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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 þ No o

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

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

The consolidated financial statements included in this report have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited financial statements and the related notes included in our annual report on Form 10-K for the year ended December 31, 2003.

In the opinion of our management, any adjustments contained in the accompanying unaudited consolidated financial statements are of a normal recurring nature, necessary to present fairly our financial position, results of operations, changes in stockholders’ equity and cash flows as of and for the three-month period ended March 31, 2004. Interim results are not necessarily indicative of results for the full fiscal year.

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

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

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

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

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

The primary customer for GLIADEL® is Cardinal Health Specialty Pharmaceuticals Distribution (SPD), a division of Cardinal Health, Inc. which sells directly to hospitals and was formerly known as National Specialty Services, Inc. Product demand by SPD during a given period may not correlate with prescription demand for the product in that period. As a result, the Company periodically evaluates SPD’s inventory position. If the Company believes these levels are too high based on prescription demand, it will either not accept purchase orders from, or ship additional product to, SPD until these levels are reduced or it will defer recognition of revenue if it determines that there is excess channel inventory for the product.

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

Collaborative research revenue is recognized, up to the contractual limits, when the Company meets its performance obligations under the respective agreements. Payments received that relate to future performance are deferred and recognized as revenue at the time such future performance has been accomplished. Non-refundable upfront fee arrangements that contain an element of continuing involvement are deferred and recognized as revenue over the involvement period. Contract and licensing revenue is recognized when

The revenue interest obligation entered into with Paul Royalty Fund, L.P. and certain of its affiliated entities (collectively, “PRF”), in the fourth quarter of 2003, was recorded as debt as the Company has significant continuing involvement in the generation of the cash flows due to PRF. The obligation will be amortized under the effective interest method. The Company utilized an imputed interest rate equivalent to PRF’s projected internal rate of return based on estimated future revenue interest obligation payments. Revenue interest obligation payments made to PRF will reduce the future obligation. The Company will periodically review estimated future revenues and update the imputed interest rate as necessary.

The Financial Accounting Standards Board (FASB) issued Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” which amended FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amended the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure requirements of Statement No. 148 have been incorporated herein.

The Company continues to account for stock based compensation under APB No. 25. If Statement No. 123 would have been applied it would have had the following impact:

Net loss, as reported, does not include any stock-based compensation expense determined under the intrinsic value method.

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

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

Accounts receivable at March 31, 2004 and December 31, 2003, include amounts relating to sales of GLIADEL® and AGGRASTAT®. Sales of GLIADEL® to the Company’s specialty distributor, hospitals and wholesalers provide for net payments in 91 days, with certain discounts for early payment. Additionally, amounts due from Merck and Co., Inc., which is providing billing and collection services on a transitional basis, for sales of AGGRASTAT® to wholesalers is included in accounts receivable at March 31, 2004 and December 31, 2003. Sales of AGGRASTAT® to the wholesalers provide for net payments in 31 days.

At December 31, 2003, the allowance for doubtful accounts included $0.8 million relating to a dispute with Cardinal Health Sales and Marketing Services (“Cardinal”) that SPD, the Company’s specialty pharmaceutical distributor and a division of Cardinal, offset against an existing trade receivable to the Company. In the first quarter of 2004, the Company wrote-off the receivable due from SPD.

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

Intangible assets and related accumulated amortization consist of the following:

The Company is amortizing the intangible assets over periods varying between 10 to 13 years. Amortization expense of intangible assets was $1.7 million and $0.2 million for the quarters ended March 31, 2004 and 2003, respectively. Amortization expense is expected to be $6.9 million a year for 2004, 2005, 2006, 2007 and 2008.

On October 28, 2003, the Company acquired the rights to AGGRASTAT® from Merck and Co., Inc., in the United States and its territories, for a purchase price of $84.0 million. In order to finance the acquisition, the Company used $42.0 million of working capital and entered into a $42.0 million revenue interest financing arrangement with PRF pursuant to a revenue interest assignment agreement. In addition to its revenue interest in the Company’s products or future products, as the case may be, PRF received five-year warrants to purchase 300,000 shares of the Company’s common stock at an exercise price of $9.15 per share. Under the Company’s arrangement with PRF, from October 28, 2003, through December 31, 2006, PRF is entitled to receive 10% of the Company’s GLIADEL® and AGGRASTAT® net sales up to $75.0 million, and 2.5% of those annual net sales in excess of $75.0 million, and from January 1, 2007, through December 31, 2012 (the end of the term of the financing arrangement with PRF), these percentages are 17.5% and 3.5%, respectively. This revenue interest percentage can increase if the Company fails to meet contractually specified levels of annual net sales of products for which PRF is entitled to receive its revenue interest.

Revenue interest expense of $2.3 million was recorded for the three months ended March 31, 2004. Interest expense is calculated using the effective interest method. The Company utilized an imputed interest rate equivalent to PRF’s projected internal rate of return based on estimated future revenue interest obligation payments. Revenue interest obligation payments made to PRF will reduce the future obligation. The Company will periodically review estimated future revenues and update the imputed interest rate as necessary.

Under the revenue interest agreement, the Company will pay PRF on a quarterly basis minimum payments totaling $5.0 million in 2004, $6.3 million in 2005, $7.5 million in 2006, $10.0 million in each of 2007 – 2009 and $12.5 million in each of 2010 – 2012. During the first quarter, the Company paid to PRF $1.25 million related to the minimum payments.

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

Also in connection with the Company’s arrangement with PRF, the Company has agreed to set aside cash and cash equivalents, such as marketable securities, to PRF, in the amount of $11.9 million (such amount to be in the amount of the next eight quarters of minimum payments to PRF) as additional evidence of its liquidity. The Company may maintain this account at its discretion; however, if the Company does not, it will be required to maintain at least $20 million of net working capital during the term of the agreement. If the Company does not maintain the account or it does not have $20.0 million of net working capital, then PRF may exercise a right to require the Company to repurchase its revenue interest at a purchase price that reflects a return to PRF (but is reduced by amounts previously paid to PRF). PRF may also require the Company to repurchase its revenue interest if (1) the Company fails to make its minimum payments to them, (2) the Company sells GLIADEL® and AGGRASTAT® (with PRF having partial rights to make the Company repurchase its interest in the event of the sale of one, but not both products), (3) upon the occurrence of a bankruptcy or similar event, or (4) upon a change of control of the Company. Regardless of the reason for which PRF may be entitled to require the Company to repurchase its revenue interest (in addition to the liquidity events discussed above), the repurchase amount may never exceed three and a half times PRF’s initial investment, or $147.0 million.

In connection with the sale of 34,129 shares of the Company’s common stock in February 1994 to John P. Brennan, Senior Vice President, Technical Operations, Mr. Brennan delivered to the Company a full-recourse note bearing an interest rate of 5.34% annually in the amount of $60,000. That note, as amended, was due and payable during February 2002, at which time the Company extended the payment date of the note to February 2004. In January 2004, the Compensation Committee of the Board of Directors forgave the obligation under the note, which at the time equaled approximately $94,200 of principal and interest. The forgiveness of the note was a taxable event for Mr. Brennan and Mr. Brennan is responsible for the tax obligations. The forgiveness of the note was in connection with the planned retirement of Mr. Brennan from the Company, which will be effective May 2005. Until his effective retirement date, Mr. Brennan will be transitioning his duties to his respective successors in the areas of manufacturing, logistics, facilities and employee safety and health.

This quarterly report contains forward-looking statements that we try to identify by using words such as “anticipate,” “believe,” “expect,” “estimate,” and similar expressions. While these statements reflect our current plans and expectations, we cannot be sure that we will be able to implement these plans successfully. These statements involve risks and uncertainties, including those described in the section entitled “Risk Factors” contained in Item 5 of Part II of this quarterly report. Investors should review this quarterly report in combination with these risk factors, in order to have a more complete understanding of the principal risks associated with an investment in our securities. The statements that we make in this quarterly report that are forward looking are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Further, these statements speak only as of the date of this document, and we do not intend to update these statements to reflect events or circumstances that occur after that date.

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

We currently have two marketed products: GLIADEL® Wafer (GLIADEL®) and AGGRASTAT® Injection (AGGRASTAT®). GLIADEL® provides targeted, site-specific chemotherapy for the treatment of malignant glioma at the time of initial surgery, in conjunction with radiation and chemotherapy, and for the treatment of recurrent glioblastoma multiforme. AGGRASTAT® is an inhibitor of platelet aggregation approved for the treatment of acute coronary syndrome, or ACS. We acquired the rights to AGGRASTAT® in the United States and its territories and possessions from Merck & Co., Inc. (Merck) in October 2003.

