<PAGE>   1
                      SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C.  20549

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


                                  FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934

FOR THE PERIOD ENDED MAY 31, 1997

                                      OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ________________  TO ________________

                        COMMISSION FILE NUMBER 0-24050

                         NORTHFIELD LABORATORIES INC.

            (Exact name of registrant as specified in its charter)


                 DELAWARE                               36-3378733      
       (State of other jurisdiction                  (I.R.S. Employer   
    of incorporation or organization)             Identification Number)

   1560 SHERMAN AVENUE, SUITE 1000, EVANSTON, ILLINOIS        60201-4800
        (Address of principal executive offices)              (Zip Code)


     REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (847) 864-3500

       Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01 PER SHARE

     INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.

                 YES  X                                   NO
                     ---                                     ---

     INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN THE DEFINITIVE PROXY OR INFORMATION
STATEMENT INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [x]

     AS OF AUGUST 27, 1997, 14,092,375 SHARES OF THE REGISTRANT'S COMMON STOCK,
PAR VALUE $.01 PER SHARE, WERE OUTSTANDING.  ON THAT DATE, THE AGGREGATE MARKET
VALUE OF VOTING STOCK (BASED UPON THE CLOSING PRICE OF THE REGISTRANT'S COMMON
STOCK ON AUGUST 27, 1997) HELD BY NON-AFFILIATES OF THE REGISTRANT WAS
$102,086,485  (10,606,388 SHARES AT $9 5/8 PER SHARE).




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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for its 1997 Annual Meeting are
incorporated by reference into Part III of this Form 10-K.

CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

     This Annual Report contains forward-looking statements withing the meaning
of the Private Securities Litigation Reform Act of 1995 concerning, among other
things, the Company's prospects, clinical and regulatory developments affecting
the Company's potential product and business strategies for the Company's
operations.  These forward-looking statements are identified by the use of such
terms as "intends," "expects," "plans," "estimates," "anticipates," "should"
and "believes" and are in certain cases followed by a cross reference to "Risk
Factors."

     When a forward-looking statement includes a statement of the assumptions
or bases underlying the forward-looking statement, the Company cautions that,
while it believes such assumptions or bases to be reasonable, assumed facts or
bases almost always vary from actual results, and the differences between
assumed facts or bases and actual results can be material.  Where, in any
forward-looking statement, the Company or its management expresses an
expectation or belief as to future events or results, such expectation or
belief is expressed in good faith and is believed to have a reasonable basis.
There can be no assurance, however, that the expected event or result will
occur or be accomplished.

     The Company's actual results may differ significantly from the results
discussed in the forward-looking statements.  Factors that might cause such a
difference include the factors discussed under "Risk Factors" as well as other
factors.















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PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

     Northfield  Laboratories Inc. ("Northfield" or the "Company") is a leader
in the development of a safe and effective alternative to transfused blood for
use in the treatment of acute blood loss.  The Company's PolyHeme blood
substitute product is a solution of chemically modified hemoglobin derived from
human blood.  Clinical studies to date indicate that PolyHeme carries as much
oxygen, and loads and unloads oxygen in the same manner, as transfused blood.
Infusion of PolyHeme also restores blood volume.  Therefore, PolyHeme should be
effective as an oxygen-carrying resuscitative fluid in the treatment of
hemorrhagic shock resulting from extensive blood loss.  The Company's method of
manufacturing PolyHeme is designed to eliminate the risk of transmission of
diseases such as AIDS or  hepatitis.  Clinical studies to date indicate that
PolyHeme is universally compatible and accordingly should not require blood
typing prior to infusion. Therefore, PolyHeme should be available for immediate
use in emergency situations.  In addition, PolyHeme has an extended shelf life
compared to blood.

     The Company in April 1997 received approval from the Food and Drug
Administration (the "FDA") for Phase III trials of PolyHeme, which will include
randomized controlled studies at multiple locations.  The Company expects to
begin its Phase III trials in the third calendar quarter of 1997.  Under the
Company's Phase III protocol, elective surgical patients will be infused with
up to six units of PolyHeme (three liters containing 300 grams of hemoglobin).
The study will include about 240 patients and, once underway, is expected to
take approximately 12 months to complete.  Northfield believes the trials in an
elective surgery environment will permit a greater level of control and
predictability than is possible in emergency surgical applications.  Both of
these factors are important in ensuring documentation of safety and efficacy in
patients and the achievement of the design goals of the Company's clinical
trials.

     To date, over 100 individuals have been enrolled in the Company's clinical
trials, including infusions up to the maximum dose of  ten units of  PolyHeme.
Infusions were given during resuscitation intraoperatively and postoperatively
to a diverse set of  patients experiencing acute blood loss.  The infusions
were administered both to awake and anesthetized patients in the critical care
and stable ward settings.  None of  these actively bleeding patients received
transfusions of donated  blood during the infusion of PolyHeme.  No adverse
effects attributed to the infusion of  PolyHeme have been observed in any of
these patients.

BACKGROUND

     The principal function of  human blood is to transport oxygen throughout
the body.  The lack of an adequate supply of oxygen as a result of blood loss
can lead to organ dysfunction or death.  The transfusion of human blood is
presently the only effective means of immediately restoring diminished
oxygen-carrying capacity resulting from blood loss.  Approximately 14 million
units of blood were transfused in the United States in 1996, of which
approximately 8.5 million units were administered to patients suffering the
effects of acute blood loss.

     The use of donated blood in transfusion therapy, while effective in
restoring an adequate supply of oxygen in the body of  the recipient, has
several limitations.  Although  testing  procedures exist to detect the
presence of certain diseases in blood, these procedures cannot eliminate
completely the risk of  blood-borne disease.  Transfused blood also can be used
only in recipients having a blood type compatible with that of the donor.
Delays in treatment resulting from the 




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necessity of blood typing prior to transfusion, together with the limited shelf 
life of  blood and the limited availability of certain blood types, impose
constraints on the immediate availability of compatible blood for transfusion. 
There is no commercially available blood substitute which addresses these
problems.

     Northfield's interdisciplinary scientific research team has worked for
over 25 years to explore and test the concept of using a hemoglobin solution
derived from human blood in the treatment of acute blood loss.  Northfield's
scientific research team has been responsible for the original concept, the
early development and evaluation and clinical testing of  PolyHeme, and have
authored over 100 publications in the scientific literature relating to human
blood substitute research and development.  Members of the scientific research
team have been involved in development of national transfusion policy through
their participation in the activities of the National Heart Lung Blood
Institute, the National Blood Resource Education Panel, the Department of
Defense, the American Association of Blood Banks, the American Blood
Commission, the American College of Surgeons and the American Red Cross.

THE PRODUCT

     PolyHeme is a solution of chemically modified hemoglobin-derived from
human blood.  Hemoglobin is the oxygen-carrying component of the human red
blood cell.  Northfield purchases donated blood from The American Red Cross and
Blood Centers of America for use as the starting material for PolyHeme.  The
Company uses a proprietary process of separation, filtration and chemical
modification to produce PolyHeme.  Hemoglobin is first extracted from red blood
cells and filtered to remove impurities.  The purified hemoglobin is next
chemically modified using a multi-step process to create a polymerized form of
hemoglobin designed to avoid the undesirable effects historically associated
with hemoglobin-based blood substitutes, including vasoconstriction, kidney
dysfunction, liver dysfunction and gastrointestinal distress.  The modified
hemoglobin is then incorporated into a solution which can be administered as an
alternative to transfused blood.  One unit of  PolyHeme contains 50 grams of
modified hemoglobin, approximately the same amount of hemoglobin delivered by
one unit of transfused blood.

     PolyHeme is intended for use as an alternative to transfused blood in the
treatment of acute blood loss.  Clinical studies to date indicate that PolyHeme
carries as much oxygen, and loads and unloads oxygen in the same manner, as
transfused blood.  Infusion of PolyHeme also restores blood volume.  Therefore,
PolyHeme should be effective as an oxygen-carrying resuscitative fluid in the
treatment of hemorrhagic shock resulting from extensive blood loss.

     In addition to its utility as an oxygen carrier and blood volume expander,
the Company believes PolyHeme will have the following additional benefits:

     Elimination of Disease Transmission.  Northfield believes, and laboratory
and clinical tests have thus far indicated, that the manufacturing process used
to produce PolyHeme eliminates blood-borne diseases, such as AIDS and
hepatitis, which may be present in transfused blood.

     Universal Compatibility.  Clinical studies to date indicate that PolyHeme
is universally compatible  and accordingly should not require blood typing
prior to use.  The benefits of universal compatibility include the ability to
use PolyHeme immediately, the elimination of transfusion reactions due to
mistakes in blood typing, and the reduction of the inventory burden associated
with maintaining sufficient quantities of blood types having limited
availability.



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     Extended Shelf Life.  The Company believes PolyHeme has a shelf life well
in excess of the 28 to 42 days currently permitted for blood.  The Company
estimates PolyHeme has a shelf life of approximately 12 months under
refrigerated conditions.

THE MARKET

     Approximately 14 million units of  blood were transfused  in the United
States in 1996, of which approximately 8.5 million units were administered to
patients suffering the effects of acute blood loss.  Patient charges for the
units of  blood used in the United States in 1996 for the treatment of acute
blood loss were approximately $2.5 billion.  The transfusion market in the
United States consists of two principal segments.  The acute blood loss
segment, which comprises approximately 60% of the transfusion market, includes
transfusions required in connection with trauma, surgery and unexpected blood
loss.  The chronic blood loss segment represents approximately 40% of the
transfusion market and includes transfusions in connection with general medical
applications and chronic anemias.

     PolyHeme is intended for use as an alternative to transfused blood in
the treatment of acute blood loss.  The two principal clinical settings in
which patients experience acute blood loss are elective surgery and
non-elective, emergency surgery.  Elective surgery represents the largest
potential market for PolyHeme, with approximately 6.5 million units of blood
being used in the United States each year.  The major benefit of PolyHeme in
this setting is expected to be increased transfusion safety for patients and
health care professionals.  In addition, approximately two million units of
blood are used in the United States each year for emergency surgical
procedures.  In this setting, the immediate availability and universal
compatibility of PolyHeme is expected to provide significant advantages over
transfused blood by avoiding the delay and opportunities for error associated
with blood typing.


     In addition to the foregoing applications for which blood is currently
used, there exist potential sources of demand for which blood is not currently
utilized and for which PolyHeme may be suitable.  These include applications in
which the required blood type is not immediately available or in which
transfusions are desirable but not given for fear of a transfusion reaction due
to difficulty in identifying compatible blood.  For example, the Company
believes emergicenters and surgicenters both experience events where an
oxygen-carrying volume expander may be useful.  The Company also believes
PolyHeme may be used by Emergency Medical Technicians in ambulances, medical
helicopters and other prehospital settings.  In addition, the military has
expressed a high level of interest in oxygen-carrying products for the
resuscitation of battlefield casualties.

CLINICAL TRIALS

PHASE III CLINICAL TRIALS

     In April 1997,  the Company announced it had received clearance from the
FDA to begin Phase III trials of PolyHeme.  The Company expects to begin its
Phase III trials in the third calendar quarter of 1997.  The pivotal trial, the
first Phase III study to include direct replacement of  blood in large volumes,
marks a milestone in medicine's search for an oxygen-carrying blood substitute.
Under the Company's Phase III protocol, elective surgical patients will be
infused with up to six units of PolyHeme (three liters containing 300 grams of
hemoglobin). The Company is the only firm to report successful achievement of
this high dose limit in any phase of clinical testing, and the only firm to
evaluate its oxygen carrier as a direct replacement for blood in high volumes
in a Phase III 




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study.  The randomized, controlled study  will include about 240 elective       
surgery patients and, once underway, is expected to take 12 months to complete. 
Northfield believes the trials in an elective surgery environment will permit a
greater level of control and predictability than is possible in emergency
surgical applicants.  Both of these factors are important in ensuring
documentation of safety and efficacy in patients and the achievement of the
design goals of the Company's clinical trials.

     It is expected that the Company's Phase III clinical trials will
demonstrate complete avoidance of donated blood use in a significant number of
patients undergoing high-volume blood-loss surgical procedures.  This is a
compelling endpoint in elective surgery.

PHASE II CLINICAL TRIALS

     In August 1994, the Company began Phase II clinical trials of PolyHeme at
a major trauma center in the United States.  These continuing clinical trials
are designed to assess the safety and effectiveness of  PolyHeme in treating
acute blood loss and hemorrhagic shock in trauma and surgical patients.  When
the treating physicians participating in the Company's clinical trials
determine a blood transfusion is indicated, the infusion of  PolyHeme is
initiated in place of donated blood.

