UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2005

Commission file number: 0-23736

GUILFORD PHARMACEUTICALS INC.

(Exact name of Registrant as specified in its charter)

(410) 631-6300

(Registrant’s telephone number, including area code)

     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 Exchange Act Rule 12b-2).     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.

TABLE OF CONTENTS

FORWARD LOOKING STATEMENTS

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

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

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

PART I. FINANCIAL INFORMATION

      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 U.S. generally accepted accounting principles, 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, 2004.

      In the opinion of our management, any adjustments contained in the accompanying unaudited consolidated financial statements as of and for the quarter ended March 31, 2005 (or Unaudited Consolidated Financial Statements) are of a normal recurring nature, necessary to present fairly our financial position, results of operations, cash flows and changes in stockholders’ equity. Interim results are not necessarily indicative of results for the full fiscal year.

GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands, except share data)

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

($ in thousands, except per share data)

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

($ in thousands)

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

($ in thousands, except share data)

(unaudited)

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Basis of Presentation

      The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated.

Use of Estimates

      The preparation of the Company’s financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and to disclose contingent assets and liabilities as of the dates of such financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Interest Obligation

      The Company has entered into a Revenue Interest Assignment Agreement (or Revenue Agreement) with Paul Royalty Fund, L.P. and certain of its affiliated entities (collectively, PRF), pursuant to which PRF is entitled to receive revenue interest payments based on our sales of certain of the Company’s existing and future products. The Company recorded its revenue interest obligation as debt due to the Company’s significant continuing involvement in the generation of cash flows due to PRF. The Company amortizes the revenue interest obligation under the effective interest method and utilizes 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 reduce the future obligation.

Revenue Recognition

      Revenue from sales of GLIADEL® Wafer (or Gliadel) and AGGRASTAT® Injection (or Aggrastat) is recognized when all four of the following criteria are met:

      The Company records its revenue net of provisions for returns, chargebacks and discounts, which are established at the time of sale. The Company’s credit and exchange policy includes provisions for return of any product that has expired or 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.

      Product demand by distributors and wholesalers during a given period may not correlate with prescription demand for the product in the period. As a result, the Company periodically evaluates the specialty distributor’s and wholesalers’ inventory positions. If such evaluation causes the Company to believe that these

levels are too high based on prescription demand, then until these levels are reduced to acceptable levels the Company will:

Stock-Based Compensation

      The Company accounts for stock-based compensation under Accounting Principals Board Opinion No. 25 (or APB 25) and recognizes compensation costs attributable to stock option and similar plans based on any excess of the quoted market price of the stock on the date of grant over the amount the employee is required to pay to acquire the stock.

      Statement of Financial Accounting Standards (or SFAS) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (or SFAS 148), which amended SFAS 123, “Accounting for Stock-Based Compensation,” (or SFAS 123) requires companies 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, SFAS 148 amended the disclosure requirements of SFAS 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 SFAS 148 have been incorporated herein.

      The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:

New Accounting Standards

SFAS 123R:

      In December 2004, the Financial Accounting Standards Board (or FASB) issued SFAS 123R (revised 2004), “Share-Based Payment,” which is a revision of SFAS 123, “Accounting for Stock-Based Compensation.” SFAS 123R supersedes Accounting Principles Bulletin Opinion (or APB) No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. In accordance with the effective date of the statement, the Company will adopt the statement starting with its fiscal year beginning January 1, 2006.

      As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values over the expected period of service. Accordingly, the adoption of SFAS 123R’s fair value method may have an impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position.

      The impact of adopting of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, if the Company adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share as disclosed above in “Stock-Based Compensation.” SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company is unable to estimate what those amounts will be in the future because they depend on, among other things, when employees exercise stock options.

SFAS 151:

      In November 2004, FASB issued SFAS 151, “Inventory Cost.” This statement amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). The provision of the statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is evaluating the impact of this statement on its consolidated financial positions, results of operations and cash flows.

      On April 5, 2005, the Company concluded that its Aggrastat intangibles and other related assets and liabilities (or the Aggrastat Assets) were not essential to the Company’s long-term business strategy. As a result, the Company intends to pursue strategic alternatives for the Aggrastat Assets, including, but not limited to, selling, divesting, partnering, licensing or entering into other similar arrangements with respect to those assets.

      In accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” the Company performed an impairment analysis due to the Company’s current expectation that it is more likely than not the Aggrastat Assets will be sold or otherwise disposed of significantly before the end of their previously estimated useful lives. The impairment analysis was performed using market-based sales multiples for comparable product lines and determined that the carrying value of the Aggrastat Assets was in excess of their fair value. The Company recorded a non-cash charge of $31.0 million to reduce the carrying value to fair value. The Aggrastat Assets are being treated as an “Asset Held for Use” until a determination is made, if ever, to dispose of the product line.

      The Company’s commitment to pursue strategic alternatives for the Aggrastat Assets and to reduce the scope of or eliminate any related clinical trials, including the TENACITY clinical trial, could potentially result in future cash expenditures. These expenses may include, but are not limited to, employee and contract termination costs and other miscellaneous costs that currently cannot be determined.

      As of March 31, 2005, the Company’s contractual commitments related to the Aggrastat Assets included:

      Additionally, under the Revenue Agreement, the Company may not be free to utilize the Aggrastat Assets due to the fact that PRF received a security interest in the assets related to Aggrastat. Moreover, PRF may be entitled to require the Company to repurchase all or a portion of PRF’s revenue interest if the Company sells the Aggrastat Assets. The repurchase price guarantees PRF a return in an amount over its initial investment and is reduced based on the Company’s prior payments to PRF before the date that PRF’s interest is repurchased; however, the repurchase price may never exceed three and one-half times PRF’s initial investment, or $147.0 million. If the Company had sold Aggrastat on March 31, 2005, it would have owed PRF approximately $37.0 million, in addition to ongoing revenue interest obligations on Gliadel and future products under the Revenue Agreement. Alternatively, if PRF had exercised its repurchase option as of March 31, 2005, the Company would have owed PRF approximately $57.0 million, without any ongoing revenue interest obligations. The Company believes that the payments due to PRF upon the sale or other disposition of the Aggrastat Assets would be offset, in whole or in part, by amounts it would receive upon such disposition.

      Accounts receivable consist of the following:

      Accounts receivable include amounts relating to sales of Gliadel to a specialty distributor, hospitals and wholesalers that provide for net payments in 91 days, and sales of Aggrastat to wholesalers that provide for net payments in 31 days, both with certain discounts for early payment.

      Inventory consists of the following:

      Cost of sales was charged $0.2 million and less than $0.1 million for the quarters ended March 31, 2005 and 2004, respectively, to reflect total Gliadel and Aggrastat inventory at net realizable value.

      Intangible assets consist of the following:

      On April 5, 2005, the Company concluded that the Aggrastat Assets were not essential to the Company’s long-term business strategy. As a result, the Company evaluated the recoverability of the Aggrastat Assets as of March 31, 2005 and determined that the carrying value was in excess of the fair value. Accordingly, the Company recorded a non-cash charge of $31.0 million to write-down the carrying value of the Aggrastat Assets to fair value.

      Amortization expense for each of the quarters ended March 31, 2005 and 2004 was $1.7 million. As a result of the write-down of the Aggrastat Assets’ carrying value by $31.0 million, the amortization expense related to the above intangible assets is expected to be $4.8 million for the fiscal year 2005 and $4.2 million for each of the next five years.

      In January 2005, the Company paid off the outstanding principal balance of $17.2 million on its five-year term loan with Wachovia Bank National Association (or Wachovia). Under the terms of the loan, the Company was required to maintain a restricted cash collateral account in the amount of the remaining unpaid principal of the loan. Additionally, the Company had entered into a swap agreement that effectively fixed the interest rate on this indebtedness at 5.36%. As a result of the repayment, the related cash collateral account balance of $17.2 million has been released and the swap agreement was paid and terminated, which resulted in a realized loss of $0.5 million.