Our product pipeline consists of product candidates in various stages of clinical and preclinical development. Two Phase II clinical trials of AQUAVAN®, a prodrug of propofol, for procedural sedation during brief diagnostic or therapeutic procedures were completed in late 2003. GPI 1485, a lead clinical candidate in our neuroimmunophilin ligand program, is in Phase II clinical trials for the treatment of Parkinson’s disease and peripheral nerve injury. DOPASCAN® Injection, an imaging agent used to diagnose and monitor the progression of Parkinson’s disease, is in registration in Japan and Finland by our corporate collaborators. Our preclinical research programs include the development of NAALADase inhibitor compounds for prostate cancer, drug addiction and traumatic brain and spinal cord injury and the development of PARP inhibitor compounds for cancer chemosensitization and radiosensitization.

We recently met with the FDA regarding results from our AQUAVAN® Phase II clinical trials and discussed plans for the Phase III clinical program. Following submission of the first Phase III study protocol

During the first quarter of 2004, we began the marketing of AGGRASTAT® for the treatment of ACS. We continued our preparations for the initiation of a Phase III clinical program studying AGGRASTAT® for use in percutaneous coronary intervention, or PCI, in order to try and expand the label for the product. In March and May 2004, we held pre-Phase III meetings with the FDA to discuss our plans for a Phase III PCI trial. Based on the outcome of these meetings, we are considering making some trial design changes. Through both the expansion of our marketing efforts for the use of AGGRASTAT® to treat ACS and our efforts to expand AGGRASTAT®’s label for use in PCI, we expect to achieve our goal of significantly expanding top line revenues through a broader hospital-based commercial portfolio.

We have financed our operations since inception in July 1993, primarily through the issuance of equity securities, convertible subordinated notes, revenues from the sales of GLIADEL® and more recently AGGRASTAT®, funding pursuant to collaborative and partnering agreements, a revenue interest obligation with Paul Royalty Fund, L.P. and certain of its affiliated entities (PRF), and proceeds from loans or other borrowings. Until such time as we become sustainably profitable, any or all of these financing vehicles or others may be utilized to fund our future capital requirements.

For the quarters ended March 31, 2004 and 2003, we recognized revenues of $8.9 million and $3.5 million, respectively. These revenues consisted of the following:

AGGRASTAT® product sales of $3.2 million for the quarter contributed to the $5.4 million increase in revenue year over year. The remainder of the increase results from a $2.1 million increase in GLIADEL® product sales quarter over quarter. We believe that the increase in quarterly GLIADEL® sales over the prior year is principally attributable to the FDA notification on February 25, 2003 that our amended sNDA to market GLIADEL® for use at the time of initial surgery for malignant glioma as an adjunct to surgery and radiation was approved and reflects having a full quarter in 2004 during which the product was marketed under this expanded label. During these periods, we sold GLIADEL® (i) directly to a specialty distributor, (ii) directly to hospitals, (iii) by drop shipment to hospitals pursuant to purchase orders from wholesalers, (iv) to distributors located outside the United States for resale by distributors in non-United States markets and (v) directly to a corporation for use in clinical trials.

For the quarters ended March 31, 2004 and 2003, we recognized GLIADEL® revenues of $5.5 million and $3.4 million, respectively. These revenues were sold through the following channels:

GLIADEL® net sales to customers within the United States were approximately $5.0 million and $3.3 million for the three-month period ended March 31, 2004 and 2003, respectively. The remaining units were sold outside the United States, including Europe and Canada, either through distributors or directly to hospitals.

Approximately $3.8 million (364 units) or 69% and $2.7 million (248 units) or 79% of GLIADEL® treatments sold during the three-month periods ended March 31, 2004 and 2003, respectively, were sold to Cardinal Health Specialty Pharmaceuticals Distribution, or SPD, a division of Cardinal Health Inc., that was formerly known as National Specialty Services, Inc. SPD has nationwide marketing and distribution capabilities that complement our sales and marketing efforts. Additionally, when we make sales to SPD, they are responsible for shipping the product that they purchase to hospital pharmacies, thereby reducing our overall distribution costs. Without this distributor, we would incur separate shipping costs from our logistical distributor for each shipment of the product to hospital pharmacies and other end-users. SPD receives a discount on its purchases of GLIADEL® based on the amount of capital it has committed to the product as of the date of its purchases, and a discount for timely payment. We have the ability to accept or reject purchase orders from SPD at our sole discretion. For the three-month periods ended March 31, 2004 and 2003, SPD sold 401 and 278 units, respectively, to hospitals and wholesalers.

For the three-month periods ended March 31, 2004 and 2003, approximately $1.3 million, or 24% and $0.7 million, or 21% of GLIADEL® net sales, respectively, resulted from sales directly to hospitals, drop shipments to hospitals pursuant to purchase orders from wholesalers, or to distributors outside of the United States. Substantially all of these sales to hospitals and wholesalers included our normal payment terms, including discounts for early payment. The remaining $0.4 million of GLIADEL® net sales for the three month period ended March 31, 2004 were sold to a corporation for use in a competitive clinical trial.

During the first quarter of 2004, all of our sales of AGGRASTAT® were made directly to wholesalers. Three wholesalers accounted for approximately $3.1 million net sales of AGGRASTAT®. All AGGRASTAT® net sales occurred in the United States and its territories and possessions. Sales of AGGRASTAT® to the wholesalers provide for net payments in 31 days. Since the acquisition of AGGRASTAT®, we have increased the size of our sales force and completed a training program for the entire sales and marketing teams. These re-launch efforts will focus on increasing demand for the product in the ACS market.

GLIADEL® cost of sales includes the cost of materials, labor, overhead and royalties paid to the Massachusetts Institute of Technology pursuant to a license agreement. Gross profit percentage (net product sales less cost of sales as a percent of net product sales) for GLIADEL® for the three-month periods ended March 31, 2004 and 2003 was 85% and 74%, respectively. The gross profit percentage in the first quarter of 2003 was negatively impacted by a write off of inventory of approximately $0.4 million that we determined did not meet product specifications through regular quality control testing. The cost to manufacture GLIADEL® can vary materially with production volume. To the extent that production levels increase or decrease in the future, we anticipate that the unit cost to manufacture GLIADEL® may decrease or increase, respectively. As a result, we would expect the cost of product sales of GLIADEL®, and accordingly, gross profit percentage, to fluctuate from year to year.

For the three months ended March 31, 2004, the gross profit percentage for AGGRASTAT® was 94%. We have entered into an exclusive supply agreement with Merck for the manufacture and supply of the active pharmaceutical ingredient of AGGRASTAT® until December 31, 2014. Merck has agreed to supply us with finished product of AGGRASTAT®, through its contract manufacturers, Baxter for bags until August 2007, and Ben Venue for vials through the end of 2004. We may and expect to negotiate direct contractual relationships with these manufacturers in the future.

Beginning in fiscal year 1999, the Company began recording research and development costs under two platforms, pharmaceutical technologies and biopolymer technologies. From January 1, 1999 through March 31, 2004, the Company has incurred, in the aggregate, costs of $111.5 million in pharmaceutical technologies, $34.3 million for its biopolymer technologies, and $86.4 million of indirect expenses. From our inception in July 1993 through December 1998, the Company recorded $100.4 million in direct and indirect research and development costs relating to pharmaceutical and biopolymer technologies. Our research and development projects are currently focused on pharmaceutical research and development. For our biopolymer technologies, we have chosen to pursue potential corporate partnerships or other strategic alternatives in order to further their research and development, rather than develop these projects ourselves. The following chart sets forth our projects in each of these areas and the stage to which each has been developed:

For each of our research and development projects, we incur both direct and indirect expenses. Direct expenses include salaries and other costs of personnel, raw materials and supplies. We may also incur third party costs related to these projects, such as contract research, consulting and clinical development costs. Indirect expenses, such as facility and equipment costs, utilities, non-specific research and development management and other administrative overhead are generally allocated to research and development based on, among other things, the extent to which our general research and development efforts make use of facilities,

non-project personnel and other resources. Because of the uncertainties involved in progressing through pre-clinical and clinical testing, and the time and cost involved in obtaining regulatory approval and in establishing collaborative arrangements, among other factors, we cannot reasonably estimate the future expenses and timing necessary to complete our research and development projects or the period in which material net cash inflows from significant projects are expected to commence.

Our research and development expenses were $9.4 million and $7.8 million for the three-month periods ended March 31, 2004 and 2003, respectively. These expenses were divided between our research and development platforms in the following manner:

Our pharmaceutical technology research and development expenses increased in the first quarter of 2004, compared to the same period in 2003, primarily due to increased spending of $0.8 million in AQUAVAN® and $0.5 million in GPI 1485, our neuroimmunophilin ligand technology. The increase in AQUAVAN® spending year over year results primarily from the analysis of the two Phase II clinical trial results that were completed in the fourth quarter of 2003 and from costs associated with the planning for the Phase III clinical trial we expect to begin during 2004. GPI 1485 spending increased primarily due to increased investigator fees as we continue the Phase II clinical trial for Parkinson’s disease. Additionally, $0.4 million of the increase for the quarter as compared to the prior year results from the preparation of the Phase III clinical trial of AGGRASTAT® for use in percutaneous coronary intervention, or PCI. The increase in spending in these programs was partially offset by a decrease in expenditures in our NAALADase Inhibitor program.