     In November 1994, the Company submitted to the FDA data concerning the
first ten patients as treated as part of the Company's Phase II clinical
trials, while continuing to enroll additional patients.  Of these ten patients,
five received the maximum dose of three units (150 grams) of  PolyHeme then
permitted under the clinical testing protocol used by the Company.  Based on
these data, the Company received authorization from the FDA to increase the
dose to six units (300 grams of  PolyHeme).  The first infusion of  PolyHeme at
that level occurred in April 1995.  In early 1996, Phase II trials advanced to
a further stage known as randomized controlled multicenter trials and testing
at a second clinical site.  The important element of  this stage is that
patients are given either blood or a blood substitute on a randomized basis,
eliminating the chance that patients receiving  PolyHeme are preselected by the
physicians.  After enrolling 44 patients in this randomized trial, the Company
was authorized by the FDA to further increase the dose to 10 units (500 grams)
of PolyHeme.  This unprecedented dose is equivalent to replacing the entire
blood volume of an average person.

     To date, over 100 individuals have been enrolled in the Company's clinical
trials, including infusion up to the maximum dose of ten units of  PolyHeme.
Infusions were given during resuscitation, intraoperatively and
postoperatively.  The rate of infusion varied with the clinical setting.  The
most rapid rate consisted of the infusion of the maximum ten units in 20
minutes.

     No adverse effects attributed to the infusion of  PolyHeme have been
observed in any of these patients.  Accordingly, no treatment with any drug
before, during or after the infusion of  PolyHeme was necessary to prevent or
eliminate any such effect in this group of patients experiencing acute blood
loss.  There was no evidence of fever in any recipient.  There were no abnormal
changes in heart rate or blood pressure attributed to PolyHeme, indicating no
evidence of vasoconstriction.  Kidney function was measured using creatinine
clearance and serum creatinine determinations.  There was no deterioration in
kidney function during or after the infusion of  PolyHeme.  There was no
evidence of gastrointestinal distress during and after the infusion of
PolyHeme.  In addition, there was no evidence of organ dysfunction in any
recipient.  The Company believes that its clinical studies to date indicate
that  PolyHeme is well tolerated when infused up 



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to and including the equivalent of a 10-unit transfusion of blood, representing 
the complete replacement of a normal blood volume.

     The Company also believes that its Phase II clinical results to date
indicate the potential clinical utility of  PolyHeme.  Results in these
recipients indicate that each unit of  PolyHeme carries as much oxygen as one
unit of transfused blood and that PolyHeme loads and unloads oxygen in the same
manner as transfused blood.  None of these actively bleeding patients received
transfusions of donated blood during the infusion of  PolyHeme.  Furthermore,
the results have demonstrated PolyHeme's capability to replace blood on a
unit-for-unit basis in acute blood loss.

PHASE I CLINICAL TRIALS

     In February 1994, the Company successfully completed Phase I clinical
trials of the current formulation of  PolyHeme in 32 individuals, consisting of
21 healthy volunteers and 11 patients.  One infusion was discontinued when the
patient complained of  feeling cold and began to shiver.  The Company believes
this event was probably due to a subsequently diagnosed bacterial infection and
not related to the infusion of  PolyHeme.  Seventeen of the 32 individuals
received an average of 50 grams of modified hemoglobin, approximately
equivalent to a one-unit transfusion of blood.  The largest individual dose
infused contained 63 grams of modified hemoglobin.  The highest dose level was
1.25 grams of modified hemoglobin per kilogram of the recipient's body weight.

MANUFACTURING AND MATERIAL SUPPLY

     The Company uses a proprietary process of separation, filtration and
chemical modification to produce PolyHeme.  Since 1990, the Company has
produced PolyHeme it its 21,000 square foot pilot manufacturing facility.  The
Company believes this facility is capable of producing sufficient quantities of
PolyHeme for all of the Company's clinical trials in the United States.  The
Company believes its existing manufacturing process can be used without
substantial modification to produce commercial quantities of PolyHeme in larger
facilities.

     If  FDA approval of PolyHeme is received, the Company presently intends to
manufacture PolyHeme for commercial sale in the Unites States using its own
facilities.  The Company currently has licensing arrangements for the
manufacture of PolyHeme in certain countries outside the United States.  The
Company is also considering entering into other collaborative relationships
with strategic partners which could involve arrangements relating to the
manufacture of PolyHeme.

     The successful commercial introduction of PolyHeme will also depend on an
adequate supply of blood to be used as a starting material.  Northfield
believes that an adequate supply of blood is obtainable through the voluntary
blood services sector.  The Company has had extensive discussions with existing
blood collection agencies, including The American Red Cross and Blood Centers
of America, regarding sourcing of blood.  The Company currently has short-term
purchasing contracts with each of these agencies. In 1996, the Company entered
into an agreement with hemerica, Inc., a subsidiary of Blood Centers of America
("hemerica"), under which hemerica will supply Northfield with 82,500 units per
year of packed red cells, the source material for PolyHeme over a three year
period.  Deliveries under that agreement are scheduled to begin in 1998, close
to the time Northfield  expects to complete its Phase III study.  Northfield
has and will continue to pursue long-term supply contracts with such agencies
and other potential sources, although there can be no assurance that the
Company will be able to obtain sufficient quantities of blood from the
voluntary blood services sector to enable it to produce commercial quantities
of PolyHeme if FDA approval is received.  See "Risk Factors - Limitation of
Supply of Starting Material."



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MARKETING STRATEGIES

     If FDA approval of PolyHeme is received, the Company intends to market
PolyHeme with its own sales force in the United States.  The Company intends to
recruit and train a specialty sales force of approximately 20 individuals to
introduce PolyHeme in selected markets.  The selling effort will target
approximately 500 hospitals which utilize over 70% of the nation's blood
supply.  The Company believes the most important marketing activities will be
educating, stimulating use by and servicing health care professionals.

     Northfield also expects to establish distribution arrangements with the
major blood collection and distribution organizations to optimize service
levels to customers and enhance the market's acceptance of PolyHeme.  These
blood centers provide a full range of blood products and transfusion services
to the United States market and can provide the Company with an established
distribution system for PolyHeme.  The Company has not yet entered into
definitive distribution arrangements with any of these blood centers.

     The Company may pursue licenses or other arrangements for the manufacture
and distribution of PolyHeme outside the United States.  The Company has
entered into license agreements with Pharmacia & Upjohn Inc., a U.S.
corporation ("Pharmacia"), and Hemocare Ltd., an Israeli corporation
("Hemocare"), to develop, manufacture and distribute PolyHeme in certain
European, Middle Eastern and African countries.  The license agreements permit
Pharmacia and Hemocare to utilize PolyHeme and related manufacturing technology
in return for the payment of royalties based upon sales of PolyHeme in the
licensed territories.

     In March 1989, the Company granted to Pharmacia an exclusive license to
manufacture, promote and sell the Company's PolyHeme product in a territory
encompassing the United Kingdom, Germany, the Scandinavian countries and
certain countries in the Middle East.  Under the terms of the license
agreement, Pharmacia has the right, upon consultation with the Company, to
promote and sell PolyHeme in the licensed territory under its own trademark.
The license agreement with Pharmacia provides for a nonrefundable initial fee,
two additional nonrefundable fees based upon the achievement of certain
regulatory and sales volume milestones by the Company, and ongoing royalty
payments based upon net sales of PolyHeme in the licensed territory.  The
license agreement further provides for a reduction of royalty payments upon the
occurrence of certain events.  In addition, under the terms of the agreement,
the Company has the right under certain circumstances to direct Pharmacia's
clinical testing of PolyHeme in the licensed territory.

     In July 1990, the Company granted to Hemocare an exclusive license to
manufacture, promote and sell the Company's PolyHeme product in a territory
encompassing Israel, Cyprus, Ivory Coast, Jordan, Kenya, Lebanon, Liberia,
Nigeria and Zaire.  Under the terms of the license agreement, Hemocare has the
right, upon consultation with the Company, to promote and sell PolyHeme in the
licensed territory under its own trademark.  The license agreement with
Hemocare provides for royalty payments based on net sales of PolyHeme in the
licensed territory.  In addition, under the terms of the license agreement, the
Company has the right under certain circumstances to direct Hemocare's clinical
testing of PolyHeme in the licensed territory.

     Northfield's present plans with respect to the marketing and distribution
of PolyHeme in the United States and overseas may change significantly based on
the results of the clinical testing of  PolyHeme, the establishment of
relationships with strategic partners, changes in the scale, timing of cost of
the Company's commercial manufacturing facility, competitive and technological
advances, the FDA regulatory process, the availability of additional funding
and other factors.


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COMPETITION

     If approved for commercial sale, PolyHeme will compete directly with
established therapies for acute blood loss and may compete with other
technologies currently under development.  There can be no assurance that
PolyHeme will have advantages which will be significant enough to cause medical
professionals to adopt it rather than to continue to use established therapies
or other new technologies or products.   There can also be no assurance that
the price of PolyHeme, in light of PolyHeme's potential advantages, will be
competitive with the price of established therapies or other new technologies
or products.

     At present there are nine companies involved with clinical trials to
develop a safe and effective blood substitute.  Northfield Laboratories is one
of only two companies that have been authorized by the FDA to conduct Phase III
trials.  The Company believes it is the only sponsor developing a product that
is designed to be used as a large volume replacement for transfused blood in
the treatment of acute blood loss.  Based upon published reports, no other
competing company has to date achieved dosage levels in their clinical trials
at or near the dose of ten units (500 grams) successfully tested by Northfield.

     Northfield believes that the treatment of acute blood loss is the setting
most likely to lead to FDA approval and the application which presents the
greatest market opportunity.  However, several companies have developed or are
in the process of developing technologies which are, or in the future may be,
the basis for products which will compete with PolyHeme.  One of these
companies is a large manufacturer of health care products and is, like
Northfield, focusing on the development of a blood substitute product derived
from human blood.  Certain of these companies are pursuing different approaches
or means of accomplishing the therapeutic effects sought to be achieved through
the use of PolyHeme.  Many of these companies have substantially greater
financial resources, larger research and development staffs, more extensive
facilities and more experience than Northfield in testing, manufacturing,
marketing and distributing medical products.

     The Company is aware that several of these competing companies are
currently conducting clinical trials of their products.  There can be no
assurance that one or more other companies will not succeed in developing
technologies and products which will be available for commercial use prior to
PolyHeme, which will be more effective or less costly than PolyHeme or which
would otherwise render PolyHeme obsolete or noncompetitive.

     The Company believes that important competitive factors in the market for
blood substitute products will include the relative speed with which
competitors can develop their respective products, complete the clinical
testing and regulatory approval process and supply commercial quantities of
their products to the market.  In addition to these factors, competition is
expected to be based on the effectiveness of blood substitute products and the
scope of the intended uses for which they are approved, the scope and
enforceability of patent or other proprietary rights, product price, product
supply and marketing and sales capability.  The Company believes that its
competitive position will be significantly influenced by the timing of the
clinical testing and regulatory filings for PolyHeme, the Company's ability to
expand its manufacturing capability to permit commercial production of
PolyHeme, if approved, and the Company's ability to maintain and enforce its
proprietary rights covering PolyHeme and its manufacturing process.  See "Risk
Factors - Competition."


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<PAGE>   10

GOVERNMENT REGULATION

     The manufacture and distribution of PolyHeme and the operation of the
Company's manufacturing facilities will require the approval of United States
government authorities as well as those of foreign countries.  In the United
States, the FDA regulates medical products, including the category known as
"biologicals" which includes PolyHeme.  The Federal Food, Drug and Cosmetic Act
and the Public Health Service Act will govern the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of PolyHeme.  In addition to FDA regulations, the Company is also
subject to other federal and state regulations, such as the Occupational Safety
and Health Act and the Environmental Protection Act.  Product development and
approval within this regulatory framework requires a number of years and
involves the expenditure of substantial funds.

     The steps required before a medical product may be sold commercially in
the United States include preclinical testing, the submission to the FDA of an
Investigational New Drug application, clinical trials in humans to establish
the safety and effectiveness of the product, the submission to the FDA of a
Product License Application ("PLA") and Establishment License Application 
("ELA") relating to the product and the manufacturing facilities to be used to
produce the product for commercial sale, and FDA approval of a PLA and ELA
prior to any commercial sale or use of the product.

