<PAGE>   1
                                                                   EXHIBIT 13.01


                             SELECTED FINANCIAL DATA

        The following selected consolidated financial data for each of the years
in the five-year period ended December 31, 2000 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,
2000 and 1999, and for each of the years in the three-year period ended December
31, 2000, including the footnotes to these financial statements, are included
elsewhere in this annual report, beginning on page 34. The information set forth
below should be read in conjunction with our consolidated financial statements
and the related footnotes, as well as "Management's Discussion and Analysis of
Financial Condition and Results of Operations," beginning on page 24 of this
annual report.

<TABLE>
<CAPTION>
                                                                      --------------------------------------------------------
YEARS ENDED DECEMBER 31                                                 1996       1997        1998        1999        2000
                                                                      --------------------------------------------------------
<S>                                                                    <C>       <C>         <C>         <C>         <C>
(in thousands, except per share data)

STATEMENT OF OPERATIONS DATA:

Total revenues                                                         $28,020   $ 23,828    $ 12,483    $ 21,561    $ 18,056

Costs and expenses:

Cost of sales                                                             --        2,585       2,036       2,308       1,358

Research and development                                                18,761     30,293      37,722      41,922      46,900

Selling, general and administrative                                      6,736      9,076      10,546      11,281      14,144

Merger costs                                                              --         --          --          --         1,403
                                                                      --------------------------------------------------------

Total costs and expenses                                                25,497     41,954      50,304      55,511      63,805
                                                                      --------------------------------------------------------

Operating income (loss)                                                  2,523    (18,126)    (37,821)    (33,950)    (45,749)

Other income, net                                                        2,550      6,689       8,123       7,082       7,247
                                                                      --------------------------------------------------------

Income (loss) before the cumulative effect of an accounting change       5,073    (11,437)    (29,698)    (26,868)    (38,502)

Cumulative effect of an accounting change                                 --         --          --          --        (8,625)
                                                                      --------------------------------------------------------

Net income (loss)                                                      $ 5,073   $(11,437)   $(29,698)   $(26,868)   $(47,127)
                                                                      ========================================================

Basic earning (loss) per common share (1):

  Income (loss) before the cumulative effect of an accounting change   $  0.39   $  (0.65)   $  (1.52)   $  (1.31)   $  (1.64)

  Cumulative effect of an accounting change                               --         --          --          --         (0.36)
                                                                      --------------------------------------------------------
  Net income (loss)                                                    $  0.39   $  (0.65)   $  (1.52)   $  (1.31)   $  (2.00)
                                                                      ========================================================
  Average common and basic equivalent shares outstanding (1)            13,001     17,570      19,479      20,475      23,517


Diluted earnings (loss) per common share (1):

  Income (loss) before the cumulative effect of an accounting change   $  0.35   $  (0.65)   $  (1.52)   $  (1.31)   $  (1.64)

  Cumulative effect of an accounting change                               --         --          --          --         (0.36)
                                                                      --------------------------------------------------------
  Net income (loss)                                                    $  0.35   $  (0.65)   $  (1.52)   $  (1.31)   $  (2.00)
                                                                      ========================================================
  Average common and dilutive equivalent shares outstanding (1)         14,634     17,570      19,479      20,475      23,517
</TABLE>



                                       1
<PAGE>   2


<TABLE>
<CAPTION>
                                                       --------------------------------------------------------------
DECEMBER 31                                                  1996        1997        1998         1999        2000
                                                       --------------------------------------------------------------
<S>                                                         <C>        <C>          <C>          <C>        <C>
(in thousands)

BALANCE SHEET DATA:

Cash, cash equivalents and investments (2)                  $77,439    $160,219     $128,261     $144,718   $109,450

Total assets(2)                                              93,659     180,081      150,959      164,242    135,633

Long-term debt                                               10,905      10,926        8,766        7,152      5,130

Total stockholders' equity                                   75,877     158,294      130,379      144,980    116,829
</TABLE>

(1) For information concerning the calculation of earnings (loss) per share, see
Note 17, "Earnings (Loss) Per Share", to the footnotes to our consolidated
financial statements on page 48.

(2) Includes restricted investments of $10.1 million, $12.1 million, $16.5
million, $21.4 million and $18.3 million at December 31, 1996, 1997, 1998, 1999
and 2000, respectively. See Note 8, "Indebtedness" and Note 9, "Leases" on pages
42 and 43, respectively, to the footnotes to our consolidated financial
statements.


-----------



                                       2
<PAGE>   3



         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS


CAUTIONARY NOTE

        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.

        While these statements reflect our current plans and expectations, and
we base the statements on information currently available to us, we cannot be
sure that we will be able to implement these plans successfully. We may not
realize our expectations in whole, or in part, in the future.

        The forward-looking statements contained in this annual report may
cover, but are not necessarily limited to, the following topics:

        -       the consequences of our reacquisition from Aventis
                Pharmaceuticals Products Inc. ("Aventis") of the worldwide
                marketing, sale and distribution rights to GLIADEL(R) Wafer;

        -       our efforts to market, sell and distribute GLIADEL(R) Wafer in
                the United States and internationally;

        -       our efforts to expand the labeled uses for GLIADEL(R) Wafer,
                including our efforts to obtain additional United States and
                international regulatory clearances for such uses;

        -       our efforts to develop polymer drug delivery product line
                extensions and new polymer drug delivery products;

        -       our research programs related to our FKBP neuroimmunophilin
                ligand technology partnered with Amgen Inc. ("Amgen"), as well
                as our NAALADase inhibition, PARP inhibition, polymer drug
                delivery (including LIDOMER(TM) Microspheres) and other
                technologies;

        -       our clinical development activities, including the commencement,
                conduct and results of clinical trials, related to our
                polymer-based drug delivery products and product candidates
                (including GLIADEL(R) Wafer and PACLIMER(R) Microspheres) and
                our pharmaceutical product candidates, including NIL-A
                (partnered with Amgen), GPI-5693 (our lead NAALADase inhibitor),
                AQUAVAN(TM) Injection (our novel prodrug of propofol) and any
                future lead compounds in our PARP program;

        -       our efforts to scale-up product candidates from laboratory bench
                quantities to commercial quantities;

        -       our efforts to secure adequate supply of the active
                pharmaceutical ingredients for clinical development and
                commercialization;

        -       our efforts to manufacture drug candidates for clinical
                development and eventual commercial supply;

        -       our strategic plans;

        -       anticipated expenditures and the potential need for additional
                funds; and

        -       specific guidance we give in the section titled "Outlook,"
                regarding our current expectations of our future operating
                results.


                                       3
<PAGE>   4

All of these items involve significant risks and uncertainties.

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

        We discuss factors that could cause or contribute to such differences
elsewhere in this annual report, as well as in our filings with the Securities
and Exchange Commission ("SEC"). Our SEC filings include the section titled
"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31,
2000. For convenience we refer to this document as the "2000 Form 10-K" in the
discussion set forth below. 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.


INTRODUCTION

        In the following sections of this Management's Discussion and Analysis
of Financial Condition and Results of Operations ("Management's Discussion and
Analysis"), we explain the general financial condition and the results of
operations for Guilford and its subsidiaries, including:

        -       what factors affect our business;

        -       what our revenues and expenses were in 2000, 1999, and 1998;

        -       why revenues and expenses changed from the year before;

        -       where our revenues came from;

        -       how all of the foregoing affect our overall financial condition;
                and

        -       what our expenditures for capital projects were in 2000, 1999
                and 1998 and a description of our capital requirements.

        As you read this Management's Discussion and Analysis, you may find it
helpful to refer to our consolidated financial statements beginning on page 34
of this annual report. These consolidated financial statements present the
results of our operations for 2000, 1999, and 1998 as well as our financial
position at December 31, 2000 and 1999. We analyze and explain the annual
changes in the specific line items set forth in the section of our consolidated
financial statements titled "Consolidated Statements of Operations." Our
analysis may be important to you in making decisions about your investment in
Guilford.

        In 1998 the SEC adopted new rules requiring public companies like us to
write certain documents in plain English. Even though the SEC does not require
us to present our Management's Discussion and Analysis in plain English, we have
decided voluntarily to apply these rules to the following discussion. Our goal
is to describe and analyze our results of operation and financial condition in
language that may be easier for our stockholders to understand.


GENERAL

        Guilford is a biopharmaceutical company located in Baltimore, Maryland,
engaged in the development and commercialization of novel products in two
principal areas:

        -       targeted and controlled drug delivery products using proprietary
                biodegradable polymers for the treatment of cancer and other
                diseases or conditions; and

        -       therapeutic and diagnostic products for neurological diseases
                and conditions.

        In February 1997, we commercially launched our first product, GLIADEL(R)
Wafer, in the United States through Aventis. GLIADEL(R) Wafer is a proprietary
polymer product for the treatment of certain types of brain cancer. This product
dissolves over time



                                       4
<PAGE>   5

and releases an anti-cancer drug known as "BCNU" (or carmustine) directly to the
tumor site. Until October 23, 2000, Aventis was our exclusive, worldwide
marketing partner for GLIADEL(R) Wafer, except in Japan and Scandinavia. On
October 23, 2000, we reacquired from Aventis its marketing, sales and
distribution rights to GLIADEL(R) Wafer in consideration for the issuance to
Aventis of 300,000 shares of our common stock. Aventis continued to market, sell
and distribute GLIADEL(R) Wafer until December 31, 2000. On January 1, 2001, we
assumed full responsibility for all aspects of marketing, sales and the
distribution of GLIADEL(R) Wafer worldwide (except in Scandinavia, where our
Scandinavian distributor and marketing partner, Orion Corporation Pharma will
continue to distribute the product).

We have also licensed from others and internally developed on our own:

        -       technologies that may be useful in preventing and treating
                certain neurological diseases and conditions;

        -       AQUAVAN(TM) Injection; a novel prodrug of propofol, a
                widely-used anesthetic; and

        -       a new class of biodegradable polymers different from the type
                used in GLIADEL(R) Wafer, including PACLIMER(R) Microspheres and
                LIDOMER(TM) Microspheres, which we are developing for the
                targeted and controlled delivery of cancer chemotherapeutics and
                other drugs, including drugs for pain management.

        As we discuss in greater detail below, if compounds, which are the
subject of our collaboration with Amgen, attain certain regulatory and/or
development objectives, we are eligible to receive certain milestone and other
payments from Amgen. We view these potential payments as significant future
revenue and/or capital raising opportunities. As we discuss in the 2000 Form
10-K, we cannot be sure that Amgen will achieve the designated milestones and
that we will receive any or all of the milestone payments for which we are
eligible under our existing collaboration with Amgen. We also cannot be sure
that we will be able to enter into collaborations in the future with others for
the research, development, and/or commercialization of our technologies.

        Additionally, prior to the reacquisition of GLIADEL(R) Wafer, we had
received milestone and other payments from Aventis; for example, in March and
September 2000, we earned non-refundable milestone payments of $1.0 million each
from Aventis upon receipt of approval to market and sell GLIADEL(R) Wafer for
the recurrent surgery indication in Spain and the U.K. As a result of the
reacquisition of GLIADEL(R) Wafer, we will not be receiving such payments from
Aventis.

        We have not marketed, sold and distributed a drug before; therefore, we
cannot be certain of the level of revenue we will be able to achieve from our
commercialization of GLIADEL(R) Wafer following our assumption of these
activities as of January 1, 2001. In order to assist us in selling GLIADEL(R)
Wafer, we have entered into an agreement with Cardinal Health Sales and
Marketing Services, a division of Redkey, Inc. ("Cardinal"). Additionally, we
have begun to establish on our own certain aspects of a commercial operations
function, including medical affairs, reimbursement and marketing.

