<PAGE>   1
                                   EXHIBIT 13


                             SELECTED FINANCIAL DATA

       The following selected consolidated financial data of our company for
each of the years in the five year period ended December 31, 1998 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, 1997 and 1998, and for each of the years in the three year period
ended December 31, 1998, including the footnotes to these financial statements,
are included elsewhere in this annual report beginning on page 24. 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 1 of this annual report.

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                              ------------------------

                                              1994         1995         1996         1997         1998
                                              ----         ----         ----         ----         ----
                                                        (in thousands, except per share data)
<S>                                         <C>          <C>          <C>          <C>          <C>     
     STATEMENT OF OPERATIONS
       DATA:
     Total Revenues....................     $ -          $    586     $ 28,020     $ 23,828     $ 12,483
     Costs and Expenses:
      Cost of sales....................       -           -            -              2,585        2,036
      Research and development.........       2,869         9,688       18,761       30,293       37,722
      General and administrative.......       2,369         4,367        6,736        9,076       10,546
      Compensation - warrants..........         991       -            -            -            -
                                            -------      --------     --------     --------     --------
            Total costs and expenses...       6,229        14,055       25,497       41,954       50,304
                                            -------      --------     --------     --------     --------
     Operating income (loss)...........      (6,229)      (13,469)       2,523      (18,126)     (37,821)
                                            -------      --------     --------     --------     --------
     Other income, net.................         332           832        2,550        6,689        8,123
                                            -------      --------     --------     --------     --------
            Net income (loss)..........     $(5,897)     $(12,637)    $  5,073     $(11,437)    $(29,698)
                                            -------      --------     --------     --------     --------
     Basic earnings (loss) per
      common share (1).................     $ (1.45)     $  (1.72)    $   0.39     $  (0.65)    $  (1.52)
                                            -------      --------     --------     --------     --------
     Average common shares
      outstanding (1)..................       4,067         7,354       13,001       17,570       19,479
     Diluted earnings (loss) per
      common share (1).................     $ (1.45)     $  (1.72)    $   0.35     $  (0.65)    $  (1.52)
                                            -------      --------     --------     --------     --------
     Average common and dilutive
      equivalent shares outstanding (1)       4,067         7,354       14,634       17,570       19,479
</TABLE>

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                          ------------
                                       1994       1995        1996        1997        1998
                                       ----       ----        ----        ----        ----
                                                          (in thousands)
<S>                                  <C>        <C>         <C>         <C>         <C>     
     BALANCE SHEET DATA:
     Cash, cash equivalents and
     investments (2).............    $11,834    $19,454     $77,439     $160,219    $128,261
     Total assets(2).............     14,562     26,048      93,659      180,081     151,028
     Long-term debt..............      1,431      4,696      10,905       10,926       8,766
     Total stockholders' equity..     11,421     17,773      75,877      158,294     130,379
</TABLE>

-------------
(1) For information concerning the calculation of earnings (loss) per share, see
Note 16, "Earnings (loss) per share", to the footnotes to our Consolidated
Financial Statements on page 44.

(2) Includes restricted investments of $1.2 million, $3.6 million, $10.1
million, $12.1 million, and $16.5 million at December 31, 1994, 1995, 1996, 1997
and 1998, respectively. See Notes 7 and 8, "Indebtedness" and "Leases", to 
the footnotes to our Consolidated Financial Statements.


<PAGE>   2

         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 oral or written
statements which 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:

       -  our efforts in conjunction with Rhone-Poulenc Rorer Pharmaceuticals
          Inc. (or "RPR") to obtain international regulatory clearances to
          market and sell GLIADEL,

       -  our efforts in conjunction with RPR to increase end-user sales of
          GLIADEL,

       -  our efforts to expand the labeled uses for GLIADEL,

       -  our efforts to develop polymer product line extensions,

       -  conducting and completing research programs related to our FKBP
          neuroimmunophilin ligand, NAALADase inhibition and PARP inhibition
          and other technologies,

       -  clinical development activities, including commencing and conducting
          clinical trials related to our polymer-based drug delivery products
          and product candidates (including GLIADEL), and our pharmaceutical
          product candidates (including NIL-A and any other lead compounds in
          our FKBP neuroimmunophilin ligand program, and any lead compounds
          in our NAALADase and PARP programs, and DOPASCAN),

       -  our strategic plans,

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


<PAGE>   3

       -  plans to assess and implement solutions, if necessary, to the Year 
          2000 issue,

       All of these items involve significant risks and uncertainties.

       Any of the statements we make in this annual report that are
forward-looking we are making 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. Our SEC filings include the section entitled "Risk
Factors" in our Annual Report on Form 10-K for the year ended December 31, 1998.
For convenience we refer to this document as the "1998 Form 10-K" in the
discussion set forth below. In addition, we intend that any forward-looking
statement we make speaks only as of the date on which we make it. We will not
update any forward-looking statement to reflect events or circumstances that
occur after the date on which we make such statement.

       INTRODUCTION

       In the following section, called "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 earnings or losses and costs were in 1998, 1997, and 1996,

       -  for 1998 and 1997, why earnings or losses and costs 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 1998 and a
          description of our capital requirements.

       As you read Management's Discussion and Analysis, you may find it helpful
to refer to our Consolidated Financial Statements beginning on page 24 of this
annual report. These financial statements present the results of our operations
for 1998, 1997, and 1996 as well as our financial position at December 31, 1998
and 1997. In Management's Discussion and Analysis, we analyze and explain the
annual changes in the specific line items set forth in the section of our
Consolidated Financial Statements entitled "Consolidated Statements of
Operations". Our


                                        2
<PAGE>   4

analysis may be important to you in making decisions about your investment in
Guilford.

       You will notice some changes in this year's discussion compared to past
years. In 1998 the SEC adopted new rules requiring public companies like us to
write certain documents in plain English. Even though the Commission 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 financial condition in language that may
be easier for our stockholders to understand.

       GENERAL

       Guilford is a biopharmaceutical company 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,
          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 Rhone-Poulenc Rorer Pharmaceuticals Inc., or
"RPR". GLIADEL is a proprietary polymer product for the treatment of certain
types of brain cancer. This product degrades over time and releases an
anti-cancer drug known as "BCNU" (or carmustine) directly to the tumor site. RPR
is our exclusive worldwide marketing partner for GLIADEL, except in Japan and
Scandinavia. Orion Corporation Pharma (formerly Orion Corporation Farmos) is our
marketing partner for GLIADEL in Scandinavia.

       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, and

       -  a new class of biodegradable polymers different from the type used in
          GLIADEL.

       In addition, in 1998 we accelerated research and development activities
with respect to certain of these technologies.

       We anticipate that our future revenues will come primarily from the
following sources:

          -    payments from our marketing partners for goods we manufacture
               and sell to them, which we refer to as "transfer payments",
               such as transfer payments from RPR for GLIADEL,


                                        3
<PAGE>   5

          -    royalties from our marketing partners related to sales of
               products to third parties, such as RPR's sales of GLIADEL to
               hospitals, and any sales of other products we may develop in the
               future, and/or

          -    one-time rights, milestone, and other payments from corporate
               partners under our current collaborative agreements and new ones
               we may enter into with others in the future.

       As we discuss in greater detail below, if we or our corporate
collaborators, RPR and Amgen Inc., attain certain regulatory and/or development
objectives, we are eligible to receive certain milestone and other payments from
these companies. We view these potential payments as significant future revenue
opportunities. As we discuss in the 1998 Form 10-K, we cannot be sure that our
corporate partners 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 or any future collaborations. 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.

       Since the commercial launch of GLIADEL in the United States in February
1997 through December 31, 1998, we have recognized an aggregate of $13.7 million
in transfer payments and royalties. Of this amount, $9.6 million are transfer
payments from both RPR and Orion Corporation Pharma for our sales of GLIADEL to
these two collaborators. The additional $4.1 million are royalties paid to us
from RPR on RPR's sales of GLIADEL to third parties, such as hospitals.

       Under the terms of our agreements with RPR, if RPR is able to achieve
certain specified regulatory objectives, RPR is obligated to pay us up to an
additional $35 million in milestone payments and payments for the purchase of
shares of our stock. These regulatory objectives include obtaining approvals to
market GLIADEL in certain foreign countries.

       As we discuss below and in greater detail in the 1998 Form 10-K, a number
of factors subject our future sales of GLIADEL to significant risk and
uncertainty. We cannot be sure that our sales of GLIADEL to RPR and RPR's sales
of GLIADEL to third parties will increase over time or even continue at the
current rate. The milestone payments and other amounts payable by RPR are
contingent on:

       -  making certain U.S. and international regulatory filings and obtaining
          clearances to market GLIADEL,

       -  obtaining authorization from the FDA to expand the description of the
          clinical uses for GLIADEL that we can put on the label for that
          product, and

       -  obtaining permission to sell GLIADEL in certain countries at prices
          that are acceptable to us and RPR.


                                        4
<PAGE>   6


       We cannot control the timing and extent of governmental clearances. We
also cannot be sure that we and RPR will attain any of these regulatory
objectives. Except for GLIADEL, we do not expect to sell other products for at
least the next several years, if ever.

       In August 1997, we entered into a collaboration with Amgen to research,
develop and commercialize our FKBP neuroimmunophilin compound 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 rights 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 Guilford's research relating to the FKBP
neuroimmunophilin ligand technology. This research funding began on October 1,
1997 and is payable quarterly over three years. As of December 31, 1998, we had
recognized an aggregate of approximately $5.6 million in research support from
Amgen under this arrangement. Amgen also has the option to fund a fourth year of
research, or under certain conditions, to terminate the research program after
two years.

       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 10 different specified
clinical indications (i.e., uses), these payments could total up to $392 million
in the aggregate. Amgen is also required to pay us royalties on its sales to
third parties of any product(s) that result from our collaboration. So long as
it funds two years of research, Amgen may elect at any time to discontinue all
development and commercialization for the FKBP neuroimmunophilin compound
technology.

       As we discuss below and in greater detail in the 1998 Form 10-K, we
cannot be sure that Amgen will be successful in its efforts to develop one or
more FKBP neuroimmunophilin compounds into products that the FDA and foreign
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 GLIADEL, the only other significant
revenues we recognized in 1998 consist of:

       -  $4.5 million in research payments from Amgen, and

       -  $1.0 million as a one-time, milestone payment from Amgen.

       Amgen made this $1.0 million payment following its initiation of a
one-month Good


                                        5
<PAGE>   7

Laboratory Practices (GLP) toxicology study of Amgen's first lead FKBP
neuroimmunophilin compound. Amgen refers to this compound as "NIL-A". Amgen is
initially working to advance NIL-A into human clinical trials for the treatment
of Parkinson's disease.

       As we describe above, pursuant to our agreement, we expect Amgen to pay
us $4.5 million in 1999 to support our research on the FKBP neuroimmunophilin
ligand technology. As we note above, Amgen may make certain other milestone
payments to us in the future if Amgen achieves certain product development
and/or regulatory milestones. Amgen will also pay royalties to us on future
sales of products that result from our collaboration, if there are any.

       As we discuss below and in greater detail in the 1998 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 or significant revenues from Amgen in the future.