     Preclinical tests include evaluation of product chemistry and studies to
assess the safety and effectiveness of the product and its formulation.  The
results of the preclinical tests are submitted to the FDA as part of the
Investigational New Drug application.  The goal of clinical testing is the
demonstration in adequate and well-controlled studies of substantial evidence
of the safety and effectiveness of the product in the setting of its intended
use.  The results of preclinical and clinical testing are submitted to the FDA
from time to time throughout the trial process.  In addition, before approval
for the commercial sale of a product can be obtained, results of the
preclinical and clinical studies must be submitted to the FDA in the form of a
PLA.  The testing and approval process requires substantial time and effort and
there can be no assurance that any approval will be granted on a timely basis,
if at all.  The approval process is affected by a number of  factors, including
the severity of the condition being treated, the availability of alternative
treatments and the risks and benefits demonstrated in clinical trials.
Additional preclinical studies or clinical trials may be requested during the
FDA review process and may delay product approval.  After FDA approval for its
initial indications, further clinical trials may be necessary to gain approval
for the use of a product for additional indications.  The FDA may also require
postmarketing testing, which can involve significant expense, to monitor for
adverse effects.

     Among the conditions for PLA approval is the requirement that the
prospective manufacturer's quality controls and manufacturing procedures
conform to FDA requirements through the concurrent approval of the ELA.  In
addition, domestic manufacturing facilities are subject to biennial FDA
inspections and foreign manufacturing facilities are subject to periodic FDA
inspections or inspections by the foreign regulatory authorities with
reciprocal inspection agreements with the FDA.  Outside the United States, the
Company also is subject to foreign regulatory requirements governing clinical
trials and marketing approval for medical products.  The requirements governing
the conduct of clinical trials, product licensing, pricing and reimbursement
vary widely from country to country.

     The Company's regulatory strategy is to pursue clinical testing and FDA
approval of PolyHeme in the United States.  The Company intends to arrange for
testing and seek regulatory 


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approval of PolyHeme outside the United States through licensing or other       
arrangements with other foreign or domestic companies.  See "Risk Factors -
Government Regulation and Uncertainty of Product Approvals."

PATENTS AND PROPERTY RIGHTS

     The Company owns two United States patents relating to PolyHeme, its uses
and certain of the Company's manufacturing processes.  The Company has obtained
counterpart patents in Canada, France, the United Kingdom, Israel, Italy,
Portugal and Spain.  The Company's United States patents expire in 2006 and
2010.  Northfield has additional patent applications pending in the United
States, Japan, the Netherlands and Germany.  The Company has a policy of
seeking patents covering the important techniques, processes and applications
developed from its research and all modifications and improvements thereto. The
Company also relies upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain its competitive
position.

     There can be no assurance that the Company's patents or other proprietary
rights will be determined to be valid or enforceable if challenged in court or
administrative proceedings or that the Company will not become involved in
disputes with respect to the patents or proprietary rights of third parties.
An adverse outcome from such proceedings could subject the Company to
significant liabilities to third parties, require disputed rights to be
licensed from third parties or require the Company to stop using such
technology, any of which would result in a material adverse effect on the
Company's results of operations.  See "Risk Factors - Uncertainty of Patents
and Protection of Proprietary Technology."

RESEARCH AND DEVELOPMENT

     Prior to 1991, the principal focus of  Northfield's research and
development efforts was the design and development of PolyHeme, the design and
implementation of preclinical and clinical trials of PolyHeme and the
development of manufacturing techniques for the production of PolyHeme in
quantities sufficient for clinical trials.  Since 1991, the principal focus of
the Northfield's research and development effort has been the support of the
clinical trials necessary for regulatory approval of PolyHeme.  The Company
since 1991 has also conducted preliminary work on the process engineering
necessary to produce PolyHeme in commercial quantities.

     In fiscal 1997, 1996 and 1995, the Company's research and development
expenses totaled $5,188,000, $5,223,000 and $5,902,000, respectively.  The
Company anticipates that these expenses will increase as the Company funds the
further clinical testing of PolyHeme and prepares for its anticipated
production in commercial quantities.

HUMAN RESOURCES

     As of May 31, 1997, the Company had 44 employees, of  whom 36 were
involved in research and development and eight were responsible for financial
and other administrative matters.  The Company also had consulting arrangements
with five individuals as of such date.  None of the Company's employees are
represented by labor unions, and the Company is not aware of any organizational
efforts on behalf of any labor unions involving the Company's employees.  The
Company considers its relations with its employees to be excellent.



                                     -11-
<PAGE>   12


RISK FACTORS

     In addition to the other information contained in this document, the
following risk factors should be considered carefully in evaluating the Company
and its business.

NEED FOR EXTENSIVE CLINICAL TRIALS

     The results of the Company's clinical trials are not sufficient at
present to demonstrate adequately the safety and effectiveness of PolyHeme in
order to file a PLA with the FDA.  Although more that 100 individuals have
participated in clinical trials with PolyHeme, the Company will be required by
the FDA to conduct substantial additional trials, which are likely to be
expensive and time-consuming, before PolyHeme can be approved for commercial
sale.  The timing of the FDA review process is uncertain.  There can be no
assurance that the Company will be able to complete its clinical trials
successfully or even obtain FDA approval of PolyHeme, or that FDA approval, if
obtained, will not include limitations on the indicated uses for which PolyHeme
may be marketed. The Company's business, financial condition and results of
operations are critically dependent on receiving FDA approval of PolyHeme.  A
significant delay in the Company's clinical trials or a failure to achieve FDA
approval of commercial sales of PolyHeme would have a material adverse effect
on the Company and could result in the cessation of the Company's business. 
The Company or the FDA may in the future suspend clinical trials at any time if
it is believed that the subjects participating in such trials are being exposed
to unacceptable health risks.  In 1989, the Company suspended clinical testing
of an earlier formulation of the Company's PolyHeme product.

GOVERNMENT REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS

     The Company's research, development, testing, manufacturing, marketing and
distribution of PolyHeme are, and will continue to be, subject to extensive
regulation, monitoring and approval by the FDA and its foreign counterparts.
The regulatory approval process to establish the safety and effectiveness of
PolyHeme and the safety and reliability of the Company's manufacturing process
has already consumed several years and considerable expenditures.  The data
obtained from clinical trials are susceptible for varying interpretations which
could delay, limit or prevent FDA regulatory approval.  The lack of established
criteria for evaluating the effectiveness of blood substitute products could
also delay or prevent FDA regulatory approval.  In addition, delay or rejection
could be caused by changes in FDA policies and regulations.  Similar delays or
rejections may also be encountered in foreign countries.  There can be no
assurance that, even after extensive clinical trials, regulatory approval will
ever be obtained for PolyHeme.  Under new FDA guidelines, the FDA may comment
upon the acceptability of a PLA following its submission.  There can be no
assurance that the FDA will accept the Company's PLA or, if the Company's PLA
is deemed acceptable, that PolyHeme will ultimately be approved for manufacture
and sale based on the Company's PLA.  Moreover, if regulatory approval of
PolyHeme is granted, such approval may include limitations on the indicated
uses for which PolyHeme may be marketed.  Further, even if such regulatory
approval is obtained, the Company does not presently have manufacturing
facilities sufficient to produce commercial quantities of PolyHeme.  In order
to seek FDA approval of the sale of PolyHeme produced at its first commercial
manufacturing facility, the Company may be required to conduct a portion of its
clinical trials with product manufactured at that facility.  Discovery of
previously unknown problems with PolyHeme or unanticipated problems with the
Company's manufacturing facilities, even after FDA approval of PolyHeme for
commercial sale, may result in the imposition of significant restrictions,
including withdrawal of PolyHeme from the market.  Additional laws and
regulations may also be enacted which could prevent or delay regulatory
approval of PolyHeme, including laws or regulations relating to the price or
cost-effectiveness of 


                                     -12-
<PAGE>   13


medical products.  Any delay or failure to achieve regulatory approval of       
commercial sales of PolyHeme would have a material adverse effect on the
Company's financial condition and could result in cessation of the Company's
business.

EARLY STAGE OF DEVELOPMENT

     The Company was founded in 1985 and is a development stage company.  Since
1985, the Company has been engaged primarily in the development and clinical
testing of PolyHeme.  No revenues have been generated to date from commercial
sales of PolyHeme and commercial sales are not expected for several years, if
they are achieved at all.  The Company's revenues to date have consisted solely
of license fees and interest income.  There can be no assurance that the
Company's clinical testing will be successful, that regulatory approval of
PolyHeme will be obtained, that the Company will be able to manufacture
PolyHeme at an acceptable cost and in appropriate quantities or that it will be
able to successfully market and sell PolyHeme.  There can also be no assurance
that the Company will not encounter unexpected difficulties which will have a
material adverse effect on the Company, its operations or its properties.

RELIANCE ON SINGLE PRODUCT: TECHNOLOGICAL RISK

     The Company's operations have to date consisted primarily of the
development and clinical testing of PolyHeme.  The Company does not expect to
realize product revenues unless it successfully develops and achieves
commercial introduction of PolyHeme.  The Company expects that such revenues,
if any, will be derived solely from sales of PolyHeme.  The Company also
expects the use of PolyHeme to be limited primarily to the acute blood loss
segment of the transfusion market.  The biomedical field has undergone rapid
and significant technological changes.  Technological developments may result
in PolyHeme becoming obsolete or non-competitive before the Company is able to
recover any portion of the research and development and other expenses it has
incurred to develop and clinically test PolyHeme.  Any such occurrence would
have a material adverse effect on the Company and its operations.

MANUFACTURING UNCERTAINTIES

     The Company intends to build a commercial scale manufacturing facility
significantly larger than that currently being used to produce PolyHeme for the
Company's clinical testing.  Northfield has no experience in commercial scale
manufacturing, and there can be no assurance that Northfield can achieve
commercial scale manufacturing capacity.  There can also be no assurance that
the Company will not incur substantial cost overruns and delays in building and
equipping a commercial scale manufacturing facility.  Moreover, in order to
seek FDA approval of the sale of  PolyHeme produced at its first commercial
manufacturing facility, the Company may be required to conduct a portion of its
clinical trials with product manufactured at that facility.  Accordingly, a
delay in achieving scale-up of manufacturing capabilities will have a material
adverse effects on the completion of the Company's  clinical trials and
therefore on the commercial manufacture and sale of  PolyHeme.  Additionally,
the manufacture of  PolyHeme will be subject to extensive government
regulation.  Among the conditions for marketing approval is that the Company's
quality control and manufacturing procedures conform to the FDA's good
manufacturing practice regulations.  There can be no assurance that the Company
will be able to obtain the necessary regulatory clearances or approvals to
manufacture PolyHeme on a timely basis or at all.


                                     -13-
<PAGE>   14


LIMITATION OF SUPPLY OF STARTING MATERIAL

     Northfield currently purchases donated blood from the American Red Cross
and Blood Centers of America for use as the starting material for PolyHeme.  In
1996, the Company entered into an agreement with hemerica, Inc., a subsidiary
of Blood Centers of America, under which hemerica would supply Northfield with
82,500 units per year of packed red cells, the source material for PolyHeme
over a three year period.  Deliveries under that agreement are scheduled to
begin in 1998, close to the time Northfield expects to complete its Phase III
study.  The Company has plans to enter long-term supply arrangements with other
blood collectors.  There can be no assurance that the Company will be able to
enter into satisfactory long-term arrangements with blood bank operators, that
the price the Company may be required to pay for starting material will permit
the Company to price PolyHeme competitively or that the Company will be able to
obtain an adequate supply of starting material.  Additional demand for blood
may arise from competing blood substitute products, some of which are derived
from  human blood, thereby limiting the Company's available supply of starting
material.

COMPETITION

     If approved for commercial sale, PolyHeme will compete directly with
established therapies for acute blood loss and may compete with other
technologies currently under development.  There can be no assurance that
PolyHeme will have advantages which will be significant enough to cause medical
professionals to adopt it rather than to continue to use established therapies
or to adopt other new technologies or products.  There can also be no assurance
that the cost of PolyHeme will be competitive with the cost of established
therapies or other new technologies or products.  The development of blood
substitute products is a rapidly evolving field.  Competition is intense and
expected to increase.  At present there are nine companies involved with
clinical trials to develop a safe and effective blood substitute.  Several
companies have developed or are in the process of developing technologies which
are, or in the future may be, the basis for products which will compete with
PolyHeme.  One of  these companies is a large manufacturer of health care
products and is, like Northfield, focusing on the development of a product
derived from human blood.  Several other companies have entered into agreements
with large pharmaceutical companies for the manufacture and distribution of
their products.  Certain of these companies are pursuing different  approaches
or means of accomplishing the therapeutic effects sought to be achieved through
the use of  PolyHeme.  Many of these companies have substantially greater
financial resources, larger research and development staffs, more extensive
facilities and more experience than Northfield in testing, manufacturing,
marketing and distributing medical products.  There can be no assurance that
one or more other companies will not succeed in developing technologies or
products which will become available for commercial use prior to PolyHeme,
which will be more effective or less costly than PolyHeme or which would
otherwise render PolyHeme obsolete or non-competitive.