        Since the commercial launch of GLIADEL(R) Wafer in the United States in
February 1997 through December 31, 2000, we have recognized an aggregate of
$24.5 million in product sales and royalties. Of this amount, $15.5 million
represents revenues from sales of GLIADEL(R) Wafer to both Aventis and Orion
Corporation Pharma. The additional $9.0 million are royalties paid to us from
Aventis on its sales of GLIADEL(R) Wafer to third parties, such as hospitals.

        As we discuss below and in greater detail in the 2000 Form 10-K, a
number of factors subject our future sales of GLIADEL(R) Wafer to significant
risk and uncertainty. We cannot be sure that our sales of GLIADEL(R) Wafer will
increase over time or at all. Prior to the reacquisition of GLIADEL(R) Wafer, we
have not had responsibility for the marketing, sales and distribution of
GLIADEL(R) Wafer. Increasing sales of GLIADEL(R) Wafer are contingent upon,
among other things, the following:

        -       developing a marketing, sales and distribution network for
                GLIADEL(R) Wafer;

        -       making certain international regulatory filings and obtaining
                clearances to market GLIADEL(R) Wafer for the recurrent surgery
                indication or the first surgery indication;

        -       obtaining authorization from the U.S. Food and Drug
                Administration ("FDA") and international health regulatory
                authorities to expand the labeled indications for GLIADEL(R)
                Wafer;

        -       obtaining permission to sell GLIADEL(R) Wafer in those countries
                that require pricing approval at prices that are acceptable to
                those countries and to us; and



                                       5
<PAGE>   6

        -       the ability of patients to receive reimbursement for the cost of
                GLIADEL(R) Wafer from insurance carriers and governmental
                authorities.

        Additionally, we cannot control the timing and extent of governmental
clearances, nor can we be sure that we will attain any of these regulatory
objectives. We also cannot be certain of the degree of acceptance of GLIADEL(R)
Wafer by neurosurgeons, payors and patients in the United States and
internationally, based on previously available clinical data, data from the
Phase III first surgery trial announced in November 2000 and actual clinical
experience with the marketed drug. Even if the market were to increasingly
accept the product, we cannot be certain that our marketing, sales and
distribution efforts will be successful.

        In August 1997, we entered into a collaboration with Amgen to research,
develop, and commercialize our FKBP neuroimmunophilin ligand technology. Under
our agreement with Amgen, Amgen paid us $35 million in 1997. Of this amount,
Amgen paid $15 million in the form of a one-time, non-refundable signing fee
upon signing the agreement. Amgen paid us the remaining $20 million for the
purchase of 640,095 shares of our common stock and warrants to purchase up to an
additional 700,000 shares of our common stock. These warrants are exercisable
for five years and have an exercise price of $35.15 per share. We also granted
to Amgen certain rights to register shares of our common stock with the SEC for
sale in the public markets.

        As part of this collaboration, Amgen agreed to fund up to a total of
$13.5 million to support our research relating to the FKBP neuroimmunophilin
ligand technology. This research funding began on October 1, 1997 and was
payable quarterly over three years. The last quarterly payment was made on July
1, 2000. Since the inception of the agreement through December 31, 2000, we had
recognized an aggregate of $13.5 million in research support from Amgen under
our collaboration arrangement.

        Our agreement also requires that Amgen make milestone payments to us if
Amgen achieves specified regulatory and product development milestones. If Amgen
is able to meet all of these milestones for each of ten different specified
clinical indications (i.e., uses), then these payments could total up to $392
million in the aggregate. As of December 31, 2000, we had recognized an
aggregate of $6.0 million in milestone payments from Amgen. Amgen is also
required to pay us royalties on its sales to third parties of any product(s)
that result from our collaboration.

        As we discuss below and in greater detail in the 2000 Form 10-K, we
cannot be sure that Amgen will be successful in its efforts to develop one or
more FKBP neuroimmunophilin compounds (including NIL-A) into products that the
FDA and international regulatory authorities will approve as safe and effective
drugs for neurological or other uses. Consequently, we cannot be sure that we
will earn any of the milestone payments related to these regulatory and product
development activities.

        In addition to revenues related to net product sales and royalties from
GLIADEL(R) Wafer, the only other significant revenues we recognized in 2000
consisted of:

        -       $8.6 million in non-cash contract revenues under the Aventis and
                Amgen agreements pursuant to adoption of SEC Staff Accounting
                Bulletin No. 101 ("SAB 101");

        -       $2.0 million in milestone payments from Aventis; and

        -       $3.4 million in research support from Amgen relating to the FKBP
                neuroimmunophilin ligand technology.

        As a result of our recent reacquisition of the marketing, sales and
distribution rights for GLIADEL(R) Wafer, we will not be receiving any future
milestone payments from Aventis. As we discuss below and in greater detail in
the 2000 Form 10-K, whether Amgen will ever make milestone or royalty payments
to us in the future is subject to significant risk and uncertainty. We cannot be
sure that we will recognize any significant revenues from Amgen in the future.

        For the year ended December 31, 2000, we incurred a net loss of $47.1
million. Since inception through December 31, 2000, we had an accumulated
deficit of $130.0 million. Our accumulated deficit is equal to the sum of our
cumulative profits and losses since inception in July 1993.

        We do not expect 2001 to be profitable. We cannot be sure that we will
ever achieve or sustain profitability in the future. Furthermore, our revenues
and expenses have fluctuated significantly in the past because of the nature and
timing of their sources. We expect fluctuations in our revenues and expenses to
continue, and thus our operating results should also vary significantly from


                                       6
<PAGE>   7

quarter-to-quarter and year-to-year. A variety of factors cause these
fluctuations, including:

        -       the timing and amount of sales of GLIADEL(R) Wafer;

        -       the timing and recognition of upfront and milestone payments
                from corporate partners;

        -       the timing and amount of expenses relating to our research and
                development, product development, and manufacturing activities;

        -       the extent and timing of costs related to our activities to
                obtain, extend, enforce and/or defend our patent and other
                rights to our intellectual property; and

        -       the cost of developing a marketing, sales and distribution
                network for our GLIADEL(R) Wafer product.

        We expect that expenses in all areas of our business will continue to
increase. These areas include research and product development, pre-clinical
testing, human clinical trials, regulatory affairs, operations, manufacturing,
selling, and general and administrative activities. In addition, we expect the
number of employees working at our Company to continue to increase. At December
31, 2000, we had 254 full-time employees, which compares to 228 and 218
full-time employees at December 31, 1999 and 1998, respectively.

        Our ability to achieve or sustain profitability in the future will
depend on many factors, including:

        -       the level of future sales of GLIADEL(R) Wafer;

        -       our ability to arrange for marketing, sales and distribution of
                GLIADEL(R) Wafer in the U.S. and internationally, either by
                ourselves or through outsourcing such activities to third party
                vendors such as Cardinal;

        -       the ability, either alone or with others, to develop our product
                candidates successfully, including NIL-A with Amgen, AQUAVAN(TM)
                Injection, GPI-5693, PACLIMER(R) Microspheres, LIDOMER(TM)
                Microspheres and any other product candidates;

        -       the extent of any human clinical trials and related costs
                necessary to develop our product candidates;

        -       our ability, either alone or with others, to obtain required
                regulatory approvals to market our product candidates;

        -       our ability and that of our corporate partners to manufacture
                products at reasonable cost;

        -       our ability and that of our collaborators to market, sell and
                distribute and be reimbursed or otherwise paid for products
                successfully;

        -       our ability to enter into acceptable collaborative arrangements
                for our technologies;

        -       our ability to invent or acquire new technologies and/or
                in-license new technologies from others; and

        -       our ability to obtain, acquire, defend, and/or enforce patents
                on new and existing technologies.



        Future product sales of GLIADEL(R) Wafer are subject to certain risks
and uncertainties including the following:

        -       we have never marketed or sold our products directly before and
                we may not be successful in our efforts to market, sell and
                distribute GLIADEL(R) Wafer through Cardinal, or otherwise;

        -       neurosurgeons and their patients may not accept GLIADEL(R) Wafer
                for a number of reasons;

        -       we may not be successful in our attempts to obtain any
                additional regulatory and marketing approvals to market
                GLIADEL(R)



                                       7
<PAGE>   8

                Wafer (including approval for GLIADEL(R) Wafer to be used at the
                time of initial surgery) and sell GLIADEL(R) Wafer at acceptable
                prices;

        -       patients may not be able to receive reimbursement for the cost
                of GLIADEL(R) Wafer from their insurance carriers or from
                governmental authorities;

        -       BCNU, the chemotherapeutic agent we use in GLIADEL(R) Wafer, is
                currently only available from two suppliers, and thus this
                material may not be available for GLIADEL(R) Wafer manufacture;
                and

        -       our current manufacturing plants for GLIADEL(R) Wafer are
                located in close proximity to each other in Baltimore, Maryland,
                and thus, are subject to the risk that natural disasters or
                other factors may adversely affect their operation and interrupt
                GLIADEL(R) Wafer manufacturing.

        As we note in the section captioned "Risk Factors" in the 2000 Form 10-K
there is no guarantee that we or Amgen will be able to successfully develop any
FKBP neuroimmunophilin compounds, including NIL-A, or other product candidates
into safe and effective drug(s) for neurological or other uses. Consequently, we
may not earn additional milestone payments related to Amgen's development
activities or revenues related to product sales. In particular, the research,
development, and commercialization of early-stage technology, like the FKBP
neuroimmunophilin ligand technology, are subject to significant risks and
uncertainty. These risks involve those relating to, among other things:

        -       selection of appropriate lead compounds;

        -       successful completion of pre-clinical and clinical development
                activities;

        -       the need to obtain regulatory clearances in the U. S. and
                elsewhere to market and sell drug products;

        -       formulation of final product dosage forms;

        -       scale-up from laboratory bench quantities to commercial
                quantities at a reasonable cost;

        -       successful manufacture of drug products at an acceptable cost;

        -       successful commercialization of such products at an acceptable
                price; and

        -       the successful prosecution, enforcement, and defense of patent
                and other intellectual property rights.

RESULTS OF OPERATIONS

    In this section we discuss our 2000, 1999, and 1998 revenues, costs and
expenses, and other income and expenses, as well as the factors affecting each
of them.

REVENUES

        In 2000, 1999, and 1998 our revenues primarily came from the following
sources:

        -       net product sales of GLIADEL(R) Wafer to our marketing, sales
                and distribution partners;

        -       royalty payments from Aventis on its sales of GLIADEL(R) Wafer
                to others, primarily hospitals;

        -       one-time rights or milestone payments from Aventis and Amgen;

        -       non-cash contract revenues under the Aventis and Amgen
                agreements pursuant to adoption of SAB 101;

        -       quarterly research funding from Amgen; and



                                       8
<PAGE>   9

        -       amounts Aventis reimbursed to us for costs related to our
                efforts to develop a high-dose GLIADEL(R) Wafer product.

In 2000, 1999, and 1998, we recognized net revenues of $18.1 million, $21.6
million, and $12.5 million, respectively.