       With the sole exception of 1996, we have not earned an operating profit
in any year since our inception in July 1993. Our operating profit in 1996 was
$5.1 million. This operating profit was primarily due to two, one-time rights
payments from RPR which totaled $27.5 million:

          -    a $7.5 million payment in June 1996 upon the signing of our
               agreements with RPR for the sales, marketing and distribution of
               GLIADEL, and

          -    a $20 million payment following FDA approval of the New Drug
               Application to market GLIADEL in September 1996.

       For the year ended December 31, 1998, we incurred a net loss of $29.7
million. Since inception through December 31, 1998, we had an accumulated
deficit of $56.0 million. Our accumulated deficit is equal to the sum of our
cumulative profits and losses since inception in July 1993.

       We do not expect 1999 to be profitable. We cannot be sure that we will
ever achieve or sustain profitability in the future. Furthermore, our revenues
have fluctuated significantly in the past because of the nature of their
sources. We expect fluctuations in our revenues to continue, and thus our
operating results should also vary significantly from quarter-to-quarter and
year-to-year. A variety of factors cause these fluctuations, including:

       -  the timing and amount of sales of GLIADEL to RPR and RPR's sales to
          others,

       -  the timing and realization of milestone and other payments from our
          corporate partners, including RPR and Amgen,

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


                                        6
<PAGE>   8

       -  the extent and timing of costs related to our activities to:

          -    obtain patents on our inventions, and
          -    extend, enforce and /or defend our patent and other rights to
               our intellectual property.

          We expect that expenses in all areas of our business will continue to
increase as we conduct our research and product development activities. These
areas include research and product development, preclinical testing, human
clinical trials, regulatory affairs, operations, manufacturing and general and
administrative activities.

       The number of our employees has grown significantly since inception. At
December 31, 1998, we had 218 full-time employees. This compares to 198
full-time employees at December 31, 1997 and 138 full-time employees at December
31, 1996. Our ability to achieve consistent profitability in the future will
depend on many factors, including:

       -  the level of future sales of GLIADEL,

       -  our ability, either alone or with others, to develop our product
          candidates successfully, including any product candidates identified
          pursuant to our collaboration with Amgen,

       -  the extent of any human clinical trials 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 products
          successfully, and

       -  our ability to enter into acceptable collaborative arrangements for
          our technologies and license agreements for new technologies of others
          in the future.

       For a discussion of these and other risks, you should read the "Risk
Factors" section of the 1998 Form 10-K, particularly those paragraphs
specifically addressing the risks we note above.

RESULTS OF OPERATIONS

       In this section we discuss our 1998, 1997 and 1996 revenues, costs and
expenses, and other income and expenses as well as the factors affecting each of
them.

       YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

       In 1998, 1997 and 1996 our revenues primarily came from the following
sources:


                                        7
<PAGE>   9

       -  transfer payments on our sales of GLIADEL to our marketing partners,

       -  royalty payments from RPR on its sales of GLIADEL to others,

       -  one-time rights or milestone payments from RPR and Amgen,

       -  quarterly research funding from Amgen, and

       -  amounts RPR reimbursed to us for costs related to our efforts to
          develop a high dose GLIADEL product.

       In 1998, 1997 and 1996, we recognized revenues of $12.5 million, $23.8
million and $28.0 million, respectively.

       These revenues consisted primarily of the following:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
                               1998               1997               1996
                               ----               ----               ----
---------------------------------------------------------------------------------
                                                ($ amounts in
                                                thousands)
---------------------------------------------------------------------------------
<S>                           <C>               <C>                   <C>
REVENUES RELATED TO
GLIADEL:
---------------------------------------------------------------------------------
    Transfer Payments....     $ 3,860           $  5,741              $ -
---------------------------------------------------------------------------------
    Royalties............       2,563              1,578                -
---------------------------------------------------------------------------------
    Licensing Revenues...         100            -                      -
---------------------------------------------------------------------------------
    Non-Recurring Rights
    & Milestone Payments.       -                -                      27,600
---------------------------------------------------------------------------------
Reimbursement of high
dose GLIADEL
expenses.................         194                320                   420
---------------------------------------------------------------------------------
REVENUES FROM AMGEN:
---------------------------------------------------------------------------------
    Non-Recurring Rights
    & Milestone Payments.       1,000             15,000                --
---------------------------------------------------------------------------------
    Research Funding.....       4,500              1,125                --
---------------------------------------------------------------------------------
</TABLE>

       Revenues from the sale and distribution of GLIADEL consist primarily of:

       -  transfer payments on our sales of GLIADEL directly to our marketing 
          and distribution partners, RPR (for the entire world except 
          Scandinavia and Japan) and Orion


                                        8
<PAGE>   10

          Corporation Pharma (for Scandinavia only), and

       -  royalties from RPR based on its sales of GLIADEL to others, primarily
          hospitals.

       We did not recognize transfer payments or royalty revenues related to the
sale and distribution of GLIADEL prior to 1997 because RPR did not commercially
launched GLIADEL in the United States until February 1997.

       GLIADEL Transfer Payments

       RPR and Orion Corporation Pharma made $3.9 million in transfer payments
to us in 1998. This amount was $5.7 million in 1997. Our sales of GLIADEL to RPR
in 1997 include relatively high levels of sales made in the first half of 1997
to support RPR's initial build-up of inventory to support commercial launch. The
reduction in our sales of GLIADEL to RPR in 1998 as compared to 1997 resulted
from a leveling-off of RPR's current inventory requirements for GLIADEL. This
reduction in sales caused a corresponding reduction in transfer payments to us.

       GLIADEL Royalties

       Net royalty revenue on RPR's sales of GLIADEL to third parties increased
to $2.6 million in 1998 as compared to $1.6 million in 1997. This represents a
62% increase in net royalty revenue in 1998 as compared to 1997. An increase in
the amount of RPR's sales to third parties caused this increase in royalty
revenue during 1998. We believe RPR's sales of GLIADEL to third parties
increased in 1998 as compared to 1997 because:

          -    awareness about GLIADEL has increased among neurosurgeons, the
               physician group that uses GLIADEL and makes treatment
               recommendations to brain cancer patients,

          -    neurosurgeons have gained familiarity and experience in using
               GLIADEL, and

          -    GLIADEL sales commenced in late February 1997, and thus were
               made only for approximately 10 months in 1997 as compared to 12
               months in 1998.

       Since launch, RPR's sales of GLIADEL to third parties have increased on
an annual basis. As we discuss in greater detail in the 1998 Form 10-K, a number
of factors subject our future sales of GLIADEL to significant risk and
uncertainty. We cannot be sure that GLIADEL sales will increase from, or even
remain at, current levels or will ever generate significant revenues for us in
the future.

       Cost of Sales

       Our cost of sales for the years ended December 31, 1998 and 1997 were
$2.0 million and


                                        9
<PAGE>   11

$2.6 million, respectively. Included in these amounts are approximately $159,000
and $281,000, respectively, representing:

       -  royalty payments made to the university from which we have licensed
          certain technology related to GLIADEL, and

       -  with respect to 1997 only, certain additional costs specifically
          related to the commercial product launch of GLIADEL in the United
          States.

       Because GLIADEL was commercially launched in the United States in
February 1997, we did not incur cost of sales prior to 1997.

       The reduction in the cost of sales for 1998 compared to 1997 primarily
reflects a reduction in the number of units of GLIADEL manufactured for sale to
RPR during 1998. In 1998 cost of product sales represented 53% of total product
sales revenues as compared to 45% in 1997. To the extent GLIADEL production
levels increase in the future, we expect the cost per unit to manufacture
GLIADEL may decrease as we achieve economies of scale. We cannot be sure,
however, that GLIADEL product sales will ever reach levels necessary for us to
realize significant cost savings related to manufacturing economies of scale.

       Research and Development Expenses

       Our research and development expenses increased to $37.7 million in 1998.
These amounts were $30.3 million in 1997 and $18.8 million in 1996. The
increases in research and development expenses of $7.4 million from 1997 to
1998, and $11.5 million from 1996 to 1997, were primarily attributable to costs
related to:

       -  increased personnel costs,

       -  outside services such as contracted research and consulting services,

       -  laboratory and other supplies related to our research and development
          programs, and

       -  royalties on dollar amounts from Amgen that we paid to a university
          which has licensed certain neuroimmunophilin ligand technology to us.

       At December 31, 1998, we employed 185 individuals on a full-time basis in
the areas of research, development and manufacturing. We employed 167
individuals and 113 individuals in these areas at December 31, 1997 and 1996,
respectively.

       During 1998, we continued to increase our research and product
development efforts, particularly with respect to our NAALADase inhibitor and
PARP inhibitor neuroprotectant programs, our FKBP neuroimmunophilin compound
program, and our polymer development


                                       10
<PAGE>   12

program. We also continued to fund development activities at a third-party
manufacturer of clinical supply of DOPASCAN(R) Injection as well as certain
costs not reimbursed to us by RPR for Phase I clinical trials for a high-dose
formulation of GLIADEL. In addition, we provided financial support for RPR's
Phase III clinical trial program in support of a first surgery indication for
GLIADEL.

       During 1997, we continued to increase our research and development
efforts, particularly with respect to our FKBP neuroimmunophilin compound
program, our NAALADase inhibitor program, our biodegradable polymer program, and
other research and development programs. We also continued to fund development
activities at the third-party manufacturer for DOPASCAN(R)Injection as well as
Phase I clinical trials for a high-dose formulation of GLIADEL.

       In 1998, 1997 and 1996 our research and development expenses included
charges relating to certain consulting agreements we entered into in April 1996.
These charges consisted of:

          -    non-cash compensation expense of $439,000, $985,000 and $1.2
               million, respectively, and

          -    cash compensation expense of $264,000, $244,000 and $135,000,
               respectively.

       We entered into these agreements to assist in the commercialization of
GLIADEL, including our efforts to expand the labeling for this product and to
generate product line extensions, and to enhance our ability to develop new
polymer technologies and products for the delivery of anti- cancer agents for
those diseases or conditions where local tumor recurrence is likely and
controlled release may be more effective than current therapies. We expect to
record up to an additional $750,000, in total, of non-cash compensation charges
in our research and development expenses quarterly through 2001 because of these
agreements. We also anticipate that our research and development expenses will
continue to increase in future periods.

       General and Administrative Expenses

       Our general and administrative expenses increased to $10.5 million in
1998. These amounts were $9.1 million in 1997 and $6.7 million in 1996. We
attribute the increases in general and administrative expenses of $1.4 million
from 1997 to 1998 and $2.4 million from 1996 to 1997 to higher legal services,
patent and professional contract services costs as well as higher personnel
costs. These costs increased, in part, because of an increase in the activities
necessary to support our research, product development and commercialization
efforts. At December 31, 1998, we employed 33 individuals on a full-time basis
in general and administrative areas. We employed 31 individuals and 25
individuals in these areas at December 31, 1997 and 1996, respectively.

       We included 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


                                       11
<PAGE>   13

our general and administrative expenses. These costs also increased from 1996
through 1998. Costs related to our operations as a publicly-traded company
contributed to the increase in general and administrative costs for 1997 as
compared to 1996. We anticipate that our general and administrative expenses
will continue to increase in future periods.