Our biopolymer technology research and development expenses were $0.2 million for the first three months of 2004 and 2003, respectively. Currently, we do not plan to conduct additional research or clinical testing on our biopolymer technologies. Instead, we plan to pursue a corporate partnership, divestiture or similar strategic transaction to further develop these technologies.

Our indirect research and development expenses decreased $0.5 million for the three-month period ended March 31, 2004 compared to the same period in 2003, primarily as a result of reduced non-core project employee expenses.

Our selling, general and administrative expenses were $11.7 million and $6.5 million for the three-month periods ended March 31, 2004 and 2003, respectively. For the three-month period ended March 31, 2004, the costs incurred to market, sell and distribute GLIADEL® and AGGRASTAT® were $6.9 million compared to $2.7 million for the same period in 2003. Approximately $3.0 million of the increase in sales and marketing expenses is attributable to an increased sales force to focus on two products, the training of the sales team and the marketing efforts to launch AGGRASTAT®. Additionally, during the first quarter of 2004, we incurred external costs of approximately $0.8 million related to AGGRASTAT® commercial operations.

Costs and expenses associated with our general and administrative functions were $4.8 million and $3.8 million for the three-month periods ended March 31, 2004 and 2003, respectively. The increase in general and administrative expenses is attributable to increased legal and professional expenses of $0.4 million in connection with SEC filings and supporting activity, the implementation of expanded evaluative procedures for assessing internal controls and procedures for financial reporting mandated by the Sarbanes-Oxley Act of 2002 and increased patent related costs of $0.3 million. Additionally we incurred increased recruiting costs of approximately $0.2 million to (i) expand the sales force and (ii) the development teams in preparation for the Phase III clinical trials of AGGRASTAT® and AQUAVAN®. Our general and administrative functions include the areas of executive management, finance and administration, investor and public relations, corporate development, human resources, legal and compliance. We include the costs to prepare, file and prosecute domestic and international patent applications and for other activities to establish and preserve our intellectual property rights in our general and administrative expenses. For each function, we may incur direct expenses such as salaries, supplies, third-party consulting and other external costs. A portion of indirect costs such as facilities, utilities and other administrative overhead are also allocated to selling, general and administrative expenses.

Intangible amortization was $1.7 million and $0.2 million for the three months ended March 31, 2004 and 2003, respectively. Intangible amortization increased $1.5 million year over year as a result of the AGGRASTAT® product rights acquisition in the fourth quarter of 2003.

Other income and expense consists primarily of income on our investments and interest expense on our debt and other financial obligations. Our investment income was $0.5 million and $0.9 million for the three-month periods ended March 31, 2004, and 2003, respectively. The decrease in investment income in the first three months of 2004 compared to the same period in 2003 was primarily due to both lower interest rates and investment balances maintained during those periods.

We incurred interest expense of $1.3 million and $0.1 million for the three-month periods ended March 31, 2004 and 2003, respectively. The increase in interest expenses in 2004 as compared to 2003 is primarily due to the $69.4 million 5% convertible notes offering and the $18.8 million term loan arrangement with Wachovia Bank, National Association, both of which occurred in the second quarter of 2003. Included in interest expense in the first quarter of 2004 is amortization related to the deferred financing costs of the foregoing transactions. Additional interest expense for 2004 and 2003 resulted primarily from (i) loans from a commercial bank that helped fund the construction of our manufacturing, administrative, and research and development facilities and the purchase of certain furniture and equipment, (ii) capital leases entered into for the purchase of computer equipment, and (iii) a note payable to a commercial bank primarily used to repay a $2.4 million note payable to Cardinal Health Sales and Marketing Services.

We incurred revenue interest expense of $2.3 million related to the PRF revenue interest obligation for the period ended March 31, 2004. Revenue interest expense was calculated using the effective interest method. We utilized an imputed interest rate equivalent to PRF’s projected internal rate of return based on estimated future revenue interest obligation payments. We will periodically review the estimated future revenues and make adjustments as necessary.

Our primary cash requirements are (i) to fund our research and development programs, (ii) to support our sales and marketing efforts, (iii) to obtain regulatory approval, (iv) to prosecute, defend and enforce any patent claims and other intellectual property rights, (v) to fund general corporate overhead, and (vi) to support our debt service requirements and contractual obligations. We have financed our operations since inception primarily through the issuance of equity securities, convertible subordinated notes, revenues from the sales of GLIADEL® and more recently AGGRASTAT®, funding pursuant to collaborative agreements

In May 2003, we entered into an agreement granting Pfizer, Inc. (Pfizer) the exclusive right to develop NAALADase inhibitors worldwide, for which Pfizer paid us $5.0 million upon the execution of the agreement, and was to pay us $10.0 million on or before March 31, 2004. On March 30, 2004, Pfizer elected to terminate the agreement. As a result of Pfizer’s termination, all rights to develop and commercialize the NAALADase Inhibitor technology that were granted to Pfizer revert to us and no further milestone payments or royalty payments will be received from Pfizer.

Our cash, cash equivalents and investments were $81.0 million at March 31, 2004. Of this amount, $21.5 million is restricted as collateral for certain of our loans and other financial lease obligations. The $20.9 million decrease in cash, cash equivalents and investments from $101.9 million at December 31, 2003 resulted primarily from our operating activities.

Cash used in operating activities was $19.9 million and $16.3 million for the periods ending March 31, 2004 and 2003, respectively. The net cash used in operating activities is substantially the result of our operating loss. The increase in quarterly depreciation and amortization over the prior year results primarily from the purchase price amortization associated with the AGGRASTAT® purchase in October of 2003 ($1.5 million) and the amortization of various deferred financing costs incurred during 2003. Net changes in assets and liabilities utilized cash of $5.9 million in 2004 mainly due to a decrease in current liabilities and an increase in accounts receivable. The reduction in current liabilities as of March 31, 2004 compared to December 31, 2003, resulted from the payout of our Annual Incentive Program ($3.3 million), payment of our semi-annual Subordinated Convertible Debenture interest due on January 1, 2004 ($1.9 million), timing of our research and development activity, and payment of professional services supporting our transition activity in 2003. At March 31, 2004, net accounts receivable increased by approximately $1.0 million over the prior quarter. The increase in accounts receivable results from the timing of sales and the subsequent cash receipt thereof. The increase in accounts receivable from December 31, 2003 results from increased sales during March 2004 as compared to sales in December 2003. Of the $4.5 million net account receivable balance at March 31, 2004, 86% of the balance is due from both SPD for GLIADEL® and Merck for AGGRASTAT®. Accounts receivable from Merck represent net sales on behalf of the Company that Merck bills and collects during the transition period. Sales are traditionally paid by SPD and Merck within 30 days. Prepaid expenses fluctuate period to period depending on the timing of preparation and initiation of clinical trials. We are often required to prepay contract research organizations for services prior to the initiation of work performed. Fluctuations in operating items vary period to period due to, among others, timing of sales and the subsequent cash receipts thereof, and research and development activities such as clinical trial preparation and initiations.

Our total long-term debt, excluding the revenue interest obligation, decreased $0.7 million to $91.6 million at March 31, 2004, compared to $92.3 million at December 31, 2003. For the period, we entered into capital lease obligations of $0.1 million and made principal repayments of $0.8 million. Our revenue interest obligation was $42.9 million at March 31, 2004 compared to $42.2 million at December 31, 2003.

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

On October 28, 2003, we acquired the rights to AGGRASTAT® from Merck and Co., Inc., or Merck, in the United States and its territories, for a purchase price of $84.0 million, plus a royalty based on net sales of

AGGRASTAT®. From the closing until December 31, 2006, we will not pay royalties on annual net sales less than $40.0 million. On annual net sales above $40.0 million prior to December 31, 2006, and beginning on January 1, 2007, on all sales of AGGRASTAT®, we will pay royalties ranging from 5% to 20% of AGGRASTAT® net sales, based upon our achievement of certain net sales thresholds. In connection with the acquisition of AGGRASTAT®, we entered into an agreement with Merck, to supply us with our requirements of the active pharmaceutical ingredient of AGGRASTAT® through 2014. Additionally, until June 28, 2004, Merck has agreed to provide us with certain services related to the transition of AGGRASTAT® from Merck to us.