These revenues consisted primarily of the following:

<TABLE>
<CAPTION>
                                                                            2000        1999        1998
                                                                         ----------  ----------  -------
                                                                                   (IN MILLIONS)
<S>                                                                      <C>         <C>         <C>
                        REVENUES RELATED TO GLIADEL(R) WAFER:
                            Net product sales                             $ 1.5       $ 4.4       $ 3.9
                            License fees and royalties                      2.4         2.4         2.7
                            Non-recurring rights and milestone payments     6.9         4.5          --
                        REVENUES FROM AMGEN:
                            Non-recurring rights and milestone payments     3.7         5.0         1.0
                            Research funding under collaborative
                              agreements                                    3.4         4.5         4.5
</TABLE>

GLIADEL(R) WAFER PRODUCT SALES

        We earned $1.5 million, $4.4 million and $3.9 million for the years
ended December 31, 2000, 1999, and 1998, respectively, from the net product
sales of GLIADEL(R) Wafer to our marketing, sales and distribution partners,
Aventis (for the entire world, except Scandinavia and Japan) and Orion
Corporation Pharma (for Scandinavia only). The decrease in revenues attributable
to sales of GLIADEL(R) Wafer to Aventis in 2000 compared to 1999 is the result
of Aventis managing existing inventory to meet their current sales requirement.

ROYALTIES ON GLIADEL(R) WAFER SALES TO THIRD PARTIES

        Net royalty revenues on Aventis' sales of GLIADEL(R) Wafer to third
parties were $2.4 million, $2.4 million, and $2.6 million for the years ended
December 31, 2000, 1999, and 1998, respectively. These royalty payments are a
function of the demand for the product in the market. Net royalty revenues
generated from Aventis's sales of GLIADEL(R) Wafer to third parties remained
constant in 2000 compared to 1999. We believe Aventis' sales of GLIADEL(R) Wafer
to third parties decreased in 1999 as compared to 1998 because the sales force
at Aventis was restructured in 1999.

        A number of factors subject our future sales of GLIADEL(R) Wafer to
significant risk and uncertainty. Additional factors such as, our ability to
market, sell and distribute the GLIADEL(R) Wafer through Cardinal and on our own
may also affect GLIADEL(R) Wafer sales. We cannot be sure that GLIADEL(R) Wafer
sales will increase from, or even remain at, current levels or will ever
generate significant revenues for us in the future.

CONTRACT REVENUES

        Contract revenues were $10.6 million, $9.5 million and $1.0 million for
the years ended December 31, 2000, 1999 and 1998, respectively. The increase in
contract revenues in 2000 compared to 1999 is due to the adoption of SAB 101, in
the fourth quarter of 2000, effective January 1, 2000. Generally accepted
accounting principles previously allowed us to recognize as revenue certain
non-refundable upfront fees at the inception of the arrangement. Under SAB 101,
collaborative arrangements that include a non-refundable upfront fee and contain
an element of continuing involvement must be deferred and recognized as revenue
over the involvement period. For the year ended December 31, 2000, we recognized
$8.6 million of contract revenues that were deferred upon adoption of SAB 101.

COST OF SALES

        Our cost of sales for the years ended December 31, 2000, 1999, and 1998
were $1.4 million, $2.3 million, and $2.0 million, respectively, including
unabsorbed manufacturing overhead of $0.6 million for the year ended December
31, 2000. Cost of sales as a percentage of net product sales revenue were
approximately 53% for the years ended December 31, 2000, 1999 and 1998,
excluding



                                       9
<PAGE>   10

the aforementioned unabsorbed manufacturing overhead. The cost to manufacture
GLIADEL(R) Wafer at current market levels can vary materially with production
volume. Production volume in turn is dependent upon purchase orders. As a result
of the reacquisition of GLIADEL(R) Wafer, we did not manufacture GLIADEL(R)
Wafer during the three-month period ended September 30, 2000. Therefore, the
fixed overhead costs associated with our manufacturing capabilities (unabsorbed
manufacturing overhead) are included in cost of sales. To the extent that
GLIADEL(R) Wafer production levels increase in the future, we anticipate that
the unit cost to manufacture GLIADEL(R) Wafer may decrease, although we cannot
be sure that GLIADEL(R) Wafer product sales will ever reach levels necessary for
us to realize such a reduction in the per unit cost of manufacturing GLIADEL(R)
Wafer. To the extent that GLIADEL(R) Wafer production levels decrease, we
anticipate that the unit cost to manufacture GLIADEL(R) Wafer will increase.
Based on our experience to date, we would expect the cost of net product sales
of GLIADEL(R) Wafer to fluctuate from quarter to quarter.

RESEARCH AND DEVELOPMENT EXPENSES

        Our research and development expenses were $46.9 million, $41.9 million,
and $37.7 million for the years ended December 31, 2000, 1999, and 1998,
respectively. Our research and development expenses increased in 2000 compared
to 1999 due primarily to the acceleration in the development of AQUAVAN(TM)
Injection , which we in-licensed during 2000. Our research and development
expenses increased in 1999 compared to 1998 as a result of research and product
development activity with respect to our NAALADase inhibitor and PARP inhibitor
neuroprotectant programs, our FKBP neuroimmunophilin compound program, and our
polymer development program, including our polymer oncology candidate,
PACLIMER(R) Microspheres.

        At December 31, 2000, we employed 211 individuals on a full-time basis
in the areas of research, development, and manufacturing. We employed 193
individuals and 185 individuals in these areas at December 31, 1999 and 1998,
respectively.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

        Our selling, general and administrative ("SG&A") expenses were $14.1
million, $11.3 million, and $10.5 million for the years ended December 31, 2000,
1999, and 1998, respectively. Our SG&A expenses increased in 2000 compared to
1999 due to the following:

        -       $1.8 million in costs associated with the reacquisition and
                re-launch of GLIADEL(R) Wafer; and


        -       higher personnel costs as we increased staff in certain
                administrative departments.

        Our SG&A expenses increased in 1999 compared to 1998, due to increase in
personnel costs and other costs to support our research, product development,
and commercialization efforts.

        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 selling, general and
administrative expenses. These costs also increased from 1998 through 2000. We
anticipate that our SG&A expenses will continue to increase in future periods as
we build the infrastructure to support the marketing, sales and distribution of
GLIADEL(R) Wafer.

        At December 31, 2000, we employed 43 individuals on a full-time basis in
selling, general and administrative areas compared to 35 and 33 at December 31,
1999 and 1998, respectively.

MERGER COSTS

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

OTHER INCOME AND EXPENSE

        Other income and expense consists primarily of investment income on our
monetary investments and interest expense on our debt and other financial
obligations. Our investment income was $7.7 million, $7.7 million, and $8.9
million for the years ended December 31, 2000, 1999, and 1998, respectively.
Investment income in 2000 compared with 1999 remained the same. Average cash
balances



                                       10
<PAGE>   11

available for investment during 2000 were comparable to 1999. The decrease in
1999 compared to 1998 was primarily due to lower average amounts invested during
the course of the year. We incurred interest expense of $0.5 million, $0.6
million and $0.8 million for the years ended December 31, 2000, 1999, and 1998,
respectively. These expenses resulted primarily from 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. Because we continued to repay these loans, resulting in a lower
average principal balance during 2000, interest expense decreased in 2000 as
compared to 1999 and 1998. We describe these interest expenses in Notes 4 and 8,
"Interest Rate Swap Agreements" and "Indebtedness," on pages 41 and 42,
respectively, to the footnotes to our consolidated financial statements.

CUMULATIVE  EFFECT OF A CHANGE IN ACCOUNTING PRINCPLE

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

LIQUIDITY AND CAPITAL RESOURCES

        Our cash, cash equivalents, and investments were approximately $109.5
million at December 31, 2000. Of this amount, we pledged $18.3 million as
collateral for certain of our loans and other financial lease obligations. In
addition to these restricted investments, the Company is required to maintain,
in the aggregate, unrestricted cash, cash equivalents, and investments of $40
million at all times under the terms of certain of its financial obligations. In
January 2001, we received an additional $42.6 million, as a result of the sale
of 2.5 million shares of our common stock under a shelf registration statement.

        Our total debt decreased to $7.6 million at December 31, 2000, compared
to $9.4 million at December 31, 1999. This decrease resulted primarily because
of our continued repayment of principal under our loans with a commercial bank
offset by the increase for capitalized leases.

        We have funded our capital expenditures by either leasing the equipment
pursuant to our equipment lease arrangements or purchasing the equipment
utilizing our existing cash. We funded capital expenditures of $3.5 million,
$4.1 million and $8.6 million for the years ended December 31, 2000, 1999 and
1998, respectively. Of the capital expenditures funded during the year ended
December 31, 2000, $3.0 million were funded pursuant to equipment lease
arrangements and $0.5 million were acquired through the use of our cash.

        Subsequent to December 31, 2000, we agreed in principle to a master
lease arrangement with an equipment leasing company that permits us to lease up
to $7.2 million in eligible equipment, including computer hardware and software,
and furniture and fixtures. The term of any lease under this arrangement will be
three years. Our ability to draw on this master lease arrangement expires on
December 31, 2002.

        We expect our existing financing arrangements, our internal capital
resources, and potential external sources of funds to provide for our current
equipment needs at least through the end of 2001. If we decide to expand our
research and development programs beyond current expectations or if we engage in
acquisitions, our capital equipment requirements could increase, and thus, we
may require additional capital funding.

        In 1997, in order to meet our anticipated future facilities needs, we
initiated a project to design, construct, and lease a research and development
facility. To accomplish this task, in February 1998 we entered into an operating
lease and other related agreements with a commercial bank and related entities
in connection with such a facility. This facility, which was substantially
completed in June 1999, was constructed adjacent to our current headquarters in
Baltimore, Maryland. This facility is owned by a trust affiliated with a
commercial bank (the "Trust") and provides approximately 73,000 square feet of
research and development capacity. The initial lease term expires in February
2005. At the end of the initial lease term, the Company may lease the facility,
purchase the building, or arrange for the sale of the building to a third party.
In the event the building is sold to a third party, the Company will be
obligated to



                                       11
<PAGE>   12

to pay the lessor any shortfall between the sales price and 83% of the lessor's
net investment in the facility. We describe these arrangements with the Trust in
Note 9, "Leases," to the footnotes to our consolidated financial statements on
page 43. We anticipate that this research and development facility, along with
our headquarters, will support our research, development, commercialization, and
administrative activities through at least the end of 2001.

        During 1998 and 1999, we entered into a series of interest rate swap
transactions with a commercial bank covering $20 million in financial
obligations under our lease with the Trust and $10 million with the commercial
bank covering our bond and term loans. As a result, we fixed the interest rates
on our financial lease obligations and debt at approximately 6% in the
aggregate. Certain of the interest rate swap agreements provide the commercial
bank with a call provision exercisable during 2003. We describe these interest
rate swap transactions with the commercial bank in Note 4, "Interest Rate Swap
Agreements," to the footnotes to our consolidated financial statements on page
41.

        During 1998, we established an unsecured, revolving line of credit for
$5 million with a commercial bank. Borrowings under this line of credit are
payable on demand at an interest rate of LIBOR plus 0.55%. We may draw on this
line of credit from time to time to meet our short-term working capital needs.
No amounts were drawn under this line of credit in 2000, 1999 or 1998.

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

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

        -       the progress of our research and development programs;

        -       the progress of pre-clinical and clinical testing;

        -       the time and costs involved in obtaining regulatory approvals;

        -       the cost of filing, prosecuting, defending and enforcing any
                patent claims and other intellectual property rights;

        -       competing technological and market developments;

        -       changes in our existing research relationships;

        -       our ability to establish collaborative arrangements;

        -       our ability to enter into licensing agreements and contractual
                arrangements with others; and

        -       the progress of efforts to scale-up manufacturing processes.