       Other Income and Expense

       Other income and expense consists primarily of interest income on our
monetary investments and interest expense on our debt and other financial
obligations. Our interest income increased to $8.9 million in 1998 compared to
$7.5 million in 1997 and $3.1 million in 1996. The increases over these periods
were primarily due to an increase in the average amount of money we invested
each year as compared to the prior year, and to a lesser extent, a higher
average yield on our investment portfolio. We were able to invest greater
amounts during 1997 and 1998 primarily because of:

          -    the public sale of our common stock in April 1997,

          -    Amgen's payment of a one-time signing fee of $15 million in
               August 1997, and

          -    the sale of our shares and warrants to Amgen for $20 million in
               October 1997.

       In 1998, 1997 and 1996, we incurred interest expense of $768,000,
$837,000 and $528,000, respectively. These expenses resulted from loans we have
with First Union National Bank. These loans have 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, interest expense decreased in 1998 as compared to 1997, resulting 
in a lower average principal balance during 1998.

LIQUIDITY AND CAPITAL RESOURCES

       Our cash, cash equivalents and investments were approximately $128.3
million at December 31, 1998. Of this amount, we pledged $16.5 million as
collateral for certain of our loans and other financial lease obligations. We
have recorded this amount under "Investments - restricted" on our Consolidated
Balance Sheets. We include these balance sheets as part of our Consolidated
Financial Statements on page 24.

       The increase of $4.4 million in the amount of restricted investments at
December 31, 1998 as compared to December 31,1997 resulted from an increase in
the amount of cash collateral related to our design and construction of a new
research and development facility. We describe the financing for this facility
below. A decrease in cash collateral on certain of our loans with First Union
National Bank partially offset this increase in cash collateral. In June 1998,
the State of Maryland increased its commitment to guarantee repayment of one of
our loans with First Union National Bank. As a result, First Union National Bank
reduced the amount of cash collateral related to that loan. In addition, our
cash collateral levels decreased somewhat in


                                       12
<PAGE>   14

1998 as a result of our continued repayment of our loans with First Union
National Bank. We describe our cash collateral requirements in Notes 7 and 8,
"Indebtedness - Restrictive Covenants" and "Leases", to the footnotes to our
Consolidated Financial Statements on pages 35 and 36.

       In 1998, we began a program to purchase up to 1,000,000 shares of our
common stock in the open market from time to time in our discretion. As of
December 31, 1998, we had repurchased 39,600 of our shares for an aggregate of
$475,000. In addition, in 1998, individuals holding options to purchase shares
of our stock exercised their rights to acquire an aggregate of
approximately 178,678 shares. In exchange for issuing these shares, these
individuals paid us approximately $1.0 million in cash.

       Our debt decreased to $10.9 million at December 31, 1998 compared to
$13.1 million at December 31, 1997. This decrease resulted primarily because of
our continued repayment of principal under our loans with First Union National
Bank.

       We incurred net capital expenditures of $5.2 million in 1998. These
amounts were $6.4 million in 1997 and $9.1 million in 1996. We used these
capital expenditures to fund the construction of our GLIADEL and biodegradable
polymer manufacturing facilities. They also funded improvements to our current
facility for research and development laboratories and administrative offices.
Additionally, we purchased capital equipment, including laboratory and
manufacturing equipment, and computer hardware and software.

       In March 1998, we entered into arrangements with others that permit us to
lease up to $10.8 million in equipment, including computer hardware and
software, furniture and fixtures. We leased $3.4 million in equipment under
these arrangements in 1998. Depending on the type of equipment covered and
certain other factors, the term of any lease we enter under these arrangements
can range from two to four years. At December 31, 1998, $7.4 million was
available under these arrangements to lease additional equipment. In addition,
at December 31, 1998, we were leasing an additional $3.5 million in equipment
under a prior lease arrangement.

       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 until the end of 1999. If we decide to expand our
research and development programs, our capital equipment requirements may
increase and thus we may require additional capital funding.

       In order to meet our anticipated future facilities needs, in 1997 we
initiated a project to design and construct a new research and development
facility. To accomplish this task, in February 1998 we entered into an operating
lease and other related agreements with a trust affiliated with First Union
National Bank for such a facility. This new facility is being constructed on a
lot adjacent to our current headquarters in Baltimore, Maryland and will be
approximately 73,000 square feet when complete. We anticipate that this new R&D
facility, along with our current facility, will support our research,
development, commercialization and administrative activities until at least the
end of 2000.


                                       13
<PAGE>   15

       Since construction began in the first quarter 1998, we have been acting
as construction agent for the First Union National Bank trust, responsible for
performing substantially all of the duties associated with the development of
the property. We anticipate that we will be able to move into the facility prior
to the end of the second quarter of 1999 and expect to consolidate all of our
operations into our current headquarters and the new facility in 1999. Our lease
to the new facility expires in February 2005. We anticipate that the lease
payments for this facility will not exceed $1.5 million annually.

       At the expiration of the lease term, we may purchase the property for an
amount equal to:

       -  all unamortized acquisition and construction costs,

          plus

       -  all accrued but unpaid interest and similar costs the First Union
          National Bank trust incurs as part of its acquisition and construction
          of the property.

       For convenience we refer to this amount as the "Termination Amount".

       In the alternative, we may sell the property on behalf of the First Union
National Bank trust. The trust then has to credit the proceeds from the sale
against our repayment of the Termination Amount. If the sale proceeds are not
enough to cover the entire Termination Amount, we then have to repay an amount
equal to the difference between 83% of the Termination Amount and the shortfall.
In addition, we may extend the lease term, but only if First Union National Bank
in its discretion agrees to such an extension. We describe these arrangements
with First Union National Bank in Note 8, "Leases", of the footnotes to our
Consolidated Financial Statements on page 36.

       Under our agreements with First Union National Bank related to this new
facility, we are required to hold in the aggregate unrestricted cash, cash
equivalents and investments of $40 million at all times during the term of the
lease. This requirement is in addition to the cash collateral requirements we
discuss above in this "Liquidity and Capital Resources" section.

       RPR has extended to us a $7.5 million line of credit to support expansion
of our GLIADEL and polymer manufacturing capacity. As of January 2, 1997, $4.0
million was available to us. The remaining $3.5 million becomes available no
earlier than 12 months nor later than 18 months following funding of the initial
portion. Any principal amounts we borrow are due five years from the date
borrowed. These amounts will carry an interest rate equal to the lowest rate RPR
pays from time to time on its most senior debt. We had not borrowed any amounts
under this credit facility as of December 31, 1998. We have not yet determined
whether to draw on the capital available from RPR to finance the expansion of
our polymer manufacturing facilities.

       During 1998, we entered into a series of interest rate swap transactions
with First Union


                                       14
<PAGE>   16

National Bank covering $20 million in financial obligations under our lease with
the First Union National Bank trust. In January 1999, we entered into additional
interest rate swap agreements with First Union covering $10 million in floating
rate debt. As a result, we fixed the interest rates on these financial lease
obligations and debt at approximately 6% in the aggregate. We describe these
interest rate swap transactions with First Union National Bank in Note 4,
"Interest Rate Swap Agreements", of the footnotes to our Consolidated Financial
Statements on page 33.

       We expect to need much more money to continue our research and product
development programs and preclinical and clinical testing and to manufacture and
possibly market our products. We will also need additional funds to meet our
future facilities needs. Our capital requirements depend on a number of factors,
including:

       -  the progress of our research and development programs,

       -  the progress of preclinical and clinical testing,

       -  the time and costs involved in obtaining regulatory approvals,

       -  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 for at least the next 24 months. We may, however, expend these
resources before that time for a number of reasons including, among others:

       -  changes in our research, product development and commercialization
          plans,

       -  other factors that increase our expenses, including potential
          acquisitions of other companies, assets or technologies,

       -  repurchases of our stock under our ongoing stock repurchase program,
          and


                                       15
<PAGE>   17

       -  unanticipated capital expenditures.

       We anticipate that we will fund future capital requirements through a
combination of (1) our existing working capital, (2) future revenues generated
under our agreements with RPR and Amgen, (3) potential public or private equity
or debt financing, (4) additional collaborative agreements with corporate
partners for research and product development and/or commercialization, and (5)
other potential sources.

       Our ability to raise capital in the future on acceptable terms depends on
conditions in the public and private markets for stock and our performance as
well as the overall performance of other companies in our industry. We cannot be
sure that any future financing arrangements that we may need will be available
to us on acceptable terms, or at all.

       SUBSEQUENT EVENT

       During the first quarter of 1999, through March 15, 1999, we repurchased
an additional 121,900 shares of our stock on the open market under our stock
repurchase program for an aggregate of $1.3 million.

       THE YEAR 2000 ISSUE

          Introduction

       The so-called "Year 2000 issue" results from computer programs that rely
on two-digit date codes instead of four-digit date codes to indicate the year.
For example, these types of computer systems, which include computer software
for desktop computers, software used in scientific equipment, and software
embedded in computer chips, indicate the year 1966 by the digits "66". As the
year 2000 approaches, these systems will have to process information involving
the year 2000 and later years. Systems that only use two-date digit codes may
confuse the year 2000 with the year 1900. As a result, these computer programs
may not be able to perform computations and decision-making functions correctly.
This inability could also cause computer systems or other equipment to
malfunction or shutdown completely.

          We have developed a multi-phase program to address this potential
problem. It consists of the following steps:

       -  assess those corporate systems and operations that the Year 2000 issue
          could adversely affect,

       -  fix or replace non-compliant systems and components, if any, and then

       -  test these systems and components to ensure proper functioning.

       We have focused our Year 2000 compliance assessment program on four
principal areas:


                                       16
<PAGE>   18

       -  our internal information technology system, which includes our 
          internal computer network and phone system;

       -  our internal, non-information technology facilities systems, which
          include software embedded in:

          -    environmental controls,

          -    security systems,

          -    fire protection systems,

          -    manufacturing hardware and monitoring controls, and

          -    public utility connections for gas, electric and telephone
               systems, which for convenience we refer to as "Facilities
               Systems",

       -  software we use with our laboratory and other equipment, which may
          either be located outside of the equipment or embedded within it, and

       -  Year 2000 compliance of those third parties with which we do important
          business. They include:

          -    our main vendors of goods and services, including raw materials,
               laboratory and other equipment,

          -    our financial institutions such as banks and investment managers,

          -    our major insurance companies, and

          -    our corporate partners such as RPR and Amgen.

       For convenience purposes, we refer to these institutions as our "Major
Third Parties".

          Assessment and Remediation of Internal Systems

       We continue to conduct an inventory of the internal information
technology systems, Facilities Systems, and equipment that we believe the Year
2000 issue could adversely affect. We are also assessing the likelihood of there
being a Year 2000 problem with these systems, which together make up our
internal company systems. We are currently taking the following actions to
address the Year 2000 issue:

       -  repair or replace, as necessary, those internal company systems that
          we find not to be Year 2000 compliant,

       -  re-test these internal company systems to verify Year 2000 compliance,
          and

       -  engage an outside consultant to review our approach to Year 2000
          compliance.

