NORTHFIELD LABORATORIES INC /DE/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION
REPORTS PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended May 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

COMMISSION FILE NUMBER 0-24050

NORTHFIELD LABORATORIES INC.
(Exact name of Registrant as Specified in Its Charter)

DELAWARE 36-3378733
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1560 SHERMAN AVENUE, SUITE 1000, EVANSTON, ILLINOIS 60201-4800
(Address of Principal Executive Offices) (Zip Code)

(847) 864-3500
(Registrant's Telephone Number, Including Area Code)

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

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $.01 PER SHARE

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in the definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

As of July 30, 2001, 14,265,875 shares of the Registrant's common stock,
par value $.01 per share, were outstanding. On that date, the aggregate market
value of voting stock (based upon the closing price of the Registrant's common
stock on July 30, 2001) held by non-affiliates of the Registrant was
$230,941,934 (12,416,233 shares at $18.60 per share).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for its 2001 Annual Meeting
are incorporated by reference into Part III of this Form 10-K. The Registrant
maintains an Internet web site at www.northfieldlabs.com. None of the
information contained on this web site is incorporated by reference into this
Form 10-K or into any other document filed by the Registrant with the Securities
and Exchange Commission.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Annual Report contains forward-looking statements concerning, among
other things, our prospects, clinical and regulatory developments affecting our
potential product and our business strategies. These forward-looking statements
are identified by the use of such terms as "intends," "expects," "plans,"
"estimates," "anticipates," "should" and "believes" and are in certain cases
followed by a cross reference to "Risk Factors."

These forward-looking statements involve risks and uncertainties. Actual
results may differ materially from those predicted by the forward-looking
statements because of various factors and possible events, including those
discussed under "Risk Factors." Because these forward-looking statements involve
risks and uncertainties, actual results may differ significantly from those
predicted in these forward-looking statements. You should not place a lot of
weight on these statements. These statements speak only as of the date of this
document or, in the case of any document incorporated by reference, the date of
that document.

All subsequent written and oral forward-looking statements attributable to
Northfield or any person acting on our behalf are qualified by the cautionary
statements in this section. We will have no obligation to revise these
forward-looking statements.
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PART I

ITEM 1. DESCRIPTION OF BUSINESS.

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

We are presently conducting clinical trials of PolyHeme at multiple
locations in the United States. Our clinical trials include the infusion of
PolyHeme in trauma and emergency surgical applications as well as in elective
surgical procedures. The observations in the trials continue to demonstrate the
potential clinical utility of PolyHeme in the treatment of urgent blood loss.
Both our trauma trials and elective surgery trials involve high dosage and rapid
infusion of PolyHeme in situations that are life-threatening and where massive
blood loss routinely occurs. We believe that this application addresses the
largest worldwide clinical need and has the greatest market opportunity. We
believe we are the only company in our field with an oxygen-carrying blood
substitute being rapidly infused at high dosage -- as much as 20 units (1000
grams) or twice the blood volume of the average adult.

BACKGROUND

The principal function of human blood is to transport oxygen throughout the
body. The lack of an adequate supply of oxygen as a result of blood loss can
lead to organ dysfunction or death. The transfusion of human blood is presently
the only effective means of immediately restoring diminished oxygen-carrying
capacity resulting from blood loss. We estimate that approximately 12 million
units of blood were transfused in the United States in 2000, of which
approximately 7.2 million units were administered to patients suffering the
effects of acute blood loss.

The use of donated blood in transfusion therapy, while effective in
restoring an adequate supply of oxygen in the body of the recipient, has several
limitations. Although testing procedures exist to detect the presence of certain
diseases in blood, these procedures cannot eliminate completely the risk of
blood-borne disease. Transfused blood also can be used only in recipients having
a blood type compatible with that of the donor. Delays in treatment, resulting
from the necessity of blood typing prior to transfusion, together with the
limited shelf life of blood and the limited availability of certain blood types,
impose constraints on the immediate availability of compatible blood for
transfusion. There is no commercially available blood substitute in this country
which addresses these problems.