        We believe that our existing resources will be sufficient to fund our
activities through at least December 31, 2001. However, we expect to need
significantly greater capital in the near future to:

        -       cover the costs of our commercial operations function for
                marketing, selling, and distributing GLIADEL(R) Wafer; and

        -       increase pre-clinical and clinical development activities for
                development candidates such as:

                        -       PACLIMER(R) Microspheres (for ovarian and other
                                cancers);

                        -       GPI-5693 (our lead NAALADase inhibitor initially
                                targeting neuropathic pain and disease
                                modifications of diabetic neuropathy);

                        -       AQUAVAN(TM) Injection (our propofol prodrug for
                                sedation);

                        -       LIDOMER(TM) Microspheres (our delayed release
                                lidocaine analgesic product candidate targeting
                                post-surgical pain); and

                        -       PARP inhibitors.



                                       12
<PAGE>   13

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133") as amended by SFAS 137 and SFAS
138. SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities on the balance sheet at their
respective fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. As required under SFAS 137, the
Company will adopt SFAS 133, as amended, in the first quarter of 2001.
Management has evaluated the impact of SFAS 133 in connection with the Company's
use of derivatives in managing interest rate risks. The Company's exposure to
derivatives is limited to interest rate swap agreements that are highly
effective in managing the Company's interest rate exposure. Consequently, the
implementation of SFAS 133 is not expected to have a material impact on the
financial position and results of operation of the Company.

OUTLOOK

        During the year 2001, we expect sales of GLIADEL(R) Wafer to be between
$17.0 million and $22.0 million (the result of recording the full value of sales
of GLIADEL (R) Wafer). Sales from GLIADEL(R) Wafer may be greater if we receive
a first surgery label in the United States and internationally, especially if
GLIADEL(R) Wafer were to achieve "standard of care" acceptance by the
neurosurgical community.

        We plan to seek additional revenues from partnering activities in 2001.
From time to time, we are in discussions with potential partners regarding
international rights to our products and product candidates, including
GLIADEL(R) Wafer and GPI 5693. As a result of SAB 101, we are currently not able
to define the extent to which any payments received in 2001 from partnering
activities would be recorded as revenue.

        We expect that our total expenses for 2001, will increase over 2000,
primarily due to costs related to establishing and supporting our commercial
operations and increased research and development costs as we advance our
product candidates (PACLIMER(R) Microspheres, GPI-5693, AQUAVAN(TM) Injection
and LIDOMER(TM) Microspheres) through clinical development.

        We currently anticipate that research and development expenses in 2001
will increase by approximately $10.0 million when compared to 2000. As we stated
above, most of this increase will be related to increased clinical development
costs. We anticipate that general and administrative costs will be consistent
with 2000. Marketing, sales and distribution costs will be part of the operating
statement for the full year in 2001. We would expect such costs to be between
$12 million to $14 million for 2001. Cost of sales as a percentage of net sales
will range from 10% to 15% (the result of recording the full value of sales of
GLIADEL(R) Wafer).

        During 2001, we expect to file and hope to obtain a supplemental New
Drug Application for GLIADEL(R) Wafer for first surgery indication from the FDA,
and to re-launch GLIADEL(R) Wafer directly though our own marketing and sales
organization. We also expect to report results from our Phase I clinical trials
of GPI 5693, AQUAVAN (TM) Injection, and PACLIMER(R) Microspheres and our
neuroimmunophilin Phase II clinical trial.

        In January 2001, we sold approximately 2.5 million shares of our common
stock under a shelf registration, which generated net proceeds of approximately
$42.6 million. We expect that our cash burn rate will be in the range of $30
million to $35 million for 2001. We expect our capital expenditures in 2001 will
be between $2.0 million and $2.5 million.




                                       13

<PAGE>   14
                          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, 2000
and 1999, 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, 2000. 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 standard 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.

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


/s/ KPMG LLP

Philadelphia, Pennsylvania
February 9, 2001




<PAGE>   15
                          GUILFORD PHARMACEUTICALS INC.
                                AND SUBSIDIARIES



                           CONSOLIDATED BALANCE SHEETS
                                AS OF DECEMBER 31
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                2000          1999
                                                              ---------     ---------
<S>                                                           <C>           <C>
                           ASSETS
Current assets:
    Cash and cash equivalents                                 $  32,806     $  14,336
    Investments                                                  58,309       108,997
    Accounts receivable                                             844         1,020
    Inventories                                                   2,168         1,348
    Prepaid expenses and other current assets                     1,652           752
                                                              ---------     ---------
          Total current assets                                   95,779       126,453
Investments - restricted                                         18,335        21,385
Property and equipment, net                                      12,048        15,793
Intangible asset, net                                             8,272          --
Other assets                                                      1,199           611
                                                              ---------     ---------
                                                              $ 135,633     $ 164,242
                                                              =========     =========

            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                           $   4,145     $   3,085
   Current portion of long-term debt                              2,481         2,214
   Accrued payroll related costs                                  2,911         2,070
   Accrued contracted services                                    2,693         2,066
   Accrued expenses and other current liabilities                 1,444         1,550
   Deferred income                                                 --           1,125
                                                              ---------     ---------
          Total current liabilities                              13,674        12,110

Long-term debt, net of current portion                            5,130         7,152
                                                              ---------     ---------


          Total liabilities                                      18,804        19,262
                                                              ---------     ---------

Stockholders' equity:
   Preferred stock, par value $.01 per share;
        authorized 4,700,000 shares,  none issued                  --            --
   Series A junior participating preferred stock,
        par value $.01 per share; authorized 300,000
        shares, none issued                                        --            --
   Common stock, par value $.01 per share;
        authorized 75,000,000 shares,
       24,318,982 and 23,328,313 issued
        at December 31, 2000 and 1999,
        respectively                                                243           233
   Additional paid-in capital                                   250,858       232,913
   Accumulated deficit                                         (130,004)      (82,877)
   Accumulated other comprehensive loss                            (823)       (1,838)
   Note receivable from officer                                     (60)          (60)
   Treasury stock, at cost:  262,985 and 274,880 shares at
       December 31, 2000 and 1999, respectively                  (3,277)       (3,284)
   Deferred compensation                                           (108)         (107)
                                                              ---------     ---------
          Total stockholders' equity                            116,829       144,980
                                                              ---------     ---------
                                                              $ 135,633     $ 164,242
                                                              =========     =========
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


<PAGE>   16


                          GUILFORD PHARMACEUTICALS INC.
                                AND SUBSIDIARIES



                      CONSOLIDATED STATEMENTS OF OPERATIONS
                             YEARS ENDED DECEMBER 31
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                          2000         1999         1998
                                                                                        --------     --------     --------
<S>                                                                                     <C>          <C>          <C>

Revenues:
    Contract revenues                                                                   $ 10,625     $  9,500     $  1,000
    Net product sales                                                                      1,492        4,371        3,860
    License fees and royalties                                                             2,369        2,427        2,713
    Revenues under collaborative agreements                                                3,570        5,263        4,910
                                                                                        --------     --------     --------
       Total revenues                                                                     18,056       21,561       12,483

Costs and Expenses:
    Cost of sales                                                                          1,358        2,308        2,036
    Research and development                                                              46,900       41,922       37,722
    Selling, general and administrative                                                   14,144       11,281       10,546
    Merger costs                                                                           1,403         --           --
                                                                                        --------     --------     --------
       Total costs and expenses                                                           63,805       55,511       50,304
                                                                                        --------     --------     --------

Operating loss                                                                           (45,749)     (33,950)     (37,821)

Other Income (Expense):
    Investment income                                                                      7,689        7,671        8,855
    Interest expense                                                                        (504)        (640)        (768)
    Other income                                                                              62           51           36
                                                                                        --------     --------     --------
Loss before the cumulative effect of an accounting change                                (38,502)     (26,868)     (29,698)

Cumulative effect of an accounting change                                                 (8,625)        --           --
                                                                                        --------     --------     --------
Net loss                                                                                $(47,127)    $(26,868)    $(29,698)
                                                                                        ========     ========     ========

Basic and diluted loss per common share:
   Loss before the cumulative effect of an accounting change                            $  (1.64)    $  (1.31)    $  (1.52)

   Cumulative effect of an accounting change                                               (0.36)        --           --
                                                                                        --------     --------     --------
   Net loss                                                                             $  (2.00)    $  (1.31)    $  (1.52)
                                                                                        ========     ========     ========

Weighted-average shares outstanding used to compute basic and diluted loss per share      23,517       20,475       19,479
                                                                                        ========     ========     ========

Pro forma amounts assuming the change in application of accounting principle
  applied retroactively:

Net loss                                                                                $(38,502)    $(21,118)    $(23,948)
                                                                                        ========     ========     ========

Net loss per common share                                                               $  (1.64)    $  (1.03)    $  (1.23)
                                                                                        ========     ========     ========
</TABLE>



SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.




<PAGE>   17




                          GUILFORD PHARMACEUTICALS INC.
                                AND SUBSIDIARIES



           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                        COMMON STOCK                                   ACCUMULATED
                                                                     -------------------   ADDITIONAL                     OTHER
                                                                      NUMBER                PAID-IN     ACCUMULATED   COMPREHENSIVE
                                                                     OF SHARES    AMOUNT    CAPITAL       DEFICIT     INCOME (LOSS)
                                                                     ---------    ------   ----------   -----------   -------------

<S>                                                                  <C>          <C>      <C>          <C>           <C>
BALANCE, JANUARY 1, 1998                                             19,387,946    $194     $185,205    $ (26,311)       $   426
Comprehensive loss
  Net loss                                                                                                (29,698)
  Other comprehensive income:
    Unrealized gain on available-for-sale securities                                                                         450

Total comprehensive loss

Issuances of common stock                                               206,370       2        1,485
Purchase of 41,677 shares of common stock
Stock option compensation                                                                        449
Amortization of deferred compensation
                                                                     ----------    ----     --------    ---------        -------
BALANCE, DECEMBER 31, 1998                                           19,594,316    $196     $187,139    $ (56,009)       $   876
Comprehensive loss:
  Net loss                                                                                                (26,868)
  Other comprehensive loss:
     Unrealized loss on available-for-sale securities                                                                     (2,714)

Total comprehensive loss

Issuance of common stock in private placement at $13.50 per share,
  net of offering costs                                               3,360,000      34       42,374
Other issuances of common stock                                         373,997       3        2,601
Purchase of  224,150 shares of common stock
Distribution of 26,494 shares of treasury stock to 401(k) plan                                    28
Stock option compensation                                                                        947
Amortization of deferred compensation
Forfeiture of unvested restricted stock                                                        (176)
                                                                     ----------    ----     --------    ---------        -------
BALANCE, DECEMBER 31, 1999                                           23,328,313    $233     $232,913    $ (82,877)       $(1,838)
Comprehensive loss:
   Net loss                                                                                               (47,127)
   Other comprehensive income:
     Unrealized gain on available-for-sale securities                                                                      1,015

Total comprehensive loss

Common stock issued in exchange for intangible asset                    300,000       3        7,984
Other issuances of common stock                                         690,669       7        9,532
Purchase of  8,285 shares of common stock
Distribution of 20,180 shares of treasury stock to 401(k) plan                                   139
Stock option compensation                                                                        290
Amortization of deferred compensation
                                                                     ----------    ----     --------    ---------        -------
BALANCE, DECEMBER 31, 2000                                           24,318,982    $243     $250,858    $(130,004)       $  (823)
                                                                     ==============================================================
</TABLE>