       We believe that we will complete these actions no later than June 30,
1999, but expect to continue to test our systems intermittently through the end
of 1999.


                                       17
<PAGE>   19

       Our information technology personnel have discussed whether our
enterprise-wide software systems are Year 2000 compliant with the vendors of
those systems. We have also tested those systems for Year 2000 compliance. Based
on these activities, we believe that such systems are Year 2000 compliant. We
will continue to stay in contact with these vendors in order to obtain any
additional revisions or upgrades the vendors issue to ensure that such
enterprise-wide software remains Year 2000 compliant.

          Inquiries of Third Parties

       We are also examining the Year 2000 readiness of our Major Third Parties.
We consider these institutions, either together as a group or in certain cases
on an individual basis, to pose the greatest Year 2000 risk to our business.
Their failure to become Year 2000 compliant could:

       -  limit our ability to obtain raw materials, equipment and supplies in 
          a timely manner,

       -  limit or prevent us from getting:

          -    our cash and other financial assets, and 

          -    timely and accurate information about our financial assets,

       -  significantly disrupt our financial transactions, and

       -  interfere with the efforts of our corporate partners to continue their
          research, development and/or commercialization activities with respect
          to GLIADEL and the FKBP neuroimmunophilin compound technology.

       We are in the process of contacting our Major Third Parties, which
consist of approximately 20 institutions, to ask that they give us information
about their Year 2000 compliance status, and we recently mailed Year 2000
compliance inquiry letters to them in this regard.

       Except for asking these third parties about their Year 2000 compliance
and assessing their responses, we cannot independently verify whether these
institutions are or will be Year 2000 compliant. In most cases we have limited
or no ability to influence directly the Year 2000 compliance activities of these
Major Third Parties. If any or all of these institutions fail to achieve
substantial Year 2000 compliance, this failure could have a material adverse
effect on our business, financial condition and results of operations.

       Furthermore, most of RPR's sales of GLIADEL are to hospitals. The failure
of these hospitals, or of any of RPR's other customers for GLIADEL, to pay for
their GLIADEL purchases because of a Year 2000 problem could materially and
adversely affect our business. In addition, sales of GLIADEL are dependent, in
part, on the availability of reimbursements from third-party healthcare payors,
such as government insurance plans like Medicare and Medicaid, and private
insurance plans. Again, the failure of these third-party healthcare payors to


                                       18
<PAGE>   20

reimburse claims because of Year 2000 problems could materially and adversely
affect our business.

          Remediation Costs

       As of December 31, 1998, the total costs for our Year 2000 compliance
program have not been significant. We historically have not tracked these costs
but estimate that our costs did not exceed $200,000 in 1998. We did not incur
any external costs during 1998 related to the Year 2000 issue. Based on
information currently available to us, we do not believe that the future costs
associated with developing a Year 2000 compliance plan and bringing our internal
computer systems into Year 2000 compliance will be material. We estimate that
the total costs will not exceed $400,000 in the aggregate. As of December 31,
1998, we estimate that we have incurred approximately 25% of the total costs we
anticipate that we will incur to address Year 2000 issues relating to our
internal company systems. Further, as of December 31, 1998, we had not
separately set aside funds specifically to address the Year 2000 issue, but
rather are using funds allocated to our yearly information technology budget.

       However, as we note above, with respect to most of our internal computer
systems, we are still conducting our Year 2000 compliance and remediation
activities. Depending on the actual outcome of our Year 2000 compliance testing
activities, the costs may be significantly greater than our current estimates.

       We also do know whether the costs associated with our efforts to assess
and address any Year 2000 compliance concerns regarding our Major Third Parties
will be material. As we note above, with most Major Third Parties, we have
little or no direct ability to influence the Year 2000 compliance efforts of
these institutions.

       Depending on the responses we get from suppliers, we will decide on a
case-by-case basis whether to seek out alternative suppliers. As of March 15,
1999, we had not switched vendors because of concerns over Year 2000 readiness.
If we determine to seek out an alternative supplier in the future because of
that supplier's inability to assure us of its Year 2000 compliance, we may not
be able to find an adequate alternative supplier. In certain cases, a vendor may
represent the sole supplier for a good or service.

          Disaster Recovery Plans and Certain Mitigating Factors

       In addition to our Year 2000 compliance activities, we are working with
an outside consulting firm to implement a comprehensive disaster recovery plan.
This plan will cover a variety of areas, including the Year 2000 issue. We
currently anticipate putting such a plan into place no later than June 30, 1999.
We do not anticipate that the external costs for putting such a plan in place
will exceed $125,000 in the aggregate.

       We currently make complete back-up copies of all of the data generated on
our computer systems on a weekly basis. We also track changes to such data on a
daily basis. We believe this


                                       19
<PAGE>   21

practice should limit the amount of computer system data that would be lost if
our computer systems were to fail as a result of a Year 2000 issue.

       Many of our Facilities Systems, including our environmental controls,
security systems, and fire protection systems, have manual override functions.
These will allow us to operate certain of our Facilities Systems even if their
software malfunctions. In addition, while we primarily hold our financial assets
at a single banking institution, we hold certain financial assets at, and have
established a $5 million line of credit with, another banking institution. This
arrangement should allow us to meet our operating expenses in the short term in
the event our primary banking relationship were to be interrupted because of a
Year 2000 issue. With respect to GLIADEL, we maintain what we believe to be
sufficient inventories of raw materials, package components and product to
prevent a product supply interruption if a vendor should have a Y2K problem.

       Due to the nature of our business, even if (1) we were to fail to
implement our Year 2000 compliance program successfully for our internal company
systems or (2) the Year 2000 compliance provisions of our disaster recovery plan
prove inadequate, we believe that these circumstances would not have a material
adverse effect on our business, financial condition and results of operations
over the long term. They would, however, disrupt our operations in the
short-term. However, the failure of one or more of our Major Third Parties,
particularly our banks, investment managers, corporate partners, and
suppliers of key raw materials to be Year 2000 compliant could have a material 
adverse effect on our business, financial condition and results of operations 
over the long term.

          Risks

       We have based our estimate as to the costs of our Year 2000 compliance
program and disaster recovery plan and our expected dates for implementing these
initiatives on the information currently available to us. We have based these
estimates on a number of assumptions regarding future events. These include the
continued availability of certain resources and other factors. We cannot be sure
that these costs will not exceed our expectations or that the Year 2000 issue
will not substantially and adversely affect our business, financial condition or
results of operations.

       Specific factors that might cause our estimates not to be correct
include:

       -  our ability to locate and correct all relevant computer codes,
          including software embedded in environmental controls and
          manufacturing and laboratory equipment,

       -  the ability of the Major Third Parties to identify and resolve their
          own Year 2000 issues,

       -  the availability and cost of personnel trained in the area of Year
          2000 compliance, and

       -  unforeseen or unanticipated problems that we are unable to address or
          can only remedy at


                                       20
<PAGE>   22

          great cost.

       Furthermore, our current cost estimates do not include costs that we may
incur as a result of the failure of Major Third Parties, including Amgen and
RPR, to become Year 2000 compliant on a timely basis. Moreover, if a Year 2000
issue causes (1) hospitals and other of RPR's customers for GLIADEL to fail to
pay for their GLIADEL purchases or (2) third-party healthcare payors to fail to
reimburse claims for GLIADEL, such failures could materially and adversely
affect our business.

       Finally, our ability to continue to manufacture GLIADEL, conduct our
research and product development programs, and function as a viable business
enterprise depends on the continued availability of various basic infrastructure
systems. These include electric power, telecommunications and transportation
systems. We cannot be sure that the Year 2000 issue will not disrupt these
infrastructure systems. If such disruptions were to occur in the Baltimore,
Maryland metropolitan region where our manufacturing facilities and research and
development laboratories are located and/or the East Coast of the United States,
these disruptions could very well have a material adverse effect on our
business, financial condition, results of operations, or business prospects.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.


                                       21
<PAGE>   23
                         GUILFORD PHARMACEUTICALS INC.
                                        
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                        Page
                                                                        ----
Independent Auditors' Report ............................................ 23
Consolidated Balance Sheets ............................................. 24
Consolidated Statements of Operations ................................... 25
Consolidated Statements of Changes in Stockholders' Equity .............. 26
Consolidated Statements of Cash Flows ................................... 27
Notes to Consolidated Financial Statements .............................. 28




                                       22
<PAGE>   24

                          INDEPENDENT AUDITORS' REPORT

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

       We have audited the accompanying consolidated balance sheets of Guilford
Pharmaceuticals Inc. and subsidiaries as of December 31, 1998 and 1997, 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, 1998. In connection with our audits of the consolidated financial
statements, we also have audited the accompanying financial statement schedule.
These consolidated financial statements and financial statement schedule are 
the responsibility of the Company's management. Our responsibility is to 
express an opinion on these consolidated financial statements and financial 
statement schedule based on our audits.

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

       In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Guilford
Pharmaceuticals Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

/s/ KPMG LLP

Philadelphia, Pennsylvania
February 12, 1999


                                       23
<PAGE>   25
                         GUILFORD PHARMACEUTICALS INC.
                                AND SUBSIDIARIES
                                        
                                        
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)



<TABLE>
<CAPTION>
                                                                  DECEMBER 31, 1998     DECEMBER 31, 1997
                                                                ---------------------  -------------------
<S>                                                              <C>                    <C>
ASSETS
------
Current assets:
  Cash and cash equivalents                                      $           8,480      $         24,980
  Investments                                                              103,281               123,120
  Accounts receivable                                                        1,241                   606
  Inventories                                                                1,291                 1,342
  Other current assets                                                         709                   494
                                                                ---------------------  -------------------
     Total current assets                                                  115,002               150,542
Investments - restricted                                                    16,500                12,119
Property and equipment, net                                                 18,790                17,153
Other assets                                                                   736                   267
                                                                ---------------------  -------------------
                                                                 $         151,028      $        180,081
                                                                =====================  ===================

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
  Accounts payable                                               $           3,265      $          2,743
  Current portion of long-term debt                                          2,159                 2,159
  Accrued payroll related costs                                              2,279                 2,000
  Accrued contracted services                                                2,095                 1,527
  Accrued expenses and other current liabilities                               960                 1,307
  Deferred income                                                            1,125                 1,125
                                                                ---------------------  -------------------
     Total current liabilities                                              11,883                10,861

Long-term debt, net of current portion                                       8,766                10,926
                                                                ---------------------  -------------------

     Total liabilities                                                      20,649                21,787
                                                                ---------------------  -------------------

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
    19,594,316 and 19,387,946 issued 
    at December 31, 1998
    and December 31, 1997, respectively                                        196                   194
  Additional paid-in capital                                               187,139               185,205
  Accumulated deficit                                                      (56,009)              (26,311)
  Accumulated other comprehensive income                                       876                   426
  Note receivable from officer                                                 (60)                  (60)
  Treasury stock, at cost: 77,224 and 35,547 shares in
    1998 and 1997, respectively                                             (1,399)                 (878)
  Deferred compensation                                                       (364)                 (282)
                                                                ---------------------  -------------------
     Total stockholders' equity                                            130,379               158,294
                                                                ---------------------  -------------------
                                                                 $         151,028      $        180,081
                                                                =====================  ===================