Our scientific research team has been responsible for the original concept,
the early development and evaluation and clinical testing of PolyHeme, and has
authored over 100 publications in the scientific literature relating to human
blood substitute research and development. Members of our scientific research
team have been involved in development of national transfusion policy through
their participation in the activities of the National Heart Lung Blood
Institute, the National Blood Resource Education Panel, the Department of
Defense, the American Association of Blood Banks, the American Blood Commission,
the American College of Surgeons and the American Red Cross.

THE PRODUCT

PolyHeme is a solution of chemically modified hemoglobin derived from human
blood. Hemoglobin is the oxygen-carrying component of the human red blood cell.
We purchase indated and outdated blood from

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

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

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

Impact on Disease Transmission. We believe, and laboratory and clinical
tests have thus far indicated, that the manufacturing process used to produce
PolyHeme greatly reduces the concentration of infectious agents known to be
responsible for the transmission of blood-borne diseases. There are no currently
approved methods in this country to reduce the quantity of such infectious
agents in red cells.

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

Extended Shelf Life. We believe PolyHeme has a shelf life well in excess of
the 28 to 42 days currently permitted for blood. We estimate that PolyHeme has a
shelf life in excess of 12 months under refrigerated conditions.

THE MARKET

We estimate that approximately 12 million units of blood were transfused in
the United States in 2000, of which approximately 7.2 million units were
administered to patients suffering the effects of acute blood loss. Patient
charges for the units of blood used in the United States in 2000 for the
treatment of acute blood loss exceed $2 billion. The transfusion market in the
United States consists of two principal segments. The acute blood loss segment,
which comprises approximately 60% of the transfusion market, includes
transfusions required in connection with trauma, surgery and unexpected blood
loss. The chronic blood loss segment represents approximately 40% of the
transfusion market and includes transfusions in connection with general medical
applications and chronic anemias.

PolyHeme is intended for use in the treatment of acute blood loss. The two
principal clinical settings in which patients experience acute blood loss are
urgent use in trauma, emergency surgery and other unexpected blood loss, and
elective use in planned surgery. For trauma and emergency surgical procedures,
the immediate availability and universal compatibility of PolyHeme are expected
to provide significant advantages over transfused blood by avoiding the delay
and opportunities for error associated with blood typing. The major benefit of
PolyHeme in elective surgery is expected to be increased transfusion safety for
patients and health care professionals.

In addition to the foregoing applications for which blood is currently
used, there exist potential sources of demand for which blood is not currently
utilized and for which PolyHeme may be suitable. These include applications in
which the required blood type is not immediately available or in which
transfusions are

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desirable but not given for fear of a transfusion reaction due to difficulty in
identifying compatible blood. For example, we believe emergicenters and
surgicenters both experience events where an oxygen-carrying volume expander may
be useful. We also believe PolyHeme may be used by Emergency Medical Technicians
in ambulances, medical helicopters and other prehospital settings. In addition,
the military has expressed a high level of interest in oxygen-carrying products
for the resuscitation of battlefield casualties.

CLINICAL TRIALS

We are presently conducting clinical trials of PolyHeme at multiple
locations in the United States. Our clinical trials include the infusion of
PolyHeme in trauma and emergency surgical applications as well as in elective
surgical procedures. In addition, we continue to make PolyHeme available on a
compassionate use basis in life-threatening situations when blood cannot be
used. The observations in the trials continue to demonstrate the potential
clinical utility of PolyHeme in the treatment of urgent blood loss. Both our
trauma trials and elective surgery trials involve high dosage and rapid infusion
of PolyHeme in situations that are life-threatening and where massive blood loss
routinely occurs. We believe that this application addresses the largest
worldwide clinical need, provides the greatest patient benefit, and has the
greatest market opportunity. We believe we are the only company in our field
with an oxygen-carrying blood substitute being rapidly infused at high
dosage -- as much as 20 units (1000 grams) or twice the blood volume of the
average adult.

We have engaged an international contract research organization to
independently administer the collection of patient data generated by test sites
participating in our trials. The purpose of independent administration is to
ensure that data collected as part of these trials is free from any inaccuracy
or bias that might result from interactions between the testing sites and the
trial sponsor.