<TABLE>
<CAPTION>
                                                                         NOTE
                                                                       RECEIVABLE                                       TOTAL
                                                                          FROM         TREASURY        DEFERRED     STOCKHOLDERS'
                                                                        OFFICER     STOCK, AT COST   COMPENSATION       EQUITY
                                                                       ----------   --------------   ------------   -------------

<S>                                                                    <C>          <C>              <C>            <C>
BALANCE, JANUARY 1, 1998                                                  $(60)        $  (878)         $(282)         $158,294
Comprehensive loss
  Net loss                                                                                                              (29,698)
  Other comprehensive income:
    Unrealized gain on available-for-sale securities                                                                        450
                                                                                                                       --------
Total comprehensive loss                                                                                               $(29,248)
                                                                                                                       --------
Issuances of common stock                                                                                (191)            1,296
Purchase of 41,677 shares of common stock                                                 (521)                            (521)
Stock option compensation                                                                                                   449
Amortization of deferred compensation                                                                     109               109
                                                                          ----         -------          -----          --------
BALANCE, DECEMBER 31, 1998                                                $(60)        $(1,399)         $(364)         $130,379
Comprehensive loss:
  Net loss                                                                                                              (26,868)
  Other comprehensive loss:
     Unrealized loss on available-for-sale securities                                                                    (2,714)
                                                                                                                       --------
Total comprehensive loss                                                                                               $(29,582)
                                                                                                                       --------
Issuance of common stock in private placement at $13.50 per share,
  net of offering costs                                                                                                  42,408
Other issuances of common stock                                                                                           2,604
Purchase of  224,150 shares of common stock                                             (2,209)                          (2,209)
Distribution of 26,494 shares of treasury stock to 401(k) plan                             324                              352
Stock option compensation                                                                                                   947
Amortization of deferred compensation                                                                      81                81
Forfeiture of unvested restricted stock                                                                   176               -
                                                                          ----         -------          -----          --------
BALANCE, DECEMBER 31, 1999                                                $(60)        $(3,284)         $(107)         $144,980
Comprehensive loss:
   Net loss                                                                                                             (47,127)
   Other comprehensive income:
     Unrealized gain on available-for-sale securities                                                                     1,015
                                                                                                                       --------
Total comprehensive loss                                                                                               $(46,112)
                                                                                                                       --------
Common stock issued in exchange for intangible asset                                                                      7,987
Other issuances of common stock                                                                           (56)            9,483
Purchase of  8,285 shares of common stock                                                 (237)                            (237)
Distribution of 20,180 shares of treasury stock to 401(k) plan                             244                              383
Stock option compensation                                                                                                   290
Amortization of deferred compensation                                                                      55                55
                                                                          ----         -------          -----          --------
BALANCE, DECEMBER 31, 2000                                                $(60)        $(3,277)         $(108)         $116,829
                                                                          =====================================================
</TABLE>



See accompanying notes to consolidated financial statements.


<PAGE>   18

                          GUILFORD PHARMACEUTICALS INC.
                                AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             YEARS ENDED DECEMBER 31
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                   2000       1999       1998
                                                                                                   ----       ----       ----
<S>                                                                                             <C>         <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                                                     $ (47,127)  $(26,868)  $(29,698)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                                                                 4,321      5,118      3,601
      Non-cash compensation expense                                                                   893        866        558
   Changes in assets and liabilities:
      Accounts receivable, prepaid expenses and other assets                                         (865)       (37)    (1,270)
      Inventories                                                                                    (820)       (57)        51
      Accounts payable and other current liabilities                                                  908        247        839
                                                                                                ---------   --------   --------
         Net cash used in operating activities                                                    (42,690)   (20,731)   (25,919)
                                                                                                ---------   --------   --------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                                                               (541)    (1,850)    (5,104)
   Maturities of held-to-maturity securities                                                          510      2,023     21,499
   Maturities of available-for-sale securities                                                    239,643    164,325     78,631
   Purchases of available-for-sale securities                                                    (185,400)  (179,155)   (84,222)
                                                                                                ---------   --------   --------
         Net cash provided by (used in) investing activities                                       54,212    (14,657)    10,804
                                                                                                ---------   --------   --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from issuances of common stock                                                      9,483     45,012      1,296
   Purchase of treasury stock                                                                        (237)    (2,209)      (521)
   Proceeds from loans                                                                                -          600        -
   Principal payments on long-term debt                                                            (2,298)    (2,159)    (2,160)
                                                                                                ---------   --------   --------
         Net cash provided by (used in) financing activities                                        6,948     41,244     (1,385)
                                                                                                ---------   --------   --------
Net increase (decrease) in cash and cash equivalents                                               18,470      5,856    (16,500)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR                                                 14,336      8,480     24,980
                                                                                                ---------   --------   --------
CASH AND CASH EQUIVALENTS AT THE END OF YEAR                                                      $32,806    $14,336     $8,480
                                                                                                =========   ========   ========

Supplemental disclosures of cash flow information:
    Net interest paid                                                                                $490       $590       $784
                                                                                                =========   ========   ========

   Non-cash investing and financing activities:
      During 2000, the Company issued 300,000 shares of common stock valued at
           $8,000 and assumed the obligation for product returns estimated
           at $500 in return for the rights to market, sell and
           distribute GLIADEL (R) Wafer.

      Capital lease obligations of $543 were incurred in 2000 when the
           Company entered into new leases for certain computer equipment.
</TABLE>


See accompanying notes to consolidated financial statements.
<PAGE>   19


                          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 biopharmaceutical company located in Baltimore, Maryland
engaged in the development and commercialization of novel products in two
principal areas: (i) targeted and controlled drug delivery systems using
proprietary biodegradable polymers for the treatment of cancer and other
diseases or conditions; and (ii) therapeutic and diagnostic products for
neurological diseases and conditions.


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES


Principles of Consolidation

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


  Segment Information

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


Cash Equivalents

    Cash equivalents of $30.3 million and $10.4 million at December 31, 2000 and
1999, respectively, consist of


                                        1


<PAGE>   20


overnight investments and 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, 2000 and 1999 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
(loss)". Realized gains and losses on available-for-sale securities are
determined on a specific identification basis. Held-to-maturity securities are
those securities in which the Company has the ability and intent to hold the
security until maturity. Held-to-maturity securities are carried at cost,
adjusted for the amortized discount or premium. Dividends and interest income
are recognized when earned.

    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

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


Interest Rate Swap Agreements

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


                                        2


<PAGE>   21


Inventories

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

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

    In periods when production volume is less than planned, manufacturing
overhead not capitalized as inventory is expensed in the period incurred and is
included as part of cost of sales.


Property and Equipment

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


Intangible Asset

    The intangible asset, net of accumulated amortization, represents the cost
to reacquire the rights to market, sell and distribute GLIADEL (R) Wafer from
Aventis S.A. ("Aventis") (See Note 15). The Company is amortizing this
intangible asset over a period of 10 years using the straight-line method.


Impairment of Long-Lived Assets

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


                                        3


<PAGE>   22


Accounting Change

    In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), which summarizes the views of the
SEC in applying generally accepted accounting principles to revenue recognition
in financial statements. The Company adopted SAB 101 in the fourth quarter of
2000 effective January 1, 2000 resulting in a non-cash charge of $8.6 million or
$0.36 per basic and diluted share. In accordance with SAB 101, the charge has
been reflected on a separate line entitled "Cumulative effect of an accounting
change" on the Consolidated Statements of Operations. Under SAB 101,
non-refundable upfront fee arrangements that contain an element of continuing
involvement must be deferred and recognized as revenue over the involvement
period. See Note 15 for a description of the past agreements impacted by SAB
101. For the year ended December 31, 2000, the Company recognized $8.6 million
of contract revenues, which were deferred upon adoption of SAB 101. The effect
of the adoption of SAB 101 on the pre-change interim periods is disclosed in
Note 20.

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


<TABLE>
<CAPTION>
                                                        2000             1999          1998
                                                        ----             ----          ----
<S>                                                 <C>              <C>            <C>
Revenue                                               $18,056          $27,311        $18,233
Net loss                                             ($38,502)        ($21,118)      ($23,948)
Net loss per common share                              ($1.64)          ($1.03)        ($1.23)
</TABLE>


Revenue Recognition

    Product sales are recognized at the time the product has received a
"certificate of analysis", has been shipped and title has passed. Sales are
reported net of estimated discounts, rebates, charge backs and product returns.
Royalty revenue is recognized at such time as the Company's marketing, sales and
distribution partner sells the product.

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

    Commencing with the adoption of SAB 101 in 2000, non-refundable upfront fee
arrangements that contain an element of continuing involvement are deferred and
recognized as revenue over the involvement period. Prior to the adoption of SAB
101, non-refundable upfront fee arrangements for which no further performance
obligation existed were recognized when payment was received.

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

Research and Development, Patent and Royalty Costs


                                        4


<PAGE>   23


    Research and development, patent, and royalty costs are expensed as
incurred. Royalty expense related to product sales is recognized concurrently
with the recognition of product revenue and included as part of cost of sales.
Royalty expense from third-party sales is expensed as incurred and is offset
against royalty revenue related to third-party sales.


Accounting for Income Taxes

    Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance 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 in income in the period that such tax rate changes are enacted.


Stock-Based Compensation

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


Comprehensive Income (Loss)

    Under SFAS 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, 2000, 1999 and 1998 has
been reflected in the Consolidated Statements of Changes in Stockholders'
Equity.


                                        5


<PAGE>   24


Earnings (Loss) per Share

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


Fair Value of Financial Instruments

    The fair values of the Company's financial instruments, including long-term
debt and interest rate swaps, are obtained from independent quotation services
as monitored by the Company's investment advisors. These fair values may be
based on closing prices, the mean between the bid and the asking price or a
matrix based on interest rates for similar securities. For financial instruments
trading less frequently, the Company's investment advisors may rely on outside
pricing services or computerized pricing models.

    The carrying amounts approximate fair value for cash and cash equivalents,
accounts receivable, other assets, accounts payable and accrued expenses because
of the short term duration of these instruments.


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.


Uncertainties

    The Company is subject to various risks common to companies within the
biotechnology industry. These include, but are not limited to, development by
competitors of new technological innovations; dependence on key personnel;
dependence on a limited number of products; risks inherent in the research and
development of 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 the end customer; 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


                                        6


<PAGE>   25


    The preparation of the Company's financial statements, in conformity with
accounting principles generally accepted in the United Sates 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.


Significant Customer and Product

    The Company sells only one product, GLIADEL (R)(R)Wafer, a novel treatment
for recurrent malignant glioblastoma multiforme, the most fatal form of brain
cancer. The Company formerly marketed, sold and distributed its product through
one of its partners, Aventis. Substantially all net product sales and license
fees and royalties were from Aventis for years ended December 31, 2000, 1999 and
1998. As described in Note 15, the Company reacquired the rights to market, sell
and distribute GLIADEL (R) Wafer during 2000. The Company will begin selling
GLIADEL (R) Wafer directly to wholesalers and hospitals on January 1, 2001.