ABSENCE OF SALES AND MARKETING EXPERIENCE

     If approved for commercial sale, the Company intends to market PolyHeme in
the United States using its own sales force.  The Company  has no experience in
the sale or marketing of medical products.  The Company's ability to implement
its sales and marketing strategy for the United States will depend on its
ability to recruit, train and retain a marketing staff and sales force with
sufficient technical expertise.  There can be no assurance that the Company
will be able to establish an effective marketing staff and sales force, that
the cost of  establishing such a marketing staff and sales force will not
exceed revenues from the sale of PolyHeme or that the Company's marketing and
sales efforts will be successful.


                                     -14-
<PAGE>   15

HISTORY OF LOSSES; UNCERTAINTY
OF FUTURE PROFITABILITY OR FUNDING

     From its inception to May 31, 1997, the Company had incurred net losses
totaling $54.9 million.  The Company will require substantial additional
expenditures to complete clinical trials, to establish commercial scale
manufacturing processes and facilities, and to establish marketing, sales and
administrative capabilities.  These expenditures are expected to result in
substantial losses for at least the next several years.  The expense and the
time required to realize any product revenues or profitability are highly
uncertain.  There can be no assurance that the Company will be able to achieve
product revenues or profitability on a sustained basis or at all.  The Company
may require substantial additional funds to achieve commercial production of
PolyHeme.  The Company's future capital requirements will depend on many
factors, including the scope and results of clinical trials, the timing and
outcome of regulatory reviews, administrative and legal expenses, the status of
competitive products, the establishment of manufacturing capacity and the
establishment of collaborative relationships.  There can be no assurance that
such additional funding will be available to the Company or, if available, that
such funding can be obtained on terms and conditions the Company will deem
acceptable.  Any such additional funding may result in significant dilution to
then existing stockholders.

UNCERTAINTY OF MARKET ACCEPTANCE

     Northfield anticipates that the market price for PolyHeme, if FDA approval
is received, will exceed the cost of transfused blood.  Competitors may also
develop new technologies or products which are more effective or less costly
than PolyHeme.  There can be no assurance that the price of PolyHeme,
considered in relation to PolyHeme's expected benefits, will be perceived by
health care providers and third party payors as cost-effective, or that the
price of PolyHeme will be competitive with transfused blood or with other new
technologies or products.  The Company's results of operations may be adversely
affected if the price of PolyHeme is not considered cost-effective by health
care providers or third party payors of if PolyHeme does not otherwise receive
market acceptance.

UNCERTAINTY OF PATENTS AND PROTECTION OF
PROPRIETARY TECHNOLOGY

     The Company's ability to compete effectively with other companies will
depend, in part, on its ability to protect and maintain the proprietary nature
of its technology.  There can be no assurance as to the degree of  protection
offered by the patents owned by the Company, or as to the likelihood that
additional patents in the United States, Japan, the Netherlands and Germany
will be issued based upon pending patent applications.  Patent applications in
the United States are maintained in secrecy until patents are issued.  The
Company cannot be certain that it was the first creator of the inventors
covered by its patents or pending patent applications or that it was the first
to file patent applications for such inventions.  The high costs of enforcing
patent and other proprietary rights may also limit the degree of protection
afforded the Company.  The Company also relies on unpatented proprietary
technology, and there can be no assurance that others may not independently
develop the same or similar technology or otherwise obtain access to the
Company's proprietary technology.  There can be no assurance that the Company's
patents or other proprietary rights will be determined to be valid or
enforceable if challenged in court or administrative proceedings or that the
Company will not become involved in disputes with respect to the patents or
proprietary rights of third parties.  An adverse outcome from such proceedings
could subject the Company to significant liabilities to 



                                     -15-
<PAGE>   16


third parties, require disputed rights to be licensed from third parties or     
require the Company to stop using such technology, any of which would result in
a material adverse effect on the Company's results of operations.

ITEM 2. PROPERTIES

     Northfield currently leases a 21,000 square foot pilot manufacturing
facility located in Mt. Prospect, Illinois, and maintains its principal
executive offices in Evanston, Illinois.  The lease of the Mt. Prospect
facility expires in 1998,  with two five-year renewal options available to the
Company.  The Evanston office lease expires in 1998.  For its 1997 fiscal year,
the Company's lease payments for its Evanston facility were $23.31 per square
foot, or a total of $256,000, and the lease payments for its Mt. Prospect pilot
manufacturing facility were $8.70 per square foot, or a total of $183,000.  The
Company believes its present manufacturing facility is capable of producing
sufficient quantities of PolyHeme for all of the Company's clinical trials in
the United States.

     The Company is negotiating the acquisition of a parcel of undeveloped land
in the Chicago metropolitan area for development as the Company's initial
commercial-scale manufacturing facility.  The initial engineering design
studies for the facility, which is anticipated to have a production capacity of
approximately 300,000 units of PolyHeme per year, have been completed.
Northfield expects that the cost of constructing the facility, including land
acquisition costs, will be approximately $45 million.

ITEM 3. LEGAL PROCEEDINGS.

     As of  May 31, 1997, the Company was not a party to any material pending
legal proceedings.

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

     None.






                                     -16-
<PAGE>   17


PART II

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

MARKET INFORMATION

     The Company's Common Stock began trading publicly on the Nasdaq National
Market under the symbol "NFLD" effective May 26, 1994.  The following table set
forth, for the periods indicated, the range of high and low sales prices for
the Common Stock on the Nasdaq National Market.  These prices do not include
retail markups, markdowns or commissions.


<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
                                             HIGH           LOW      
<S>                                          <C>            <C>      
August 31, 1994                              $10 3/8        $5 5/8   
November 30, 1994                             12 1/4         8 1/8   
February 28, 1995                             11 7/8         6       
May 31, 1995                                  13 3/4         7 3/8   
August 31, 1995                               20 1/2        13 1/4   
November 30, 1995                             19 1/4        10 7/8   
February 29, 1996                             26 5/8        13 1/8   
May 31, 1996                                  22 1/2        14 1/2   
August 31, 1996                               17 1/8         9 1/2   
November 30, 1996                             14 1/2         9 5/8   
February 28, 1997                             14 1/4         9 3/4   
May 31, 1997                                  13 1/2         8 3/8   
August 31, 1997 (through August 27, 1997)     10 3/8         9       
</TABLE>

HOLDERS OF RECORD

     As of May 31, 1997, there were approximately 400 holders of record and
approximately 7,500 beneficial owners of the Company's Common Stock.  There
were as of such date no issued and outstanding shares of the Company's
Preferred Stock.

DIVIDENDS

     The Company has never declared or paid dividends on its capital stock and
does not anticipate declaring or paying any dividends in the foreseeable
future.



                                     -17-
<PAGE>   18


ITEM 6.  SELECTED FINANCIAL DATA

     The selected financial data set forth below for, and as of the end of,
each of the years in the five-year period ended May 31, 1997 and for the period
from June 19, 1985 (inception) through May 31, 1997 were derived from the
financial statements of the Company, which financial statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants.


<TABLE>
<CAPTION>
                                                                                                                       
                                                                                                      CUMULATIVE FROM   
                                                   YEARS ENDED MAY 31,                                JUNE 19, 1985     
                                                                                                   THROUGH MAY 31, 1997 
                                      1997         1996          1995         1994          1993
<S>                               <C>           <C>           <C>          <C>           <C>              <C>
STATEMENT OF OPERATIONS DATA:
(in thousands, except per
share data)
Revenues:
License income                    $    ---      $   ---       $   ---      $   ---       $   ---          $  3,000     
Costs and expenses:                                                                                                    
Research and development             5,188        5,223         5,901        5,512         6,354            45,612     
General and administrative           2,317        2,509         2,275        1,987         1,924            24,561     
Interest income (net)                3,259        2,953           737          135           211            12,316     
Net loss                          $ (4,246)     $(4,779)      $(7,439)     $(7,364)      $(8,067)         $(54,857)    
Net loss per share                $   (.30)     $  (.37)      $  (.76)     $ (1.05)      $ (1.22)         $  (7.17)    
Shares used in calculation of                                                                                          
per share data (1)                  13,961       12,849         9,850        6,990         6,623             7,648     
</TABLE>





                                     -18-
<PAGE>   19
<TABLE>
<CAPTION>


                                                       MAY 31,

                                      1997         1996          1995         1994          1993
<S>                                <C>          <C>           <C>           <C>           <C>
Cash and marketable
securities                         $60,294      $63,984       $12,252       $1,222        $7,024
Total assets                        62,343       66,339        14,852       20,038        12,400
Total liabilities                    1,048        1,391         1,226        1,617           804
Deficit accumulated during
 development stage                 (54,857)     (50,611)      (45,832)     (38,393)      (31,029)
Total shareholders' equity (2)      61,295       64,948        13,626       18,421        11,596
</TABLE>

(1)  Computed on the basis described in Note 1 of Notes to Financial
     Statements.

(2)  Excludes 345,500 shares reserved for issuance upon the exercise of stock
options outstanding as of May 31, 1997, and 135,500 shares reserved for 
issuance upon the exercise of warrants outstanding as of such date. Additional
stock options exercisable for a total of 305,000 shares and 200,000 shares,
respectively, were available for grant as of May 31, 1997 under the Company's
Employee Stock Option Plan and Stock Option Plan for Outside Directors.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

     Since its incorporation in 1985, Northfield has devoted substantially all
of its efforts and resources to the research, development and clinical testing
of PolyHeme.  Northfield has incurred operating losses during each year of its
operations since inception and expects to incur substantial additional
operating losses for the next several years.  From its inception to May 31,
1997, Northfield incurred net operating losses totaling $54,857,000.

     The Company's success will depend on several factors, including its
ability to obtain FDA regulatory approval of PolyHeme and the Company's
manufacturing facilities, obtain sufficient quantities of blood to manufacture
PolyHeme in commercial quantities, manufacture and distribute PolyHeme in a
cost-effective manner, and enforce its patent positions.  The Company has
experienced significant delays in the development and clinical testing of
PolyHeme.  There can be no assurance that the Company will be able to achieve
these goals or that it will be able to realize product revenues or
profitability on a sustained basis or at all.

     The Company anticipates that research and development expenses will
significantly increase during the foreseeable future.  These expected increases
are related to the conducting of future clinical trials, the monitoring and
reporting of results of such trials and continuing process development
associated with increases in the Company's manufacturing capacity to permit



                                     -19-
<PAGE>   20


commercial scale production of PolyHeme.  The Company also expects that general
and administrative expenses will increase over the foreseeable future due to
the higher costs relating to expanding the Company's organization.

RESULTS OF OPERATIONS

Fiscal Years Ended May 31, 1997, 1996 and 1995

     The Company reported no revenues for the fiscal years ended May 31, 1997,
1996 or 1995.  From its inception through May 31, 1997, the Company has
reported total revenues of $3,000,000, all of which were derived from licensing
fees.

OPERATING EXPENSES

     Operating expenses for the fiscal year ended May 31, 1997, 1996 and 1995
totaled $7,505,000, $7,732,000 and $8,176,000, respectively.  On a percentage
basis fiscal 1997 operating expenses were 2.9% less than fiscal 1996 operating
expenses and fiscal 1996 operating expenses were 5.4% less than those incurred
in fiscal 1995.

     Research and development expenses in fiscal 1997 totaled $5,188,000
compared to research and development expenses in fiscal 1996 of $5,223,000.
This decrease of $35,000, or .7%, resulted from a decrease in depreciation
expense as the Company's prototype manufacturing facility is nearing the end of
its depreciable life.  While total fiscal 1997 research and development
expenses decreased from fiscal 1996 levels, increases were incurred in the
areas of salaries and benefits, purchased engineering and clinical trials
expense.

     Research and development expenses in fiscal 1996 of $5,223,000 represented
a decrease of $678,000, or 11.5%, from fiscal 1995 levels.  Reduced depreciation
expense on the Company's prototype manufacturing facility was the primary
reason for the decline.

     The Company anticipates that research and development expenses will
increase significantly over the next several years.  Additional costs are
expected for expanded clinical trials, third-party clinical monitoring,
third-party product testing as well as costs associated with the construction
of a commercial scale manufacturing facility.