TRAUMA AND EMERGENCY SURGICAL APPLICATIONS

We are conducting clinical trials of PolyHeme in trauma and emergency
surgical applications at multiple hospitals in the United States, including both
civilian and military institutions. These continuing clinical trials are
designed to assess the safety and effectiveness of PolyHeme in treating acute
blood loss and hemorrhagic shock in trauma and emergency surgical patients.
Patients participating in these trials have been infused with up to 20 units
(1000 grams) of PolyHeme. This unprecedented dose is equivalent to twice the
blood volume of an average adult.

The protocol has allowed us to assess the life-sustaining capacity of
PolyHeme following massive blood loss when blood is not used for resuscitation
and the red blood cell hemoglobin level falls to life-threatening levels. The
anticipated survival rate at the life-threatening red blood cell hemoglobin
levels that occur in our patients is less than 20% based on the published
literature. The observed survival rate in our patients receiving PolyHeme
continues to be 75%. This improvement demonstrates the ability of PolyHeme to
effectively transport oxygen. The important safety observations are that none of
the toxicities historically associated with other hemoglobin solutions have been
identified in our clinical experience.

We have been analyzing the data from our trauma trials and are continuing
to consider our regulatory position based on our findings. We are pleased with
the results from these trials, which demonstrate potential life saving benefit
from the use of PolyHeme in urgent, acute blood loss settings, including trauma,
emergency surgery and unexpected life-threatening blood loss during elective
surgical procedures. We are planning to file the Biologic License Application,
or BLA, with the Food and Drug Administration in the near future.

ELECTIVE SURGICAL APPLICATIONS

We are also conducting clinical trials of PolyHeme in elective surgical
applications at multiple locations in the United States. Our clinical protocol
for these trials is a randomized controlled study in which elective surgical
patients are infused with up to six units of PolyHeme (three liters containing
300 grams of hemoglobin). The majority of elective surgical procedures require
the infusion of six units or less of blood.

While the use of PolyHeme in our elective surgery trials is the same as
that for trauma -- high dose, rapid infusion for acute blood loss -- the
clinical endpoint for these trials is the elimination of the use of
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banked blood. We believe these trials are producing important results. Due to
the complexity of the clinical protocol, however, patient accrual is progressing
slowly, as previously reported. As a result, we are considering instituting
additional elective surgery trials with different protocols to more broadly and
rapidly confirm PolyHeme's capability as an alternative to blood in critical
care situations. We intend to terminate our current elective surgery protocol
after the BLA is filed and focus on these additional trials. We believe our
clinical trials may continue throughout the regulatory review process.

MANUFACTURING AND MATERIAL SUPPLY

We use a proprietary process of separation, filtration and chemical
modification to produce PolyHeme. Since 1990, we have produced PolyHeme in our
manufacturing facility. We believe this facility is capable of producing
sufficient quantities of PolyHeme for all of our clinical trials in the United
States. Our current manufacturing capability for PolyHeme is to produce 10,000
units annually. We have leased space adjacent to our current facility that will
allow a further expansion of an additional 75,000 units of capacity per year as
our next step. Our independent engineering consultants and we believe that our
existing manufacturing process may be scaled up without substantial modification
to produce commercial quantities of PolyHeme in larger facilities.

If FDA approval of PolyHeme is received, we presently intend to manufacture
PolyHeme for commercial sale in the United States using our own facilities. We
currently have licensing arrangements for the manufacture of PolyHeme in certain
countries outside the United States. We are also considering entering into other
collaborative relationships with strategic partners which could involve
arrangements relating to the manufacture of PolyHeme.

The successful commercial introduction of PolyHeme will also depend on an
adequate supply of blood to be used as a starting material. We believe that an
adequate supply of blood is obtainable through the voluntary blood services
sector. We have had extensive discussions with existing blood collection
agencies, including The American Red Cross and Blood Centers of America,
regarding sourcing of blood. We currently have short-term purchasing contracts
with each of these agencies. We have also entered into an agreement with
hemerica, Inc., a subsidiary of Blood Centers of America, under which hemerica
will supply us with 82,500 units per year of packed red cells, the source
material for PolyHeme, over a three year period. We have not purchased any blood
supplies under this agreement to date. We will continue to pursue long-term
supply contracts with such agencies and other potential sources, although we
cannot ensure that we will be able to obtain sufficient quantities of blood from
the voluntary blood services sector to enable us to produce commercial
quantities of PolyHeme if FDA approval is received.