Reclassifications

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


New Accounting Standards

    In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No.133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133") as amended by SFAS 137 and SFAS 138. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
companies to recognize all derivatives as either assets or liabilities on the
balance sheet at their respective fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. As
required under SFAS 137, the Company will adopt SFAS 133, as amended, in the
first quarter of 2001. Management has evaluated the impact of SFAS 133 in
connection with the Company's use of derivatives in managing interest rate
risks. The Company's exposure to derivatives is limited to interest rate swap
agreements that are highly effective in managing the Company's interest rate
exposure. Consequently, the implementation of SFAS 133 is not expected to have a
material impact on the financial position and results of operation of the
Company.

    In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation - an Interpretation of APB 25, ("FIN
44") which clarifies certain issues relating to stock compensation. FIN 44 is
effective July 1, 2000; however, certain conclusions cover specific events that
occurred prior to July 1, 2000. The adoption of FIN 44 on July 1, 2000 does not
have any impact on the Company's historical financial statements.


                                        7


<PAGE>   26


(3) INVESTMENTS

    Investments in marketable securities as of December 31, 2000 and 1999 are as
follows:


<TABLE>
<CAPTION>
                                                                         Gross                     Gross
                                                                       Unrealized                Unrealized
                                                                        Holding                   Holding              Fair
                           2000                      Cost                Gains                     Losses             Value
                           ----                      ----                -----                     ------             -----
                                                                                   (in thousands)
<S>                                              <C>                   <C>                        <C>                <C>
         Available-for-sale:
            U.S. Treasury securities             $    28,895           $      -                   $   (162)          $  28,733
            Corporate debt securities                 38,181                  -                       (605)             37,576
            Other debt securities                     10,391                  -                        (56)             10,335
                                                 -----------           ---------                  ---------          ---------
                                                 $    77,467           $     -                    $   (823)          $  76,644
                                                 ===========           =========                  =========          =========


                           1999
                           ----

         Available-for-sale:
            U.S. Treasury securities             $    44,335           $      -                   $  ( 595)          $  43,740
            Corporate debt securities                 68,624                  -                       (872)             67,752
            Other debt securities                     18,751                  -                       (371)             18,380
                                                 -----------           ---------                  ---------          ---------
                                                     131,710                  -                     (1,838)            129,872
         Held-to-maturity:
            U.S. Treasury securities                     510                  -                          -                 510
                                                 -----------           --------                   ---------          ---------
                                                 $   132,220           $       -                  $ (1,838)          $ 130,382
                                                 ===========           =========                  =========          =========
</TABLE>


    At December 31, 2000 and 1999, investments of $18.3 million and $21.4
million, respectively are classified as "Investments-restricted" in the
accompanying consolidated balance sheets (see Notes 8 and 9).

    Maturities of investments in marketable securities classified as
available-for-sale as of December 31, 2000 were as follows:


<TABLE>
<CAPTION>
                                                                Amortized                    Fair
                                                                  Cost                      Value
                                                             ---------------                -----
                                                                             (in thousands)

<S>                                                          <C>                        <C>
            Due in 1 year or less                              $   47,230                 $  46,608
            Due in 1- 5 years                                      30,237                    30,036
                                                               ----------                 ---------
                                                               $   77,467                 $  76,644
                                                               ==========                 =========
</TABLE>


                                        8


<PAGE>   27


(4) INTEREST RATE SWAP AGREEMENTS

    During 1998 and 1999, the Company entered into interest rate swap agreements
with a commercial bank ("counter party") to reduce the impact of changes in
interest rates on certain financial obligations (see Notes 8 and 9). These
agreements have a total notional principal amount of approximately $26.6 million
at December 31, 2000. The Company has effectively fixed its floating rate debt
and certain financial lease obligations to an annual rate of approximately 6%.
These interest rate swap agreements have approximately the same maturity dates
as the financial obligations and expire on various dates through February 2005.
Certain of the interest rate swap agreements provide the commercial bank with a
call provision exercisable during 2003. In the event of non-performance by the
counter party, the Company could be exposed to market risk related to interest
rates.

    The fair value of the interest rate swap agreements were approximately $0.1
million and $1.0 million at December 31, 2000 and 1999, respectively. Current
market pricing models were used to estimate fair values of interest rate swap
agreements.


(5) INVENTORIES

        Inventories consist of the following:

<TABLE>
<CAPTION>

                                                                    December 31,
                                                             ---------------------------
                                                                 2000           1999
                                                             ------------   ------------
                                                                    (in thousands)

<S>                                                          <C>            <C>
                             Raw materials                   $        304   $        280
                             Work in process                          603            416
                             Finished goods                         1,261            652
                                                             ------------   ------------
                                                             $      2,168   $      1,348
                                                             ============   ============
</TABLE>


 (6) PROPERTY AND EQUIPMENT

         Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                     ---------------------------
                                                                         2000                  1999
                                                                     ------------          ------------
                                                                               (in thousands)

<S>                                                                  <C>                   <C>
            Laboratory equipment                                     $      4,467          $      4,789
            Manufacturing equipment                                         2,522                 2,794
            Computer and office equipment                                   5,735                 4,758
            Leasehold improvements                                         15,961                16,052
                                                                     ------------          ------------
                                                                           28,685                28,393
            Less accumulated depreciation and amortization                (16,637)              (12,600)
                                                                     ------------          ------------
                                                                     $     12,048          $     15,793
                                                                     ============          ============
</TABLE>


                                        9


<PAGE>   28


(7) INTANGIBLE ASSET

         Intangible asset consists of the following:

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                       ----------------
                                                                               2000
                                                                             ---------
                                                                          (in thousands)

<S>                                                                           <C>
            Reacquisition of GLIADEL (R) Wafer rights                         $8,412
            Less accumulated amortization                                       (140)
                                                                              -------
                                                                              $8,272
                                                                              =======
</TABLE>

    As described in note 15, the Company reacquired the rights to market, sell
and distribute GLIADEL (R) Wafer during 2000. This intangible asset is being
amortized over ten years.



(8) INDEBTEDNESS

    Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                                  December 31,
                                                                                        -------------------------------
                                                                                           2000                 1999
                                                                                        ---------             ---------
                                                                                               (in thousands)
<S>                                                                                     <C>                <C>
         Borrowings under bond financing arrangement, ** payable in monthly
         installments of $78, plus interest at LIBOR + 0.75% (7.554% at December
         31,2000*), with final payment due December 2004                                $   3,765           $   4,706

         Borrowings under term loan,** payable in monthly installments of $101,
         plus interest at LIBOR + 0.625% (7.446% at December 31, 2000*),
         with final payment due April 2003                                                  2,842               4,060

         Note payable to the City of Baltimore, interest
         at 2.0% per annum, payable in monthly installments
         of approximately $5, including principal and interest,
         with final payment due December 2009                                                 545                 600

         Capital leases***, interest imputed at 11.2% per annum,
         leases expire between July 2002 and November 2002                                    459                   -
                                                                                        ---------           ---------

         Total long-term debt                                                               7,611               9,366

         Less current portion of long-term debt                                           (2,481)              (2,214)
                                                                                        ---------           ---------

         Long-term debt, net of current portion                                         $   5,130           $   7,152
                                                                                        =========           =========
</TABLE>


                                       10


<PAGE>   29


        *    See Note 4- "Interest Rate Swap Agreements"

        **   Secured by equipment and leasehold improvements

        ***  See Note 9 - "Leases"

    Aggregate maturities of long-term debt for each of the five years subsequent
to December 31,2000, and thereafter are approximately: 2001, $2.5 million; 2002,
$2.4 million; 2003, $1.4 million; 2004, $1.0 million; 2005, $0.1 million; and
thereafter, $0.2 million. The fair value of long-term debt is $7.1 million at
December 31, 2000.


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 with 50% of the outstanding borrowings guaranteed by the Maryland
Industrial Development Financing Authority ("MIDFA"). Effective June 1998, MIDFA
increased its guarantee from 50% to 82% of the outstanding borrowings.
Restrictive covenants

    The aforementioned debt agreements contain restrictions that require the
Company to meet certain financial covenants. Under the bond financing
arrangement, the Company maintained $0.6 million and $0.7 million at December
31, 2000 and 1999, respectively, as cash collateral (approximately 18.27% of the
outstanding principal balance less $100,000). In accordance with the term loan
agreement, the Company maintained as cash collateral $2.8 million and $4.1
million at December 31, 2000 and 1999, respectively (equal to 100% of the
outstanding principal balance). Total collateral is included in the accompanying
Consolidated Balance Sheets as "Investments-restricted." Other covenants
preclude the Company from declaring any cash dividends on its common stock
without prior written consent.


Revolving Line of Credit

    In 1998, the Company entered into a revolving line of credit agreement
renewable annually with a commercial bank for $5.0 million. Borrowings under the
line of credit, if any, require interest at LIBOR plus 0.55% and are payable on
demand. The commercial bank requires the Company to maintain unrestricted cash,
cash equivelants and investments in the aggregate equal to $40.0 million. This
requirement is met in conjunction with a similar requirement related to our
financial obligations associated with our research and development facility (see
Note 9). There were no amounts drawn under the line of credit during 2000 or
1999.


(9) LEASES

    In February 1998, the Company entered into a Real Estate Development
Agreement and an operating lease agreement in connection with the construction
of a research and development facility. The facility, which is approximately
73,000 square feet, is located adjacent to the Company's corporate headquarters
in Baltimore, Maryland. Construction of this facility was completed during 1999
for a total cost of approximately $19.5 million. The initial lease term is for a
period of 84 months (including the construction period) and expires in February
2005. The Company has the option to purchase the facility beginning in February
2001 and annually thereafter. In addition,


                                       11


<PAGE>   30


the Company has an option to sell the facility to a third party during the third
and fourth year or at the expiration date of the initial term. In the event the
building is sold to a third party, the Company will be obligated to pay the
lessor any shortfall between the sales price and 83% of the lessor's net
investment in the facility. Annual lease payments under this operating lease
agreement are approximately $1.4 million during the initial lease term. The
Company is required to maintain collateral equal to 83% of the remaining balance
of the lessor's net investment in the facility less guarantees. The Company
maintained collateral of $14.3 million as of December 31, 2000 and 1999. The
collateral is included in the accompanying Consolidated Balance Sheets as
"Investments-restricted". In addition to its collateral requirements, the
Company is subject to certain financial covenants, the most restrictive of which
requires that the Company maintain unrestricted cash, cash equivalents, and
investments in the aggregate equal to $40 million.

    In March 1998, the Company entered into certain Master Lease Agreements, as
amended, to provide up to $10.8 million for computer and equipment financing. At
December 31, 2000, $1.0 million remains unexpired and was available under these
arrangements to lease additional equipment. The Company's ability to draw on
these Master Lease Agreements expires on March 31, 2001. The term of each
operating lease may vary from 24 to 48 months based upon the type of equipment
being leased. As of December 31, 2000, the Company had leased approximately $8.8
million in computer and equipment under these agreements.

    The Company entered into a Master Lease Arrangement related to the land and
building which it occupies as its corporate headquarters. The term of the lease
is for ten years and expires July 2004 with options to renew for two five-year
periods. The Company has the option to purchase the building after the ninth
year for its then current fair market value (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,
2000 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                             CAPITAL         OPERATING
                                                                             LEASES            LEASES
                                                                             ======            ======
<S>                                                                          <C>              <C>
2001                                                                         $ 307            $ 4,183
2002                                                                           202              2,839
2003                                                                            -               1,941
2004                                                                            -               1,681
2005                                                                            -                 226
Beyond 2005                                                                     -                  -
                                                                             -----            -------
   Total minimum lease payments                                                509            $10,870
                                                                                              =======
Less amounts representing interest                                             (50)
                                                                             -----
   Present value of net minimum lease payments                                 459
Less current maturities of capital lease obligations                          (266)
                                                                             -----
   Capital lease obligations, excluding current installments                 $ 193
                                                                             =====
</TABLE>


    Rent expense for operating leases was approximately $4.8 million, $4.2
million, and $2.7 million for the years


                                       12


<PAGE>   31


ended December 31, 2000, 1999 and 1998, respectively.