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                       24
<PAGE>   26
                         GUILFORD PHARMACEUTICALS INC.
                                AND SUBSIDIARIES



                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)



<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                   1998               1997                   1996
                                                             -----------------------------------------------------------
<S>                                                           <C>                 <C>                   <C>
Revenues:
  Contract revenues                                            $       1,000      $      15,000         $       27,600
  Net product sales                                                    3,860              5,741                    -
  License fees and royalties                                           2,713              1,628                    -
  Revenues under collaborative agreements                              4,910              1,459                    420
                                                             -----------------------------------------------------------
    Total revenues                                                    12,483             23,828                 28,020

Costs and Expenses:
  Cost of sales                                                        2,036              2,585                    -
  Research and development                                            37,722             30,293                 18,761
  General and administrative                                          10,546              9,076                  6,736
                                                             -----------------------------------------------------------
    Total costs and expenses                                          50,304             41,954                 25,497
                                                             -----------------------------------------------------------
Operating income (loss)                                              (37,821)           (18,126)                 2,523
Other income (expense):
  Interest income                                                      8,855              7,477                  3,070
  Interest expense                                                      (768)              (837)                  (528)
  Other income                                                            36                 49                      8
                                                             -----------------------------------------------------------
    Net income (loss)                                          $     (29,698)     $     (11,437)        $        5,073
                                                             ===========================================================


Basic earnings (loss) per common share                         $       (1.52)     $       (0.65)        $         0.39
                                                             ===========================================================

Average common shares outstanding                                     19,479             17,570                 13,001
                                                             ===========================================================

Diluted earnings (loss) per common share                       $       (1.52)     $       (0.65)        $         0.35
                                                             ===========================================================

Average common and dilutive equivalent
  shares outstanding                                                  19,479             17,570                 14,634
                                                             ===========================================================
</TABLE>



SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      25

<PAGE>   27
                          GUILFORD PHARMACEUTICALS INC.
                                 AND SUBSIDIARIES



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




<TABLE>
<CAPTION>
                                                                                    COMMON STOCK
                                                                                   --------------           ADDITIONAL
                                                                                NUMBER                       PAID-IN
                                                                               OF SHARES      AMOUNT         CAPITAL
                                                                             -------------  -----------   --------------
<S>                                                                           <C>           <C>           <C>
BALANCE, JANUARY 1, 1996                                                       6,793,065     $     68      $     38,121
Comprehensive income
  Net income for the year
  Other comprehensive income
    Unrealized gain on available-for-sale securities
Total comprehensive income
Issuance of common stock in follow-on public offering at $20.00 *
  per share, net of offering costs                                             2,300,000           23            42,880
Other issuances of common stock                                                  226,595            2             7,679
Three-for-two stock split                                                      4,659,830           47               (47)
Equity proceeds from Gell Pharmaceuticals relating to the put option                                              1,076
Amortization of stock option compensation                                                                         1,171
Amortization of deferred compensation
Reduction in notes receivable on common stock

BALANCE, DECEMBER 31, 1996                                                    13,979,490     $    140      $     90,880
Comprehensive loss
  Net loss for the year
  Other comprehensive income
    Unrealized gain on available-for-sale securities
Total comprehensive loss
Issuance of common stock in follow-on public offering
   at $20.00 per share, net of offering costs                                  3,737,500           37            70,429
Other issuances of common stock                                                1,670,956           17            22,911
Purchase of 35,547 shares of common stock
Amortization of stock option compensation                                                                           985
Amortization of deferred compensation
Reduction in notes receivable on common stock

BALANCE, DECEMBER 31, 1997                                                    19,387,946     $    194      $    185,205
Comprehensive loss
  Net loss for the year
  Other comprehensive income
    Unrealized gain on available-for-sale securities
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
                                                                             =============  ===========   ==============
</TABLE>

<TABLE>
<CAPTION>
                                                                                                 ACCUMULATED         NOTE
                                                                                                    OTHER         RECEIVABLE
                                                                              ACCUMULATED       COMPREHENSIVE        FROM
                                                                                DEFICIT             INCOME          OFFICER
                                                                            ----------------   ---------------   -----------
<S>                                                                         <C>                 <C>              <C>
BALANCE, JANUARY 1, 1996                                                     $     (19,947)      $      -         $    (139)
Comprehensive income
  Net income for the year                                                            5,073
  Other comprehensive income
    Unrealized gain on available-for-sale securities                                                     62
Total comprehensive income
Issuance of common stock in follow-on public offering at $20.00 *
  per share, net of offering costs
Other issuances of common stock
Three-for-two stock split
Equity proceeds from Gell Pharmaceuticals relating to the put option
Amortization of stock option compensation
Amortization of deferred compensation
Reduction in notes receivable on common stock                                                                            10

BALANCE, DECEMBER 31, 1996                                                   $     (14,874)      $       62       $    (129)
Comprehensive loss
  Net loss for the year                                                            (11,437)
  Other comprehensive income
    Unrealized gain on available-for-sale securities                                                    364
Total comprehensive loss
Issuance of common stock in follow-on public offering
   at $20.00 per share, net of offering costs
Other issuances of common stock
Purchase of 35,547 shares of common stock
Amortization of stock option compensation
Amortization of deferred compensation
Reduction in notes receivable on common stock                                                                            69

BALANCE, DECEMBER 31, 1997                                                   $     (26,311)      $      426       $     (60)
Comprehensive loss
  Net loss for the year                                                            (29,698)
  Other comprehensive income
    Unrealized gain on available-for-sale securities                                                    450
Total comprehensive loss
Issuances of common stock
Purchase of 41,677 shares of common stock
Stock option compensation
Amortization of deferred compensation
                                                                            ----------------   ---------------   -----------
BALANCE, DECEMBER 31, 1998                                                   $     (56,009)      $      876       $     (60)
                                                                            ================   ===============   ===========
</TABLE>





<TABLE>
<CAPTION>

                                                                                                                TOTAL
                                                                          TREASURY          DEFERRED         STOCKHOLDERS'
                                                                       STOCK, AT COST     COMPENSATION          EQUITY
                                                                      ----------------   --------------     ---------------
<S>                                                                    <C>                <C>               <C>
BALANCE, JANUARY 1, 1996                                                $       -          $     (330)       $      17,773
Comprehensive income
  Net income for the year                                                                                            5,073
  Other comprehensive income
    Unrealized gain on available-for-sale securities                                                                    62
                                                                                                            ---------------
Total comprehensive income                                                                                   $       5,135
                                                                                                            ---------------
Issuance of common stock in follow-on public offering at $20.00 *
  per share, net of offering costs                                                                                  42,903
Other issuances of common stock                                                                                      7,681
Three-for-two stock split                                                                                              -
Equity proceeds from Gell Pharmaceuticals relating to the put option                                                 1,076
Amortization of stock option compensation                                                                            1,171
Amortization of deferred compensation                                                             128                  128
Reduction in notes receivable on common stock                                                                           10

BALANCE, DECEMBER 31, 1996                                              $       -          $     (202)       $      75,877
Comprehensive loss
  Net loss for the year                                                                                            (11,437)
  Other comprehensive income
    Unrealized gain on available-for-sale securities                                                                   364
                                                                                                            ---------------
Total comprehensive loss                                                                                     $     (11,073)
                                                                                                            ---------------
Issuance of common stock in follow-on public offering
   at $20.00 per share, net of offering costs                                                                       70,466
Other issuances of common stock                                                                  (331)              22,597
Purchase of 35,547 shares of common stock                                      (878)                                  (878)
Amortization of stock option compensation                                                                              985
Amortization of deferred compensation                                                             251                  251
Reduction in notes receivable on common stock                                                                           69

BALANCE, DECEMBER 31, 1997                                              $      (878)       $     (282)       $     158,294
Comprehensive loss
  Net loss for the year                                                                                            (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                                              $    (1,399)       $     (364)       $     130,379
                                                                      ================   ==============     ===============
</TABLE>

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

* Per share prices are pre-stock split.

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      26
<PAGE>   28
                         GUILFORD PHARMACEUTICALS INC.
                               AND SUBSIDIARIES


                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                         1998                    1997                    1996
                                                                         ----                    ----                    ----
<S>                                                              <C>                        <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)                                                $      (29,698)            $   (11,437)            $      5,073
 Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
    Depreciation and amortization                                          3,575                   2,735                    1,102
    Noncash compensation expense                                             558                   1,236                    1,309
    Gain on sale of assets                                                    26                       -                        -
  Changes in assets and liabilities:
    Accounts receivable, other current assets, and other assets           (1,339)                   (135)                     (94)
    Inventory                                                                 51                     191                   (1,533)
    Accounts payable and other current liabilities                           908                   3,306                    2,110
                                                                 -----------------         ---------------          ---------------
     Net cash provided by (used in) operating activities                 (25,919)                 (4,104)                   7,967
                                                                 -----------------         ---------------          ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment, net                                (5,104)                 (6,433)                  (9,101)
  Sales and maturities of available-for-sale securities                  100,130                 100,457                   47,010
  Purchases of available-for-sale securities                             (84,222)               (174,453)                 (92,633)
                                                                 -----------------         ---------------          ---------------
      Net cash provided by (used in) investing activities                 10,804                 (80,429)                 (54,724)
                                                                 -----------------         ---------------          ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuances of common stock                              1,296                  93,063                   50,584
  Purchase of treasury stock                                                (521)                   (878)                       -
  Proceeds from bond and term loan issuances                                   -                   1,843                    7,867
  Equity proceeds from Gell Pharmaceuticals Inc. relating to
    the put option                                                             -                       -                    1,076
  Payment of notes receivable on common stock                                  -                      69                      -
  Principal payments on bond and term loan payable                        (2,160)                 (1,144)                    (470)
                                                                 -----------------         ---------------          ---------------
      Net cash provided by (used in) financing activities                 (1,385)                 92,953                   59,057
                                                                 -----------------         ---------------          ---------------
Net increase (decrease) in cash and cash equivalents                     (16,500)                  8,420                   12,300
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR                        24,980                  16,560                    4,260
                                                                 -----------------         ---------------          ---------------
CASH AND CASH EQUIVALENTS AT THE END OF YEAR                      $        8,480             $    24,980             $     16,560
                                                                 =================         ===============          ===============

Supplemental disclosures of cash flow information:
  Net interest paid                                               $          784             $       828             $        470
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       27

<PAGE>   29

                          GUILFORD PHARMACEUTICALS INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

(1) ORGANIZATION AND BUSINESS ACTIVITIES

     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; and (ii) therapeutic and diagnostic products for neurological
diseases and conditions.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

     The consolidated financial statements include the accounts of Guilford
Pharmaceuticals Inc. and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

     Highly liquid investments with an original maturity of three months or
less are classified as cash equivalents.