MARKETING STRATEGIES

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

We may pursue licenses or other arrangements for the manufacture and
distribution of PolyHeme both inside and outside the United States. We have
entered into license agreements with Pharmacia Corporation and Hemocare Ltd., an
Israeli corporation, to develop, manufacture and distribute PolyHeme in certain
European, Middle Eastern and African countries. The license agreements permit
Pharmacia and Hemocare to utilize PolyHeme and related manufacturing technology
in return for the payment of royalties based upon sales of PolyHeme in the
licensed territories.

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

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

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

COMPETITION

If approved for commercial sale, PolyHeme will compete directly with
established therapies for acute blood loss and may compete with other
technologies currently under development. We cannot ensure that PolyHeme will
have advantages which will be significant enough to cause medical professionals
to adopt it rather than continue to use established therapies or other new
technologies or products. We also cannot ensure that the price of PolyHeme, in
light of PolyHeme's potential advantages, will be competitive with the price of
established therapies or other new technologies or products.

We believe that the treatment of urgent blood loss is the setting most
likely to lead to FDA approval and the application which presents the greatest
market opportunity. However, several companies have developed or are in the
process of developing technologies which are, or in the future may be, the basis
for products which will compete with PolyHeme. Certain of these companies are
pursuing different approaches or means of accomplishing the therapeutic effects
sought to be achieved through the use of PolyHeme. Many of these companies have
substantially greater financial resources, larger research and development
staffs, more extensive facilities and more experience than Northfield in
testing, manufacturing, marketing and distributing medical products. We cannot
ensure that one or more other companies will not succeed in developing
technologies and products which will be available for commercial use prior to
PolyHeme, which will be more effective or less costly than PolyHeme or which
would otherwise render PolyHeme obsolete or noncompetitive. During the past
year, a bovine-source hemoglobin-based oxygen-carrier was approved for human use
in South Africa and an application for marketing approval for one human-source
hemoglobin-based oxygen-carrier was filed in Canada and the United Kingdom.

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

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GOVERNMENT REGULATION

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

The steps required before a biological product may be sold commercially in
the United States include preclinical testing, the submission to the FDA of an
Investigational New Drug application, clinical trials in humans to establish the
safety and effectiveness of the product, the submission to the FDA of a Biologic
License Application, or BLA, relating to the product and the manufacturing
facilities to be used to produce the product for commercial sale, and FDA
approval of a BLA. After a BLA is filed there is an initial review by the FDA to
be sure that all of the required elements are included in the filing. There can
be no assurance that the filing will be accepted or that the FDA may not issue a
refusal to file, or RTF. If the filing is accepted there can be no assurance
that the full review will result in product approval.

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

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

Our regulatory strategy is to pursue clinical testing and FDA approval of
PolyHeme in the United States. We intend to arrange for testing and seek
regulatory approval of PolyHeme outside the United States through licensing or
other arrangements with other foreign or domestic companies. To date, we have
not conducted any clinical trials of PolyHeme outside of the United States.

PATENTS AND PROPRIETARY RIGHTS

We own five United States patents relating to PolyHeme, its uses and
certain of our manufacturing processes. We have obtained counterpart patents and
have additional patent applications pending in Canada, Israel and various
European Union countries. Our United States patents expire in 2017. We have a
policy of seeking patents covering the important techniques, processes and
applications developed from our research

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and all modifications and improvements thereto. We also rely upon trade secrets,
know-how, continuing technological innovations and licensing opportunities to
develop and maintain our competitive position. We will continue to seek
appropriate protection for its proprietary technology.

We cannot ensure that our patents or other proprietary rights will be
determined to be valid or enforceable if challenged in court or administrative
proceedings or that we will not become involved in disputes with respect to the
patents or proprietary rights of third parties. An adverse outcome from these
proceedings could subject us to significant liabilities to third parties,
require disputed rights to be licensed from third parties or require us to stop
using our technology, any of which would result in a material adverse effect on
our results of operations.

RESEARCH AND DEVELOPMENT

The principal focus of our research and development effort is the support
of the clinical trials necessary for regulatory approval of PolyHeme. We have
also contracted for the preliminary engineering necessary to assess the
production of PolyHeme in commercial quantities.