     General and administrative expenses in fiscal 1997 totaled $2,317,000
which was a decline of $192,000, or 7.6%, from the $2,509,000 in general and
administrative expenses reported in fiscal 1996.  Expense reductions were
experienced in legal, public relations and state filing fees from those
experienced in fiscal 1996.

     General and administrative expenses of $2,509,000 in fiscal 1996 exceeded
fiscal 1995 general and administrative expenses by $234,000, or 10.3%.  This
increase occurred as a result of the higher costs associated with communicating
to an expanding investor base, business development related expenses and
increased state filing fees based on the capitalization of the Company.


                                     -20-
<PAGE>   21


INTEREST INCOME

     Interest income for fiscal 1997 totaled $3,259,000, or a $306,000 increase
from the $2,953,000 of interest income reported in fiscal 1996.  Higher average
cash balances caused interest income to increase.  The $2,953,000 of interest
income reported in fiscal 1996 represented a $2,216,000 increase from the
$737,000 reported in fiscal 1995.  Higher balances in fiscal 1996 caused
interest income to increase.

     In August 1995, during its 1996 fiscal year, the Company completed a
public offering of 2,925,000 common shares generating net proceeds to the
Company of $48,354,000.  In September 1995, the Company sold an additional
438,750 common shares generating net proceeds to the Company of $7,365,000.

TAXES

     As a result of the losses incurred to date, the Company has not had to
provide for income taxes.  At May 31, 1997, the Company had net operating loss
carry forwards for financial reporting purposes of approximately $54,900,000.
Net operating loss carryforwards for income tax purposes as of May 31, 1997
amounted to approximately $56,700,000 expiring between 2001 and 2012.  The
difference between the amount of net operating loss carryforwards for financial
reporting and income tax purposes resulted from differences in the recognition
of research and development, compensatory stock options, depreciation expenses
and the tax benefit from the exercise of stock options.  Future changes in
stock ownership could result in a limitation of the Company's ability to
utilize present and future net operating loss carryforwards.  The Company also
has research and experimentation credits and investment tax credits of
approximately $1,300,000 which will be available to reduce future income taxes
through 2012.

LIQUIDITY AND CAPITAL RESOURCES

     From its inception through May 31, 1997, the Company has used cash for
operating activities and for the purchase of plant and equipment totaling
$52,485,000.  For the Company's fiscal years ended May 31, 1997 and 1996, such
expenditures were $4,280,000 and $4,431,000, respectively.   The Company
expects that such expenditures will increase significantly in future periods.
The Company has financed its research and development and other activities to
date primarily through the private sale of equity securities and through the
public offering of its common stock.  The Company's initial public offering
took place in May 1994 and in August 1995 the Company sold additional common
stock to the public.  The Company also recognized $3,000,000 of revenues
through the sale of product rights in 1989.  As of May 31, 1997, the Company
had cash and marketable securities totaling $60,294,000.

     The Company believes its existing capital resources will be adequate to
satisfy its operating capital requirements for approximately the next 18-24
months.  Thereafter, Northfield may require substantial additional funds to
test and seek regulatory approval for PolyHeme and to expand its commercial
capabilities.   Construction of a 300,000 unit annual capacity commercial scale
manufacturing facility is currently in the planning stages and (including land
costs) is estimated to cost $45 million.

     The Company expects to use existing resources to finance a commercial
manufacturing facility, though it may enter into collaborative arrangements
with strategic partners which could provide the Company with additional funding
or absorb expenses otherwise payable by the 


                                     -21-
<PAGE>   22


Company.  The Company has engaged in discussions with a number of potential     
strategic partners, though these discussions are at preliminary stages and
there can be no assurance that any such arrangement will be consummated.

     The Company's capital requirements may vary materially from those now
anticipated because of the results of the clinical testing of PolyHeme, the
establishment of relationships with strategic partners, changes in the scale,
timing or cost of the Company's commercial manufacturing facility, competitive
and technological advances, the FDA regulatory process, changes in the
Company's marketing and distribution strategy and other factors.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     See the Index to Financial Statements on page 24.  Such Financial 
Statements are incorporated herein by reference.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

     There has not been a disagreement on any matter of accounting principles or
financial statement disclosure with the Company's independent accountants
during the Company's 1997, 1996 or 1995 fiscal years.









                                     -22-
<PAGE>   23


PART III
ITEMS 10 THROUGH 13.

     The information specified in Items 10 through 13 of Form 10-K has been 
omitted in accordance with instructions to Form 10-K.  The Company expects to   
file with the Commission in September 1997, pursuant to Regulation 14A, a
definitive proxy statement involving the election of directors which will
contain the information required to be included in Items 10 through 13 of Form
10-K.

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

a)   The following documents are filed as part of this report:

     (1) & (2) See the Index to Financial Statements on page 24.

     (3) See Description of Exhibits on page 41.

b)   None.

c)   See Description of Exhibits on page 41.

d)   None.







                                     -23-
<PAGE>   24

<TABLE>
<CAPTION>

INDEX TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                                Page(s)
                                                                                                                ------ 

<S>                                                                                                              <C>
Independent Auditors' Report  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         25

Balance Sheets, May 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         26

Statements of Operations, Years ended May 31, 1997, 1996,
    and 1995 and the cumulative period from June 19, 1985
    (inception) through May 31, 1997  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         27

Statements of Shareholders' Equity (Deficit), Years ended May 31,
    1997, 1996, and 1995 and the cumulative period from June 19, 1985
    (inception) through May 31, 1997  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         28-31

Statements of Cash Flows, Years ended May 31, 1997, 1996,
    and 1995 and the cumulative period from June 19, 1985
    (inception) through May 31, 1997  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         32

Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         33-40
                                                                                                                      
</TABLE>




                                       
                                      24
<PAGE>   25
                      [KPMG PEAT MARWICK LLP LETTERHEAD]




                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Northfield Laboratories Inc.:


We have audited the accompanying balance sheets of Northfield Laboratories Inc.
(a company in the development stage) as of May 31, 1997 and 1996 and the
related statements of operations, shareholders' equity (deficit), and cash
flows for each of the years in the three-year period ended May 31, 1997 and for
the cumulative period from June 19, 1985 (inception) through May 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northfield Laboratories Inc.
(a company in the development stage) as of May 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the years in the
three-year period ended May 31, 1997 and for the cumulative period from June
19, 1985 (inception) through May 31, 1997, in conformity with generally
accepted accounting principles.


                                                           KPMG Peat Marwick LLP


Chicago, Illinois
July 3, 1997



                                      25
                                      
                                        
<PAGE>   26

NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Balance Sheets

May 31, 1997 and 1996


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Assets                                                                    1997      1996
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                                  <C>           <C>
Current assets:
 Cash                                                                $21,367,496    11,688,744
 Short-term marketable securities                                     38,926,904    52,295,647
 Prepaid expenses                                                        334,875       362,272
 Other current assets                                                    417,693       598,068
------------------------------------------------------------------------------------------------------------------------------------

Total current assets                                                  61,046,968    64,944,731

Plant and equipment, net                                               1,263,361     1,310,385
Other assets                                                              32,432        83,442
------------------------------------------------------------------------------------------------------------------------------------

                                                                     $62,342,761    66,338,558
====================================================================================================================================

                     LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------

Current liabilities:
 Accounts payable                                                        656,816       924,097
 Accrued expenses                                                        121,559       172,350
 Accrued compensation and benefits                                       175,800       178,050
------------------------------------------------------------------------------------------------------------------------------------

Total current liabilities                                                954,175     1,274,497

Other liabilities                                                         93,823       116,101
------------------------------------------------------------------------------------------------------------------------------------

Total liabilities                                                      1,047,998     1,390,598
------------------------------------------------------------------------------------------------------------------------------------

Shareholders' equity:
 Preferred stock, $.01 par value.  Authorized
  5,000,000 shares; none issued and outstanding                                -             -
 Common stock, $.01 par value.  Authorized
  20,000,000 shares; issued and outstanding
  14,092,375 and 13,586,155 shares in
  1997 and 1996, respectively                                            140,924       135,862
 Additional paid-in capital                                          116,011,985   115,427,120
 Deficit accumulated during the development stage                    (54,856,862)  (50,611,169)
 Deferred compensation                                                    (1,284)       (3,853)
------------------------------------------------------------------------------------------------------------------------------------

Total shareholders' equity                                            61,294,763    64,947,960
------------------------------------------------------------------------------------------------------------------------------------

                                                                     $62,342,761    66,338,558
====================================================================================================================================
</TABLE>


See accompanying notes to financial statements.



                                      26

<PAGE>   27

NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Statements of Operations

Years ended May 31, 1997, 1996, and 1995
and the cumulative period from June 19, 1985
(inception) through May 31, 1997


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                         Cumulative
                                                                                            from
                                                                                       June 19, 1985
                                                          Years ended May#31,             through
                                              --------------------------------------    May 31, 1997
                                                   1997          1996        1995       
------------------------------------------------------------------------------------------------------------------------------------

<S>                                          <C>                <C>         <C>           <C>
Revenues - license income                     $            -             -           -     3,000,000
Costs and expenses:
 Research and development                          5,187,738     5,223,056   5,901,608    45,611,765
 General and administrative                        2,317,217     2,509,161   2,274,776    24,560,909
------------------------------------------------------------------------------------------------------------------------------------

                                                   7,504,955     7,732,217   8,176,384    70,172,674
------------------------------------------------------------------------------------------------------------------------------------

Other income and expense:
 Interest income                                   3,259,262     2,953,342     737,371    12,399,046
 Interest expense                                          -             -           -        83,234
------------------------------------------------------------------------------------------------------------------------------------

                                                   3,259,262     2,953,342     737,371    12,315,812
------------------------------------------------------------------------------------------------------------------------------------

Net loss                                      $   (4,245,693) 0 (4,778,875) (7,439,013)  (54,856,862)
====================================================================================================================================

Net loss per share                            $       (0.30)         (0.37)      (0.76)        (7.17)
====================================================================================================================================

Shares used in calculation
 of per share data                                13,960,557    12,848,904   9,849,815     7,647,931
====================================================================================================================================
</TABLE>


See accompanying notes to financial statements.




                                      27
<PAGE>   28

NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Statements of Shareholders' Equity (Deficit)

Years ended May 31, 1997, 1996, and 1995 and the cumulative
period from June 19, 1985 (inception) through May 31, 1997




<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Preferred stock
                                                                                                     -----------------------
                                                                                                      Number       Aggregate
                                                                                                     of shares       amount
                                                                                                    
<S>                                                                                                       <C>      <C>
Issuance of common stock at $0.002 per share on August 27, 1985                                              -       $      -
Issuance of Series A convertible preferred stock at $4.00 per share on                              
 August 27, 1985 (net of costs of issuance of $79,150)                                                       -              -
Net loss                                                                                                     -              -
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    
Balance at May 31, 1986                                                                                      -              -
Net loss                                                                                                     -              -
Deferred compensation relating to grant of stock options                                                     -              -
Amortization of deferred compensation                                                                        -              -
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    
Balance at May 31, 1987                                                                                      -              -
Issuance of Series B convertible preferred stock at $35.68 per share on                             
 August 14, 1987 (net of costs of issuance of $75,450)                                                       -              -
Net loss                                                                                                     -              -
Amortization of deferred compensation                                                                        -              -
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    
Balance at May 31, 1988                                                                                      -              -
Issuance of common stock at $24.21 per share on June 7, 1988 (net of costs of issuance of $246,000)          -              -
Conversion of Series A convertible preferred stock to common stock on June 7, 1988                           -              -
Conversion of Series B convertible preferred stock to common stock on June 7, 1988                           -              -
Exercise of stock options at $2.00 per share                                                                 -              -
Issuance of common stock at $28.49 per share on March 6, 1989 (net of costs of issuance of $21,395)          -              -
Issuance of common stock at $28.49 per share on March 30, 1989 (net of costs of issuance of $10,697          -              -
Sale of options at $28.29 per share to purchase common stock at $.20 per share on                   
 March 30, 1989 (net of costs of issuance of $4,162)                                                         -              -
Net loss                                                                                                     -              -
Deferred compensation relating to grant of stock options                                                     -              -
Amortization of deferred compensation                                                                        -              -
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    
Balance at May 31, 1989                                                                                      -              -
Net loss                                                                                                     -              -
Deferred compensation relating to grant of stock options                                                     -              -
Amortization of deferred compensation                                                                        -              -
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    
Balance at May 31, 1990                                                                                      -              -
Net loss                                                                                                     -              -
Amortization of deferred compensation                                                                        -              -
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    
Balance at May 31, 1991                                                                                      -              -
Exercise of stock warrants at $5.60 per share                                                                -              -
Net loss                                                                                                     -              -
Amortization of deferred compensation                                                                        -              -
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    
Balance at May 31, 1992                                                                                      -              -
Exercise of stock warrants at $7.14 per share                                                                -              -
Issuance of common stock at $15.19 per share on April 19, 1993 (net of costs of issuance of $20,724          -              -
Net loss                                                                                                     -              -
Amortization of deferred compensation                                                                        -              -
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    
Balance at May 31, 1993                                                                                      -       $      -
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>