In order to finance the acquisition, we used $42.0 million of working capital and entered into a $42.0 million revenue interest financing arrangement with Paul Royalty Fund, L.P. and Paul Royalty Fund II Holdings, L.P., or PRF, pursuant to a revenue interest assignment agreement (the Revenue Agreement). Under our arrangement with PRF, from October 28, 2003, through December 31, 2006, PRF is entitled to receive 10% of our GLIADEL® and AGGRASTAT® annual net sales as defined in the agreement up to $75.0 million, and 2.5% of those annual net sales in excess of $75.0 million, and from January 1, 2007, through December 31, 2012 (the end of the term of the financing arrangement with PRF), these percentages are 17.5% and 3.5%, respectively. If GLIADEL® and AGGRASTAT® net sales are less than $48.3 million, $60.2 million, or $80.6 million in 2004, 2005, and 2006, respectively, then PRF will receive the higher of the minimum payments for such years described below or 12.5% of combined GLIADEL® and AGGRASTAT® net sales. If combined GLIADEL® and AGGRASTAT® annual net sales are less than $75.0 million in any of 2007 through 2012, then PRF will receive the higher of the minimum payments for such years described below, or 22.5% of combined GLIADEL® and AGGRASTAT® net sales. During each year of the term of the arrangement with PRF, PRF will be entitled to receive a portion of revenues from products that we may acquire in the future, or of AQUAVAN® Injection and GPI 1485 (each product candidates of the Company), in the case that our calculated annual obligation(s) to make royalty payments under the Revenue Agreement (based upon the combined net sales of GLIADEL®and AGGRASTAT®) are less than $6.4 million for 2004, $7.6 million for 2005, $8.3 million for 2006, $15.3 million for 2007, $15.5 million for 2008, $15.8 million for 2009, $16.0 million for 2010 or $15.9 million for 2011 and 2012, respectively. We will pay PRF minimum royalties of $5.0 million in 2004, $6.3 million in 2005, $7.5 million in 2006, $10.0 million in each of 2007-2009 and $12.5 million in each of 2010-2012. PRF is also entitled to receive portions of amounts payable to us on the resolution of future intellectual property disputes involving GLIADEL® and AGGRASTAT® and on the divestiture, if any, of ex-North American marketing rights to GLIADEL®. In addition to its revenue interest in our products or future products, as the case may be, PRF received five-year warrants to purchase 300,000 shares of our common stock at an exercise price of $9.15 per share.

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

Also in connection with our arrangement with PRF, we have agreed to set aside cash and cash equivalents, such as marketable securities, to PRF, initially in the amount of $11.9 million (such amount representing the next eight quarters of minimum payments to PRF) as additional evidence of our liquidity. We may maintain this account at our discretion; however, if we do not maintain this account, we will be required to maintain at least $20.0 million of net working capital during the term of the agreement. If we do not maintain the account or we do not have $20.0 million of net working capital, then PRF may exercise a right to require us to repurchase its revenue interest at a purchase price that reflects a return to PRF on its investment (but is reduced by amounts previously paid to PRF). PRF may also require us to repurchase its revenue interest if (1) we fail to make our minimum payments to them, (2) we sell GLIADEL® and AGGRASTAT® (with PRF having partial rights to make us repurchase its interest in the event of the sale of one, but not both products), (3) upon the occurrence of a bankruptcy or similar event, or (4) upon a change of control of us. Regardless of the reason for which PRF may be entitled to require us to repurchase its

On June 17, 2003, we issued $60.0 million (principal amount at maturity) of convertible subordinated notes (Notes) due July 1, 2008. Interest on the Notes accrues at 5% per annum and is payable semi-annually on January 1 and July 1 of each year, commencing on January 1, 2004. The sale of these Notes resulted in our receiving net proceeds of approximately $51.9 million, after taking into account stock repurchases made in connection with the offering and various transaction expenses. The Notes are convertible at the option of the holder at any time prior to maturity into shares of our common stock at a conversion price of $6.24 per share. We have the option to redeem the Notes on or after July 6, 2006, but prior to July 6, 2007, for 102.00% of the principal amount. If we elected to redeem the Notes on or after July 6, 2007, until the maturity date, the redemption price would be 101.00% of the principal amount. The agreement with the initial purchasers of the Notes granted them an option, until July 26, 2003, to purchase up to an additional $20.0 million of Notes. On July 30, 2003, the initial purchasers exercised this option in part, and purchased an additional $9.4 million of Notes, resulting in additional net proceeds of approximately $9.0 million.

On May 7, 2003, we entered into a 5-year $18.8 million term loan agreement with Wachovia Bank, National Association. With the proceeds of this loan, we acquired our dedicated research and development facility, land and building. As part of the agreement, we have effectively fixed interest expense on this indebtedness at 5.36%. The agreement requires monthly principal payments, which during the five-year term will be approximately $940,000 per year. The unpaid principal balance of the loan is due in 5 years. Under the terms of the loan, we are required to establish a restricted cash collateral account in the amount of the unpaid principal balance of the loan ($18.0 million at March 31, 2004).

In May 2002, we borrowed $3.0 million from a commercial bank, in order to repay a note payable to Cardinal Health Sales and Marketing Services. This indebtedness is payable in four equal annual installments of principal beginning April 30, 2003, with the final payment due on April 30, 2006. In May 2003, we entered into an interest rate swap agreement effectively fixing the interest rate of this debt at 2.78%. Interest payments are due quarterly. In connection with this indebtedness, we are required to maintain with the commercial bank, restricted cash, in the amount of the unpaid principal balance of this indebtedness ($2.2 million at March 31, 2004).

In October 2002, we entered into a new master lease agreement to provide up to $1.0 million for computer and equipment financing for a period of one year. Our previous master lease agreement, entered into in August 2001 expired in June 2002. The term of each operating lease varies from 24 to 48 months based upon the type of equipment being leased. As of March 31, 2004, we had leased approximately $0.4 million in equipment under this master lease agreement. In connection with our various lease arrangements, we are required to maintain restricted cash in the amount of $1.1 million.

We have an agreement with SPD, to whom we sell GLIADEL®, that permits either us or SPD to terminate the agreement upon 60 days prior written notice. Under the terms of our agreement with SPD, if the agreement is terminated, we have an obligation to repurchase any remaining treatments of GLIADEL® that it may have in its inventory. As of March 31, 2004, we believe that SPD had approximately $1.7 million of GLIADEL® in its inventory.

Historically, we have financed our operations primarily through the issuance of equity securities, revenue from the sale of GLIADEL®, funding pursuant to collaborative agreements and proceeds from loans and other borrowings, and during the second and third quarters of 2003, the issuance of convertible debt securities. During the fourth quarter of 2003, we financed the acquisition of AGGRASTAT® through a revenue interest financing arrangement. Our future capital requirements and liquidity will depend on many factors, including but not limited to, revenues from the sale of GLIADEL® and AGGRASTAT®, progress of our research and development programs, progress of pre-clinical and clinical testing, time and cost involved in obtaining regulatory approval, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, changes in our existing research relationships, competing technological and

marketing developments, our ability to establish collaborative arrangements and to enter into licensing agreements and contractual arrangements with others, conversion of long-term convertible notes, the costs of servicing debt, the costs of product in-licensing, and substantial future expenditures we expect to make to increase sales of AGGRASTAT®. However, we do not know and cannot reasonably estimate when we may incur significant future expenses or the period in which material net cash flows from significant projects are expected to commence because of, among other factors, the risks and uncertainties involved in:


	•	The amount of our sales of GLIADEL® and AGGRASTAT®;

	•	The outcomes and costs of pre-clinical testing and clinical trials and the time when those outcomes will be determined;

	•	Obtaining future corporate partnerships;

	•	The time and expense of obtaining regulatory approval;

	•	Competing products potentially coming to market; and

	•	Obtaining freedom to operate for our patented technologies.

We will need additional capital within the next three to six months in order to achieve our current business objectives, including clinical and pre-clinical development activities for product candidates, such as:


	•	GPI 1485 (our lead neuroimmuniophilin ligand);

	•	AGGRASTAT® PCI;

	•	AQUAVAN® Injection;

	•	NAALADase Inhibitors;

	•	other neuroimmunophilin ligands; and

	•	other research projects.

The source, timing and availability of this funding will depend on market conditions, interest rates and other factors. This funding may be sought through various sources, including debt and equity offerings, corporate collaborations, bank borrowings, lease arrangements relating to fixed assets, or other financing methods. There can be no assurance that additional capital will be available on favorable terms, if at all.


	•	Significantly delay, curtail or eliminate one or more of our research, development and clinical programs;

	•	Reduce the scope of our efforts to market and sell GLIADEL® and/or AGGRASTAT®;

	•	Reduce our workforce;

	•	Reduce our facilities;

	•	Reduce the scope of our intellectual property protection; or

	•	Enter into arrangements with collaborative partners or others that may require us to relinquish certain rights to our technologies, product candidates or future products, including licensing or transferring rights to our research or development programs to third parties.