In fiscal 2001, 2000 and 1999, our research and development expenses
totaled $9,437,000, $9,193,000 and $7,661,000, respectively. We anticipate that
these expenses will continue to increase as we fund the further clinical testing
of PolyHeme and prepare for production of PolyHeme in commercial quantities.

HUMAN RESOURCES

As of May 31, 2001, we had 58 employees, of whom 50 were involved in
research and development and eight were responsible for financial and other
administrative matters. We also had consulting arrangements with eight
individuals as of that date. None of our employees are represented by labor
unions, and we are not aware of any organizational efforts on behalf of any
labor unions involving our employees. We consider our relations with our
employees to be excellent.

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RISK FACTORS

You should consider the following matters when reviewing the information
contained in this document. You also should consider the other information
incorporated by reference in this document.

WE MAY BE REQUIRED TO CONDUCT EXTENSIVE ADDITIONAL CLINICAL TRIALS IN THE FUTURE

The results of our clinical trials may not be sufficient at present to
demonstrate adequately the safety and effectiveness of PolyHeme in order to
receive product approval once our Biologic License Application is filed with the
FDA. We believe clinical trials may continue throughout the regulatory review
process. If extensive additional trials are necessary, they will be expensive
and time-consuming. The timing of the FDA review process is uncertain. We cannot
ensure that we will be able to complete our clinical trials successfully or
obtain FDA approval of PolyHeme, or that FDA approval, if obtained, will not
include limitations on the indicated uses for which PolyHeme may be marketed.
Our business, financial condition and results of operations are critically
dependent on receiving FDA approval of PolyHeme. A significant delay in our
clinical trials or a failure to achieve FDA approval of commercial sales of
PolyHeme would have a material adverse effect on us and could result in the
cessation of our business. We or the FDA may in the future suspend clinical
trials at any time if it is believed that the subjects participating in such
trials are being exposed to unacceptable health risks.

OUR ACTIVITIES ARE AND WILL CONTINUE TO BE SUBJECT TO EXTENSIVE GOVERNMENT
REGULATION

Our research, development, testing, manufacturing, marketing and
distribution of PolyHeme are, and will continue to be, subject to extensive
regulation, monitoring and approval by the FDA and its foreign counterparts. The
regulatory approval process to establish the safety and effectiveness of
PolyHeme and the safety and reliability of our manufacturing process has already
consumed several years and considerable expenditures. The data obtained from
clinical trials are susceptible to varying interpretations, which could delay,
limit or prevent FDA regulatory approval. The lack of established criteria for
evaluating the effectiveness of blood substitute products could also delay or
prevent FDA regulatory approval. In addition, delay or rejection could be caused
by changes in FDA policies and regulations. Similar delays or rejections may
also be encountered in foreign countries. We cannot ensure that, even after
extensive clinical trials, regulatory approval will ever be obtained for
PolyHeme. Under FDA guidelines, the FDA may comment upon the acceptability of a
BLA following its submission. After a BLA is filed there is an initial review by
the FDA to be sure that all of the required elements are included in the filing.
There can be no assurance that the BLA filing will be accepted or that the FDA
may not issue a refusal to file, or RTF. If the BLA filing is accepted, there
can be no assurance that the full review will result in approval of PolyHeme for
manufacture and sale. Moreover, if regulatory approval of PolyHeme is granted,
the approval may include limitations on the indicated uses for which PolyHeme
may be marketed. Further, even if such regulatory approval is obtained, we do
not presently have manufacturing facilities sufficient to produce commercial
quantities of PolyHeme. In order to seek FDA approval of the sale of PolyHeme
produced at its first commercial manufacturing facility, we may be required to
conduct a portion of our clinical trials with product manufactured at that
facility. Discovery of previously unknown problems with PolyHeme or
unanticipated problems with our manufacturing facilities, even after FDA
approval of PolyHeme for commercial sale, may result in the imposition of
significant restrictions, including withdrawal of PolyHeme from the market.
Additional laws and regulations may also be enacted which could prevent or delay
regulatory approval of PolyHeme, including laws or regulations relating to the
price or cost-effectiveness of medical products. Any delay or failure to achieve
regulatory approval of commercial sales of PolyHeme is likely to have a material
adverse effect on our financial condition.

