stock at an exercise price of $35.15 per share expired
during 2002.

F23



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company is authorized to issue up to
4,700,000 shares of preferred stock in one or more
different series with terms fixed by the Board of Directors.
Stockholder approval is not required to issue this preferred
stock. There were no shares of this preferred stock outstanding
at December 31, 2003 or 2002.



|     |                        
|---- | -----------------------
|(16) | 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, 2003, the Rights
were neither exercisable nor traded separately from the
Companys common stock, and become exercisable only if a
person or group becomes the beneficial owner of 20% or more of
the Companys common stock or announces a tender or
exchange offer that would result in its ownership of 20% or more
of the Companys common stock without the approval of the
Board of Directors. Each holder of a Right, other than the
acquiring person, would be entitled to purchase $120 worth of
common stock of the Company for each Right at the exercise price
of $60 per Right, which would effectively enable such
Rights holders to purchase common stock at one-half of the then
current price.

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



|     |                          
|---- | -------------------------
|(17) | Equity Compensation Plans



| |                                            
| | -------------------------------------------
| | Stock Option and Restricted Share
    Plans

The Company adopted Stock Option and Restricted
Share Plans in 1993, 1998 and 2002 (the 1993 Plan,
the 1998 Plan, and the 2002 Plan,
respectively, and collectively, the Plans). The
Plans were adopted to provide eligible individuals with an
opportunity to acquire or increase an equity interest in the
Company and to encourage these individuals to continue in the
employment of the Company and contribute to its success.
Eligible individuals include full-time employees of the Company
and others whose participation in the Plan is determined by the
Board of Directors to be in the best interests of the Company.
Employees of the Company generally receive share option grants
upon the commencement of their employment, and to the extent
approved by the Compensation Committee of the Board of
Directors, as a long-term incentive bonus award in February of
each year. Share options under the Plans are granted at a price
per share equal to the fair market value of the Companys
Common Stock on the day immediately preceding the grant date, or
if later, the date that the employee commences employment with
the Company. The 1993 Plan and the 2002 Plan permitted the
issuance of incentive stock options, but the 1998 Plan does not.
Share options granted under the Plans are exercisable for a
period of not more than 10 years from the grant date. Share
options granted under the Plans vest with respect to 25% of any
grant upon the first anniversary of the grant date, and
thereafter, the remaining grant vests in 36 equal monthly
installments.

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

F24



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Companys Common Stock on the date of the
grant multiplied bythe number of shares that were
subject to the grant. This unearned compensation is expensed
over the vesting period.

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

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

As of December 31, 2003, the maximum number
of shares issuable under the Plans was 7,354,021, of which
500,000 shares may be issued under the restricted share
provisions. During the years ended December 31, 2003, 2002
and 2001, the Company granted 1,171,332, 2,131,132, and
2,098,354 share options and restricted shares under the
Plans, respectively. As of December 31, 2003, there were
5,299,697 share options and 200,414 restricted shares
outstanding under the Plans, of which, with respect to the share
options, 3,360,852 were exercisable as of December 31,
2003. As of December 31, 2003, there were
1,853,910 shares available for grant under the 2002 Plan.



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

The Directors Stock Option Plan (the
Directors Plan) was adopted to provide
non-employee directors an opportunity to acquire or increase an
equity interest in the Company. Under the Directors Plan
300,000 shares of the Companys Common Stock were
reserved for issuance at an exercise price not less than the
fair market value of the Companys Common Stock on the day
immediately preceding the grant date. Share option grants under
the Directors Plan vest 50% on the first anniversary of
the grant date and are 100% vested on the second anniversary of
the grant date. As of December 31, 2003, 262,500 share
options were outstanding under the Directors Plan, of
which 262,500 were exercisable. Share options granted under the
Directors Plan are for a term of 10 years. The
Company did not make any share option grants under the
Directors Plan in 2003 and 2002, and granted
15,000 share options for the year ended December 31,
2001.

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



| |                              
| | -----------------------------
| | Employee Stock Purchase Plans

In September 2001, the Company established the
2001 Stock Purchase Plan (the 2001 Stock Purchase
Plan), to encourage and assist employees to acquire an
equity interest in the Company. The 2001 Plan is authorized to
issue up to 300,000 shares of the Companys Common
Stock. Eligible employees may elect to have up to 15% of their
annual gross earnings withheld to purchase shares of the
Companys Common Stock at 85% of the fair market value of
the Common Stock on either the first or last trading day of the
offering period, whichever is lower. The 2001 Stock Purchase
Plan was not subject to shareholder approval; and therefore,
does not currently comply with the requirements of
Sections 421 and 423 of the Internal Revenue Code. As of
December 31, 2003, the Company has issued
73,438 shares of the Companys Common Stock under the
2001 Stock Purchase Plan.