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

The following are contractual commitments at March 31, 2004, associated with debt obligations, lease obligations and our research and development projects (in thousands):

(1)

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


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


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


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

(3)	Research and development arrangements include commitments that we have entered into at March 31, 2004, to engage third parties to perform various aspects of our research and development efforts subsequent to March 31, 2004.

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

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

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

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

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

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

Long-lived assets. We review our property and intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Such assumptions include projections of future cash

Revenue Interest Obligation. Our revenue interest obligation was recorded as debt as we have significant continuing involvement in the generation of the cash flows due to PRF. The obligation will be amortized under the effective interest method. We utilized an imputed interest rate equivalent to PRF’s projected internal rate of return based on estimated future revenue interest obligation payments. Revenue interest obligation payments made to PRF will reduce the future obligation. We will periodically review estimated future revenues and update the imputed interest rate as necessary.

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

A substantial portion of our assets are investment grade debt instruments such as direct obligations of the U.S. Treasury, securities of federal agencies which carry the direct or implied guarantee of the U.S. government, bank certificates of deposit and corporate securities, including commercial paper and corporate debt instruments. The market value of such investments fluctuates with current market interest rates. In general, as rates increase, the market value of a debt instrument would be expected to decrease. The opposite is also true. To minimize such market risk, we have in the past and, to the extent possible, will continue in the future to hold such debt instruments to maturity, at which time the debt instrument will be redeemed at its stated or face value. Due to the short duration and nature of these instruments, we do not believe that we have a material exposure to interest rate risk related to our investment portfolio. The investment portfolio at March 31, 2004 was $79.7 million and yield to maturity was approximately 1.1%. The weighted-average return on our investments during the quarter ended March 31, 2004 was approximately 1.6%.

Certain of our debt, primarily the $18.0 million in borrowings from Wachovia Bank, was established with interest rates which fluctuate with market conditions. As a hedge against such fluctuations in interest rates, we have entered into certain interest rate swap agreements with a commercial bank (“counter party”), to exchange substantially all of our variable rate financial obligations for fixed rate obligations. Including the Wachovia borrowings, we have entered into interest rate swaps for $21.0 million of our approximately $134.6 million in total outstanding indebtedness, which includes our revenue interest obligation. For this $21.0 million of debt, we were obligated to pay variable interest rates of LIBOR plus between 1/2% and 3/4%. The interest rate swap agreements had a total notional principal amount of approximately $21.0 million as of March 31, 2004. Pursuant to these interest rate swap agreements, we pay a fixed rate of interest to the counter party and receive from the counter party a variable rate of interest. The differential to be paid or received as interest rates change is charged or credited, as appropriate to operations. Accordingly, we had fixed interest rates on our March 31, 2004 financial obligations between 2.78% and 5.36%. These interest rate swap agreements have approximately the same maturity dates as the financial obligations and expire on various dates through May 2008. We do not speculate on the future direction of interest rates nor do we use these derivative financial instruments for trading purposes. In the event of non-performance by the counter party, we could be exposed to market risk related to interest rates.

The aggregate fair value of these interest rate swap agreements was a liability of approximately $1.4 million at March 31, 2004. Current market pricing models were used to estimate these fair values.

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

b) Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting

On April 19, 2004, we issued one thousand five hundred twenty-six (1,526) shares of our common stock to Burns McClellan Inc. (“Burns McClellan”), as partial consideration for Burns McClellan providing us with investor relations/public-relations services. In connection with this issuance, we relied on the exemption from registration under the Securities Act of 1933 provided in Section 4(2) of the Act.

You should carefully consider the risks described below, before making a decision to invest in our securities. Due to our recent acquisition of AGGRASTAT® Injection, we have organized these risks as those that are specific to the acquisition of AGGRASTAT® Injection, and those that are applicable to our business in general. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our securities could decline and you could lose all or part of your investment.

We may not be able to achieve or sustain significant revenues or earn a profit in the future. Since we were founded in July 1993, with the sole exception of 1996, we have not earned a profit in any year. Our losses for the years ended December 31, 2003, 2002 and 2001, were $53.9 million, $59.3 million, and $60.3 million, respectively, and for the three months ended March 31, 2004 were $18.1 million. Our losses result mainly from the significant amount of money that we have spent on research, development and clinical trial activities. As of March 31, 2004, we had an accumulated deficit of approximately $321.6 million. We expect to have significant additional losses over the next several years due to expenses associated with our product candidates related to research, development and clinical trial activities, applying for and obtaining meaningful patent protection and establishing freedom to commercialize and applying for and receiving regulatory approval for our drug product candidates.

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


	•	our sale and distribution of GLIADEL® Wafer;

	•	payments from Aventis and Amgen under now terminated agreements with each of them, supporting the research, development and commercialization of our product candidates; and

	•	royalty payments from Aventis’ sale and distribution of GLIADEL® Wafer.

Presently, we expect to receive significant revenue only from sales of GLIADEL® Wafer and AGGRASTAT® Injection. We do not expect that the revenue from these sources will be sufficient to support

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


	•	our ability to successfully market, sell, distribute and obtain additional regulatory approvals for GLIADEL® Wafer and AGGRASTAT® Injection;

	•	the successful development of our other product candidates either on our own, or together with future corporate partners with whom we enter into collaborative or license agreements; and

	•	the ability to in-license or acquire additional products in our targeted markets.

We will require substantial funds in addition to our existing working capital to develop our product candidates, carry out our sales and marketing plans and otherwise to meet our business objectives.

We will require substantial funds in addition to our existing working capital to develop our product candidates, including to conduct a Phase III clinical trial of AQUAVAN® and clinical trials to support expanding the label indications of AGGRASTAT® Injection, to carry out our sales and marketing plans, including our plans for AGGRASTAT® Injection, and otherwise to meet our business objectives. We have never generated enough revenue during any period since our inception to cover our expenses and have spent, and expect to continue to spend, substantial funds to continue our research and development and clinical programs and to support our sales and marketing efforts. We cannot be certain that we will be able to raise additional capital when we need it, on terms favorable to us, or at all. If we cannot raise additional capital in a timely manner, then we may not be able meet our business objectives.

On May 3, 2004, we announced that Andrew R. Jordan, our Chief Financial Officer, will be leaving Guilford effective May 31, 2004. While we have commenced a search for Mr. Jordan’s successor, we are not certain when a permanent replacement for Mr. Jordan will join the Company. If we are unable to hire a new Chief Financial Officer in a timely manner, there may be an adverse effect on our financial reporting processes, our financial controls and procedures and our ability to raise additional capital.

Our short-term prospects depend heavily on sales of GLIADEL® Wafer and AGGRASTAT® Injection, our commercial products. GLIADEL® Wafer and AGGRASTAT® Injection accounted for approximately 70% and 9%, respectively, of our total revenues for the year ended December 31, 2003, and approximately 62% and 36%, respectively, of our total revenues for the three months ended March 31, 2004. GLIADEL® Wafer was launched commercially in the United States by Aventis and its predecessors in February 1997 after having received approval from the FDA in September 1996. We do not know whether the product will ever gain broader market acceptance. If GLIADEL® Wafer fails to gain broader market acceptance, the revenues we receive from sales of GLIADEL® Wafer would be unlikely to increase.

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

On February 25, 2003, we received FDA approval to also market GLIADEL® Wafer for patients undergoing initial surgery, also known as first line therapy, in the United States for malignant glioma in conjunction with surgery and radiation. We estimate that the total number of patients undergoing initial surgery in the United States is between approximately 7,000 and 9,000 per year. In the second quarter of 2003

In addition, in January 2002 we submitted applications for approval to market GLIADEL® Wafer in Europe for patients undergoing initial surgery for malignant glioma. In November 2002, we withdrew those applications, while we were waiting for the FDA to respond to a similar application in the United States. We resubmitted these European applications in November 2003. Presently GLIADEL® Wafer is approved for the recurrent GBM market in only 21 countries, including France, Spain, Germany and the U.K. GLIADEL® Wafer is currently approved for first line therapy only in the United States and Canada. If we are not able to obtain additional approvals, the market for GLIADEL® Wafer would remain limited outside of the United States, which reduces the potential sales of GLIADEL® Wafer. Regardless of the number of foreign regulatory approvals that we have received, international sales to date comprised less than 6% and 10% of worldwide sales of GLIADEL® Wafer for the year ended December 31, 2003 and for the three months ended March 31, 2004, respectively.

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

Pfizer terminated its agreement with us and we will not receive any more payments from them.

In May 2003, we entered into an exclusive license agreement with Pfizer, which provided Pfizer with research, development and commercialization rights to our NAALADase inhibitor technology. The agreement included a $5 million payment to us at signing and an additional $10 million milestone payment due on or before March 31, 2004. In March 2004, Pfizer informed us that the milestone payment would not be made and that Pfizer was terminating the agreement. We do not have sufficient resources to pursue independently the research, development and commercialization of the NAALADase inhibitor technology that we licensed to Pfizer and pursue our other business objectives. Unless we enter into an alternative partnering or other arrangement with respect to this NAALADase technology or alter our other business objectives, it is unlikely that we will be able to further develop this technology. Accordingly, it is less likely that we will receive revenues from products based on this technology in the future.