                                      28

                                       
<PAGE>   29

NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Statements of Shareholders' Equity (Deficit)

Years ended May 31, 1997, 1996, and 1995 and the cumulative
period from June 19, 1985 (inception) through May 31, 1997


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                               
                         Series A convertible    Series B convertible                    Deficit                       Total
     Common stock          preferred stock        preferred   stock                     accumulated                    share-
 ---------------------   --------------------    --------------------    Additional      during the      Deferred      holders
  Number     Aggregate    Number     Aggregate     Number   Aggregate      paid-in       development      compen-       equity
 of shares    amount     of shares     amount      of shares  amount       capital          stage          sation       (deficit)
------------------------------------------------------------------------------------------------------------------------------------
<S>         <C>           <C>         <C>          <C>      <C>   <C>     <C>            <C>             <C>            <C>
 3,500,000    $ 35,000            -    $       -        -    $      -         (28,000)             -             -           7,000 
                                                                                                                                   
         -           -      250,000      250,000        -           -         670,850              -             -         920,850 
         -           -            -            -        -           -               -       (607,688)            -        (607,688)
-----------  ------------  ----------  -------------------   -----------    ------------  --------------  ------------ -------------
                                                                                                                                   
 3,500,000      35,000      250,000      250,000        -           -         642,850       (607,688)            -         320,162 
         -           -            -            -        -           -               -     (2,429,953)            -      (2,429,953)
         -           -            -            -        -           -       2,340,000              -      (2,340,000)          -   
         -           -            -            -        -           -               -              -         720,000       720,000 
-----------  ------------  ----------  -------------------   -----------    ------------  --------------  ------------ -------------
                                                                                                                                   
 3,500,000      35,000      250,000      250,000        -           -       2,982,850     (3,037,641)     (1,620,000)   (1,389,791)
                                                                                                                                   
         -           -            -            -    200,633     200,633     6,882,502              -               -     7,083,135 
         -           -            -            -        -           -               -     (3,057,254)              -    (3,057,254)
         -           -            -            -        -           -               -              -         566,136       566,136 
-----------  ------------  ----------  -------------------   -----------    ------------  --------------  ------------ -------------
                                                                                                                                   
 3,500,000      35,000      250,000      250,000    200,633     200,633     9,865,352     (6,094,895)     (1,053,864)    3,202,226 
   413,020       4,130            -            -        -           -       9,749,870              -               -     9,754,000 
 1,250,000      12,500     (250,000)    (250,000)       -           -         237,500              -               -             - 
 1,003,165      10,032            -            -   (200,633)   (200,633)      190,601              -               -             - 
    47,115         471            -            -        -           -          93,759              -               -        94,230 
   175,525       1,755            -            -        -           -       4,976,855              -               -     4,978,610 
    87,760         878            -            -        -           -       2,488,356              -               -     2,489,234 
                                                                                                                                   
         -           -            -            -        -           -       7,443,118              -               -     7,443,118 
         -           -            -            -        -           -               -       (791,206)              -      (791,206)
         -           -            -            -        -           -         683,040              -        (683,040)            - 
         -           -            -            -        -           -               -              -         800,729       800,729 
-----------  ------------  ----------  -------------------   -----------    ------------  --------------  ------------ -------------
                                                                                                                                   
 6,476,585      64,766            -            -        -           -      35,728,451     (6,886,101)       (936,175)   27,970,941 
         -           -            -            -        -           -               -     (3,490,394)              -    (3,490,394)
         -           -            -            -        -           -         699,163              -        (699,163)            - 
         -           -            -            -        -           -               -              -         546,278       546,278 
-----------  ------------  ----------  -------------------   -----------    ------------  --------------  ------------ -------------
                                                                                                                                   
 6,476,585      64,766            -            -        -           -      36,427,614    (10,376,495)     (1,089,060)   25,026,825 
         -           -            -            -        -           -               -     (5,579,872)              -    (5,579,872)
         -           -            -            -        -           -               -              -         435,296       435,296 
-----------  ------------  ----------  -------------------   -----------    ------------  --------------  ------------ -------------
                                                                                                                                   
 6,476,585      64,766            -            -        -           -      36,427,614    (15,956,367)       (653,764)   19,882,249 
    90,000         900            -            -        -           -         503,100              -               -       504,000 
         -           -            -            -        -           -               -     (7,006,495)              -    (7,006,495)
         -           -            -            -        -           -               -              -         254,025       254,025 
-----------  ------------  ----------  -------------------   -----------    ------------  --------------  ------------ -------------
                                                                                                                                   
 6,566,585      65,666            -            -        -           -      36,930,714    (22,962,862)       (399,739)   13,633,779 
    15,000         150            -            -        -           -         106,890              -               -       107,040 
   374,370       3,744            -            -        -           -       5,663,710              -               -     5,667,454 
         -           -            -            -        -           -               -     (8,066,609)              -    (8,066,609)
         -           -            -            -        -           -               -              -         254,025       254,025 
-----------  ------------  ----------  -------------------   -----------    ------------  --------------  ------------ -------------
                                                                                                                                   
 6,955,955    $ 69,560            -    $      -        -     $     -       42,701,314    (31,029,471)       (145,714)   11,595,689 
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                      29


<PAGE>   30
NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Statements of Sharehonder's Equity (Deficit), Continued


<TABLE>
<CAPTION>
                                                                                                             Preferred stock
                                                                                                        ------------------------  
                                                                                                          Number       Aggregate
                                                                                                         of shares      amount
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                        <C>      <C>
Net loss                                                                                                     -       $   -
Issuance of common stock at $6.50 per share on May 26, 1994 (net of costs of issuance of $2,061,149)         -           -
Cancellation of stock options                                                                                -           -
Amortization of deferred compensation                                                                        -           -
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            
Balance at May 31, 1994                                                                                      -           -
Net loss                                                                                                     -           -
Issuance of common stock at $6.50 per share on June 20, 1994 (net of issuance costs of $172,500)             -           -
Exercise of stock options at $7.14 per share                                                                 -           -
Exercise of stock options at $2.00 per share                                                                 -           -
Cancellation of stock options                                                                                -           -
Amortization of deferred compensation                                                                        -           -
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            
Balance at May 31, 1995                                                                                      -           -
Net loss                                                                                                     -           -
Issuance of common stock at $17.75 per share on August 9, 1995 (net of issuance costs of $3,565,125)         -           -
Issuance of common stock at $17.75 per share on September 11, 1995 (net of issuance costs of $423,238)       -           -
Exercise of stock options at $2.00 per share                                                                 -           -
Exercise of stock options at $6.38 per share                                                                 -           -
Exercise of stock options at $7.14 per share                                                                 -           -
Cancellation of stock options                                                                                -           -
Amortization of deferred compensation                                                                        -           -
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            
Balance at May 31, 1996                                                                                      -           -
Net loss                                                                                                     -           -
Exercise of stock options at $0.20 per share                                                                 -           -
Exercise of stock options at $2.00 per share                                                                 -           -
Exercise of stock options at $7.14 per share                                                                 -           -
Amortization of deferred compensation                                                                        -           -
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            
Balance at May 31, 1997                                                                                      -       $   -
====================================================================================================================================
</TABLE>


See accompanying notes to financial statements.



                                      30

<PAGE>   31
NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Statements of Sharesholders' Equity (Deficit), Continued



<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                 
                        Series A convertible  Series B convertible               Deficit                    Total
      Common stock        preferred stock      preferred stock                  accumulated                 share-
----------------------  -------------------   --------------------  Additional  during the     Deferred     holders
  Number       Aggregate   Number         Aggregate    Number       Aggregate    paid-in      development  compen-        equity
 of shares      amount    of shares        amount     of shares      amount      capital         stage     sation        (deficit)
------------------------------------------------------------------------------------------------------------------------------------
<S>           <C>           <C>         <C>         <C>           <C>        <C>            <C>            <C>        <C>          
                                                                                                                                   
         -      $      -         -       $    -        -            $   -               -    (7,363,810)         -      (7,363,810)
 2,500,000        25,000         -            -        -                -      14,163,851             -          -      14,188,851 
         -             -         -            -        -                -         (85,400)            -     85,400               - 
         -             -         -            -        -                -               -             -        267             267 
------------------------------------------------------------------------------------------------------------------------------------
                                                            
 9,455,955        94,560         -            -        -                -      56,779,765   (38,393,281)   (60,047)     18,420,997 
         -             -         -            -        -                -               -    (7,439,013)         -      (7,439,013)
   375,000         3,750         -            -        -                -       2,261,250             -          -       2,265,000 
    10,000           100         -            -        -                -          71,300             -          -          71,400 
   187,570         1,875         -            -        -                -         373,264             -          -         375,139 
         -             -         -            -        -                -        (106,750)            -    106,750               - 
         -             -         -            -        -                -               -             -    (67,892)        (67,892)
------------------------------------------------------------------------------------------------------------------------------------
                                                            
10,028,525       100,285         -            -        -                -      59,378,829   (45,832,294)   (21,189)     13,625,631 
         -             -         -            -        -                -               -    (4,778,875)         -      (4,778,875)
 2,925,000        29,250         -            -        -                -      48,324,374             -          -      48,353,624 
   438,750         4,388         -            -        -                -       7,360,187             -          -       7,364,575 
   182,380         1,824         -            -        -                -         362,937             -          -         364,761 
     1,500            15         -            -        -                -           9,555             -          -           9,570 
    10,000           100         -            -        -                -          71,300             -          -          71,400 
         -             -         -            -        -                -         (80,062)            -     80,062               - 
         -             -         -            -        -                -               -             -    (62,726)        (62,726)
------------------------------------------------------------------------------------------------------------------------------------
                                                            
13,586,155       135,862         -            -        -                -     115,427,120   (50,611,169)    (3,853)     64,947,960
         -             -         -            -        -                -               -    (4,245,693)         -      (4,245,693)
   263,285         2,633         -            -        -                -          50,025             -          -          52,658
   232,935         2,329         -            -        -                -         463,540             -          -         465,869
    10,000           100         -            -        -                -          71,300             -          -          71,400
         -             -         -            -        -                -               -             -      2,569           2,569
------------------------------------------------------------------------------------------------------------------------------------
                                                            
14,092,375      $140,924         -       $    -        -            $   -     116,011,985   (54,856,862)    (1,284)     61,294,763
====================================================================================================================================
</TABLE>



                                      31

<PAGE>   32

NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Statements of Cash Flows

Years ended May 31, 1997, 1996, and 1995
and the cumulative period from June 19, 1985
(inception) through May 31, 1997


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 
                                                                                                     Cumulative  
                                                                                                        from     
                                                                  Years ended May 31,               June 19, 1985
                                                              ----------------------------            through    
                                                              1997        1996        1995           May 31, 1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>              <C>          <C>            <C>
Cash flows from operating activities:
 Net loss                                               $ (4,245,693)    (4,778,875)   (7,439,013)   (54,856,862)
 Adjustments to reconcile net loss to net
  cash used in operating activities:
   Depreciation and amortization                             489,970      1,195,273     1,895,581     12,867,123
   Amortization of deferred compensation                       2,569        (62,726)      (67,892)     3,448,707
   Loss on sale of equipment                                       -              -             -         66,359
   Changes in assets and liabilities:
    Prepaid expenses                                          27,397        (80,124)       34,133       (334,875)
    Other current assets                                      41,208       (215,595)     (629,335)    (2,304,777)
    Other assets                                              49,938         22,912        78,819        (47,324)
    Accounts payable                                        (267,281)       398,052      (107,999)       656,816
    Accrued expenses                                         (50,791)      (112,776)     (271,867)       121,559
    Accrued compensation and benefits                         (2,250)       (98,441)       10,785        175,800
    Other liabilities                                        (22,278)       (22,278)      (22,278)        93,823
------------------------------------------------------------------------------------------------------------------------------------

Net cash used in operating activities                     (3,977,211)    (3,754,578)   (6,519,066)   (40,113,651)
------------------------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
 Purchase of plant and equipment, and
  capitalized engineering costs                             (302,706)      (676,670)     (162,591)   (12,371,454)
 Proceeds from sale of equipment                                   -              -             -         76,587
 Proceeds from matured marketable securities              69,599,200     79,915,208    30,264,065    235,742,381
 Proceeds from sale of marketable securities                       -              -             -      7,141,656
 Purchase of marketable securities                       (56,230,458)  (121,533,154)  (40,551,079)  (281,810,942)            
------------------------------------------------------------------------------------------------------------------------------------

Net cash provided by (used in) investing activities       13,066,036    (42,294,616)  (10,449,605)   (51,221,772)
------------------------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
 Proceeds from issuance of common stock                      589,927     60,152,293    17,984,040    102,327,828
 Payment of common stock issuance costs                            -     (3,988,363)     (172,500)    (5,072,012)
 Proceeds from issuance of preferred stock                         -              -             -      6,644,953
 Proceeds from sale of stock options to
  purchase common shares                                           -              -             -      7,443,118
 Proceeds from issuance of notes payable                           -              -             -      1,500,000
 Repayment of notes payable                                        -              -             -       (140,968)
------------------------------------------------------------------------------------------------------------------------------------

Net cash provided by financing activities                    589,927     56,163,930    17,811,540    112,702,919
------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash                                       9,678,752     10,114,736       842,869     21,367,496

Cash at beginning of period                               11,688,744      1,574,008       731,139              -
------------------------------------------------------------------------------------------------------------------------------------

Cash at end of period                                   $ 21,367,496     11,688,744     1,574,008     21,367,496
====================================================================================================================================
</TABLE>

See accompanying notes to financial statements.