      On October 28, 2003, the Company acquired from Merck the rights to Aggrastat in the United States and its territories for a purchase price of $84.0 million. The Company paid $42.0 million in cash and entered into a $42.0 million revenue interest financing arrangement with PRF pursuant to the Revenue Agreement, the terms of which are summarized as follows:

      The repurchase price guarantees PRF a return in an amount over its initial investment and is reduced based on the Company’s prior payments to PRF before the date that PRF’s interest is repurchased; however, the repurchase price may never exceed three and one-half times PRF’s initial investment, or $147.0 million.

      Revenue interest expense, calculated using the effective interest method, was $2.1 million and $2.3 million for the quarters ended March 31, 2005 and 2004, respectively. The Company utilizes 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 reduce the future obligation.

      In December 2004, the Company recorded $3.8 million in unearned compensation to stockholders’ equity for the fair value of the equity instruments granted to Dean J. Mitchell, the Company’s newly appointed President and Chief Executive Officer. The Company is amortizing the unearned compensation expense into earnings over the service period. During the quarter ended March 31, 2005, the Company recorded non-cash compensation expense of $0.4 million. As of March 31, 2005, $3.2 million of unearned compensation remained to be amortized for Mr. Mitchell’s equity instrument grants.

      Pursuant to the terms of the Company’s September 2004 consulting and separation agreement with Craig R. Smith, M.D., the Company’s former President, Chief Executive Officer and Chairman of the Board, the Company paid Dr. Smith approximately $0.3 million for the quarter ended March 31, 2005. As of March 31, 2005, $1.6 million in consulting and separation costs remained and is recorded in accrued payroll related costs on the Unaudited Consolidated Balance Sheet.

      Pursuant to the Company’s September 1995 consulting agreement with Solomon H. Snyder, M.D., a director, the Company paid approximately $0.1 million and $0.1 million for consulting services for the quarters ended March 31, 2005 and 2004, respectively. These services included assisting the Company in recruiting scientific staff, advising on acquisitions of new technologies and laboratory equipment and participating in business meetings with the President and Chief Executive Officer of the Company.

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

Overview

      We are 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 have financed our operations since inception in July 1993 through the issuance of equity securities, convertible subordinated notes, revenues from the sales of GLIADEL® Wafer (or Gliadel) and more recently AGGRASTAT® Injection (or Aggrastat), funding pursuant to collaborative and partnering agreements, a revenue interest obligation with Paul Royalty Fund, L.P. and certain of its affiliated entities (or PRF), a sale and leaseback transaction of our facilities and proceeds from loans or other borrowings. Any or all of these financing vehicles, or others, may be utilized to fund our future capital requirements.

      We currently have two marketed products: Gliadel and Aggrastat. Gliadel provides targeted, site-specific chemotherapy for the treatment of malignant glioma and recurrent glioblastoma multiforme in conjunction with surgery and radiation. Aggrastat is an inhibitor of platelet aggregation approved for the treatment of acute coronary syndrome (or ACS), including patients who are to be managed medically and those undergoing percutaneous transluminal coronary angioplasty. We acquired the rights to Aggrastat in the United States and its territories and possessions from Merck & Co., Inc. (or Merck) in October 2003.

      Based on our review of our long-term strategy, on April 5, 2005, we determined that we should focus our activities and resources on Gliadel and AQUAVAN® Injection (or Aquavan) in order to maximize their value, and consequently, maximize shareholder value. We are currently implementing this business strategy by, among other things, seeking strategic partners, licensees, acquirers or other similar opportunities to divest our non-key assets, such as Aggrastat, which transactions would be subject to the approval of our Board of Directors.

      Our product pipeline consists of product candidates in various stages of clinical and pre-clinical development as described below in this quarterly report.

AQUAVAN® Injection

      Aquavan is a proprietary water soluble prodrug of propofol. Unlike propofol, which is formulated in an oil or lipid-based emulsion, Aquavan is formulated in a clear aqueous solution and is rapidly converted by an enzyme in the body, called alkaline phosphatase, into propofol after intravenous injection.

      Aquavan is currently in Phase III clinical trials for use for procedural sedation during brief diagnostic or therapeutic procedures. In March 2005, we announced the results of the first Phase III clinical trial with Aquavan for use for procedural sedation in connection with patients undergoing colonoscopy. In support of the filing of a New Drug Application (or NDA) for Aquavan, we expect additional Phase III and supporting Phase II studies with Aquavan to include its use for (i) intensive care unit sedation, (ii) drug interaction evaluation, (iii) colonoscopy, and (iv) minor surgical procedures. We expect that the colonoscopy and minor surgical procedures studies will be based on the results of a dose finding trial in colonoscopy that we expect to launch during the third quarter of 2005. Based on our current projected timelines, we expect to be able to file an NDA during the second half of 2006.

GPI 1485

      GPI 1485, a lead clinical candidate in the neuroimmunophilin ligand program, is in Phase II clinical trials for the treatment of Parkinson’s disease and post-prostatectomy erectile dysfunction (or PPED) and in pre-clinical development for HIV-related dementia and neuropathy. GPI 1485 is licensed to Symphony Neuro Development Company (or SNDC).

AGGRASTAT® Injection

      On April 5, 2005, we concluded that Aggrastat was not essential to our long-term business strategy. As a result, we intend to divest, partner, license or enter into other similar arrangements for this product. While we are pursuing these strategic alternatives, we plan to reduce or eliminate our costs and expenses related to Aggrastat including, but not limited to, clinical trial costs, but continue to actively market this product.

Additional Product Candidates

      Our other product candidates and pre-clinical research programs include DOPASCAN® Injection, an imaging agent used to diagnose and monitor the progression of Parkinson’s disease; NAALADase inhibitors for the treatment of neuropathic pain and peripheral neuropathy; PARP inhibitors for cancer chemo- and radiosensitization; and GPI 15715 in a non-intravenous formulation of the prodrug of propofol.

Results of Operations — Revenue

      Total revenue was $10.7 million and $8.9 million for the quarters ended March 31, 2005 and 2004, which consisted of the following:

      For the quarter ended March 31, 2005, the increase in total revenue of $1.8 million compared to the same period in 2004 was due to the increase in Gliadel net product revenue. We believe that the increase in Gliadel revenue for the quarter ended March 31, 2005 over the same period in 2004 is attributable to:

      During the quarters ended March 31, 2005 and 2004, we sold Gliadel:

      During the quarters ended March 31, 2005 and 2004, our specialty distributor, Cardinal Health Specialty Pharmaceuticals Distribution (or SPD), a division of Cardinal Health Inc. (or Cardinal), sold 447 and 401 units, respectively, to hospitals and wholesalers. Total units we sold to SPD were 407 and 364 units during the quarters ended March 31, 2005 and 2004, respectively. SPD has nationwide marketing and distribution capabilities that complement our sales and marketing efforts. SPD is also responsible for shipping the product that it purchases from us to hospital pharmacies, thereby reducing our overall distribution costs due to the fact that, without SPD, we would incur separate shipping costs from our logistical distributor for each shipment. SPD receives a discount on its monthly purchases of Gliadel based on the projected inventory in the distribution channel, compared to the previous month’s prescription demand, and also receives an additional discount for early payment. We have the ability to accept or reject purchase orders from SPD at our sole discretion based on our review of estimated inventory in the distribution channel compared to current prescription demand.

      During the quarters ended March 31, 2005 and 2004, Gliadel direct hospital revenue of $0.9 million and $0.8 million, respectively, resulted from sales made directly to hospitals or drop shipments to hospitals pursuant to purchase orders from wholesalers. Substantially all of these sales to hospitals and wholesalers included our normal payment terms, including discounts for early payment.

      All of our Aggrastat net product revenue of $3.2 million and $3.2 million for the quarters ended March 31, 2005 and 2004, respectively, arose from direct sales to wholesalers in the United States and its territories. Three principal wholesalers accounted for $2.9 million and $3.1 million in Aggrastat revenue for the quarters ended March 31, 2005 and 2004, respectively. Since the acquisition of Aggrastat in the fourth

quarter of 2003, we increased the size of our sales force and completed training programs for the entire sales and marketing team in an effort to increase demand for Aggrastat in the ACS market.