The amount of computer equipment and related accumulated depreciation recorded
under capital leases at December 31, 2000 was $543,000 and $93,000,
respectively.


(10) INCOME TAXES

    As of December 31, 2000, the Company had net operating loss ("NOL")
carryforwards available for federal income tax purposes of approximately $123.8
million, which expire at various dates between 2010 to 2020. 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, 2000, the
Company had tax credit carryforwards of approximately $7.3 million expiring
between 2008 and 2020.

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

<TABLE>
<CAPTION>
                                                                                 2000               1999             1998
                                                                              ---------          ----------       ----------
                                                                                               (in thousands)

<S>                                                                          <C>              <C>                <C>
         Computed "expected" tax benefit at statutory rate                   $ (16,023)       $   (9,135)        $ (10,097)
         State income tax, net of federal benefit                               (3,303)           (1,867)           (1,965)
         General business credit generated                                      (1,827)           (1,631)           (1,610)

         Other, net                                                                (19)               62              (546)
         Change in valuation allowance                                          21,172            12,571            14,218
                                                                             ---------        ----------         ---------
                                                                             $     -          $      -           $     -
                                                                             =========        ==========         =========
</TABLE>


    Realization of net deferred tax assets related to the Company's NOL
carryforwards and other items is dependent on future earnings, which are
uncertain. Accordingly, a valuation allowance has been established equal to net
deferred tax assets that may not be realized in the future. The change in the
valuation allowance was an increase of approximately $21.2 million in 2000 and
an increase of approximately $12.6 million in 1999.

    Significant components of the Company's deferred tax assets and liabilities
are shown below.

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                  -----------------------
                                                                               2000                     1999
                                                                             ----------------------------------
                                                                                       (in thousands)
<S>                                                                           <C>                     <C>
         Deferred tax assets:
           Net operating loss carryforwards                                   $ 50,786                $ 30,021
           Research and experimentation credits                                  7,273                   5,446
           Compensatory stock grants                                             2,208                   2,156
           Depreciation                                                            235                   1,617
           Alternative minimum tax credit carryforwards                            138                     138
           Contribution carryover and capitalized start-up costs                   185                     101
</TABLE>


                                       13


<PAGE>   32


<TABLE>
<S>                                                                         <C>                     <C>
           Other                                                                 1,318                   1,269
                                                                             ---------               ---------
                                                                                62,143                  40,748
         Deferred tax liabilities:
           Prepaid expenses and deferred compensation                            (753)                    (530)
                                                                             ---------               ---------
         Net deferred tax assets                                                61,390                  40,218
         Valuation allowance                                                   (61,252)                (40,080)
                                                                             ---------               ---------
         Net deferred tax assets                                             $     138               $     138
                                                                             =========               =========
</TABLE>



(11) CAPITAL TRANSACTIONS

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

    In October 2000, the Company issued 300,000 shares of its common stock,
valued at approximately $8.0 million to Aventis in consideration for the
reacquisition of the rights to market, sell and distribute GLIADEL (R) Wafer
(see Note 15).

    In September 1999, the Company completed a private placement of
approximately 3.4 million shares of its common stock to certain institutional
and other accredited investors, resulting in net proceeds to the Company of
approximately $42.4 million.

    In June 1999, the Company issued 312,993 shares of common stock upon
exercise of a warrant by Bear, Stearns Securities Corp. as partial compensation
for underwriting services. In exchange, the Company received approximately $2.25
million.

    The Company repurchased 8,285, 224,150 and 41,677 shares of its common stock
at an aggregate cost of approximately $0.2 million, $2.2 million and $0.5
million during the years ended December 31, 2000, 1999 and 1998, respectively,
of which 212,900 and 39,600 shares were purchased during the years ended
December 31, 1999 and 1998, respectively, pursuant to the stock repurchase
program approved by the Company's Board of Directors in September 1998. In
August 1999, this stock repurchase program was terminated.

    On October 1, 1997, the Company sold 640,095 shares of common stock to Amgen
Inc. ("Amgen") for $15 million. In addition, the Company received $5 million for
warrants, exercisable for five years, to purchase up to 700,000 shares of the
Company's common stock at an exercise price of $35.15 per share (see Note 15).

    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, 2000 or 1999.


(12) STOCKHOLDER RIGHTS PLAN

    In September 1995, the Board of Directors adopted a Stockholder Rights Plan
in which preferred stock purchase


                                       14


<PAGE>   33


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, 2000, 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.



(13) SHARE OPTION AND RESTRICTED SHARE PLANS


Employee Share Option and Restricted Share Plans

    The Company adopted Employee Share Option and Restricted Share Plans in 1993
(the "1993 Plan") and 1998 (the "1998 Plan" and together with the 1993 Plan, the
"Plans"). The Plans were established to provide eligible individuals with an
opportunity to acquire or increase an equity interest in the Company and to
encourage such individuals to continue in the employment of the Company.
Eligible individuals include any full-time employee of the Company and other
individuals (including some consultants) whose participation in the Plans is
determined by the board of directors to be in the Company's best interest. The
1993 Plan allows the Company to issue incentive stock options to eligible
individuals while the 1998 Plan does not. Share options are granted under both
Plans at the fair market value of the stock on the day immediately preceding the
date of grant or date of initial employment, if later. The Plans permit
employees to pay for shares purchased pursuant to the exercise of options
through the tender to the Company of shares of the Company's common stock that
have been held by the employee for at least six months. Share options are
exercisable under both Plans for a period not to exceed 10 years from the date
of grant. Share option grants to new hires under both Plans vest at 50% of the
award on the second anniversary date of the grant date and 25% on each of the
third and fourth anniversary dates. Share option grants that are part of the
Company's bonus program vest at 25% per year.

    The Company has granted, pursuant to the Plans, restricted shares to some of
its executive officers in connection with the commencement of their employment
with the Company. Shares awarded under the restricted share provisions of the
Plans are valued at the fair market value of the stock on the day immediately
preceding the date of award (date of grant, if later) and require a vesting
period determined by the board of directors. Restricted share awards generally
vest at 25% of the award on each of the first four anniversary dates of the
employee's date of employment with the Company.

    Should an individual leave the employment of the Company for any reason
(other than by reason of death or


                                       15


<PAGE>   34


permanent disability) the award recipient would forfeit their ownership rights
for all share options and restricted shares not otherwise fully vested. All
unvested options and restricted shares held by the Company's employees vest in
full upon certain events constituting a change in control of the Company.

    At December 31, 2000, the maximum share options issuable under the Plans
were 4,535,000, of which up to 400,000 shares may be issued under the restricted
share provisions. At December 31, 2000, there were 522,752 share options or
restricted shares (subject to the above limitation) available for grant under
the Plans.

    Pursuant to the 1993 and 1998 Employee Share Option and Restricted Share
Plans, certain executive officers have received awards of restricted common
stock. To the extent that the award does not provide the executive officer to
pay for such stock, unearned compensation is recorded at the time an award of
restricted stock is made to the executive officer. Unearned compensation is
calculated as the product of multiplying the number of shares awarded by the
fair market value of the Company's common stock. Unearned compensation is
amortized over the vesting period of the restricted shares.


The Directors' Plan

    The Director's Stock Option Plan (the "Directors' Plan") was established to
provide non-employee directors an opportunity to acquire or increase an equity
interest in the Company. Under the Directors' Plan, 300,000 shares of common
stock are reserved for issuance at an exercise price not less than fair value of
the Company's common stock on the day immediately preceding the date of grant.
Such share options vest 50% at the end of year one and 100% at the end of year
two. Under the Directors' Plan 52,500, 22,500 and 52,500 share options were
granted during the years ended December 31, 2000, 1999 and 1998, respectively.
As of December 31, 2000, 247,500 share options were outstanding under the
Directors' Plan, of which 183,750 are exercisable as of December 31, 2000. At
December 31, 2000, there were 52,500 share options available for grant under the
Directors' Plan.

    If the above Director's Plan has reached its limit of grants per individual
director, those non-employee directors eligible to receive annual share option
grants under the above Director's Plan may instead receive annual grants of
non-qualified stock options to purchase 7,500 shares under the terms of the
Company's 1998 Employee Share Option and Restricted Share Plan, as amended. Such
options are to be for a term of 10 years and are exercisable 50% at the end of
year one and 100% at the end of year two. Two non-employee directors were each
granted 15,000 share options in the aggregate in 2000 and 1999, with an exercise
price equal to fair value at date of grant. At December 31, 2000, 7,500 share
options were exercisable.


Consultants

    Prior to 1997, the Company granted share options to each of two consultants
to purchase up to 225,000 shares of the Company's common stock, valid for 10
years from issuance, with varying exercise prices. Vesting periods are based on
either the passage of time or upon the achievement of certain milestones. Of
these share options, 142,800 were exercisable as of December 31, 2000. The
Company recognized $257,000, $439,000 and $439,000 in non-cash compensation
expense, in accordance with SFAS 123, relating to the value of such share
options (as determined using the Black-Scholes pricing model) for the years
ended December 31, 2000, 1999 and 1998, respectively. The


                                       16


<PAGE>   35


Company expects to charge up to an additional $54,000 of non-cash compensation
expense to operations during the year ending December 31, 2001 relating to such
agreements.

    The following is a summary of the Company's share option activity and
balances as of and for the years ended December 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                  Weighted -
                                             Share                 Average
                                            Options             Exercise Price
                                            -------             --------------
<S>                                      <C>                    <C>
Balance, January 1, 1998                   2,421,489              $    14.38
Granted                                      867,403                   19.31
Exercised                                   (178,678)                   5.91
Canceled                                   ( 197,984)                  20.62
                                       --------------             ----------
Balance, December 31, 1998                 2,912,230                   15.94
Granted                                      752,719                   12.89
Exercised                                    (61,064)                   5.81
Canceled                                    (378,231)                  18.84
                                       --------------             ----------
Balance, December 31, 1999                 3,225,654                   15.08
Granted                                    1,173,277                   27.17
Exercised                                   (525,643)                  12.47
Canceled                                    (222,192)                  20.98
                                       --------------             ----------
Balance, December 31, 2000                 3,651,096              $    18.98
                                       ==============             ==========
</TABLE>


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


<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING                                         OPTIONS EXERCISABLE

                      OUTSTANDING AS OF    WEIGHTED-AVERAGE   WEIGHTED-AVERAGE    EXERCISABLE AS OF       WEIGHTED-AVERAGE
   RANGE OF           DECEMBER 31, 2000        REMAINING       EXERCISE PRICE     DECEMBER 31, 2000       EXERCISE PRICE
EXERCISE PRICES       -----------------    CONTRACTUAL LIFE    --------------     -----------------       --------------
---------------                            ----------------

<S>                     <C>                <C>                  <C>                <C>                     <C>
$0 - $10.00                   228,346             4.6               $5.88                228,346               $5.88
$10.01 - $20.00             2,278,873             6.9              $15.89              1,348,356              $16.28
$20.01 - $30.00             1,133,627             8.9              $27.73                140,475              $23.79
$30.01 - $40.00                10,250             7.4              $32.16                  7,500              $30.63
                           ----------             ---                                 ----------
                            3,651,096             7.4              $18.98              1,724,677              $15.58
                           ==========                                                 ==========
</TABLE>


                                       17


<PAGE>   36


Pro forma option information

    Using the Black-Scholes option pricing model, the per share weighted-average
fair value of all share options granted during 2000, 1999 and 1998 was $8.61,
$7.76 and $10.00, respectively, on the date of grant with the following
weighted-average assumptions.