Investments

     The Company classifies investments at the time of purchase as either
available-for-sale or held-to-maturity. Investments in securities that are
classified as available-for-sale are carried at their fair values. Changes in
the fair values of available-for-sale securities are recognized as a separate
component of stockholders' equity as "Accumulated Other Comprehensive Income".
Realized gains and losses from the sale of available-for-sale securities are
determined on a specific identification basis. Held-to-maturity securities are
carried at cost adjusted for amortized premium or discount.

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

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.



                                       28

<PAGE>   30

Property and Equipment

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

Revenue Recognition

     Product sales are recognized at the time the product has received a
certificate of analysis and has been shipped. Sales are reported net of
estimated discounts, rebates, chargebacks and product returns.

     Royalty revenue is recognized at such time as the Company's sales,
marketing and distribution partner sells the product (see note 14).
                                        
     Collaborative research revenue is recognized, up to the contractual
limits, when the Company meets its performance obligations under the respective
agreements. Contract and non-refundable licensing revenue is recognized when
milestones are met and the Company's significant performance obligations have
been satisfied in accordance with the terms of the respective agreements.
Payments received that relate to future performance are deferred and recognized
as revenue at the time such future performance has been accomplished.

Research and Development, Patent and Royalty Costs

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

Accounting for Income Taxes

     Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits, which are
not expected to be realized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period that such tax rate changes
are enacted. 

Stock-Based Compensation

     On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("FAS") No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"), which permits companies to continue to apply the provisions of
Accounting Principles Board APB No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations, in accounting for its
employee share option plans. The Company continues to apply APB No. 25. Under
the Company's employee share option plans, share options are granted at an
exercise price that equals the current fair market value at the date of grant.
Under APB 25, no compensation


                                       29

<PAGE>   31

expense is recorded for employee share options issued at current fair market
value. Under FAS 123, the Company is required to provide pro forma net earnings
(loss) and pro forma earnings (loss) per share footnote disclosures for
employee stock option grants as if the fair-value based method defined in FAS
123 had been applied. Stock-based awards issued to non-employees are accounted
for under the fair-value based method defined in FAS 123.

Comprehensive Income

      On January 1, 1998, the Company adopted FAS No. 130 "Reporting
Comprehensive Income" ("FAS 130"). Under FAS 130, the Company is required to
display comprehensive income (loss) and its components as part of the Company's
full set of financial statements. Comprehensive income (loss) is comprised of
net income (loss) and net unrealized gains (losses) on securities and is
presented in the consolidated statements of changes in stockholders' equity.
The Statement requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial position or
results of operations. Prior year financial statements have been reclassified
to conform with the requirements of FAS 130.    

Earnings (Loss) per Share

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

Impairment of Long-Lived Assets

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

Interest Rate Swap Agreements

     As a hedge against fluctuations in interest rates, the Company has entered
into interest rate swap agreements to exchange a portion of its variable rate
interest payment 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.

Fair Value of Financial Instruments

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

Concentration of Credit Risk

     The Company invests excess cash in accordance with a policy objective that
seeks to preserve both liquidity



                                       30

<PAGE>   32

and safety of principal. The policy limits investments to certain instruments
issued by institutions with strong investment grade credit ratings at the time
of purchase and places restrictions on their terms and concentrations by type
and issuer.

Uncertainties

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

Use of Estimates

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

Significant Customer and Product

      The Company sells only one product, GLIADEL, a novel treatment for
recurrent malignant gliablastoma multiforme, the most fatal form of brain
cancer. The Company markets, sells and distributes its product through one of
its partners Rhone-Poulenc Rorer Pharmaceuticals Inc ("RPR") (see note 14).
Substantially all sales were with RPR for the years ended December 31, 1998 and
1997. GLIADEL was launched in February of 1997; accordingly, there were no
sales in 1996. The Company expects that future sales will also be derived
largely from the same customer and will be relying upon that customer's ability
to obtain regulatory clearance where necessary and then market, sell and
distribute the product.

Reclassifications

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

New Accounting Standard

        In June 1998, the Financial Accounting Standards Board issued FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("FAS
133"), effective beginning in the first quarter of 2000. FAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative


                                       31

<PAGE>   33

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 and measure those instruments at 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 under FAS 133. Based on the requirements of FAS 133, there
may be changes to the balance sheet and reported assets and liabilities. The
Company is currently evaluating the impact of FAS 133 on its consolidated
financial position and results of operations.

(3) INVESTMENTS

     Investments in marketable securities as of December 31, 1998 and 1997 are
as follows:

<TABLE>
<CAPTION>
                                                                           Gross                     Gross
                                                                         Unrealized                Unrealized
                                                                          Holding                   Holding             Fair
                           1998                      Cost                  Gains                     Losses            Value
                           ----                      ----                  -----                     ------            -----
                                                                                 (in thousands)
<S>                                               <C>                     <C>                   <C>               <C>
         Available-for-sale:
            U.S. Treasury Securities                $ 89,399                 $689                  $      -         $ 90,088
            Corporate Debt Securities                 15,900                   36                         -           15,936
            Other Debt Securities                     11,073                  151                         -           11,224
                                                    --------                  ---                 ---------         --------
                                                    $116,372                 $876                  $      -         $117,248
                                                    --------                 ----                 ---------         --------

         Held-to-maturity:
            U.S. Treasury Securities                  $2,023                 $ 16                  $      -          $ 2,039
            Corporate Debt Securities                    510                    -                       (1)              509
                                                         ---                -----                       ---         --------
                                                   $   2,533                 $ 16                 $     (1)          $ 2,548
                                                   ---------                 ----                ----------         --------
                                                    $118,905                 $892                 $     (1)         $119,796
                                                    ========                 ====                ==========         ========



                           1997
                           ----
         Available-for-sale:
            U.S. Treasury Securities                $ 97,499                $ 458                   $  (89)         $ 97,868
            Corporate Debt Securities                  6,990                   13                       (5)            6,998
            Other Debt Securities                      6,292                   49                         -            6,341
                                                    --------               ------                   -------        ---------
                                                    $110,781                $ 520                   $  (94)        $ 111,207
                                                    --------                -----                   -------        ---------
         Held-to-maturity:
            U.S. Treasury Securities                $ 20,162                 $ 24                  $    (4)         $ 20,182
            Corporate Debt Securities                  3,870                    7                       (4)            3,873
                                                    --------               ------               -----------        ---------
                                                    $ 24,032                 $ 31                  $    (8)         $ 24,055
                                                    --------                 ----                  --------        ---------
                                                   $ 134,813                $ 551                   $ (102)         $135,262
                                                   =========                =====                   =======        =========

</TABLE>

     At December 31, 1998 and 1997, investments of $16.5 million and $12.1
million, respectively, are classified as "Investments - restricted" in the
accompanying consolidated balance sheets (see notes 7 and 8).
                           

     Maturities of debt securities classified as available-for-sale and
held-to-maturity were as follows at December 31, 1998.


                                       32

<PAGE>   34
<TABLE>
<CAPTION>
                                              December 31, 1998                      
                                              -----------------                                           
                                            Amortized          Fair                     
                                               Cost           Value                                                
                                               ----           -----                        
                                               (in thousands)                                               

        <S>                                 <C>             <C>                   
         Available-for-sale
            Due in 1 year or less             $23,869         $23,962                                              
            Due in 1- 5 years                  86,555          87,320                  
            Greater than 5 years                5,948           5,966                  
                                             --------        --------                  
                                             $116,372        $117,248                  
                                             --------        --------                  
                                                                                       
         Held-to-maturity                                                              
            Due in 1 year or less            $  2,023       $   2,033                 
            Due in 1-5 years                      510             515                  
                                             --------       ---------                  
                                             $  2,533       $   2,548                  
                                             --------       ---------                 
                                             $118,905        $119,796                  
                                             ========       =========                 

</TABLE>


(4) INTEREST RATE SWAP AGREEMENTS

     During 1998, the Company entered into interest rate swap agreements to
reduce the impact of changes in interest rates on certain financial lease
obligations (see note 8). The interest rate swap agreements are with First
Union National Bank ("First Union"), having a total notional principal amount
of $20 million at December 31, 1998. In January 1999, the Company entered into
additional interest rate swap agreements having a total notional principal
amount of $10 million on its long-term debt (see note 7). As a result of these
interest rate swap agreements, the Company has effectively fixed the interest
rates on its long-term debt and certain financial lease obligations to an
annual rate of approximately 6%. The interest rate swap agreements have the
same maturity as its long-term debt and certain financial lease obligations.
First Union has the right to terminate these agreements on the fifth year
anniversary date of each such agreement. The fair value of the Company's
interest rate swap agreements approximate carrying value at December 31, 1998.
The Company is not directly exposed to credit risk. In the event of
non-performance by First Union, which is unlikely, the Company could be exposed
to market risk related to interest rates. 

(5) INVENTORIES

     Inventories consist of the following:

<TABLE>
<CAPTION>

                                                         December 31,
                                                   ----------------------
                                                     1998          1997
                                                   --------      --------

                                                          (in thousands)

                   <S>                             <C>           <C>
                     Raw materials                   $   283       $   386
                     Work in process                     371           497
                     Finished goods                      637           459
                                                     -------       -------
                                                     $ 1,291       $ 1,342
                                                     =======       =======
</TABLE>


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

(6) PROPERTY AND EQUIPMENT

    Property and equipment consist of the following:



                                       33

<PAGE>   35
<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                              -----------------------
                                                                               1998             1997
                                                                              ------           ------
                                                                                    (in thousands)

           <S>                                                              <C>                 <C>
            Laboratory equipment                                             $ 4,055            $  4,779
            Manufacturing equipment                                            2,544               2,299
            Computer and office equipment                                      4,106               3,825
            Leasehold improvements                                            15,838               7,773
            Construction in process                                               -                2,925
                                                                             -------            --------
                                                                             $26,543            $ 21,601
            Less accumulated depreciation and amortization                    (7,753)             (4,448)
                                                                             -------            --------
                                                                             $18,790            $ 17,153
                                                                             =======            ========
</TABLE>

                                       34

<PAGE>   36



(7)   INDEBTEDNESS

      Long-term debt at December 31, 1998 and 1997 consists of the following:

<TABLE>
<CAPTION>
                                                                                                December 31,
                                                                                         -----------------------
                                                                                           1998           1997
                                                                                         --------       --------
                                                                                              (in thousands)

<S>                                                                                     <C>           <C>
         Borrowings under bond financing arrangement, payable in monthly
         installments of $78,431, plus interest at LIBOR + .75% (6.287% at
         December 31,1998), final payment due December 2004                             $ 5,647          $ 6,588

         Borrowings under term loan, payable in monthly installments of
         $101,515, plus interest at LIBOR + .625% (6.172% at December 31, 1998),
         final payment due April 2003                                                     5,278            6,497
                                                                                        -------          -------

         Total long-term debt                                                           $10,925          $13,085

         Less current potion of long-term debt                                           (2,159)          (2,159)
                                                                                        -------          -------

         Long-term debt, net of current portion                                         $ 8,766          $10,926
                                                                                        =======          =======

</TABLE>
          See note 4 - Interest Rate Swap Agreements

Bond Financing Arrangement

    In 1994, the Company entered into a $8 million bond financing arrangement
with a commercial bank. The bond was issued by the Maryland Economic
Development Corporation and 50% of the outstanding borrowings were guaranteed
by the Maryland Industrial Development Financing Authority ("MIDFA"). Effective
June 1998, MIDFA increased its guarantee from 50% to 81.73% of the outstanding
borrowings.