Cost of Sales and Gross Margin

      The unit cost to manufacture Gliadel can vary inversely with production volume. To the extent that production levels materially increase or decrease in the future, we anticipate that the unit cost to manufacture Gliadel will respectively decrease or increase. In the event of such a material change in production levels, we would expect the cost of sales of Gliadel, and accordingly, gross profit percentage, to fluctuate from quarter to quarter.

      Cost of sales for the quarter ended March 31, 2005 was negatively affected by an adjustment of $0.2 million primarily to reflect total Gliadel inventories at net realizable value. Depending on the ultimate strategic alternative selected for Aggrastat, we may need to reserve additional amounts for Aggrastat inventory that we are required to purchase from Baxter Healthcare Corporation (or Baxter) under the supply arrangement described below.

      Cost of sales for the quarter ended March 31, 2004 was negatively affected by less than $0.1 million to reflect total Gliadel and Aggrastat inventories at net realizable value.

      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. In the second quarter of 2004, we also entered into a manufacturing and supply agreement with Baxter to supply us with finished product of Aggrastat in 250 ml and 100 ml bags, through July 2009. This agreement with Baxter replaced an agreement with Merck whereby Merck had agreed to supply us with finished product in bags through December 2007. We are also currently negotiating with a potential supplier to provide 50 ml vials of Aggrastat for 2005 and future years.

Research and Development Expenses

      In 1999, we began recording research and development costs under two platforms, pharmaceutical technologies and biopolymer technologies. From January 1, 1999, through March 31, 2005, we incurred, in the aggregate, costs of $152.7 million for our pharmaceutical technologies platform, $35.2 million for our biopolymer technologies platform, and $97.4 million of indirect expenses. From our inception in July 1993 through December 1998, we 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 technologies. For our biopolymer technologies, we plan to pursue potential corporate partnerships, divestitures or similar strategic alternatives to further their research and development, rather than develop these projects ourselves. The following chart sets forth our projects in the pharmaceutical and biopolymer technology areas and the stage to which each has been developed:

      As stated above, on April 5, 2005, we concluded that Aggrastat was not essential to our long-term business strategy and identified Gliadel and Aquavan as key assets on which to focus our future efforts. Consequently, we intend to pursue other strategic alternatives for Aggrastat and other non-key assets, including but not limited to, selling, divesting, partnering, licensing or entering into other similar arrangements to maximize the value of these non-key assets.

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

      Our research and development expenses were $16.0 million and $9.4 million for the quarters ended March 31, 2005 and 2004, respectively. These expenses were incurred among our research and development platforms and projects in the following manner:

      For the quarter ended March 31, 2005, our pharmaceutical technologies’ research and development expenses increased by $6.3 million to $12.9 million, compared to the same period in 2004, primarily due to increased spending of:

      Based on our recently announced new strategic focus, we intend to pursue other strategic alternatives for Aggrastat, including divesting, partnering, licensing or entering into other similar types of arrangements for this product. While we are pursuing these strategic alternatives, we plan to reduce or eliminate the costs and expenses related to Aggrastat including, but not limited to, clinical trial costs.

      For the quarters ended March 31, 2005 and 2004, our biopolymer technologies’ research and development expenses were $0.2 million and $0.2 million, respectively. Currently, we do not plan on conducting 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. To that end, in September 2004, we entered into licensing agreements with MIT, JHU and Angiodevice International GmbH (or Angiotech), which terminated one existing license agreement we had with MIT and JHU, thereby allowing Angiotech to obtain an exclusive license to certain rights in two patents we had previously licensed from the MIT and JHU. Concurrently with the execution of our agreement with Angiotech, we also entered into an exclusive license agreement with each of MIT and JHU granting us certain rights to develop PACLIMER® Microspheres (polilactofate/paclitaxel) for certain indications in oncology and women’s health under the two patents licensed to Angiotech.

      For the quarter ended March 31, 2005, our indirect research and development expenses increased by $0.3 million to $2.9 million, compared to the same period in 2004, primarily due to $0.3 million increase in research and development facility rent expense as a result of the December 2004 sale and leaseback of our research and development facility.

Selling, General and Administrative Expenses

      The costs incurred to market, sell and distribute Gliadel and Aggrastat increased by $1.7 million for the quarter ended March 31, 2005 compared to the same period in 2004, principally from:

      The foregoing increases were offset by a $0.4 million decrease in external costs incurred in 2004 related to integrating the Aggrastat acquisition.

      Expenses associated with our general and administrative functions increased by $1.4 million for the quarter ended March 31, 2005 compared to the same period in 2004, principally from:

      Our general and administrative functions include the areas of executive management, finance and administration, investor and public relations, corporate development, human resources, legal, intellectual property 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 and 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 $1.7 million for the quarters ended March 31, 2005 and 2004, respectively. Intangible amortization includes amortization of $1.5 million related to the Aggrastat product rights and $0.2 million related to the reacquisition of Gliadel rights in 2000.

      During the quarter ended March 31, 2005, we recorded an impairment charge of $31.0 million related to Aggrastat intangibles (see “Aggrastat Impairment” below for further detail). As a result, the intangible amortization expense is expected to be $4.8 million for fiscal year 2005 and $4.2 million for each of the next five fiscal years.

Impairment of Long-lived Assets

      On April 5, 2005, we concluded that our Aggrastat intangibles and other related assets and liabilities (or the Aggrastat Assets) were not essential to our long-term business strategy. As a result, we intend to sell, divest, partner, license or enter into other similar arrangements with respect to those assets.

      In accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” we performed an impairment analysis due to our current expectation that it is more likely than not the Aggrastat Assets will be sold or otherwise disposed of significantly before the end of their previously estimated useful lives. The impairment analysis was performed using market-based sales multiples for comparable product lines and determined that the carrying value of the Aggrastat Assets was in excess of their fair value. We recorded a non-cash charge of $31.0 million to reduce the carrying value to fair value. The Aggrastat Assets are being treated as an “Asset Held for Use” until a determination is made, if ever, to dispose of the product line.

      Our commitment to pursue strategic alternatives for the Aggrastat Assets and to reduce the scope of or eliminate any related clinical trials, including the TENACITY clinical trial, could potentially result in future cash expenditures. These expenses may include, but are not limited to, employee and contract termination costs and other miscellaneous costs that currently cannot be determined.

      As of March 31, 2005, our contractual commitments related to the Aggrastat Assets included:

      Additionally, under the Revenue Agreement, we may not be free to utilize the Aggrastat Assets due to the fact that PRF received a security interest in the assets related to Aggrastat. Moreover, PRF may be entitled to require us to repurchase all or a portion of PRF’s revenue interest if we sell the Aggrastat Assets. The repurchase price guarantees PRF a return in an amount over its initial investment and is reduced based on our prior payments to PRF before the date that PRF’s interest is repurchased; however, the repurchase price may never exceed three and one-half times PRF’s initial investment, or $147.0 million. If we had sold Aggrastat on March 31, 2005, we would have owed PRF approximately $37.0 million, in addition to ongoing revenue interest obligations on Gliadel and future products under the Revenue Agreement. Alternatively, if PRF had exercised its repurchase option as of March 31, 2005, we would have owed PRF approximately $57.0 million, without any ongoing revenue interest obligations. We believe that the payments due to PRF upon the sale or other disposition of the Aggrastat Assets would be offset, in whole or in part, by amounts we would receive upon such disposition.

Other Income and Expenses

      Other income and expenses consists primarily of income on our investments and interest expense on our debt and other financial obligations. Our investment income was $0.1 million and $0.5 million for the quarters ended March 31, 2005 and 2004, respectively. The decrease in investment income results from both overall lower interest rates and lower average investment balances maintained.

      Revenue interest expense related to the PRF revenue interest obligation was $2.1 million and $2.3 million for the quarters ended March 31, 2005 and 2004, respectively. Revenue interest expense was calculated using the effective interest method, utilizing an imputed interest rate equivalent to PRF’s projected internal rate of return based on estimated future revenue interest obligation payments.