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

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


	•	the timing and amount of sales of GLIADEL® Wafer and AGGRASTAT® Injection;

	•	the timing and realization of milestone and other payments from existing and future corporate partners;

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

	•	the extent and timing of costs related to our activities to obtain patents on our inventions and to extend, enforce and/or defend our patent and other rights to our intellectual property.

Because of these fluctuations, it is possible that our operating results for a particular quarter or quarters will not meet the expectations of public market analysts and investors, causing the market price of our common stock to decrease. For example, the trading price of our common stock from April 1, 2002 to March 31, 2004 ranged from $2.65 to $9.62.

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

Our ability to pay the required interest and principal payments on our debt depends on the future performance of our business. As of March 31, 2004, we had total long-term debt and revenue interest obligations of $134.6 million. We will require substantial funds to service our debt obligations and to operate our business in the future, including to fund research and development activities, pre-clinical and clinical testing, to manufacture our products and to make acquisitions.

Our obligations for 2004 include approximately $3.4 million in principal and approximately $5.2 million in interest on our long-term debt. In addition, we are obligated to make payments on our Revenue Interest Obligation as disclosed in the Paul Royalty Funds risk factor on page 32. We are obligated to pay the minimum amount under the Paul Royalty agreement of $5.0 million in 2004.

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

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

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

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


	•	announcements by us or our competitors of clinical results, technological innovations, regulatory approvals, product sales, new products or product candidates;

	•	developments or disputes concerning patent or proprietary rights;

	•	regulatory developments affecting our products;

	•	period-to-period fluctuations in the results of our operations;

	•	market conditions for emerging growth companies and biopharmaceutical companies;

	•	revenues received from GLIADEL® Wafer and AGGRASTAT® Injection; and

	•	our expenditures.

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

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

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

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

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

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

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

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

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

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

The efforts of government and insurance companies, health maintenance organizations and other payors of health care costs to contain or reduce costs of health care may affect our future revenues and profitability. These efforts may also affect the future revenues and profitability of our potential customers, suppliers and collaborative partners, in turn affecting demand for our products. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States, given recent federal and state government initiatives directed at lowering the total cost of health care, the U.S. Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of such proposals could have a negative effect on our business and operating results.

Our ability to commercialize our products successfully will depend in part on the extent to which private health insurers, organizations such as HMOs and governmental authorities reimburse the cost of our products and related treatments. Third-party payors are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government

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

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

Approximately 76% of our sales of GLIADEL® Wafer in 2003, and approximately 69% in the three months ended March 31, 2004, were made to Cardinal Health Specialty Pharmaceuticals Distribution, or SPD, a nationwide specialty pharmaceutical distributor. We have an agreement with SPD regarding its purchase of the product that permits either us or SPD to terminate the agreement upon 60 days prior written notice. We have no assurance that SPD will not exercise its rights to terminate its agreement with us at any time. If SPD does terminate the agreement, there can be no assurance that we will be able to enter into an arrangement with another specialty distributor for the purchase and sale of GLIADEL® Wafer. Additionally, under the terms of our agreement with SPD, if the agreement is terminated, we have an obligation to repurchase any remaining treatments of GLIADEL® Wafer that SPD may have in its inventory. As of March 31, 2004, we believe that SPD had approximately $1.7 million of GLIADEL® Wafer in its inventory.

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

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

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

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

AGGRASTAT® Injection is sold as a finished product in both vials and bags, which are manufactured and filled for Merck by third parties, known as contract manufacturers. Merck’s contractual relationships with these third party suppliers last until December 31, 2004, for vials, and until August 18, 2007, for bags. Under our agreement with Merck, we are entitled to enter into direct relationships with these contract manufacturers to obtain quantities of finished product of AGGRASTAT® Injection. If we do not enter into direct relationships with these contract manufacturers prior to 18 months after the date that we acquired the product from Merck, we may continue to receive quantities of finished product through Merck, although without remedies against the contract manufacturers if they fail to supply Merck with the finished product that we need to purchase. We also may enter into relationships with other contract manufacturers if we are unable to

Merck is obligated to supply us with the active pharmaceutical ingredient, or API, for AGGRASTAT® Injection until 2014. Under our agreement with Merck we are obligated to purchase all of our requirements of API from Merck. In the event of Merck’s breach of the agreement, we may seek an alternative source of API. However, we have not investigated alternative sources, and we may not be able to procure an alternative source of API. Should we succeed in procuring an alternative source of API, we would still need to pay a royalty to Merck for the use of API until 2014. Because we depend upon this relationship with Merck for both the finished product and key ingredient of AGGRASTAT® Injection, the limited duration of Merck’s obligation to us, and the potential lack of an alternative provider may adversely affect the operation of our business.

Merck was providing us with certain transition services for AGGRASTAT® Injection until May 3, 2004. Without these services we may not be able to successfully integrate AGGRASTAT® Injection into our business.

Merck provided us with certain transition services from October 28, 2003, until May 3, 2004, including warehousing of finished product, accounts receivable management, billing, collection and recordkeeping. Now that Merck is no longer providing us with these transition services, we are required to perform these services on our own. We have never performed these services before with respect to AGGRASTAT® Injection. If we are not able to perform these services successfully, it may negatively affect our ability to sell the product, or manage the recordkeeping, billings and collections, among other things, associated with the sales of the product.

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

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

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

Under the terms of our Revenue Interest Assignment Agreement with Paul Royalty Fund, L.P. and Paul Royalty Fund Holdings II, who we refer to as Paul Royalty Funds or PRF, from October 28, 2003, through December 31, 2006, PRF is entitled to receive 10% of the Company’s GLIADEL® Wafer and AGGRASTAT® Injection combined annual net sales up to $75 million, and 2.5% of those combined annual net sales in excess of $75 million, and from January 1, 2007, through December 31, 2012 (the end of the term of the financing arrangement with PRF), these percentages are 17.5% and 3.5%, respectively. If combined GLIADEL and AGGRASTAT annual net sales are less than $48.3 million, $60.2 million, or $80.6 million in 2004, 2005, and 2006, respectively, then PRF will receive the higher of the minimum payments for such years described below or 12.5% of combined GLIADEL and AGGRASTAT net sales. If GLIADEL and AGGRASTAT net sales are less than $75 million in any of the years 2007 through 2012, then PRF will receive the higher of the minimum payments for such years described below, or 22.5% of combined

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

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

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

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

PRF has been granted a security interest in the intellectual property assets related to GLIADEL® Wafer and AGGRASTAT®Injection, which in the aggregate accounted for all of the Company’s net product revenue of $21.7 million and $8.7 million for the year ended December 31, 2003 and for the three months ended March 31, 2004, respectively. As of March 31, 2004, the intangible assets related to Gliadel® Wafer and AGGRASTAT® Injection were $81.1 million, or approximately 41% of total assets. We, therefore, may not be free to utilize those assets at our discretion, such as selling or outlicensing rights to part or all of those assets, without first obtaining the permission of PRF. This requirement could delay, hinder or condition, our ability to enter into corporate partnerships or strategic alliances with respect to these assets.

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

In order (1) to successfully integrate AGGRASTAT® Injection into our business, which includes expanding our commercial operations and (2) to conduct clinical trials for AQUAVAN® Injection and to expand the labeled indication of AGGRASTAT® Injection, we will require significant additional capital resources within the next eighteen months. Although we know that we will need significant additional capital to undertake these activities, we cannot reasonably estimate the amount due to the uncertainties involved with these activities. For example, with respect to a clinical trial to expand the labeled indication for

AGGRASTAT® Injection, we do not know the size or nature of the clinical trial that the FDA will require us to conduct, including the number of patients in the trial, the clinical endpoints for the trial, whether the trial will require the use of concomitant medications and the cost of such medications or the duration of the trial. With respect to the Phase III clinical trials of AQUAVAN® Injection, the Company does not know the number of procedural sedation settings that the FDA will require the Company to test in order to receive approval to market the drug for a broad range of brief diagnostic or therapeutic procedures. The results of these determinations can cause our capital requirements to vary considerably. This additional financing may take the form of an offering of debt or equity, and that offering could be material in size. If we conduct a primary equity offering, the issuance of the additional shares of common stock may be dilutive to our existing stockholders and may have a negative effect on the market price of our stock. We do not know if those capital resources will be available to us. If they are not available, we may not be able to successfully execute on these business objectives or on any other business or operational goals.