Term Loan Agreement

    In 1996, the Company entered into a term loan agreement, as amended, with a
commercial bank for up to $6.7 million. During 1997, the Company borrowed $1.8
million, the remaining available principal amount under the term loan
agreement.

     The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1998 are approximately: 1999, $2.2 million; 2000, 
$2.2 million; 2001, $2.2 million; 2002, $2.2 million; and 2003, $1.3 million.

Restrictive Covenants

     The aforementioned debt agreements contain certain restrictions which
require the Company to meet certain financial covenants. Under the bond
financing arrangement, the Company maintained $0.9 million at December 31, 1998
as cash collateral (approximately 18.27% of the outstanding principal balance).
In accordance with the term loan agreement, the Company maintained $5.3 million
at December 31, 1998 (equal to 100% of the outstanding principal balance). The
total cash 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.


                                       35


<PAGE>   37




Revolving Line of Credit

    In 1998, the Company entered into a revolving line of credit agreement with
a commercial bank for $5 million. Borrowings under the line of credit, if any,
require interest at LIBOR plus .55% and are payable on demand. Under the terms
of the agreement, the Company is required to maintain cash, cash equivalents
and investments in the aggregate equal to $40 million. There were no amounts
outstanding under the line of credit at December 31, 1998.

(8) 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 new research and development facility. The facility, which is expected to
be approximately 73,000 square feet, will be adjacent to the Company's
corporate headquarters in Baltimore, Maryland. Construction costs are estimated
not to exceed $20 million in the aggregate. The lease term is for a maximum of
84 months, which includes a construction period of up to 24 months. The Company
will not make rental payments during the construction period and will have the
option to purchase the facility at the end of the lease term in February 2005.
The Company anticipates that the annual lease payments will not exceed $1.5
million. In the event the Company chooses not to exercise its purchase option,
the Company is obligated to arrange for the sale of the facility and is
required to pay the lessor any difference between the net sales proceeds and
the lessor's net investment in the facility. If the sales proceeds are less
than the lessor's net investment in the Facility, the Company has to pay an
amount equal to the difference between 83% of the lessor's net investment in
the facility and the shortfall. During the construction period, the Company
must maintain cash collateral equal to 100% of the cost of construction not to
exceed $20 million. Upon completion of construction, the Company may reduce the
amount of aggregate cash collateral by approximately $5.1 million. As of
December 31, 1998, the Company had established cash collateral of approximately
$8.1 million related to this transaction. The cash collateral is included in
the accompanying consolidated balance sheets as "Investments-restricted". In
addition 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.         

The Company has several non-cancelable operating leases for equipment and
buildings. In March 1998, the Company entered into certain Master Lease
Agreements to provide up to $10.8 million for computer and equipment financing.
The Company's ability to draw on these Master Lease Agreements expires on
December 31, 1999. The term of each operating lease may range from 24 to 48
months based upon the type of equipment being financed. As of December 31,
1998, the Company had leased approximately $4.1 million in computer and other
equipment under these agreements.



                                       36

<PAGE>   38


    The Company's future minimum lease payments under these non-cancelable
operating leases for years subsequent to December 31, 1998 are as follows:

<TABLE>
<CAPTION>
                                                         Amount
                           Year                      (in thousands)
                        ----------                   --------------
                         <S>                         <C>
                           1999                        $ 3,943
                           2000                          3,658
                           2001                          2,870
                           2002                          2,221
                           2003 and thereafter           6,240
                                                        -------
                                                        $18,932
                                                        -------
</TABLE>


    Rent expense for operating leases was approximately $2.7 million, $ 1.5
million and $0.7 million in 1998, 1997 and 1996, respectively.

(9)   INCOME TAXES

     As of December 31, 1998, the Company had net operating loss ("NOL")
carryforwards available for federal income tax purposes of approximately $51
million, which expire at various dates between 2010 and 2018. 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, 1998, the
Company had tax credit carryforwards of approximately $1 million expiring
between 2010 and 2015.

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

<TABLE>
<CAPTION>

                                                                                 1998               1997             1996
                                                                              ---------          ----------       -------
                                                                                               (in thousands)

<S>                                                                         <C>                <C>            <C>
         Computed "expected" tax expense (benefit) at statutory rate          $(10,097)          $(3,889)          $1,725
         State income tax, net of federal expense                               (1,965)             (515)             230
         Research collaboration revenue                                              -                 -              557
         Compensatory stock awards                                                   -              (373)               -
         Change in valuation allowance                                          12,608             4,734           (2,552)
         Other, net                                                               (546)               43               40
                                                                              ---------          -------       ----------
                                                                              $      -           $     -       $       -
                                                                              =========          =======       ==========

</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 which are not likely to be realized in the future,
resulting in net deferred tax assets of approximately $138,000 at December 31,
1998 and 1997. The change in the valuation allowance was an increase of
approximately $12.6 million in 1998 and an increase of approximately $6.6
million in 1997.

     Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1998 and 1997 are shown below.


                                       37



<PAGE>   39
<TABLE>
<CAPTION>
                                                                             December 31,
                                                                         -----------------------
                                                                          1998             1997
                                                                         ------           ------
                                                                             (in thousands)

<S>                                                                     <C>            <C>
         Deferred tax assets:                                                  
           Net operating loss carryforwards                                $20,771         $ 8,869
           Research and experimentation credits                                960           1,710
           Compensatory stock grants                                         1,599           1,228
           Alternative minimum tax credit carryforwards                        138             138
           Accrued expenses                                                  1,502             403
           Contribution carryover and capitalized start-up costs                88              51
                                                                         ---------     -----------
                                                                           $25,058         $12,399
             Deferred tax liabilities:
           Prepaid expenses and depreciation                                  (266)           (215)
                                                                           -------          ------ 
           Net deferred tax assets                                          24,792          12,184
           Valuation allowance                                             (24,654)        (12,046)
                                                                           -------         ------- 
           Net deferred tax assets reported                               $    138        $    138
                                                                          ========        ========
</TABLE>

(10) CAPITAL TRANSACTIONS

         In September 1998, the Company announced that a Committee of the
Company's Board of Directors had authorized a common stock repurchase program of
up to 1,000,000 shares of the Company's common stock in the aggregate. The
Company plans to purchase its common stock in the open market or in block
transactions from time to time as it deems appropriate. As of December 31, 1998,
the Company has repurchased 39,600 shares of its common stock under this
repurchase program at an aggregate cost of approximately $475,000.
                   
     On October 1, 1997, the Company sold 640,095 shares of common stock to
Amgen Inc. ("Amgen") for $15 million (see note 14). In addition, the Company
issued for $5 million a five-year warrant to purchase up to 700,000 shares of
the Company's common stock at an exercise price of $35.15 per share.

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

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

     On October 15, 1996, the Board of Directors declared a three-for-two stock
split. Equity transactions (including number of shares) prior to that date have
been adjusted to reflect the stock split. In June 1996, the Company entered
into a stock purchase agreement with Rhone-Poulenc Rorer Pharmaceuticals Inc.
and its parent corporation (collectively "RPR") (see note 14) whereby, RPR
purchased 281,531 shares of the Company's common stock for $7.5 million. In
March 1996, the Company completed a follow-on public equity offering of
approximately 3.5 million shares of its common stock, providing net proceeds of
approximately $43 million to the Company.

     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 are no shares of this preferred stock outstanding at December 31, 
1998.



                                       38
<PAGE>   40
(11) STOCKHOLDER RIGHTS PLAN

     In September 1995, the Board of Directors adopted a Stockholder Rights
Plan in which preferred stock purchase rights ("Rights") were granted at the
rate of one Right for each share of common stock. All Rights expire on October
10, 2005. At December 31, 1998, the Rights were neither exercisable nor traded
separately from the Company's common stock, and become exercisable only if a
person or group becomes the beneficial owner of 20% or more of the Company's
common stock or announces a tender or exchange offer which would result in its
ownership of 20% or more of the Company's common stock. Each holder of a Right,
other than the acquiring person, would be entitled to purchase $120 worth of
common stock of the Company for each Right at the exercise price of $60 per
Right, which would effectively enable such Rights holders to purchase common
stock at one-half of the then current price.

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

(12) SHARE OPTION AND RESTRICTED SHARE PLANS

Employee Share Option and Restricted Share Plans

     The Company adopted Employee Share Option and Restricted Share Plans (the
"Plans") in 1998 and 1993. 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. Under both plans, share options are granted at the fair market
value of the stock on the day immediately preceding the date of grant or date
of initial employment, if later. Share options are exercisable for a period not
to exceed ten years from the date of grant. In general, share options vest over
four years.

     Shares awarded under the restricted share provisions of the 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. Should an individual leave the employment
of the Company for any reason (other than by reason of death or permanent
disability), the award recipient would forfeit their ownership rights for all
share options and restricted shares not otherwise fully vested.

     At December 31, 1998, the maximum share options issuable under the Plans
are 4,035,000, of which up to 350,000 shares may be issued under the restricted
share provisions.  At December 31, 1998, there were 1,898,239 share options
available for grant under the Plans.

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 37,500 share
options were granted during 1998, 1997 and 1996, respectively. As of December
31, 1998, 172,500 share options were outstanding under the Directors' Plan, of
which 108,750 are exercisable as of December 31, 1998. At December 31, 1998,
there were 127,500 share options available for grant under the Directors' Plan.
In 1996, the Company granted 120,000 options outside of the Directors' Plan to
two directors with an exercise price of $13.54 (market value at date of grant).
These share options fully vested in 1998.
             


                                       39

<PAGE>   41


Consultants

     In 1996, the Company granted share options to each of two consultants to
purchase up to 225,000 shares of the Company's common stock, valid for 10 years
from issuance, with varying exercise prices. Vesting periods are based on
either the passage of time or based upon the achievement of certain milestones,
which, if ever achieved, would result in accelerated vesting. Of the
aforementioned share options for each consultant, 150,600 were exercisable as
of December 31, 1998. The Company recognized $439,000, $985,000 and $1.2
million in non-cash compensation expense in accordance with FAS 123 relating to
the value of such share options (as established using the Black Scholes pricing
model) for the years ended December 31, 1998, 1997 and 1996, respectively, and
it expects to charge varying amounts (up to an additional $750,000 in the
aggregate) of non-cash compensation expense to operations through 2001 relating
to such agreements.