      Interest expense was $1.2 million and $1.3 million for the quarters ended March 31, 2005 and 2004, respectively. The interest expense decreased primarily due to the fact that in January 2005 we paid off the outstanding principal balance of $17.2 million on the five-year term loan with Wachovia Bank National Association (or Wachovia) and also paid off and terminated the related swap agreement. Other interest expense items include amounts arising under our 5% convertible subordinated notes; capital leases entered into for the purchases of various equipment; and a note payable to a commercial bank primarily used to repay a $2.4 million account payable to Cardinal Health Sales and Marketing Services.

Liquidity and Capital Resources

      Our primary cash requirements are to:

      Our cash requirements could change materially as a result of changes in our business and strategy. As a result of the new senior management team’s evaluation of our business strategy, we are committed to pursuing strategic alternatives for the Aggrastat Assets and to reduce the scope of or eliminate related clinical trials, including the TENACITY clinical trial. Depending on the ultimate strategic path, our cash requirements may change materially. Our cash requirements could also change materially depending on the level of success of our marketed products, our competitive position in the marketplace, the progress of our research and development and clinical programs, licensing activities, acquisitions, divestitures or other corporate developments.

      We have financed our operations since inception primarily through:

      In evaluating alternative sources of financing we consider, among other things, the dilutive impact, if any, on our stockholders, the ability to leverage stockholder returns through debt financing, the particular terms and conditions of each alternative financing arrangement and our ability to service our obligations under such financing arrangements.

      Our cash, cash equivalents, marketable securities and restricted investments were $71.1 million and $109.5 million at March 31, 2005 and December 31, 2004, respectively. Of these amounts, $2.6 million and $19.9 million were restricted as of March 31, 2005 and December 31, 2004, respectively, as collateral for certain of our loans and other financial lease obligations. The $38.4 million decrease in cash, cash equivalents, marketable securities and restricted investments from December 31, 2004 to March 31, 2005 resulted primarily from our repayment of the outstanding principal balance of $17.2 million on our Wachovia term loan and an additional $0.6 million to pay off and terminate the related swap agreement in January 2005 and our overall operating activities. Additionally, we had investments held by SNDC of $26.9 million and $32.1 million at March 31, 2005 and December 31, 2004, respectively.

Sources and Uses of Cash

      Cash used in operating activities was $25.5 million and $19.9 million for the quarters ended March 31, 2005 and 2004, respectively. Net changes in assets and liabilities used net cash of $3.7 million during the quarter ended March 31, 2005, mainly due to a decrease in accounts payable and other liabilities, an increase in inventory, partially offset by an increase in prepaid expenses and other current assets and other assets. The decrease in accounts payable and other liabilities relates to the timing and level of our research and development activity and professional services supporting our transactional activity.

      The change in accounts receivable results from the timing of sales and the subsequent cash receipts thereof. Depending on the timing of the sales and the associated subsequent payment, which is traditionally within 31 days, our accounts receivable will increase or decrease for comparative reporting periods. At March 31, 2005 and December 31, 2004, we had $2.4 million and $2.5 million, respectively, in accounts receivable relating to the specialty distributor, primarily related to sales made in March 2005 and December 2004, respectively.

      Prepaid expenses, which fluctuate from period to period depending on the timing and level of preparation and initiation of clinical trials, decreased by $0.5 million. We are often required to prepay contract research organizations for services prior to the initiation of work performed. Fluctuations in operating items vary from

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.

      Additionally, our non-current other assets as of March 31, 2005 and December 31, 2004 includes $1.3 million for the security deposit related to the December 2004 sale and leaseback for our corporate and research and development facilities.

      Included in operating activities for the quarter ended March 31, 2005 were $5.1 million of SNDC operating activities funded by investments held by SNDC.

      In December 2004, we sold our corporate and research and development facilities for $20.8 million, net of expenses, and concurrently leased the properties back from the purchaser for an initial term of 15 years. The lease is renewable at our option for two additional terms of ten years each. A gain of $1.5 million from the sale is being deferred and amortized as a reduction of rent expense over the initial term of 15 years. We acquired the research and development facility in May 2003 utilizing a five-year $18.8 million term loan agreement with Wachovia in order to finance the acquisition. In January 2005, we paid off the outstanding principal balance of $17.2 million on our Wachovia term loan and an additional $0.6 million to terminate the related swap agreement. This repayment reduced our restricted cash by $17.2 million.

      During the quarter ended March 31, 2005, we reduced our total long-term debt, including current portion, but excluding the revenue interest obligation, by $17.5 million to $72.8 million at March 31, 2005, compared to $90.3 million at December 31, 2004. During the quarter ended March 31 2005, we made principal repayments of $17.6 million, including the above-mentioned $17.2 million payment in January 2005 to Wachovia. Our revenue interest obligation to PRF was $45.4 million at March 31, 2005, compared to $44.9 million at December 31, 2004.

      During the quarter ended March 31, 2005, we used 68,697 and 31,053 shares of treasury stock to meet our commitment under our employee stock purchase plan and for our 401(k) plan match, respectively. We may continue to use our treasury stock in the future for the same or similar needs, which will cause dilution to our shareholders.

      On October 28, 2003, we acquired from Merck the rights to Aggrastat in the United States and its territories for a purchase price of $84.0 million. We paid $42.0 million in cash and entered into a $42.0 million revenue interest financing arrangement with PRF pursuant to the Revenue Agreement, the terms of which are summarized as follows:

      We fund capital expenditures through either lease arrangements or direct purchases utilizing our existing cash. To the extent possible, we finance property and equipment requirements by obtaining leases. We had no capital expenditures during either of the quarters ended March 31, 2005 or 2004.

      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 SPD may have in its inventory. As of March 31, 2005, we believe that SPD had $2.0 million of Gliadel in its inventory.

Future Cash Needs

      Historically, we have financed our operations primarily through the issuance of equity securities and convertible subordinated notes, revenues from the sale of Gliadel and more recently of Aggrastat, funding pursuant to collaborative agreements, a revenue interest obligation with PRF and proceeds from loans and other borrowings.

      Our future capital requirements and liquidity will depend on many factors, including but not limited to:

      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:

      We believe that our existing resources will be sufficient to service our existing debt obligations and meet our planned capital expenditure and working capital requirements for the next 12 months. Regardless, we expect to raise additional capital in the future in order to achieve our future business objectives, which include clinical and pre-clinical development activities for our product candidates, including, but not limited to:

      The revised current estimated costs to complete the current series of Aquavan trials are approximately $35.0 — $40.0 million. Additionally, we may, at our discretion, exercise our right to acquire all of the equity of SNDC at any time beginning on April 1, 2005 and ending on the earlier of March 31, 2007 or the 90th day after the date that SNDC provides us with financial statements showing cash and cash equivalents of less than $2 million. The option exercise price starts at $75.1 million in April 2005 and increases incrementally to $119.8 million in January 2007, and may be paid in cash or in our common stock, at our sole discretion, provided that our common stock may not constitute more than 50% of the consideration tendered for payment.

      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, divestitures, partnership, bank borrowings, lease arrangements relating to fixed assets or other financing methods. There can be no assurance that additional capital will be available on favorable terms, if at all.

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

      If we are required to do one or more of the foregoing due to insufficient funds, then it may have the effect of delaying or restricting 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 and reductions in any potential returns realizable by us.

Off-Balance Sheet Arrangements

      The only off-balance sheet arrangements we have entered into are our facility and equipment operating lease agreements. Our obligations under these agreements are presented in this section under “Contractual Obligations” in the Form 10-K for the year ended December 31, 2004.

Contractual Obligations

      The Company’s contractual commitments for long-term debt as of December 31, 2004 was reduced in January 2005 by our repayment of the outstanding principal balance of $17.2 million under the Wachovia term loan we used to finance the acquisition of our corporate and research and development facilities.

Critical Accounting Policies and Estimates

      The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 assumptions 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. These policies have been reviewed by the Audit Committee.

      Revenue Recognition. Revenue from Gliadel and Aggrastat is 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) the title has passed, and (iv) the collection is reasonably assured. Revenues are recorded net of provisions for returns, chargebacks and discounts, which are established at the time of sale.

      Our primary customer for Gliadel is SPD, a specialty pharmaceutical distributor who sells directly to hospitals. Our three main wholesalers for Aggrastat, AmerisourceBergen Drug Corporation, Cardinal and McKesson Corporation, sell directly to hospitals.