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

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


	•	expend substantial capital and effort to develop our product candidates further, which includes conducting extensive and expensive pre-clinical animal studies and human clinical trials;

	•	apply for and obtain regulatory clearance to develop, market and sell such product candidates; and

	•	conduct other costly activities related to preparation for product launch.

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

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


	•	our new approaches will not result in any products that gain market acceptance;

	•	a product candidate will prove to be unsafe or ineffective, or will otherwise fail to receive and maintain regulatory clearances necessary for development and marketing;

	•	a product, even if found to be safe and effective, could still be difficult to manufacture on the scale necessary for commercialization or otherwise not be economical to market;

	•	a product will unfavorably interact with other types of commonly used medications, thus restricting the circumstances in which it may be used;

	•	third parties may successfully challenge our proprietary rights protecting a product;

	•	proprietary rights of third parties will preclude us from manufacturing or marketing a new product; or

	•	third parties will market superior or more cost-effective products.

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

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

Our resources are limited; and therefore, our business strategy requires us to depend on either corporate collaborations, strategic financings or both, in order to develop one or more of our product candidates through to commercialization. In developing our product candidates, we may enter into various arrangements with:


	•	corporate and financial partners;

	•	academic investigators;

	•	licensors of technologies; and

	•	licensees of our technologies.

If we are unable to enter into such arrangements, our ability to proceed with the research, development, manufacture and/or sale of product candidates may be limited and we may have to alter or curtail our business objectives based on our capital resources. If we do so, it could result in delaying the progress of pre-clinical research or clinical trials, and consequently, the eventual commercialization of a marketed product based on one of these programs, or eliminating one or more research or development programs from our business objectives.

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

Furthermore, larger pharmaceutical companies often explore multiple technologies and products for the same medical conditions. Therefore, they are likely to develop or enter into collaborations with our competitors for products addressing the same medical conditions targeted by our technologies. Our collaborators may, therefore, be pursuing alternative technologies or product candidates in order to develop treatments for the diseases or disorders targeted by our collaborative arrangements. Depending on how other product candidates advance, a corporate or financial partner may slow down or abandon its work on our product candidates or terminate its collaborative arrangement with us in order to focus on these other prospects.

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

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

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

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

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

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

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

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

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

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


	•	these parties will not honor our confidentiality agreements;

	•	disputes will arise concerning the ownership of intellectual property or the applicability of confidentiality obligations; or

	•	disclosure of our trade secrets will occur regardless of these contractual protections.

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

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

We support and collaborate in research conducted in universities, such as Johns Hopkins, and in governmental research organizations, such as the National Institutes of Health. We may not be able to acquire exclusive rights to the inventions or technical information that result from work performed by personnel at these organizations. Also, disputes may arise as to which party should have rights in research programs that we conduct on our own or in collaboration with others that are derived from or related to the work performed at a university or governmental research organization. In addition, in the event of a contractual breach by us, some

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

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

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

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

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

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


	•	exercise diligence in the research and development of these technologies;

	•	achieve specified development and regulatory milestones;

	•	expend minimum amounts of resources in bringing potential products to market;

	•	make specified royalty and milestone payments to the party from which we have licensed the technology; and

	•	reimburse patent costs to these parties.

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

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

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

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

In addition, our U.S. patent protection for GLIADEL® Wafer, which as of March 31, 2004, has accounted for approximately 63% of our product sales revenue, expires in 2006. From and after that time, there can be no assurance that others will not enter the market with a generic copy of GLIADEL® Wafer. The availability of such a generic copy could negatively impact our revenues from GLIADEL® Wafer.

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

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


	•	adequate steps have not been taken to commercialize such inventions;

	•	the grant is necessary to meet public health or safety needs; or

	•	the grant is necessary to meet requirements for public use under federal regulations.

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

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

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

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

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

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

Our research, pre-clinical development and clinical trials, and the manufacturing and marketing of our product candidates are subject to extensive regulation by numerous governmental authorities in the United States and other countries, including the FDA and the DEA. Except for GLIADEL® Wafer and AGGRASTAT® Injection, none of our product candidates has received marketing clearance from the FDA or any foreign regulatory authority.

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


	•	we will not be able to satisfy the FDA’s requirements with respect to any of our drug product candidates; or

	•	even if the FDA does approve our product candidates, the FDA will approve less than the full scope of uses or labeling that we seek.

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

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

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

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

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

We cannot be sure that we will be able to meet applicable requirements to test, manufacture and market controlled substances or radio-labeled drugs, or that we will be able to obtain additional necessary approvals,

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

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

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

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

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


	•	the treatment of malignant glioma;

	•	the treatment of acute cardiovascular conditions;

	•	the diagnosis of Parkinson’s disease;

	•	the development of a water soluble formulation of propofol;

	•	the promotion of nerve growth and repair; and

	•	the treatment and prevention of neuronal damage.

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

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

Any product candidate that we develop and for which we gain regulatory approval must then compete for market acceptance and market share. An important factor will be the timing of market introduction of competitive products. Accordingly, the relative speed with which we and competing companies can develop products, complete the clinical testing and approval processes, and supply commercial quantities of the products to the market will be an important element of market success.


	•	capabilities of our collaborators;

	•	product efficacy and safety;

	•	timing and scope of regulatory approval;

	•	product availability;

	•	awareness and acceptance of our products by physicians;

	•	marketing and sale capabilities;

	•	reimbursement coverage from insurance companies and others;

	•	the amount of clinical benefit of our product candidates relative to their cost;

	•	the method of administering a product;

	•	price; and

	•	exclusivity, through patent protection or FDA regulations.

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

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

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

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

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

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

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


	•	medicinal chemistry and other research specialties;

	•	pre-clinical testing;

	•	clinical trial management;


	•	regulatory affairs;

	•	intellectual property;

	•	sales and marketing;

	•	manufacturing; and

	•	business development.

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

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

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

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

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

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

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


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

	•	the third party acquires at least 85% of our common stock at the time its ownership goes past the 15% level; or

	•	our Board of Directors and two-thirds of the shares of our common stock not held by the third party vote in favor of the transaction.

We have also adopted a stockholder rights plan intended to deter hostile or coercive attempts to acquire us. Under the plan, if any person or group acquires more than 20% of our common stock without approval of the Board of Directors under specified circumstances, our other stockholders have the right to purchase shares

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

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

On January 12, 2004, the Company filed a current report on Form 8-K/ A, the purpose of which was to provide historical and pro forma financial statements related to the AGGRASTAT® product line acquisition reporting under Items 5 and 7.

On February 24, 2004, the Company filed a current report on Form 8-K, the purpose of which as to update the description of the Guilford Pharmaceuticals Inc.’s capital stock reporting under Item 5.

On February 27, 2004, the Company filed a current report on Form 8-K/ A, the purpose of which was to amend the pro forma financial statements related to the AGGRASTAT® product line acquisition reporting under Item 7.

On March 30, 2004, the Company filed a current report on Form 8-K, the purpose of which was to disclose Pfizer, Inc.’s termination of its agreement with the Company that had granted Pfizer the exclusive right to develop NAALADase Inhibitors worldwide reporting under Item 5 and 7.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Exhibit 10.40

AMENDMENT NO. 2 TO CONSULTING AGREEMENT

THIS AMENDMENT NO. 2 is made as of August 31, 2003 (this “Amendment”), to the CONSULTING AGREEMENT dated July 23, 1999 (the “Agreement”), by and between Guilford Pharmaceuticals Inc., a Delaware corporation (the “Company”), and Solomon H. Synder, M.D. (the “Consultant”)

B a c k g r o u n d :

The Company and the Consultant are parties to the Agreement, pursuant to which the Consultant provides consulting services to the Company.

The parties desire to modify certain terms of the Agreement, as set forth in this Amendment.

The modifications to the Agreement set forth in Section 3 of this Amendment are being made in order to comply with applicable provisions of the Sarbanes-Oxley Act of 2002.

In consideration of the foregoing, of the mutual promises of the parties hereunder, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Consultant and the Company hereby agree as follows:

1. Capitalized terms used in this Amendment without definition shall have the meanings given to such terms in the Agreement.

2. Section 2(a) of the Agreement is amended by adding the following clauses to the end of Section 2(a):

(vi) September 2003 to August 2004: $20,833.33 per month (annualized rate: $250,000 per annum);

(vii) September 2004 to August 2005: $21,666.66 per month (annualized rate: $260,000 per annum); and

(viii) September 2005 to August 2006: $22,500 per month (annualized rate: $270,000 per annum).

3. Section 3 of the Agreement is deleted in its entirety. Notwithstanding the deletion of Section 3 and for the avoidance of doubt, the Split Dollar Life Insurance Agreement dated October 10, 2000, by and between the Company and Stephen Kastenberg, Trustee under the Snyder Family 1999, Irrevocable Trust Agreement, in respect of the Policy, shall not be affected by this Amendment.