In May 2002, the Companys shareholders
adopted the 2002 Stock Purchase Plan (the 2002 Stock
Purchase Plan), to encourage and assist employees to
acquire an equity interest in the Company. The 2002 Stock
Purchase Plan is authorized to issue up to 300,000 shares
of the Companys Common Stock. Eligible employees may elect
to have up to 15% of their annual gross earnings withheld to
purchase shares of the

F25



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Companys Common Stock at 85% of the fair
market value of the Common Stock on either the first or last
trading day of the offering period, whichever is lower. As
stated, the 2002 Stock Purchase Plan was approved by
shareholders; and therefore, is intended to comply with the
requirements of Section 423 of the Internal Revenue Code.
As of December 31, 2003, the Company has issued
87,935 shares of the Companys Common Stock under the
2002 Stock Purchase Plan.



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

In 1995, 1996 and 2000, the Company granted share
options to certain of the Companys consultants. With
respect to each share option grant to those consultants, the
grant is valid for 10 years from the grant date and is
subject to a vesting period based upon either the passage of
time or the achievement of certain milestones. Of these share
options, 430,800 share options were outstanding and
exercisable as of December 31, 2003. The Company recognized
$0.1 million in non-cash compensation expense, in
accordance with SFAS 123, relating to the value of such
share options (as determined using the Black-Scholes pricing
model) for the year ended December 31, 2001, and as of the
December 31, 2001, compensation expense relating to the
share options grants has been fully recognized.

The following is a summary of the Companys
share option activity and balances as of and for the years ended
December 31, 2003, 2002 and 2001:

|                           |  |         |            |           |  |   |       | 
|-------------------------- |  | ------- | ---------- | --------- |  | - | ----- | 
|                           |  |         |            | Weighted-
|                           |  |         |            | Average  
|                           |  | Share   |            | Exercise 
|                           |  | Options |            | Price    
|                           |  |         |            |          
|Balance, January 1, 2001   |  |         | 3,651,096  |           |  | $ | 18.98 | 
|Granted                    |  |         | 2,113,354  |           |  |   | 17.78 | 
|Exercised                  |  |         | (146,723   | )         |  |   | 11.77 | 
|Canceled                   |  |         | (163,122   | )         |  |   | 20.61 | 
|                           |  |         |            |           |  |   |       | 
|Balance, December 31, 2001 |  |         | 5,454,605  |           |  |   | 18.66 | 
|                           |  |         |            |           |  |   |       | 
|Granted                    |  |         | 2,131,132  |           |  |   | 7.55  | 
|Exercised                  |  |         | (5,000     | )         |  |   | 3.09  | 
|Canceled                   |  |         | (1,725,458 | )         |  |   | 16.94 | 
|                           |  |         |            |           |  |   |       | 
|Balance, December 31, 2002 |  |         | 5,855,279  |           |  |   | 15.14 | 
|                           |  |         |            |           |  |   |       | 
|Granted                    |  |         | 1,171,332  |           |  |   | 3.88  | 
|Exercised                  |  |         | (59,300    | )         |  |   | 4.30  | 
|Canceled                   |  |         | (974,314   | )         |  |   | 12.63 | 
|                           |  |         |            |           |  |   |       | 
|Balance, December 31, 2003 |  |         | 5,992,997  |           |  | $ | 13.45 | 
|                           |  |         |            |           |  |   |       | 

F26



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                         |  |                     |           |                  |  |                     |     |              |  |           |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ---------------- |  | ------------------- | --- | ------------ |  | --------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                  |  |                    
|                         |  | Options Outstanding |           |                  |  | Options Exercisable
|                         |  |                     |           |                  |  |                    
|                         |  |                     |           | Weighted-        |  | Weighted-           |     |              |  | Weighted-
|                         |  | As of               |           | Average          |  | Average             |     | As of        |  | Average  
|                         |  | December 31,        |           | Remaining        |  | Exercise            |     | December 31, |  | Exercise 
|Range of Exercise Prices |  | 2003                |           | Contractual Life |  | Price               |     | 2003         |  | Price    
|                         |  |                     |           |                  |  |                     |     |              |  |          
|$ 0.01  $10.00          |  |                     | 2,670,142 |                  |  |                     | 8.0 |              |  | $         | 6.09  |  |  |  | 1,010,673 |  |  | $ | 6.96  | 
|10.01   20.00           |  |                     | 2,621,769 |                  |  |                     | 4.8 |              |  |           | 16.99 |  |  |  | 2,376,647 |  |  |   | 16.78 | 
|20.01   30.00           |  |                     | 693,363   |                  |  |                     | 5.6 |              |  |           | 28.27 |  |  |  | 659,109   |  |  |   | 28.34 | 
|30.01   40.00           |  |                     | 7,723     |                  |  |                     | 3.6 |              |  |           | 30.70 |  |  |  | 7,723     |  |  |   | 30.70 | 
|                         |  |                     |           |                  |  |                     |     |              |  |           |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 5,992,997 |                  |  |                     | 6.3 |              |  | $         | 13.45 |  |  |  | 4,054,152 |  |  | $ | 16.24 | 
|                         |  |                     |           |                  |  |                     |     |              |  |           |       |  |  |  |           |  |  |   |       | 