      Product demand by distributor and wholesalers during a given period may not correlate with prescription demand for the product in that period. As a result, we periodically evaluate the distributor and wholesalers’ inventory positions. If we believe these levels are too high based on prescription demand, we will either

      Provisions for sales discounts, and estimates for chargebacks, product returns for damaged or expired products, are established as a reduction of product revenues at the time such revenues recognized. We establish these revenue reductions with our best estimate at the time of the 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. Certain milestone payments are deferred and amortized over the clinical trial period. 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 that 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 from 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. When events or circumstances warrant review, we assess recoverability of intangibles from future operations, using undiscounted future cash flows derived from the intangible assets. Any impairment would be recognized in operating results, to the extent the carrying value exceeds the fair value, which is determined based on the net present value of estimated future cash flows (see Impairment of Long-lived Assets below).

      Impairment of Long-lived Assets. We review our property and intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived

assets, which could result in impairment charges in future periods. Such assumptions include projections of future cash flows and, in some cases, the current fair value of the asset. In addition, our depreciation and amortization policies reflect judgments on the estimated useful lives of assets.

      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 is being amortized under the effective interest method, utilizing 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 reduce the future obligation.

      Consolidation of SNDC. In accordance with 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, SNDCH is considered a variable interest entity. Under FIN 46R, we have been deemed the primary beneficiary of the variable interest entity because we are most closely associated with SNDCH. Accordingly, the financial results of SNDCH have been consolidated with our financial statements since June 2004.

New Accounting Pronouncements

      Statement of Financial Accounting Standards (or SFAS) No. 123R. In December 2004, FASB issued SFAS 123R (revised 2004), “Share-Based Payment,” which is a revision of SFAS 123, “Accounting for Stock-Based Compensation.” SFAS 123R supersedes Accounting Principles Bulletin Opinion (or APB) No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. In accordance with the effective date of the statement, we will adopt the statement starting with our fiscal year beginning January 1, 2006.

      As permitted by SFAS 123, we currently account for share-based payments to employees using APB 25’s intrinsic value method. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values over the expected period of service. Accordingly, the adoption of SFAS 123R’s fair value method may have an impact on our results of operations, although it will have no impact on our overall financial position.

      The full impact of adoptions of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 4 to the Consolidated Financial Statements. SFAS 123R also required the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. We are unable to estimate what those amounts will be in the future because they depend on, among other things, when employees exercise stock options.

      SFAS 151. In November 2004, FASB issued SFAS 151, “Inventory Cost.” This statement amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). The provision of the statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We are evaluating the impact of this statement on our consolidated financial positions, results of operations and cash flows.

      A substantial portion of our assets are investment grade debt instruments such as direct obligations of the U.S. Treasury, securities of federal agencies that 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, 2005 was $64.6 million and weighted-average yield to maturity was approximately 2.7%. The return on our investments during the quarter ended March 31, 2005 was approximately 2.8%.

      Certain of our debt, primarily the $17.2 million in borrowings from Wachovia that was repaid in January 2005, was established with interest rates that fluctuate with market conditions. As a hedge against such fluctuations in interest rates, we had entered into interest rate swap agreements with a commercial bank (or counter party) to exchange the variable rate financial obligations for fixed rate obligations. The remaining one interest rate swap agreement had a total notional principal value of $1.5 million as of March 31, 2005.

      Pursuant to the interest rate swap agreement, 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 rate on $1.5 million of our March 31, 2005 financial obligations at 2.78%. The interest rate swap agreement has the same maturity date as the financial obligation and expires in April 2006. 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.

      In January 2005, we paid off the $17.2 million outstanding principal balance on the Wachovia term loan, and as a result, the related cash collateral account balance has been released and the related swap agreement has been paid and terminated.

      Disclosure Controls and Procedures: Under the supervision and with the participation of our management, including our Chief Executive Officer and the Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (or the “Exchange Act”)), as of March 31, 2005 (the “Evaluation Date”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.

      Changes in Internal Control over Financial Reporting: There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended on the Evaluation Date that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.     Legal Proceedings

      None

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

      On January 31, 2005, we issued 3,103 shares of our common stock to Burns McClellan Inc. in consideration for its provision to us of investor relations/public relations services during the fourth quarter of 2004. 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.

Item 3.     Defaults Upon Senior Securities

      None

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

      None

Item 5.     Other Information

Risk Factors

      Investing in our securities involves a high degree of risk. Before making an investment decision, you should carefully consider the risk factors set forth herein, as well as other information we include in this report and the additional information in the other reports we file with the Securities and Exchange Commission (the “SEC” or the “Commission”). 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 successful in our attempts to minimize our ongoing expenses related to Aggrastat or to implement an exit strategy from this product.

      Our attempts to minimize our ongoing expenses related to Aggrastat and to devise and implement an exit strategy from the product are contingent upon a number of factors, including our ability to appropriately manage the process of reducing product development expenses, find and engage qualified purchasers, licensees or partners for the product and minimize the time that it takes us to do so. Our success, if any, will also depend on the consideration that we are able to receive for Aggrastat. If we do not find and engage qualified purchasers, licensees or partners who are willing to provide the consideration that we determine is reasonable or appropriate, or if it takes a significantly longer amount of time and resources than we presently anticipate to accomplish these objectives, we may not be able to minimize our ongoing expenses related to Aggrastat or be able to implement an exit strategy from the product.

      As of March 31, 2005, our contractual commitments related to the Aggrastat Assets included an agreement with Baxter Healthcare Corporation for the supply of 250 ml and 100 ml bags of Aggrastat through July 2009, which commits us to purchase approximately $6.3 million of such bags, and $1.4 million of such purchase commitment remains outstanding for the remainder of 2005. Additionally, we had various funding commitments and agreements related to the advancement of our research and development activities, all of which are assignable with the mutual consent of the parties. If we elected to terminate these commitments and agreements, we would be responsible for the costs related to services rendered to date and any irrevocable commitments entered into on our behalf. We currently estimate these costs to be no more than $5.0 million and are currently negotiating the termination of these commitments and agreements. We estimate that we would expend approximately $24.2 million over the next three years if these commitments and agreements are not terminated.

      Additionally, our ability to accomplish any of our objectives regarding Aggrastat will depend on our success in reaching a mutually acceptable arrangement with Paul Royalty Fund and its affiliated entities

(collectively, PRF) regarding our revenue interest agreement with PRF. The revenue interest agreement is secured by, among other things, the revenues from Aggrastat and the intellectual property related to Aggrastat. Implementing a viable exit strategy for Aggrastat will require such an arrangement. If we are not able to reach this arrangement, then we may not be able to successfully minimize our expenses related to this product, which expenses include payments owed to PRF. If we had sold Aggrastat on March 31, 2005, we would have owed PRF approximately $37.0 million, in addition to ongoing revenue interest obligations on Gliadel and future products under the Revenue Agreement. Alternatively, if PRF had exercised its repurchase option as of March 31, 2005, we would have owed PRF approximately $57.0 million, without any ongoing revenue interest obligations. We believe that the payments due to PRF upon the sale or other disposition of the Aggrastat Assets would be offset, in whole or in part, by amounts we would receive upon such disposition.

     Our ability to realize significant value from our early stage “pipeline” is dependent upon successful collaboration with external parties.

      We are attempting to create value from our early stage pipeline through licensing, corporate partnerships, sales or other similar transactions. Any such transaction will be dependent upon the cooperation of a third party. If we are not successful in reaching reasonable or appropriate agreements with such third parties related to these technologies, we may not be able to create significant value from them. Early stage research projects often fail to achieve commercial success due to factors such as unsatisfactory pre-clinical and clinical testing results, regulatory approval requirements, market acceptance, and reimbursement limitations. Additionally, in the absence of support from third parties, we may not be able to continue to fund the research and development of these early stage pipeline technologies. As a consequence, these technologies may never provide value to our shareholders.

     Timely regulatory approval(s) to market Aquavan, without the requirement for monitored anesthesia care, will directly affect whether we achieve our financial goals.