4. The first sentence of Section 5 of the Agreement shall be deleted in its entirety and in its place the following shall be inserted:

“The term of this Agreement shall commence on July 23, 1999 and shall continue until and including August 31, 2006, unless further extended by mutual written agreement of the parties hereto or unless earlier terminated as provided below (the “Term”).”

5. Except as specifically provided in this Amendment and as the context of this Amendment otherwise may require to give effect to the intent and purposes of this Amendment, the Agreement shall remain in full force and effect without any other amendments or modifications.

IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment No. 2 as of the date and year first above written.

GUILFORD PHARMACEUTICALS INC.


By:
		/s/ Craig R. Smith, M.D.
Name:		Craig R. Smith, M.D.
Title:		President and Chief Executive Officer


/s/ Solomon H. Snyder, M.D.
Solomon H. Snyder, M.D.


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

6611 Tributary Street Baltimore, Maryland		21224 (Zip Code)
(Address of principal executive offices)


Class		Outstanding May 6, 2004

Common Stock, $.01 par value		33,951,574


			Page

Part I Financial Information
	Item 1. Financial Statements			3
		Consolidated Balance Sheets		4
		Consolidated Statements of Operations		5
		Consolidated Statement of Changes in Stockholders’ Equity		6
		Consolidated Statements of Cash Flows		7
		Notes to Consolidated Financial Statements		8
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			24
	Item 4. Controls and Procedures			25

Part II Other Information
	Item 1. Legal Proceedings			26
	Item 2. Changes in Securities and Use of Proceeds			26
	Item 3. Defaults Upon Senior Securities			26
	Item 4. Submission of Matters to a Vote of Security Holders			26
	Item 5. Other Information			26
	Item 6. Exhibits and Reports on Form 8-K			43
	Signatures			44
	Certifications			45


			March 31, 2004			December 31, 2003

			(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	12,071		$	29,939
	Investments, net			47,493			50,261
	Accounts receivable, net			4,453			3,460
	Inventories, net			2,824			2,504
	Prepaid expenses and other current assets			2,227			1,787

		Total current assets		69,068			87,951
Investments – restricted				21,465			21,743
Property and equipment, net				21,532			22,395
Intangible assets, net				81,074			82,796
Other assets				6,364			6,438

			$	199,503		$	221,323

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	7,161		$	8,549
	Current portion of long-term debt			3,056			3,394
	Accrued payroll related costs			1,750			4,538
	Accrued contracted services			1,735			1,909
	Accrued expenses and other current liabilities			3,903			3,590

		Total current liabilities		17,605			21,980
Long-term debt, excluding current portion				88,578			88,885
Revenue interest obligation				42,921			42,155
Other liabilities				1,390			1,103

		Total liabilities		150,494			154,123

Stockholders’ equity:
	Preferred stock, par value $.01 per share; authorized 4,700,000 shares, none issued			—			—
	Series A junior participating preferred stock, par value $.01 per share; authorized 300,000 shares, none issued			—			—
	Common stock, par value $.01 per share; authorized 75,000,000 shares, 34,946,594 and 34,908,076 issued at March 31, 2004 and December 31, 2003, respectively			349			349
	Additional paid-in capital			377,294			377,168
	Accumulated deficit			(321,606	)		(303,538	)
	Accumulated other comprehensive loss			(2,023	)		(1,485	)
	Note receivable from officer			—			(85	)
	Treasury stock, at cost; 1,014,483 and 1,055,816 shares at March 31, 2004 and December 31, 2003, respectively			(5,005	)		(5,209	)

		Total stockholders’ equity		49,009			67,200

			$	199,503		$	221,323



			Three Months Ended
			March 31,

			2004			2003

Revenues:
	Net product sales		$	8,727		$	3,404
	Revenues from license fees, milestones and other			201			59

		Total revenues		8,928			3,463
Costs and Expenses:
	Cost of sales			991			893
	Research and development			9,373			7,787
	Selling, general and administrative			11,747			6,511
	Intangible amortization			1,722			210

		Total costs and expenses		23,833			15,401

Operating loss				(14,905	)		(11,938	)
Other income (expense):
	Investment and other income			478			864
	Revenue interest expense			(2,335	)		—
	Interest expense			(1,306	)		(119	)

Net loss			$	(18,068	)	$	(11,193	)

Basic and diluted loss per common share:			$	(0.53	)	$	(0.37	)

Weighted-average shares outstanding to compute basic and diluted loss per share				33,921			29,916


														Accumulated
				Common Stock										Other			Note
								Additional						Comprehensive			Receivable						Total
				Number of				Paid-in			Accumulated			Income			From			Treasury			Stockholders’
				Shares		Amount		Capital			Deficit			(Loss)			Officer			Stock, at Cost			Equity

Balance, January 1, 2004					34,908,076	$	349	$	377,168		$	(303,538	)	$	(1,485	)	$	(85	)	$	(5,209	)	$	67,200

Comprehensive loss:
	Net loss											(18,068	)											(18,068	)
	Other comprehensive loss:
		Unrealized loss on interest rate swap agreements													(287	)								(287	)
		Unrealized loss on available-for-sale securities													(251	)								(251	)

			Total other comprehensive loss																					(538	)

Total comprehensive loss																							$	(18,606	)

Forgiveness of officer loan																		85						85
Issuance of common stock					38,518				171															171
Distribution of 41,333 shares of treasury stock to ESP plan									(45	)											204			159

Balance, March 31, 2004					34,946,594	$	349	$	377,294		$	(321,606	)	$	(2,023	)	$	—		$	(5,005	)	$	49,009


	March 31,			December 31,
	2004			2003


	(In thousands)
Trade accounts receivable	$	4,465		$	4,276
Less allowance for doubtful accounts		(12	)		(816	)

	$	4,453		$	3,460


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


	Development
	Stage		Status

Pharmaceutical technologies:
GPI 1485 (neuroimmunophilin ligand)		Phase II		Active
AQUAVAN® Injection		Phase II		Active
AGGRASTAT® Injection for PCI indication		Phase III		Active
NAALADase inhibitors		Pre-clinical		Active
Other neuroimmunophilin ligands		Research		Active
Other CNS projects		Research		Active
PARP inhibitors		Research		Active
Biopolymer technologies:
PACLIMER® Microspheres (Ovarian Cancer)		Phase I/II		Inactive
PACLIMER® Microspheres (Lung Cancer)		Phase I/II		Inactive
Lidocaine-PE (formerly LIDOMER^™Microspheres)		Phase I		Inactive
Other biopolymer projects		Research		Inactive



	Three-month
	periods ended
	March 31,

	2004		2003

Pharmaceutical technologies	$	6.6	$	4.5
Biopolymer technologies		0.2		0.2
Indirect expenses		2.6		3.1

	$	9.4	$	7.8



	Payments Due By Period

Contractual Commitments (1)	Total		<1 Year		1-3 Years		4-5 Years		>5 years

Long-term debt	$	90,724	$	2,498	$	3,503	$	84,679	$	44
Capital lease obligations		910		558		352		—		—
Revenue interest obligation (2)		85,050		5,325		14,725		20,000		45,000
Operating leases		1,959		1,475		484		—		—
Research and development arrangements (3)		9,377		6,657		2,635		85		—

Total Contractual Commitments	$	188,020	$	16,513	$	21,699	$	104,764	$	45,044


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


Exhibit No.		Description

	10.40	Amendment to Consulting Agreement, dated August 31, 2003, between the Company and Solomon H. Snyder, M.D. (filed herewith)
	31.01	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
	31.02	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
	32.01	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
	32.02	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)


		Guilford Pharmaceuticals Inc.

Date: May 10, 2004		/s/ CRAIG R. SMITH, M.D. ----------------------------------------------- Craig R. Smith, M.D. Chairman of the Board and Chief Executive Officer

Date: May 10, 2004		/s/ ANDREW R. JORDAN ----------------------------------------------- Andrew R. Jordan Executive Vice President and Chief Financial Officer (Principal Accounting Officer)

(vi)		September 2003 to August 2004: $20,833.33 per month (annualized rate: $250,000 per annum);

(vii)		September 2004 to August 2005: $21,666.66 per month (annualized rate: $260,000 per annum); and

(viii)		September 2005 to August 2006: $22,500 per month (annualized rate: $270,000 per annum).


Item 1.	*Financial Statements*


Item 1.	*Legal Proceedings:*


Item 3.	*Defaults Upon Senior Securities:*


Item 5.	*Other Information:*


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:


	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)	[Paragraph reserved pursuant to SEC Release 33-8238];

	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


	(a)	the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2004 filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(b)	information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


	/s/ CRAIG R. SMITH, M.D.

	Craig R. Smith, M.D.
	Chief Executive Officer
	May 10, 2004


	/s/ ANDREW R. JORDAN

	Andrew R. Jordan
	Chief Financial Officer
	May 10, 2004