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

Using the Black-Scholes option pricing model, the
per share weighted-average fair value for all share options
granted during 2003, 2002 and 2001 was $1.80, $4.69, and $10.00,
respectively, on the date of grant with the following
weighted-average assumptions.

|                        |  |      |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  | 2003 |      | 2002 |  | 2001
|                        |  |      |      |      |  |     
|Expected dividend yield |  |      | 0    | %    |  |      | 0    | % |  |  | 0    | %
|Risk-free interest rate |  |      | 2.8  | %    |  |      | 2.6  | % |  |  | 4.0  | %
|Volatility              |  |      | 77.3 | %    |  |      | 76.0 | % |  |  | 96.1 | %
|Expected life in years  |  |      | 4    |      |  |      | 4    |   |  |  | 4    |  

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



|     |                           
|---- | --------------------------
|(18) | 401(k) Profit Sharing Plan

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

The Company currently elects to match employee
contributions with the Companys common stock equal to 50%
of the first 6% of an employees voluntary contribution.
Such amounts vest 25% per year, based on a
participants years of service with the Company. The
Company has made non-cash contributions of Company stock of
approximately $0.5 million for each of the years ended
December 31, 2003, 2002 and 2001.

F27



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|     |                                                   
|---- | --------------------------------------------------
|(19) | Significant Contracts and Licensing
    Agreements



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

In March 2000, the Company acquired from ProQuest
Pharmaceuticals Inc. (ProQuest) an exclusive
worldwide license to a prodrug of propofol, a widely used
anesthetic which the Company is developing under the trade name
AQUAVAN® Injection. Pursuant to this transaction, the
Company paid approximately $0.7 million for
133,333 shares of common stock of ProQuest and
approximately $0.3 million for in-process research and
development that was expensed. Under the terms of the agreement,
the Company is obligated to make payments based on clinical
development milestones and royalties on any product sales.
During the second quarter of 2002, the Company achieved a
development milestone related to AQUAVAN® Injection, which
resulted in a payment due to ProQuest of $0.8 million and
the Company receiving additional shares of the common stock of
ProQuest. At December 31, 2002, the estimated market value
of the Companys total investment in ProQuest, including
the purchases made in the second quarter of 2002, was
$0.9 million. As a result, the Company recorded the
2002 milestone payments of $0.8 million as a research
and development cost. The estimated market value of the
Companys total investment in ProQuest at December 31,
2003 is $0.9 million.

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



|     |                          
|---- | -------------------------
|(20) | Related Party Transaction

In connection with the sale of 34,129 shares
of the Companys common stock in February 1994 to John P.
Brennan, Senior Vice President, Technical Operations, he
delivered to the Company a full-recourse note bearing an
interest of 5.34% annually in the amount of $60,000. That note,
as amended, was due and payable during February 2002, at which
time the Company extended the payment date of the note to
February 2004. At December 31, 2003, the principal and
accrued interest for the note was approximately $93,519. During
the first quarter of 2004, the Compensation Committee of the
Board of Directors forgave this obligation.



|     |                              
|---- | -----------------------------
|(21) | Commitments and Contingencies



| |                                          
| | -----------------------------------------
| | Merck Royalty on AGGRASTAT® Net
    Sales

In connection with the acquisition of
AGGRASTAT®, the Company granted Merck a royalty based on
net sales of AGGRASTAT®. From the closing until
December 31, 2006, the agreement provides that Merck will
not receive royalty payments on net sales less than
$40 million. On net sales above $40 million prior to
December 31, 2006, and beginning on January 1, 2007,
on all sales of AGGRASTAT®, Merck will receive royalty
payments ranging from 5% to 20% of AGGRASTAT® net sales,
based upon the Companys achievement of certain net sales
thresholds. The royalty payments to be paid to Merck are
calculated as follows:



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Calendar Year 2004, 2005 and 2006                                                       
|
| | 0% on AGGRASTAT® Net Sales up to $40,000,000;                                           
| | 10% on AGGRASTAT® Net Sales in excess of
    $40,000,000 and less than $50,000,000;     
| | 12% on AGGRASTAT® Net Sales in excess of
    $50,000,000 and less than $75,000,000;     
| | 14% on AGGRASTAT® Net Sales in excess of
    $75,000,000 and less than $100,000,000; and
| | 20% on AGGRASTAT® Net Sales over
    $100,000,000.                                      

F28



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Calendar Year 2007 and succeeding Calendar Years                                        
|
| | 5% on AGGRASTAT® Net Sales up to $28,000,000;                                           
| | 10% on AGGRASTAT® Net Sales in excess of
    $28,000,000 and less than $50,000,000;     
| | 12% on AGGRASTAT® Net Sales in excess of
    $50,000,000 and less than $75,000,000;     
| | 14% on AGGRASTAT® Net Sales in excess of
    $75,000,000 and less than $100,000,000; and
| | 20% on AGGRASTAT® Net Sales over
    $100,000,000.                                      



| |                                         
| | ----------------------------------------
| | Research and Development
    Commitments

The Company has entered into various agreements
in order to advance its research and development activities.
These agreements may take the form of research and development
agreements, consulting agreements and/or licensing agreements.
As of December 31, 2003, the Company had committed to fund
approximately $10.3 million pursuant to these agreements.
Approximately 66% of this amount will be incurred during 2004.

The Company has entered into various licensing
agreements for certain of its technologies, which commit the
Company to minimum annual research spending on certain mutually
agreed-upon research and development projects. In the aggregate,
these minimum annual research expenditures are approximately
$1.0 million. These minimum annual research expenditures
typically continue until marketing approval of a product
incorporating the licensed technology. In addition, certain of
these licensing agreements require the Company to make payments
upon achieving specific milestones as well as requiring the
payment of royalties on future net sales of licensed products,
if any, as well as a percentage of all payments received by the
Company from sublicensees, if any.



| |                        
| | -----------------------
| | Cardinal Health Dispute

During 2002, the Company terminated its agreement
with Cardinal Health to provide a contract sales force. The
termination has led to a dispute regarding amounts owed to
Cardinal at the termination date. The Company does not believe
it has any remaining obligations to Cardinal at
December 31, 2002 relative to the agreement; however,
Cardinal has asserted that it may be owed $0.8 million. On
March 13, 2003, the Company received notice from the parent
of Cardinal Health (Parent) that Specialty
Pharmaceuticals Distribution, or SPD, (formerly known as
National Specialty Services Inc.) an affiliate of Cardinal
Health and another subsidiary of Parent, was going to offset the
amount Cardinal Health claims the Company owes it against an
account payable in the amount of approximately $1.8 million
that SPD owes the Company, in addition to taking certain
unearned prompt payment discounts, also in payment of the
amounts that Cardinal Health claims the Company owes it. SPD is
the specialty distributor to whom the Company sells
GLIADEL®. The Company does not believe that Parent or SPD
has the right to make an offset under the Companys
agreement with SPD for amounts that Cardinal Health claims the
Company owes it. The Company recorded a reserve of
$0.8 million for the SPD receivable that was not paid when
due.



| |        
| | -------
| | General

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

F29



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|     |                                     
|---- | ------------------------------------
|(22) | Quarterly Financial Data (unaudited)

|                                      |  |           |         |          |  |               |        |              |  |   |         |   |  |   |         |  
|------------------------------------- |  | --------- | ------- | -------- |  | ------------- | ------ | ------------ |  | - | ------- | - |  | - | ------- | -
|2003 Quarter Ended                    |  |           |         |          |  |               |        |             
|(In thousands, except per share data) |  | March 31, |         | June 30, |  | September 30, |        | December 31,
|                                      |  |           |         |          |  |               |        |             
|Revenues                              |  | $         | 3,463   |          |  | $             | 10,602 |              |  | $ | 5,420   |   |  | $ | 8,120   |  
|Gross margin(1)                       |  |           | 2,511   |          |  |               | 3,971  |              |  |   | 4,327   |   |  |   | 6,798   |  
|Net loss                              |  |           | (11,193 | )        |  |               | (5,354 | )            |  |   | (13,282 | ) |  |   | (24,118 | )
|                                     
|Net loss per common share(2)          |  | $         | (0.37   | )        |  | $             | (0.18  | )            |  | $ | (0.46   | ) |  | $ | (0.80   | )

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



---



|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Gross margin is calculated as net product sales
    less cost of sales.                                                                                                  
|   
|(2) | Due to rounding, the net loss per common share
    for the four quarters does not agree to the net loss per common
    share for the fiscal year ended December 31, 2003.