                                      32

<PAGE>   33



NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Notes to Financial Statements

May 31, 1997 and 1996
--------------------------------------------------------------------------------



 (1)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

             DESCRIPTION OF OPERATIONS IN THE DEVELOPMENT STAGE

       Northfield Laboratories Inc. (the Company), a Delaware corporation, was
       incorporated on June 19, 1985 to research, develop, test, manufacture,
       market, and distribute a hemoglobin-based blood substitute product.  The
       Company is continuing its research and development activities.

             BASIS OF PRESENTATION

       The financial statements have been prepared in accordance with the
       provisions of Statement of Financial Accounting Standards (SFAS) No. 7,
       Accounting and Reporting by Development Stage Enterprises, which
       requires development stage companies to employ the same accounting
       principles as operating companies.

             SHORT-TERM MARKETABLE SECURITIES

       Short-term marketable securities consist of government securities,
       corporate notes, and certificates of deposit with original maturities of
       less than one year.  The Company classifies its investment securities as
       held-to-maturity.  Held-to-maturity securities are those securities
       which the Company has the ability and intent to hold until maturity.
       Held-to-maturity securities are recorded at amortized cost, adjusted for
       the amortization or accretion of premiums or discounts .  Premiums and
       discounts are amortized or accreted over the life of the related
       security as an adjustment to yield using the straight-line method, which
       approximates the effective interest method.  Interest income is
       recognized when earned.

             PLANT AND EQUIPMENT

       Plant and equipment are recorded at cost and are depreciated using the
       straight-line method over the estimated useful lives of the respective
       assets, generally five to seven years.  Leasehold improvements are
       amortized using the straight-line method over the lesser of the life of
       the asset or the term of the lease, generally eight to ten years.

             CAPITALIZED ENGINEERING COSTS

       Capitalized engineering costs include design and other initial
       engineering studies relating to a commercial scale facility.  During
       fiscal 1997 and 1996, the Company capitalized $100,717 and $473,515,
       respectively, of such engineering costs.  Upon completion of
       construction, these costs will be amortized over the life of the
       facility.  For the years ended May 31, 1997 and 1996, no amortization of
       the capitalized costs was recorded.

             COMPUTATION OF NET LOSS PER SHARE

       The net loss per common and common equivalent shares for the years ended
       May 31, 1997, 1996, and 1995 and the cumulative period from June 19,
       1985 through May 31, 1997 has been computed using the weighted average
       number of common shares outstanding for each period.  Common equivalent
       shares from stock options and warrants are excluded from the computation
       as their effect is antidilutive.

             RECLASSIFICATION

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





                                                                     (Continued)


                                      33
<PAGE>   34



NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Notes to Financial Statements

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



             USE OF ESTIMATES

       The preparation of 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 disclosure 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.

             FINANCIAL INSTRUMENTS

       The fair values of financial instruments, which consist of cash,
       marketable securities (note 9), accounts payable, accrued expenses, and
       accrued compensation and benefits, were not materially different from
       their carrying values at May 31, 1997 and 1996.

             STOCK BASED COMPENSATION

       Prior to June 1, 1996, the Company accounted for its stock option plan
       in accordance with the provisions of Accounting Principles Board (APB)
       Opinion No. 25, Accounting for Stock Issued to Employees, and related
       interpretations.  As such, compensation expense would be recorded on the
       date of grant only if the current market price of the underlying stock
       exceeded the exercise price.  On June 1, 1996, the Company adopted SFAS
       No. 123, Accounting for Stock-Based Compensation, which permits entities
       to recognize as expense over the vesting period the fair value of all
       stock-based awards on the date of grant.  Alternatively, SFAS No. 123
       allows entities to continue to apply the provisions of APB Opinion No.
       25 and provide pro forma net income and pro forma earnings per share
       disclosures for employee stock option grants made in fiscal 1997 and
       future years as if the fair-value-based method defined in SFAS No. 123
       had been applied.  The Company has elected to continue to apply the
       provisions of APB Opinion No. 25 and provide the pro forma disclosures
       required by SFAS No. 123.


 (2)   PLANT AND EQUIPMENT

       Plant and equipment, at cost, less accumulated depreciation and
       amortization, is summarized as follows as of May 31, 1997 and 1996:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

                                                                                              1997            1996
------------------------------------------------------------------------------------------------------------------------------------
       <S>                                                                           <C>                    <C>
       Manufacturing equipment                                                       $       6,813,017       6,619,969
       Laboratory equipment                                                                  1,330,425       1,330,425
       Office furniture and equipment                                                          819,756         810,815
       Leasehold improvements                                                                1,579,732       1,579,732
       Capitalized engineering costs                                                           574,232         473,515
------------------------------------------------------------------------------------------------------------------------------------

                                                                                            11,117,162      10,814,456
       Less accumulated depreciation and amortization                                        9,853,801       9,504,071
------------------------------------------------------------------------------------------------------------------------------------

                                                                                     $       1,263,361       1,310,385
====================================================================================================================================
</TABLE>


       Depreciation and amortization of plant and equipment amounted to
       $349,730, $998,695, and $1,673,253, for the years ended May 31, 1997,
       1996, and 1995, respectively.





                                                                     (Continued)

                                      34
<PAGE>   35



NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Notes to Financial Statements

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



 (3)   SHAREHOLDERS' EQUITY

       On June 19, 1985, the date of incorporation, the Company authorized
       5,500,000 shares of $.10 par value common stock.  On August 12, 1985, an
       amendment to the Certificate of Incorporation was approved increasing
       the authorized number of common shares to 8,750,000 and changing the par
       value to $.01.

       On June 7, 1988, the Company issued 413,020 additional shares of common
       stock for net proceeds of $9,754,000.  In conjunction with this
       transaction, all outstanding shares of Series A and Series B convertible
       preferred stock were converted to common stock and the Series B warrants
       were converted to common stock warrants (note 6).  In conjunction with
       this transaction, options for 47,115 common shares were exercised at
       $2.00 per share.

       On March 6, 1989, the Company issued 175,525 additional shares of common
       stock for net proceeds of $4,978,610.

       On March 30, 1989, the Company issued 87,760 additional shares of common
       stock for net proceeds of $2,489,234.  Also on this date, the Company
       sold an option to purchase 263,285 shares of common stock for net
       proceeds of $7,443,118.  The option exercise price was $.20 per share.
       On July 8, 1996, the option was exercised and the Company issued all
       263,285 shares of common stock.

       On September 30, 1991, the Company issued 90,000 additional shares of
       common stock for net proceeds of $504,000.  These shares were issued as
       a result of the exercise of common stock warrants (note 6).

       On June 29, 1992, the Company issued 15,000 additional shares of common
       stock for net proceeds of $107,040.  These shares were issued as a
       result of the exercise of common stock warrants (note 6).

       On April 19, 1993, the Company issued 374,370 additional shares of
       common stock for net proceeds of $5,667,454.

       On May 5, 1994, the Company filed an amended and restated Certificate of
       Incorporation effecting a five-for-one stock split of the Company's
       common stock.  All common share and per share amounts have been adjusted
       retroactively to give effect to the stock split.  Additionally, the
       amended and restated Certificate of Incorporation effected an increase
       in the number of authorized shares of common stock to 20,000,000 and
       authorized 5,000,000 shares of preferred stock.

       On May 26, 1994, the Company issued 2,500,000 additional shares of
       common stock for net proceeds of $14,188,851.  The proceeds were
       received by the Company on June 3, 1994.

       On June 20, 1994, the Company issued 375,000 additional shares of common
       stock for net proceeds of $2,265,000.

       During the year ended May 31, 1995, the Company issued 197,570
       additional shares of common stock upon the exercise of stock options for
       cash at $2.00 and $7.14 per share for net proceeds of $446,539.

       On August 9, 1995, the Company issued 2,925,000 additional shares of
       common stock for net proceeds of $48,353,624.

       On September 11, 1995, the Company issued 438,750 additional shares of
       common stock for net proceeds of $7,364,575.





                                                                     (Continued)

                                      35
<PAGE>   36



NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Notes to Financial Statements

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



       During the year ended May 31, 1996, the Company issued 193,880
       additional shares of common stock upon the exercise of stock options for
       cash at $2.00, $6.38, and $7.14 per share for net proceeds of $445,731.

       During the year ended May 31, 1997, the Company issued 506,220
       additional shares of common stock upon the exercise of stock options for
       cash at $0.20, $2.00, and $7.14 per share for net proceeds of $589,927.


 (4)   INCOME TAXES

       As a result of losses incurred to date, the Company has not had to
       provide for income taxes.  As of May 31, 1997, the Company had net
       operating loss carryforwards for income tax purposes of approximately
       $56,700,000, which are available to offset future taxable income, if
       any, through 2001 to 2012.  Deferred tax assets primarily resulted from
       net operating loss carryforwards and differences in the recognition of
       research and development, compensatory stock options, and depreciation
       expenses and the tax benefit from the exercise of stock options.
       Additionally, the Company had approximately $1,300,000 of research and
       experimentation tax credits and investment tax credits available to
       reduce future income taxes through 2012.

       Under the asset and liability method of SFAS No. 109, deferred tax
       assets and liabilities are recognized for the future tax consequences
       attributable to differences between the financial statement carrying
       amounts of existing assets and liabilities and their respective tax
       bases and operating loss and tax credit carryforwards.

       The net deferred tax assets as of May 31, 1997 and 1996 are summarized
       as follows:


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                          1997                1996
------------------------------------------------------------------------------------------------------------------------------------


       <S>                                                                        <C>                     <C>
       Deferred tax liability                                                     $          -                  -

       Deferred tax assets
           Net operating loss carryforwards                                              22,100,000         19,400,000
           Tax credit carryforwards                                                       1,300,000          1,200,000
           Deferred compensation                                                          1,400,000          1,400,000
           Other                                                                            700,000            800,000
------------------------------------------------------------------------------------------------------------------------------------

                                                                                         25,500,000         22,800,000
------------------------------------------------------------------------------------------------------------------------------------

       Valuation allowance                                                              (25,500,000)       (22,800,000)
------------------------------------------------------------------------------------------------------------------------------------

       Net deferred tax asset                                                     $          -                  -
====================================================================================================================================
</TABLE>



 (5)   STOCK OPTION PLAN

       The Company's Restated Nonqualified Stock Option Plan (the Employee
       Stock Option Plan) lapsed on September 30, 1996.  Following the
       termination of the plan, all options which prior to the plan termination





                                                                     (Continued)


                                      36
<PAGE>   37



NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Notes to Financial Statements


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


       had not expired, terminated or been exercised or surrendered may be
       exercised in accordance with their terms.  As of September 30, 1996,
       under the Employee Stock Option Plan, options have been granted to
       purchase shares of the Company's common stock at prices between $2.00
       and $15.19 per share.  These options expire between 1997 and 2004, ten
       years after the date of grant.  No options were granted under this plan
       during fiscal 1997 or 1996.

       With an effective date of October 1, 1996, the Company established the
       Northfield Laboratories Inc. 1996 Stock Option Plan (the 1996 Option
       Plan).  This plan provides for the granting of stock options to the
       Company's directors, officers, key employees and consultants.  Stock
       options to purchase a total of 500,000 shares of common stock are
       available under the 1996 Option Plan.  During the year ended May_31,
       1997, the Company granted options to purchase shares of common stock at
       prices between $10.81 and $11.44 per share, which was equal to the fair
       market value of a share of common stock at the date of grant.  These
       options expire in 2006 and 2007, ten years after the date of grant.