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


<TABLE>
<CAPTION>
                                                                                                    Weighted -
                                                                                 Share               Average
                                                                                Options           Exercise Price
                                                                             --------------       --------------
                             <S>                                             <C>                  <C>
                               Balance, January 1, 1996                           782,037           $    4.47
                               Granted                                          1,786,740               15.05
                               Exercised                                          (58,363)               3.02
                               Canceled                                           ( 6,658)              10.82
                                                                                ---------            --------
                               Balance, December 31, 1996                       2,503,756               12.04
                               Granted                                            337,600               25.20
                               Exercised                                         (262,925)               6.58
                               Canceled                                          (156,942)              13.35
                                                                                ---------            --------
                               Balance, December 31, 1997                       2,421,489               14.38
                               Granted                                            867,403               19.31
                               Exercised                                         (178,678)               5.91
                               Canceled                                          (137,984)              17.63
                                                                                ---------             -------
                               Balance, December 31, 1998                       2,972,230           $   16.18
                                                                                =========           =========

</TABLE>


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

<TABLE>
<CAPTION>

                              Options Outstanding                                                       Options Exercisable
        ------------------------------------------------------------------------            ----------------------------------------
                                  Outstanding      Weighted Average          Weighted           Exercisable             Weighted-
           Range of                  as of              Remaining             Average              as of                 Average
         Excercise Prices        Dec. 31, 1998      Contractual Life      Exercise Price       Dec. 31, 1998          Exercise Price
        -----------------     ------------------  --------------------- ------------------  ------------------        --------------

<S>                         <C>                       <C>                 <C>                <C>                        <C>
         $ 0.00 - $10.00              455,095              6.6                $ 5.46                378,980                $ 5.58
         $10.01 - $20.00            2,120,859              8.0                $16.91                653,162                $15.58
         $20.01 - $30.00              388,776              6.2                $24.46                 86,627                $24.53
         $30.01 - $40.00                7,500              8.7                $30.63                  7,500                $30.63
                              ---------------            -----                ------         --------------                ------

                                    2,972,230              7.6                $16.18              1,126,269                $13.00
                              ===============            =====                ======         ==============                ======
</TABLE>


                                       40

<PAGE>   42

Pro Forma Option Information

     The per share weighted-average fair value of all share options granted
during 1998, 1997 and 1996 was $10.00, $10.00 and $7.21, respectively, on the
date of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions.

<TABLE>
<S>                                                        <C>                    <C>                 <C>
                                                              1998                  1997                1996
                                                            ---------             --------            --------
              Expected dividend yield                          0%                    0%                  0%
              Risk-free interest rate                          4.7%                  6.2%                6.1%
              Volatility                                      62.5%                 40.0%               50.0%
              Expected life in years                           4                     4                   4

</TABLE>

The per share weighted-average fair value of share options granted during 1996
to consultants was $6.12 using similar assumptions.

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

<TABLE>
<CAPTION>
                                                                                 1998              1997             1996
                                                                            -------------     --------------   ---------
                                                                                             in thousands,
                                                                                        (except per share data)

                  <S>                                    <C>               <C>               <C>               <C>
                  Net earnings (loss)                     As reported        ($29,698)         ($11,437)        $5,073
                                                          Pro forma          ($32,827)         ($12,532)        $4,373

                  Basic earnings (loss) per share         As reported         ($1.52)          ($0.65)           $.39
                                                          Pro forma           ($1.69)          ($0.71)           $.34

                  Diluted earnings (loss) per share       As reported         ($1.52)           ($.65)           $.35
                                                          Pro forma           ($1.69)          ($0.71)           $.30

</TABLE>

(13) 401(k) PROFIT SHARING PLAN

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

     Effective January 1997, the Company elected to make "matching
contributions" in the Company's common stock equal to 50% of the first 6% of an
employee's salary contributed to such employees 401(k) Plan account. Such
amounts vest 25% per year based on a participant's years of service with the
Company. The Company has made "matching contributions" of approximately
$308,000 and $241,000 for the years ended December 31, 1998 and 1997,
respectively.



                                       41

<PAGE>   43

(14) SIGNIFICANT CONTRACTS AND LICENSING AGREEMENTS

Agreements with 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 ("FKBP Neuroimmunophilin
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 five-year warrants to purchase up to an additional 700,000 shares of
the Company's common stock at an exercise price of $35.15 per share. In
connection with the sale of these securities, the Company granted Amgen certain
demand and "piggyback" registration rights under 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 Technology, with an option to
fund a fourth year of research. The Company has recognized approximately $4.5
million and $1.1 million in research support the for the years ended December 
31, 1998 and 1997, respectively.

     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 Technology.

Agreements with Rhone-Poulenc Rorer Pharmaceuticals Inc.

     In June 1996, the Company entered into a Marketing, Sales and Distribution
Rights Agreement (together with related agreements, the "RPR Agreements") with
RPR. Under the RPR Agreements, RPR has worldwide marketing rights (excluding
Scandinavia and Japan) for GLIADEL. The Company received $15 million upon the
signing of these agreements ($7.5 million as an equity investment and $7.5
million as a non-refundable rights payment). On September 23, 1996, the Company
obtained clearance from the FDA for GLIADEL for recurrent glioblastoma
multiforme where surgical tumor removal is indicated and, accordingly, received
a $20 million non-refundable milestone payment from RPR. RPR is obligated to
make up to $35 million (as amended in September 1998) in additional milestone
payments, including $7.5 million in the form of an equity investment, only if
the Company achieves certain domestic and international regulatory approvals.
In addition, RPR may also fund up to $17 million for the development of a
higher-dose GLIADEL product and to fund certain additional clinical studies, if
any, related to GLIADEL. The Company manufactures and supplies GLIADEL to RPR
and receives a transfer price and royalties based on sales.

     Under the RPR Agreements, the Company has the right to borrow up to an
aggregate of $7.5 million under certain conditions, including $4 million which
became available January 2, 1997, and the remainder no earlier than 12 nor
later than 18 months following funding of the initial $4 million. The loan
proceeds are available to provide for expansion of the Company's existing
facility supporting the production of GLIADEL and the construction of a second
facility for the scale-up, production of GLIADEL and other polymer systems. Any
principal amounts borrowed under this loan agreement are due five years from
the date borrowed and will carry an interest rate equal to the lowest rate paid
by RPR on its most senior indebtedness. Both the principal and


                                       42

<PAGE>   44

interest due under this agreement may, at the Company's election, be repaid by
offsetting certain amounts due to the Company under the RPR Agreements. The
Company has not drawn down any of the available funds under the RPR Agreements.

      In September 1998, the Company and RPR amended its RPR Agreements. Under
the original Marketing, Sales and Distribution Rights agreement, the Company
was to conduct and pay for an U.S. Phase III clinical trial for a first surgery
indication for GLIADEL. Independently, RPR was already conducting and paying
for an international Phase III clinical trial to support the first surgery
indication for GLIADEL which included clinical sites in the United States. One
of the principal amendments to the agreement now provides for the companies to
share the costs (subject to an aggregate cap of $3 million for the Company) of
this single, multinational Phase III clinical trial. A second principal
amendment provides for an equal splitting of the previously determined
international regulatory milestones (previously $40 million, amended to $35
million) between first and recurrent surgery for market clearances of GLIADEL
in France, Germany, Italy, Spain, U.K. and Australia. Under the amended
agreement, the Company is entitled to receive up to $11 million upon receipt of
marketing clearance with a claim for use in recurrent surgery and an additional
$16.5 million (of which $7.5 million would be as an equity investment), payable
upon receipt of marketing clearance for use in first surgery. Other amendments
include a scale back of RPR's right of first offer, from six months on all new
polymer oncology products, to 90 days only on products being developed directly
by Guilford specifically for brain cancer; elimination of RPR's right to a seat
on Guilford's Board of Directors at the time RPR subscribes to $7.5 million in
the Company's common stock upon any market clearance in the U.S. of GLIADEL for
first surgery; a clarification of the allocation of certain costs; and an
acknowledgment that rights to GLIADEL in Japan have reverted back to the
Company thereby reducing the original milestone payments from a total of $40
million to $35 million.

Other significant contracts and agreements

    The Company has entered into licensing, technology transfer and development
agreements with The Johns Hopkins University under which it is required to make
certain payments for patent maintenance costs, processing fees, license
payments and development payments aggregating approximately $288,000 through
2002. The Company has also agreed to spend $500,000 per year through 2014 with
respect to internal research and development activities to develop such
technologies and may be required to make certain payments, as defined, to The
Johns Hopkins University should agreed-upon milestones be attained. In
addition, the Company will be required to pay a royalty on future net sales of
all licensed products, if any, as well as a percentage (as defined) of payments
received by the Company from sublicensees, if any.

    The Company has also entered into various other licensing, research and
development agreements which commit the Company to fund certain mutually
agreed-upon research and development projects, either on a best efforts basis
or upon attainment of certain performance milestones, as defined, or both, for
various periods unless canceled by the respective parties. Such future amounts
to be paid are approximately $778,000 through 2001. In addition, the Company
will be required to pay a royalty on future net sales of all licensed products,
if any, as well as a percentage of all payments received by the Company from
sublicensees, if any.

(15) RELATED PARTY TRANSACTIONS

     Scios Inc., a significant stockholder, has billed the Company for facility
rents related to the Company's research and development activities aggregating
$883,000, $341,000 and $295,000 in 1998, 1997 and 1996, respectively.


                                       43

<PAGE>   45

(16) EARNINGS (LOSS) PER SHARE

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

<TABLE>
<CAPTION>
                                                                       1998             1997              1996
                                                                       ----             ----              ----
                                                                         (in thousands, except share data)

<S>                                                              <C>                <C>            <C>
Net income (loss) applicable to 
common stockholders                                                 $ (29,698)        $ (11,437)          $5,073
                                                                    ==========        ==========       =========

Weighted-average shares outstanding                                    19,479            17,570           13,001
Employee stock options                                                    -                   -              751
Warrants and put options                                                 -                   -               882
                                                                     ---------        ----------    ------------
Dilutive potential common shares                                         -                    -            1,633
                                                                     ---------        ----------    ------------
Total weighted-average diluted shares (1)                               19,479            17,570          14,634
                                                                     =========        ==========   =============

Basic EPS                                                          $    (1.52)          $  (.65)      $      .39
                                                                   ===========          ========      ==========
Diluted EPS                                                        $    (1.52)          $  (.65)      $      .35
                                                                   ===========          ========      ==========

</TABLE>

(1) At December 31, 1998 and 1997, there were 652,355 and 1,293,317
instruments, respectively, that were considered antidilutive and accordingly
excluded in the above calculation.

(17) LEGAL MATTERS

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



                                       44
<PAGE>   46

                       STOCK DESCRIPTION AND FORM 10-K

Our common stock is listed on the Nasdaq(R) Stock Market under the symbol
"GLFD." As of March 16, 1999, we had approximately 192 holders of record of our
common stock and in excess of 400 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) Stock Market for the periods
indicated below.

<TABLE>
<CAPTION>
                                       High      Low
                                       ----      ---

<S>                                   <C>         <C>   
1996
First Quarter....................     $17.17      $10.17
Second Quarter...................      25.17       13.33
Third Quarter....................      20.50       11.00
Fourth Quarter...................      23.38       16.00


1997
First Quarter....................      30.25       20.50
Second Quarter...................      27.75       19.75
Third Quarter....................      31.63       20.50
Fourth Quarter...................      32.25       17.88


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 (through 3/16/99)..      15.13       10.00
</TABLE>

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.
c/o Investor Relations
6611 Tributary Street
Baltimore, Maryland 21224
Attention: Angela Rubin
(410) 631-6449