      It is essential to the success of our new business strategy that we receive approval from the Food and Drug Administration (FDA) to market Aquavan so that we may launch our sales of the product during the last calendar quarter of 2007. If this approval is significantly delayed, we may not achieve our financial goals, which include goals related to revenues, total expenses, losses and profits. Additionally, if the FDA’s approval of Aquavan limits or prohibits our ability to market the administration of the product without an anesthesiologist, a nurse anesthetist or similar medical professional, we do not expect to achieve our financial goals.

     Our ability to significantly increase revenues of Gliadel will directly affect whether we achieve our financial goals.

      In order to achieve our financial goals, we must substantially increase sales of Gliadel over the next five years. Our ability to increase these sales will be primarily based upon our ability to attain greater market penetration than we currently have. We expect to attain greater market penetration through, among other things, increasing the amount of time and effort that our sales force devotes to Gliadel, increasing the sales success of that sales force and increasing our marketing resources; however, if we fail to do so then we may not be able to increase our sales of the product. Even if we are able increase our sales and marketing efforts, such increases may not result in increased sales of Gliadel.

     Our ability to achieve strong revenue growth for Gliadel and Aquavan may depend to a large extent on the results of additional clinical trials that we may conduct.

      We may conduct additional clinical trials with Gliadel to provide physicians with added clinical data and/or to expand Gliadel’s labeled indications. There is no assurance that such clinical trials, if any, will be successful, or if successful, will persuade physicians to use the product with more frequency or convince the FDA that an additional indication is warranted. Also, if one or more additional clinical trials are not successful, sales of the product in its current markets could be adversely affected and could significantly adversely affect our ability to achieve our financial goals.

      Additionally, our ability to increase the size of the potential market for Aquavan will depend upon our success in obtaining approval for the product in a variety of procedural sedation settings. We will likely need to conduct additional clinical trials beyond those we already have announced to do so, and such trials may not be successful or may not, in the determination of the FDA, warrant an indication for Aquavan larger than the one we are currently attempting to obtain. In such cases, sales of Aquavan may never meet our expectations and we would not be able to achieve our financial goals.

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

      We may not be able to achieve or sustain significant revenues or earn a profit in the future. Since we were founded in July 1993, with the sole exception of 1996, we have not earned a profit in any year. Our losses for the years ended December 31, 2004, 2003 and 2002, were $87.9 million, $53.9 million and $59.3 million, respectively, and for the three months ended March 31, 2005 were $54.5 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, 2005, we had an accumulated deficit of $446.0 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 and Aggrastat, none of our products or product candidates may be sold to the public. Nearly all of our past revenues have come from:

      Presently, we expect to receive significant revenue only from sales of Gliadel and, in the short term, from Aggrastat. We do not expect that the revenue from these sources will be sufficient to support all our anticipated future activities. We do not expect to generate revenue from sales of our product candidates for the next several years, if ever, because of the significant risks associated with pharmaceutical product development.

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

     We will depend on Gliadel and, to a limited extent, Aggrastat for revenues.

      Our short-term prospects depend heavily on sales of Gliadel and Aggrastat, our commercial products. Gliadel and Aggrastat accounted for approximately 69% and 31%, respectively, of our total product revenues for the year ended December 31, 2004, and approximately 70% and 30%, respectively, of our total revenues for the three months ended March 31, 2005. Gliadel was launched commercially in the United States by Aventis and its predecessors in February 1997 after having received approval from the Food and Drug Administration (or FDA) in September 1996. We do not know whether the product will ever gain broader market acceptance. If Gliadel fails to gain broader market acceptance, the revenues we receive from sales of Gliadel would be unlikely to increase.

      Prior to early 2003, we only had approval from the FDA to market Gliadel in the United States for patients who had a brain tumor surgically removed and had recurrent forms of a type of brain cancer called glioblastoma multiforme (or GBM), affecting approximately 3,000 to 4,000 patients annually. On February 25, 2003, we received FDA approval to also market Gliadel 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 such patients to be between 7,000 and 9,000 per year. In the second quarter of 2003 we instituted a new sales and marketing effort for Gliadel for initial surgery. We cannot assure you, however, that we will be successful in this effort or in achieving sales of Gliadel for use in initial surgeries.

      We acquired Aggrastat from Merck and Co., Inc. on October 28, 2003. Prior to acquiring Aggrastat, we had never marketed and sold a product for cardiovascular conditions. Through the end of the first quarter of 2005, our efforts to ramp up our sales of Aggrastat through expanded marketing efforts have not met our expectations. We recently announced our plans to minimize our ongoing expenses related to Aggrastat and to devise and implement an exit strategy from the product, as discussed above. We cannot assure you that we will be successful in our efforts to do so.

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

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

      Our revenue 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 revenue 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:

      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 January 1, 2002 to March 31, 2005 ranged from $2.05 to $12.55.

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

      Our ability to pay the required interest and principal payments on our debt depends on the future performance of our business. As of March 31, 2005, we had total long-term debt and revenue interest obligations of $118.2 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 2005 include approximately $1.9 million in principal payments 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 below. We are obligated to pay the minimum amount under the Paul Royalty agreement of $6.3 million in 2005.

      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.

     Revenue from Gliadel, Aggrastat or future products, if any, depends 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 insurance programs, may all result in lower prices for or rejection of our products. The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could materially and adversely affect our ability to operate profitably.

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

     Our Gliadel sales outside of the United States depend on third parties to test, release, store, distribute and market the product. If we are not successful in obtaining a new party to test and release Gliadel in the European Union, we may not be able to sell Gliadel in the territory.

      In the third quarter of 2004, we received extended marketing authorization to include use of Gliadel in newly-diagnosed patients with high-grade malignant glioma as an adjunct to surgery and radiation in France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain and the United Kingdom. Gliadel was previously authorized for use only in recurrent surgery for GBM. We cannot assure you that this increased marketing authorization will result in increased revenue. International revenue comprised approxi-

mately 8% of worldwide revenue from Gliadel for the year ended December 31, 2004, and approximately 9% for the three months ended March 31, 2005.

      Prior to Gliadel being released into the European Union, it must be tested and released by a “qualified person.” We have relied and will continue to rely on a third party for these testing and release services. If these third parties do not perform their obligations to us, then we may not be able to release Gliadel into the European Union for our distributors to market and sell. This would negatively affect our revenue from Gliadel.

     European regulatory agencies may impose restrictions on our ability to import Gliadel to the European Union.

      We have been informed by the European regulatory agency responsible for overseeing the testing and release of Gliadel in the European Union that we may have to test each sublot of Gliadel that we ship to the European Union. Each time a lot is tested it results in the destruction of a portion of the lot and the testing is costly. This requirement would make it commercially unfeasible to ship small sublots of Gliadel labeled for smaller European markets. If we are not able to agree with the regulatory agency to an alternative method of testing and releasing sublots of Gliadel, we may not be able to continue to ship Gliadel to our distributors for smaller European markets. As a result, our Gliadel revenue would be negatively affected.

     Paul Royalty Fund, L.P. and Paul Royalty Fund Holdings II (collectively, “PRF”), 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 revenue targets for Gliadel and Aggrastat, PRF may be entitled to a greater percentage of our revenue, revenue from future products we may acquire or certain of our product candidates.

      Under the terms of our Revenue Interest Assignment Agreement (the Revenue Agreement) with PRF, PRF is entitled to receive a percentage of our combined annual net revenue from Gliadel and Aggrastat as follows: from October 28, 2003 through December 31, 2006, PRF is entitled to receive 10% of such net revenue up to $75.0 million, and 2.5% of such net revenue in excess of $75.0 million; from January 1, 2007 through December 31, 2012 (the end of the term of the financing arrangement with PRF), the respective percentages are 17.5% and 3.5%. If combined Gliadel and Aggrastat annual net revenue is 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 certain minimum payments for such years (the PRF Minimum Payments, as described below) or 12.5% of combined Gliadel and Aggrastat net revenue. If combined Gliadel and Aggrastat net revenue is less than $75.0 million in any of the years 2007 through 2012, then PRF will receive the higher of the PRF Minimum Payments or 22.5% of combined Gliadel and Aggrastat net revenue.