       Compensation expense (benefit) in the amount of $2,569, $(62,726), and
       $(67,892), was recorded for those compensatory options vesting during
       the years ended May 31, 1997, 1996, and 1995, respectively.
       Compensation expense represents the amortization over the vesting period
       of the total deferred compensation attributable to the difference
       between the fair market value of the options at the date of grant and
       the exercise price.

       In September 1994, the Company adopted the Nonqualified Stock Option
       Plan for Outside Directors (Directors Plan) which provides for the
       granting of nonqualified stock options to directors of the Company who
       are neither employees of nor consultants to the Company and who were not
       directors of the Company prior to June 1, 1994.  Stock options to
       purchase a total of 200,000 shares of common stock are available under
       the Directors Plan.  As of May 31, 1997, no options under the Directors
       Plan have been granted.

       The Company applies APB Opinion No. 25 and related interpretations in
       accounting for options granted to directors, officers and key employees
       under the plans.  Accordingly, compensation cost is recorded on the date
       of grant only if the current market price of the underlying stock
       exceeds the exercise price.  Had compensation cost for the Company's
       stock option plans been determined consistent with SFAS No. 123, the
       Company's net loss and net loss per share would have been the pro forma
       amounts indicated below:


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                              1997            1996
------------------------------------------------------------------------------------------------------------------------------------

       <S>                                                                             <C>                 <C>
       Net loss as reported                                                            $   (4,245,693)     (4,778,875)
       Pro forma                                                                           (4,526,133)     (4,778,875)

       Net loss per share as reported                                                  $        (0.30)          (0.37)
       Pro forma                                                                                (0.32)          (0.37)
====================================================================================================================================
       For purposes of calculating the compensation cost consistent with SFAS No. 123, the fair value of each option grant is 
       estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 
       fiscal 1997 (as noted above, no options were granted in 1996):
====================================================================================================================================


       Expected volatility                                                                                   60.00 %
       Risk-free interest rate                                                                               6 .70 %
       Dividend yield                                                                                            -
       Expected lives                                                                                       7.8 years
====================================================================================================================================
</TABLE>

                                                                     (Continued)

                                      37
<PAGE>   38



NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Notes to Financial Statements




--------------------------------------------------------------------------------
       Additional information on shares subject to options is as follows:
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                 1997                         1996                      1995
                                       ---------------------         --------------------       --------------------
                                                    Weighted                     Weighted                   Weighted
                                                     average                      average                   average
                                                    exercise                     exercise                   exercise
                                        Options       price           Options      price        Options      price
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>       <C>                <C>        <C>            <C>         <C>
       Outstanding at beginning
           of year                       393,435   $   5.57            599,315    $ 4.54         767,885      $ 3.89
       Granted                           195,000      10.86              -          -             39,000        6.38
       Exercised                         242,935       2.21            193,880      2.30         197,570        2.26
       Canceled                            -           -                12,000      6.86          10,000        7.14
------------------------------------------------------------------------------------------------------------------------------------

       Outstanding at end of year        345,500      10.91            393,435      5.57         599,315        4.54
====================================================================================================================================

       Options exercisable at
           year end                      100,250   $  11.75            311,185    $ 4.24         476,565      $ 2.98
====================================================================================================================================

       Weighted-average fair          
           value of options granted
           during the year              $  7 .55                         -
====================================================================================================================================
</TABLE>
     The following table summarizes information about stock options outstanding 
     at May 31, 1997:
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                  Options outstanding
                                      ----------------------------------------
                                                      Weighted                              Options exercisable
                                                                                       -----------------------------
                                                       average        Weighted            Options           Weighted
                                                      remaining        average         exercisable at       average
                                         Number      contractual      exercise            May 31,           exercise
       Range of exercise prices       outstanding       life            price              1997              price
------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>          <C>            <C>                   <C>            <C>
       $       6.38 -  7.14                75,500      4.34 years     $   6.81               39,000        $    6.82
              10.81 - 15.19               270,000      8.65              12.06               61,250            14.88
====================================================================================================================================
</TABLE>


 (6)   STOCK WARRANTS

       In connection with demand notes dated September 23, 1986, the Company
       issued warrants to purchase a total of 90,000 shares of common stock at
       $5.60 per share.  The warrants were exercised on September 30, 1991
       (note 3).

       In connection with a demand note dated July 2, 1987, the Company issued
       warrants to purchase a total of 3,000 shares of Series B convertible
       preferred stock at $35.68 per share.  On June 7, 1988, these warrants
       were converted to common stock warrants to purchase 15,000 shares of
       common stock at $7.14 per share.  The warrants were exercised on June
       29, 1992 (note 3).





                                                                     (Continued)

                                      38
<PAGE>   39



NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Notes to Financial Statements

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



       The Company granted warrants to purchase 125,000 shares of common stock
       of the Company at $13.00 per share.  These warrants were canceled on
       August 3, 1994 and were reissued at $8.00 per share.  These warrants
       expire in 1999.  At May 31, 1997, 125,000 shares of authorized common
       stock were reserved for these warrants.

       In connection with a private placement of the Company's common stock,
       the Company, on April_22, 1993, granted warrants to purchase a total of
       10,000 shares of common stock at $15.19 per share.  These warrants
       expire in 1998.  At May 31, 1997, 10,000 shares of authorized common
       stock were reserved for these warrants.


 (7)   LEASES

       Rent expense amounted to $439,189, $438,759, and $426,917, for the years
       ended May 31, 1997, 1996, and 1995, respectively.

       The Company has a ten-year lease for its corporate facilities which
       expires in August 1998.  The lease requires the Company to pay
       maintenance, insurance, and real estate taxes above the base amount
       included in the lease.  The Company has the option to cancel the lease
       with a payment of $376,365.

       The Company also has a five-year lease for its research and
       manufacturing facility which expires in 1998.  The lease requires the
       Company to pay maintenance, insurance, and real estate taxes above the
       base amount included in the lease.  The lease is secured by a letter of
       credit, which is collateralized by a $49,200 certificate of deposit as
       of May 31, 1997.

       At May 31, 1997, future minimum lease payments under the operating
       leases are as follows:


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
        Year ending
          May 31,                                                                                              Amount
------------------------------------------------------------------------------------------------------------------------------------
        <S>                                                                                             <C>
           1998                                                                                           $    402,936
           1999                                                                                                 62,453
------------------------------------------------------------------------------------------------------------------------------------

                                                                                                          $    465,389
====================================================================================================================================
</TABLE>


 (8)   EMPLOYEE BENEFIT PLAN

       Effective January 1, 1994, the Company established a defined
       contribution 401(k) savings plan covering each employee of the Company
       satisfying certain minimum length of service requirements.  Matching
       contributions to the accounts of plan participants are made by the
       Company in an amount equal to 50% of each plan participant's before-tax
       contribution, subject to certain maximum contribution limitations, and
       are made at the discretion of the Company.  Expenses incurred under this
       plan for Company contributions for the years ended May 31, 1997, 1996,
       and 1995 amounted to $99,781, $87,602, and $100,362, respectively.





                                                                     (Continued)

                                      39

<PAGE>   40



NORTHFIELD LABORATORIES INC.
(a company in the development stage)

Notes to Financial Statements

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



 (9)   SHORT-TERM MARKETABLE SECURITIES

       The fair market value of the Company's short-term marketable securities
       was $38,899,221 at May 31, 1997, which included gross unrealized holding
       gains and losses of $8,352 and $36,035, respectively.

       At May 31, 1997, all of the Company's short-term marketable securities
       were scheduled to mature in less than one year.





                                                                     (Continued)


                                      40
<PAGE>   41


                         EXHIBITS


<TABLE>
<CAPTION>

========================================
Number  Description
------  -----------
----------------------------------------
<S>     <C>
3.1     Restated Certificate of
        Incorporation of the Registrant
        (incorporated herein by
        reference to Exhibit 3.2 to the
        Registrant's Registration
        Statement on Form S-1, filed
        with the Securities and
        Exchange Commission on March
        25, 1994, File No. 33-76856
        (the "Registration Statement"))
----------------------------------------
3.2     Restated Bylaws of the
        Registrant (incorporated herein
        by reference to Exhibit 3.4 to
        the Registration Statement)
----------------------------------------
10.1    Office Sublease dated as of
        April 20, 1993 between the
        Registrant and First Illinois
        Bank of Evanston, N.A., as
        Trustee (incorporated herein by
        reference to Exhibit 10.1 to
        the Registration Statement)
----------------------------------------
10.2    Lease dated as of June 8, 1989
        between the Registrant and OTR
        (incorporated herein by
        reference to Exhibit 10.2 to
        the Registration Statement)
----------------------------------------
10.3    License Agreement dated as of
        March 6, 1989 between the
        Registrant and KabiVitrum AB
        (predecessor of Pharmacia &
        Upjohn Inc.)(incorporated
        herein by reference to Exhibit
        10.6 to the Registration
        Statement)
----------------------------------------
10.4    License Agreement dated as of
        July 20, 1990 between the
        Registrant and Eriphyle BV
        (incorporated herein by
        reference to Exhibit 10.7 to
        the Registration Statement)
----------------------------------------
10.5*   Restated Nonqualified Stock
        Option Plan of Northfield
        Laboratories Inc. (incorporated
        herein by reference to Exhibit
        10.13 to the Registration
        Statement)
----------------------------------------
10.6*   Northfield Laboratories Inc.
        401(K) Plan (incorporated
        herein by reference to Exhibit
        10.14 to the Registration
        Statement)
----------------------------------------
10.7*   Northfield Laboratories Inc.
        Nonqualified Stock Option Plan
        for Outside Directors
        (incorporated herein by
        reference to Exhibit 10.15 to
        the Registrant's Annual Report
        on Form 10-K for the
        Registrant's fiscal year ended
        May 31, 1994)
----------------------------------------
</TABLE>


                                      41
<PAGE>   42

<TABLE>
<CAPTION>
========================================
Number  Description
------  -----------
----------------------------------------
<S>     <C>
10.8*   Employment Agreement dated as
        of January 1, 1996 between the
        Registrant and Richard E.
        DeWoskin (incorporated herein
        by reference to Exhibit 10.8 to
        the Registrant's Annual Report
        on Form 10-K for the
        Registrant's fiscal year ended
        May 31, 1996)
----------------------------------------
10.9*   Employment Agreement dated as
        of January 1, 1996 between the
        Registrant and Steven A. Gould,
        M.D. (incorporated herein by
        reference to Exhibit 10.9 to
        the Registrant's Annual Report
        on Form 10-K for the
        Registrant's fiscal year ended
        May 31, 1996)
----------------------------------------
10.10*  Employment Agreement dated as
        of January 1, 1996 between the
        Registrant and Jack J. Kogut
        (incorporated herein by
        reference to Exhibit 10.10 to
        the Registrant's Annual Report
        on Form 10-K for the
        Registrant's fiscal year ended
        May 31, 1996)
----------------------------------------
23.1    Consent of KPMG Peat Marwick LLP
========================================
</TABLE>

* Indicates a management contract or compensatory plan or arrangement required
to be filed as an exhibit to Form 10-K pursuant to Item 14(c).


                                      42
<PAGE>   43

                                      
                                  SIGNATURES
                                      
                                      
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this August 27,
1997.


                                       NORTHFIELD LABORATORIES INC.


                                        By  /s/ Richard E. DeWoskin
                                           --------------------------
                                            Richard E. DeWoskin
                                            Chairman of the Board and Chief 
                                             Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities indicated on August 27, 1997.



<TABLE>
<CAPTION>

        SIGNATURE                                      TITLE
        ---------                                      -----
<S>                                   <C>
/s/ Richard E. DeWoskin               Chairman of the Board and Chief Executive Officer
-----------------------               (principal executive officer)
Richard E. DeWoskin

/s/ Steven A. Gould, M.D.             President, Director
-------------------------             
Steven A. Gould, M.D.
                                      
/s/ Jack J. Kogut                     Vice President - Finance, Secretary and
-----------------                     Treasurer (principal financial officer and
Jack J. Kogut                         principal accounting officer)

/s/ Gerald S. Moss, M.D.              Director
------------------------              
Gerald S. Moss, M.D.

/s/ Bruce S. Chelberg                 Director
---------------------                 
Bruce S. Chelberg

/s/ Jack Olshansky                    Director
------------------                    
Jack Olshansky
</TABLE>


                                      43