<TABLE>
<CAPTION>
                                                                       2000                1999                  1998
                                                                       ----                ----                  ----

<S>                                                                  <C>                 <C>                   <C>
                  Expected dividend yield                                 0%                  0%                    0%
                  Risk-free interest rate                               5.1%                5.9%                  4.7%
                  Volatility                                           66.7%               57.3%                 62.5%
                  Expected life in years                                  4                   4                     4
</TABLE>


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

<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                                                    ------------------------
                                                                              2000              1999             1998
                                                                              ----              ----             ----

                                                                                (in thousands, except per share data)

<S>                                                 <C>                       <C>                <C>             <C>
         Net loss                                    As reported              ($47,127)          ($26,868)       ($29,698)
                                                     Pro forma                ($53,892)          ($32,903)       ($32,827)
         Basic and diluted loss per share            As reported                ($2.00)            ($1.31)         ($1.52)
                                                     Pro forma                  ($2.29)            ($1.61)         ($1.69)
</TABLE>


(14) 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.

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


                                       18


<PAGE>   37


approximately $390,000, $348,000 and $308,000 for the years ended December 31,
2000, 1999 and 1998, respectively.

(15) SIGNIFICANT CONTRACTS AND LICENSING AGREEMENTS

Amgen Inc.

    In August 1997, the Company entered into an agreement with Amgen (the
"Agreement") relating to the research, development and commercialization of the
Company's FKBP neuroimmunophilin ligand technology for all human therapeutic and
diagnostic applications. Pursuant to the terms of the Agreement, the Company
received an aggregate of $35 million, consisting of a one-time non-refundable
payment of $15 million upon the signing of the Agreement and $20 million for
640,095 shares of the Company's common stock and warrants, exercisable for five
years, to purchase up to an additional 700,000 shares of the Company's common
stock at $35.15 per share. In connection with the sale of these securities, the
Company granted Amgen certain demand and "piggyback" registration rights under
applicable securities laws.

    Under the terms of the Agreement, Amgen agreed to provide the Company up to
$13.5 million over three years in the aggregate to support research activities
relating to the FKBP neuroimmunophilin ligand technology. The Company recognized
$3.4 million, $4.5 million, and $4.5 million in research support for the years
ended December 31, 2000, 1999 and 1998, respectively.

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

    Additionally, the Agreement provides for certain milestone payments to the
Company, in up to ten different specified clinical indications, in the event
Amgen achieves certain development milestones. In addition, the Company will
receive royalties on product sales, if any, related to the FKBP
neuroimmunophilin ligand technology. Since the inception of the agreement
through December 31, 2000, the Company has received $6.0 million in milestone
payments related to development milestones.


Aventis

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


                                       19


<PAGE>   38


2000, the Company manufactured and supplied GLIADEL (R) Wafer to Aventis and
received revenues from net product sales and royalties based on sales.

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


    On October 23, 2000, the Company entered into a Rights Reversion Agreement
(the "Rights Reversion Agreement") with Aventis, pursuant to which the Company
reacquired the rights to market, sell and distribute GLIADEL(R) Wafer held by
Aventis. In consideration for the reacquisition of these rights, the Company
issued to Aventis 300,000 shares of its common stock, valued at approximately
$8.0 million, assumed the obligations for product returns subsequent to December
31, 2000, and granted Aventis certain registration rights with respect to such
stock. The Company has recorded a liability for estimated product returns of
approximately $0.5 million at December 31, 2000. In accordance with the terms of
the Rights Reversion Agreement, effective January 1, 2001, the Company will be
responsible for all aspects of the worldwide marketing, sales and distribution
of GLIADEL(R) Wafer (except in Scandinavia where GLIADEL(R) Wafer will continue
to be distributed by Orion Corporation Pharma). The Company intends to market,
sell and distribute GLIADEL(R) Wafer in the United States and Europe (except for
Scandinavia) and in other countries to the extent permitted by local laws.

ProQuest Pharmaceuticals Inc.

    In March 2000, the Company acquired from ProQuest Pharmaceuticals Inc.
("ProQuest") an exclusive worldwide license to a prodrug of propofol, a widely
used anesthetic. Pursuant to this transaction, the Company paid approximately
$0.7 million for 133,333 shares of common stock of ProQuest and approximately
$0.3 million for in-process research and development that was charged to
earnings. Under the terms of the agreement, the Company is obligated to make
milestone payments based on clinical development and royalties on any product
sales. ProQuest is a privately held pharmaceutical company based in Lawrence,
Kansas. The investment in ProQuest is accounted for under the cost method and is
included in the accompanying Consolidated Balance Sheets as "Other Assets".


(16) RELATED PARTY TRANSACTIONS

    A note receivable on common stock of $60,000 at December 31, 2000 and
December 31, 1999, represents an amount due from an officer of Guilford related
to the officer's purchase of shares of the Company's common stock. The note
bears interest at the rate of 5.34% per annum with principal and accrued
interest due in February 2002.

    Scios Inc., a significant stockholder until February 1999, billed the
Company for facility rents related to the Company's research and development
activities, aggregating approximately $334,000 and $883,000 in 1999 and 1998,
respectively.


                                       20


<PAGE>   39


(17) EARNINGS (LOSS) PER SHARE

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

<TABLE>
<CAPTION>
                                                                       2000             1999              1998
                                                                       ----             ----              ----
                                                                         (in thousands, except per share data)
<S>                                                                 <C>              <C>               <C>
Loss before the cumulative effect of an accounting
change                                                              $(38,502)        $(26,868)         $(29,698)

Net loss                                                            $(47,127)        $(26,868)         $(29,698)


Weighted-average shares outstanding                                   23,517           20,475            19,479
Total weighted-average diluted shares (1)                             23,517           20,475            19,479

Basic and diluted EPS:
  Loss before the cumulative effect of an accounting
  change                                                            $  (1.64)        $  (1.31)         $  (1.52)
                                                                    ========         ========          ========

  Net loss applicable to common stockholders                        $  (2.00)        $  (1.31)         $  (1.52)
                                                                    ========         ========          ========
</TABLE>


(1) At December 31, 2000, 1999 and 1998, there were approximately 889,000,
246,000 and 652,000 instruments, respectively, that were considered antidilutive
and accordingly excluded in the above calculation.


(18) TERMINATION OF PROPOSED MERGER WITH GLIATECH, INC.

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


(19) COMMITMENTS AND CONTINGENCIES

    The Company has entered into various licensing, technology transfer and
research and development agreements which commit the Company to fund certain
mutually agreed-upon research and development projects, either on a best efforts
basis or upon attainment of certain performance milestones, as defined, or both,
for various periods unless canceled by the respective parties. Such future
amounts to be paid are approximately $6.9 million through 2005 and $0.8 million
per year from 2006 through 2016. In addition, the Company will be required to
pay a royalty on future net sales of all licensed products, if any, as well as a
percentage of all payments received by the Company from sublicensees, if any.


                                       21


<PAGE>   40


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


(20) QUARTERLY FINANCIAL DATA (UNAUDITED)

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

<TABLE>
<CAPTION>
                                   MARCH 31,                 JUNE 30,                 SEPTEMBER 30,             December 31,
                                   ---------                 --------                 -------------
2000 Quarter Ended        AS REPORTED  AS RESTATED  AS REPORTED  AS RESTATED    AS REPORTED    AS RESTATED      AS REPORTED
                          -----------  -----------  -----------  -----------    -----------    -----------      -----------
(in thousands, except for per share data)
<S>                         <C>         <C>          <C>         <C>              <C>             <C>                <C>
Revenues                    $   3,267   $    4,704   $    2,291  $   3,728        $   2,978       $    4,416         $    5,208

Gross margin (1) (2)              240          240          310        310            (310)            (310)              (106)
Loss before the
cumulative effect of an
accounting change             (7,919)      (6,482)     (11,761)   (10,324)         (11,559)         (10,121)           (11,575)
Net loss                    $ (7,919)   $ (15,107)   $ (11,761)  $(10,324)        $(11,559)       $ (10,121)         $ (11,575)
Loss per common share
before the cumulative
effect of an accounting
change                      $  (0.34)   $   (0.28)   $   (0.50)  $  (0.44)        $  (0.49)       $   (0.43)         $   (0.49)
Net loss per common
share                       $ ( 0.34)   $   (0.65)   $   (0.50)  $  (0.44)        $  (0.49)       $   (0.43)         $   (0.49)
</TABLE>


<TABLE>
<CAPTION>
1999 QUARTER ENDED                                 MARCH 31,         JUNE 30,          SEPTEMBER 30,         DECEMBER 31,
                                                   ----------        ---------         -------------         ------------
(in thousands, except for per share data)
<S>                                              <C>            <C>                <C>                   <C>
Revenues                                            $   2,876         $   3,647          $   6,876             $   8,162

Gross margin (1)                                          562               861                262                   378
Net loss                                               (8,497)           (8,614)            (5,209)               (4,548)
Net loss per common share                              $(0.44)           $(0.44)            $(0.26)               $(0.20)
</TABLE>

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

(2) During the third and fourth quarters of 2000, production volume was less
than planned, as a result manufacturing overhead not capitalized as inventory
was expensed as part of cost of sales.


(21) SUBSEQUENT EVENTS

    In January 2001, the Company sold 2,506,000 shares of its common stock to
certain institutional investors under its shelf registration statement on Form
S-3, resulting in net proceeds to the Company of approximately $42.6 million.


                                       22

<PAGE>   41
Stock Description and Form 10-K

Our common stock is listed on the Nasdaq(R) National Market under the symbol
"GLFD". As of March 27, 2001, we had approximately 188 holders of record of our
common stock and in excess of 8,100 beneficial holders. We have never declared
or paid any cash dividends and do not intend to do so for the foreseeable
future. The following table sets forth the range of high and low sale prices for
our common stock as reported on the Nasdaq(R) National Market for the periods
indicated below.

<TABLE>
<CAPTION>
                                      High                  Low
<S>                            <C>                   <C>
1998

First Quarter                  $      24.88          $      17.50
Second Quarter                        24.00                 17.00
Third Quarter                         18.25                 11.63
Fourth Quarter                        18.88                 11.19

1999

First Quarter                  $      15.13          $       9.75
Second Quarter                        13.00                  9.63
Third Quarter                         17.50                 12.00
Fourth Quarter                        17.50                 13.13

2000

First Quarter                  $      38.25          $      16.25
Second Quarter                        23.25                 13.31
Third Quarter                         29.25                 14.69
Fourth Quarter                        29.13                 15.75

2001

First Quarter                  $      22.88          $      12.38
(through 3/27/01)
</TABLE>





Shareholder Inquiries:

Information about the Company can be obtained by contacting Guilford's investor
relations department at (410) 631-5022 or through our website at
www.guilfordpharm.com. Stockholders may obtain, at no charge, a copy of the
Guilford Pharmaceuticals Inc. Form 10-K, filed with the Securities and Exchange
Commission, by writing to:

Guilford Pharmaceuticals Inc.
Attn: Investor Relations
6611 Tributary Street
Baltimore, Maryland 21224