      PRF Minimum Payments included a royalty payment of $5.0 million in 2004, and include minimum royalties of $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 each year of the term of the Revenue Agreement, PRF will be entitled to receive a portion of revenues from products that we may acquire in the future or of our product candidates Aquavan and GPI 1485, in the case that our calculated annual obligation(s) to make royalty payments under the Revenue Agreement (based upon the combined net revenue from 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. PRF is also entitled to receive portions of amounts payable to us 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 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.

      In connection with our exit strategy for Aggrastat, we are presently discussing a renegotiation of the terms of the Revenue Agreement with PRF. We cannot assure you that these discussions will result in a favorable change, or any change, to such terms or our obligations under the Revenue Agreement. Failure to renegotiate the terms may hinder or prevent our ability to achieve our financial goals.

     Under certain circumstances, PRF 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 $20.0 million of net working capital, (2) if we fail to make our minimum payments to PRF, (3) if 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), (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 $147.0 million. If we had sold Aggrastat on March 31, 2005, we would have owed PRF approximately $37.0 million, in addition to ongoing revenue interest obligations on Gliadel and future products under the Revenue Agreement. Alternatively, if PRF had exercised its repurchase option as of March 31, 2005, we would have owed PRF approximately $57.0 million, without any ongoing revenue interest obligations. We believe that the payments due to PRF upon the sale or other disposition of the Aggrastat Assets would be offset, in whole or in part, by amounts we would receive upon such disposition. 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 either Gliadel or Aggrastat, 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 and Aggrastat to PRF; 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 and Aggrastat, which in the aggregate accounted for all of our net product revenue of $40.2 million for the year ended December 31, 2004, and all of our net product revenue of $10.5 million for the three months ended March 31, 2005. As of March 31, 2005, the intangible assets related to Gliadel and Aggrastat were $43.2 million, or approximately 27% of our 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.

     Our clinical development plans for Aquavan will require significant additional capital.

      In order to conduct clinical trials for Aquavan, we will require significant additional capital resources. We cannot reasonably estimate the required amount due to the uncertainties involved with these activities. With respect to our planned Phase III clinical trials of Aquavan, we do not know the number of procedural sedation settings that the FDA will require us 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, therefore, may need to enter into corporate partnerships or co-promotions to market and sell Gliadel and/or Aggrastat, or divest ourselves of one or both of the products in order to support our operations.

     We have licensed some of our GPI 1485 development and commercialization rights to Symphony Neuro Development Company (or SNDC) and will not receive any future royalties or revenues with respect to this intellectual property unless we exercise an option to acquire SNDC in the future. We may not have the

financial resources to exercise this option or sufficient clinical data in order to determine whether we should exercise this option.

      We have licensed to SNDC our rights to GPI 1485 in the United States in exchange for SNDC’s investment of up to $40.0 million to advance GPI 1485 through clinical development in four indications: Parkinson’s disease, peripheral nerve injury, including post-prostatectomy erectile dysfunction, HIV-neuropathy and HIV-dementia. We expect that the remaining $40.0 million clinical development budget will be fully expended in approximately one year. In exchange for the license rights and for five-year warrants to purchase 1.5 million shares of our common stock at $7.48 per share, we received an option to acquire all of the equity of SNDC. We may, at our discretion, exercise this option at any time beginning on April 1, 2005 and ending on the earlier of March 31, 2007 or the 90th day after the date that SNDC provides us with financial statements showing cash and cash equivalents of less than $2 million. The option exercise price starts at $75.1 million in April 2005 and increases incrementally to $119.8 million in January 2007, and may be paid in cash or in our common stock, at our sole discretion, provided that our common stock may not constitute more than 50% of the consideration tendered for payment.

      If we elect to exercise the purchase option, we will be required to make a substantial cash payment or to issue a substantial number of shares of our common stock, or enter into a financing arrangement or license arrangement with one or more third parties, or some combination of these. A payment in cash would reduce our capital resources. A payment in shares of our common stock could result in dilution to our stockholders at that time. Other financing or licensing alternatives may be expensive or impossible to obtain. The exercise of the purchase option will likely require us to record a significant charge to earnings and may adversely impact future operating results. If we do not exercise the purchase option prior to its expiration, our rights in and to SNDC with respect to the GPI 1485 programs will terminate. We may not have the financial resources to exercise the purchase option, which may result in our loss of these rights. Additionally, we may not have sufficient clinical data in order to determine whether we should exercise this option.

     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:

      In some of our research programs, we are using compounds that we consider to be prototype 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. 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.

      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:

      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, 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:

      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.

      We face serious competition from other small pharmaceutical companies and the in-house research and development staffs of larger pharmaceutical companies in trying to attract corporate and financial partners. Additionally, we may not be successful in attracting such partners (or collaborators) over other companies because (i) their research programs may be more attractive to a collaborator, (ii) their stage in the research process may be more advanced, (iii) they may have synergies with the collaborator’s existing research programs, or (iv) they may agree to terms and conditions of the collaboration that are more favorable to the collaborator than we would otherwise agree. It is common practice in many corporate partnerships in our industry for the larger partner to have responsibility for conducting pre-clinical studies and human clinical trials and/or preparing and submitting applications for regulatory approval of potential pharmaceutical products. If such a collaborative partner of ours 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.

     Our further development of our NAALADase inhibitor technologies will probably depend on our ability to partner the program.

      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 (or

NAALADase). The agreement included a $5.0 million payment to us at signing and an additional $10.0 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 may not have sufficient resources to independently pursue the research, development and commercialization of NAALADase and pursue our other business objectives. Unless we enter into an alternative partnering or other arrangement with respect to NAALADase or alter our other business objectives, it is unlikely that we will be able to advance this technology beyond the early stages of clinical development.

     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 acquire, build or expand our internal manufacturing capabilities, or rely on third parties to manufacture these product candidates. If we are not able to accomplish either of these tasks, 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, 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, DEA 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.

     A significant portion of our revenue from Gliadel is to Cardinal Health Specialty Pharmaceuticals Distribution (or SPD), a specialty pharmaceutical distributor.

      Approximately 77% of our revenue from Gliadel in the three months ended March 31, 2005 were made to SPD pursuant to a purchase agreement between us and SPD. Under the terms of this agreement, either we or SPD may terminate the agreement upon 60 days prior written notice. We have no assurance that SPD will not exercise its right to terminate the agreement 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. 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 that SPD may have in its inventory. As of March 31, 2005, we believe that SPD had approximately $2.0 million of Gliadel in its inventory.

      SPD orders Gliadel treatments based upon, among other things, its estimation of our ability and its ability to successfully sell Gliadel to hospital pharmacies and its desired level of inventory. If the demand for Gliadel 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 revenue from Gliadel.

     We depend upon Merck to supply us with the active pharmaceutical ingredient for Aggrastat and for finished product of Aggrastat in vials. We will depend upon Baxter Healthcare Corporation (or Baxter) to provide us with finished product of Aggrastat in bags.

      Aggrastat consists of an active pharmaceutical ingredient (or API), which is sold as finished product in both vials and bags. Merck is obligated to supply us with the API 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 the API until 2014. Because we depend upon this relationship with Merck for key ingredients of Aggrastat, 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.

      We sell Aggrastat primarily in 250 ml and 100 ml bags, which are filled for us by Baxter under an exclusive manufacturing agreement that we executed with them on July 1, 2004. This agreement provides us with certain remedies if Baxter is not able to perform its obligations to us. Regardless, if Baxter is not able to provide us with finished bags of Aggrastat, we may not be able to provide Aggrastat to our customers, which may adversely affect our business.

      We also sell Aggrastat in vials that we have obtained from Merck directly. Merck has informed us that it can no longer sell us vials of the product. We are engaged in discussions with a third party contract manufacturer to obtain vials of Aggrastat. If we do not enter into a direct relationship with such a contract manufacturer, or if we are not able to procure vials of Aggrastat through Merck or otherwise, we may not be able to meet the demands of our customers for vials and this inability may adversely affect our business.