F30



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

The Board of Directors and Stockholders

Guilford Pharmaceuticals Inc.:


Under date of March 12, 2004, we reported on
the consolidated balance sheets of Guilford Pharmaceuticals Inc.
and subsidiaries (the Company) as of
December 31, 2003 and 2002, and the related consolidated
statements of operations, changes in stockholders equity,
and cash flows for each of the years in the three-year period
ended December 31, 2003, which are included in the
Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule.
This financial statement schedule is the responsibility of the
Companys management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.

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

/s/ KPMG LLP

Philadelphia, Pennsylvania

March 12, 2004


S1



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##### Table of Contents



GUILFORD PHARMACEUTICALS INC. AND
SUBSIDIARIES

SCHEDULE II

(In thousands)


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

|                                                                            |  |            |     |                  |  |                  |       |            |  |            |   |  |  |   |        |      |  |   |     | 
|--------------------------------------------------------------------------- |  | ---------- | --- | ---------------- |  | ---------------- | ----- | ---------- |  | ---------- | - |  |  | - | ------ | ---- |  | - | --- | 
|                                                                            |  |            |     |                  |  |                  |       |           
|                                                                            |  |            |     | Additions        |  |                  |       |           
|                                                                            |  |            |     |                  |  |                  |       |           
|Description                                                                 |  | Balance    |     | Charged to Costs |  | Charged to Other |       |            |  | Balance   
|(Balance sheet caption)                                                     |  | @ 12/31/01 |     | and Expenses     |  | Accounts         |       | Deductions |  | @ 12/31/02
|                                                                            |  |            |     |                  |  |                  |       |            |  |           
|Allowance for doubtful accounts (Accounts
    receivable)                   |  | $          | 152 |                  |  | $                | (125  | )          |  | $          |  |  |  | $ |       |      |  | $ | 27  | 
|Inventory reserve (Inventory)                                               |  |            | 237 |                  |  |                  | (163  | )          |  |            |  |  |  |   |       |      |  |   | 74  | 
|Product return reserve (Accrued expenses and
    other current liabilities) |  |            | 751 |                  |  |                  | 1,314 | (2)        |  |            |  |  |  |   | (1,773 | )(3) |  |   | 292 | 

|                                                                            |  |            |     |                  |  |                  |       |            |  |            |   |  |  |   |        |      |  |   |     | 
|--------------------------------------------------------------------------- |  | ---------- | --- | ---------------- |  | ---------------- | ----- | ---------- |  | ---------- | - |  |  | - | ------ | ---- |  | - | --- | 
|                                                                            |  |            |     |                  |  |                  |       |           
|                                                                            |  |            |     | Additions        |  |                  |       |           
|                                                                            |  |            |     |                  |  |                  |       |           
|Description                                                                 |  | Balance    |     | Charged to Costs |  | Charged to Other |       |            |  | Balance   
|(Balance sheet caption)                                                     |  | @ 12/31/02 |     | and Expenses     |  | Accounts         |       | Deductions |  | @ 12/31/03
|                                                                            |  |            |     |                  |  |                  |       |            |  |           
|Allowance for doubtful accounts (Accounts
    receivable)                   |  | $          | 27  |                  |  | $                | 799   |            |  | $          |  |  |  | $ | (10    | )    |  | $ | 816 | 
|Inventory reserve (Inventory)                                               |  |            | 74  |                  |  |                  | 646   |            |  |            |  |  |  |   | (386   | )    |  |   | 334 | 
|Product return reserve (Accrued expenses and
    other current liabilities) |  |            | 292 |                  |  |                  | 1,639 | (2)        |  |            |  |  |  |   | (1,051 | )(3) |  |   | 880 | 



---



|    |                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Disposal of obsolete inventory reacquired
    pursuant to the reacquisition of the marketing, sales and
    distribution rights for GLIADEL® (See Note 8 to the
    footnotes to our consolidated financial statements).
|   
|(2) | The provision for product returns is a reduction
    of gross product sales.                                                                                                                                            
|   
|(3) | Product returned pursuant to the Companys
    return policy and charged to this reserve.                                                                                                                               

S2