     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 that demonstrate the product is safe and effective for the clinical use for which we are seeking approval. Adverse results from any studies, including clinical trials, could have a negative effect on our ability to obtain FDA and other approvals on our business. We also may 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. Safety and efficacy results from pre-clinical studies involving animals and other models and from early clinical trials are often not accurate indicators of results of later-stage clinical trials that involve larger human populations, and, moreover, may not always be representative of results obtained while marketing an approved drug, particularly with regard to safety.

     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, processes and uses, 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 inventions are in flux and are unclear in many respects. The range of protection given pharmaceutical patents is uncertain, and 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 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.

      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:

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

      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 JHU, 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 of our collaborative research contracts provide that we must return the technology rights, including any patents or patent applications, to the contracting university or governmental research organization.

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

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

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

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

     We rely on licensed intellectual property for Gliadel and our 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, Dopascan, Aquavan 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 may be obligated to:

      In addition, these license agreements may 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 require us to pay a royalty to the Massachusetts Institute of Technology on revenue from Gliadel. Similarly, we will have to pay milestone and/or royalty payments in connection with the successful development and commercialization of Dopascan and any products that result from the neuroimmunophilin ligand technology.

      Our U.S. patent protection for Gliadel, which for the three months ended March 31, 2005 accounted for approximately 70% of our product revenue, expires in August 2006. In addition, the FDA recently notified us that, pursuant to the Orphan Drug Act, Gliadel was entitled to seven years of market exclusivity for the treatment of patients with malignant glioma undergoing primary surgical resection. This seven year exclusivity period commenced from the date of the FDA’s approval of Gliadel in February 2003. Accordingly, following the expiration of U.S. patent protection, we now have approximately four additional years of market exclusivity for Gliadel for initial surgical resection. However, there can be no assurance that others will not enter the market with a generic copy of Gliadel for recurrent surgical resection. The availability of such a generic copy could negatively impact our revenues from Gliadel for initial surgical resection after August 2006.

     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:

      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.

     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 and Aggrastat, none of our product candidates has received marketing clearance from the FDA or any foreign regulatory authority.

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

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

      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. In response to recent events regarding questions about the safety of certain approved prescription products, including the lack of adequate warnings, the FDA and Congress are currently

considering alternative regulatory and legislative approaches to monitoring and assessing the safety of marketed drugs. Such initiatives, if adopted, will affect all of our marketed drugs.

      We cannot be sure that we can continue to meet FDA and other regulatory agency requirements pertaining to our marketed drugs or to our drug product candidates, if approved. We also cannot be sure that the current Congressional and FDA initiatives involving the safety of marketed drugs or other developments pertaining to the pharmaceutical industry will not adversely affect our operations. 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 must assure that the candidates can be made in accordance with cGMP requirements before approval is obtained. Unsatisfactory preclinical and clinical trial results, manufacturing problems, and other regulatory difficulties that result in delays in obtaining regulatory approvals or licenses could prevent the marketing of the products we are developing. Also, recent events regarding questions about the safety of marketed drugs may result in increased carefulness by the FDA in approving new drugs based on safety, efficacy, or other regulatory considerations and may result in significant delays in obtaining regulatory approvals or licenses. Such regulatory considerations may also result in the imposition of more restrictive drug labeling requirements as conditions of approval, which may significantly affect the marketability of our drug products. Until we receive the necessary approvals or licenses and meet other regulatory requirements, we will not receive revenues or royalties related to product revenue.

      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, 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 permits, authorizations, registrations or licenses to meet state, federal and international regulatory requirements to manufacture and distribute such products.

     Once we receive regulatory approval to market a product, our promotional activities are subject to extensive regulation from the FDA, the Federal Trade Commission (or FTC), the Office of the Inspector General of the U.S. Department of Health and Human Services (or OIG), or state Attorneys General. If we violate any such regulations it could be damaging to our reputation and restrict our ability to sell or market our products, and our business condition could be adversely affected.

      In their regulation of advertising, the FDA from time to time issues correspondence alleging that some advertising or promotional practices are false, misleading or deceptive. The FDA has the power to impose a

wide array of sanctions on companies for such advertising or promotional practices, and the receipt of correspondence from the FDA alleging these practices could result in any or all of the following:

      If we were to become subject to any of the above requirements, it could be damaging to our reputation, and our business condition could be adversely affected.

      Physicians may prescribe pharmaceutical products for uses that are not described in a product’s labeling or differ from those tested by us and approved by the FDA. While such “off-label” uses are common and the FDA does not regulate physicians’ choice of treatments, the FDA does restrict a manufacturer’s communications on the subject of off-label use. Companies cannot actively promote FDA-approved pharmaceutical products for off-label uses, but under certain limited circumstances they may disseminate articles to physicians published in peer-reviewed journals. If our promotional activities of this type fail to comply with the FDA’s regulations or guidelines, we may be subject to warnings from, or enforcement action by, the FDA.

      Additionally, if we fail to comply with the FDA regulations prohibiting promotion of off-label uses and the promotion of our products, the FDA, FTC, Department of Justice, OIG or state Attorneys General could bring enforcement actions against us that would inhibit our marketing capabilities as well as result in significant penalties.

     Our competitors are pursuing alternative approaches to prevent or treat 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:

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

     Our products must compete with others to gain market acceptance.

      For the treatment of malignant glioma, Gliadel competes with traditional systemic chemotherapy, radioactive seeds, radiation catheters, TEMODAR® Capsules, a chemotherapy product manufactured by Schering Corporation, and other experimental protocols. Aggrastat competes directly with INTEGRILIN® Injection, marketed by Millennium Pharmaceuticals, and ReoPro®, marketed by Eli Lilly, for the inhibition of platelet aggregation. In some medical institutions, Angiomax®, an antithrombin is being used as a replacement for IIb/IIIa inhibitors in PCI but that use is generally limited to low-risk and elective PCI patients.

      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.

      Significant competitive factors include:

      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.

     Our Chief Executive Officer and our Chief Financial Officer have limited experience with us.

      Our Chief Executive Officer, Dean J. Mitchell, joined us in December 2004. Our Chief Financial Officer, William F. Spengler, joined us in July 2004. Accordingly, Messrs. Mitchell and Spengler have limited experience with us. New senior management may result in a number of changes to our business. These changes could result in risks that, among other things, our business plans are altered, terminated or are not implemented in a timely manner, or that our ability to raise capital is impaired.

     The loss of the services of any key personnel, or an inability to attract new personnel, could harm our business.

      We are highly dependent on key personnel and members of our executive management, and the loss of the services of any of such persons might impede the achievement of our strategic objectives. We cannot assure you that we will be able to attract and retain key personnel or executive management in sufficient numbers, with the requisite skills or on acceptable terms necessary or advisable to support our continued growth. The loss of the services of key personnel or members of executive management could have a material adverse effect on us.

     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:

      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 could depress our stock price.

      Upon conversion of our $69.4 million principal amount of outstanding notes at their conversion price of $6.24, approximately 11,114,423 shares of common stock would be issuable. Additionally, upon the exercise by PRF of its warrants to purchase 300,000 shares of our common stock at an exercise price of $9.15 per share, by SNDC of its warrants to purchase 1.5 million shares of our common stock at an exercise price of $7.48 per share, or by the holders of warrants from the Company’s 2004 Private Investment in Public Equity of warrants

to purchase 962,000 shares of our common stock at an exercise price of $7.55, 300,000, 1.5 million and 962,000 shares of our common stock, respectively, would be issuable. Our stock price could be depressed significantly if the holders of the notes decide to convert their notes or the holders of the warrants decide to exercise such warrants 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 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 and Aggrastat, or the conduct of clinical trials involving our products. We currently maintain only $10.0 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.

      We depend heavily on the principal members of our management and scientific staff. The loss of the services of members of our senior management team could have a negative effect on our business.

      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:

      We may not be able to attract and retain personnel or consultants with these capabilities. Furthermore, many pharmaceutical, biotechnology and health care companies and academic and other research institutions compete intensely for personnel and consultants with these capabilities. 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:

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

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

      Our agreement with PRF gives PRF 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, at the option of the holders, upon a change in control.

SIGNATURES

      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.

Date: May 9, 2005

     May 9, 2005

     May 9, 2005