WE ARE A DEVELOPMENT STAGE COMPANY WITHOUT REVENUES OR PROFITS

Northfield was founded in 1985 and is a development stage company. Since
1985, we have been engaged primarily in the development and clinical testing of
PolyHeme. No revenues have been generated to date from commercial sales of
PolyHeme. Our revenues to date have consisted solely of license fees. We cannot
ensure that our clinical testing will be successful, that regulatory approval of
PolyHeme will be
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obtained, that we will be able to manufacture PolyHeme at an acceptable cost and
in appropriate quantities or that we will be able to successfully market and
sell PolyHeme. We also cannot ensure that we will not encounter unexpected
difficulties which will have a material adverse effect on us, our operations or
our properties.

WE WILL NEED TO RAISE SUBSTANTIAL ADDITIONAL CAPITAL TO CONTINUE OUR BUSINESS

We will be required to raise substantial additional capital to achieve
commercial production of PolyHeme. Our future capital requirements will depend
on many factors, including the scope and results of clinical trials, the timing
and outcome of regulatory reviews, administrative and legal expenses, the status
of competitive products, the establishment of manufacturing capacity and the
establishment of collaborative relationships. We cannot ensure that this
additional funding will be available or, if it is available, that it can be
obtained on terms and conditions we will deem acceptable. Any additional funding
derived from the sale of equity securities may result in significant dilution to
our existing stockholders.

WE ARE DEVELOPING A SINGLE PRODUCT THAT IS SUBJECT TO A HIGH LEVEL OF
TECHNOLOGICAL RISK

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

WE ARE NOT CERTAIN THAT WE WILL BE ABLE TO MANUFACTURE POLYHEME COMMERCIALLY

Commercial-scale manufacturing of PolyHeme will require the construction of
a manufacturing facility significantly larger than that currently being used to
produce PolyHeme for our clinical trials. We have no experience in
commercial-scale manufacturing, and there can be no assurance that we can
achieve commercial-scale manufacturing capacity. It is also possible that we may
incur substantial cost overruns and delays compared to existing estimates in
building and equipping a commercial-scale manufacturing facility. Moreover, in
order to seek FDA approval of the sale of PolyHeme produced at our first
commercial manufacturing facility, we may be required to conduct a portion of
our clinical trials with product manufactured at that facility. Accordingly, a
delay in achieving scale-up of manufacturing capabilities will have a material
adverse effect on the completion of our clinical trials and therefore on the
commercial manufacture and sale of PolyHeme. Additionally, the manufacture of
PolyHeme will be subject to extensive government regulation. Among the
conditions for marketing approval is that our quality control and manufacturing
procedures conform to the FDA's good manufacturing practice regulations. We
cannot ensure that we will be able to obtain the necessary regulatory clearances
or approvals to manufacture PolyHeme on a timely basis or at all.

THERE MAY BE LIMITATIONS IN THE SUPPLY OF THE STARTING MATERIAL FOR POLYHEME

We currently purchase donated blood from The American Red Cross and Blood
Centers of America for use as the starting material for PolyHeme. We have also
entered into an agreement with hemerica, Inc., a subsidiary of Blood Centers of
America, under which hemerica would supply us with 82,500 units per year of
packed red cells, the source material for PolyHeme, over a three year period. We
have not purchased any blood supplies under this agreement to date. We have
plans to enter long-term supply arrangements with other blood collectors. We
cannot ensure that we will be able to enter into satisfactory long-term
arrangements with blood bank operators, that the price we may be required to pay
for starting material will permit us to price PolyHeme competitively or that we
will be able to obtain an adequate supply of starting material. Additional
demand for blood may arise from competing blood substitute products, some of
which are derived from human blood, thereby limiting our available supply of
starting material.
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THERE ARE SIGNIFICANT COMPETITORS DEVELOPING SIMILAR PRODUCTS

If approved for commercial sale, PolyHeme will compete directly with
established therapies for acute blood loss and may compete with other
technologies currently under development. We cannot ensure that PolyHeme will
have advantages which will be significant enough to cause medical professionals
to adopt it rather than continue to use established therapies or to adopt other
new technologies or products. We also cannot ensure that the cost of PolyHeme
will be competitive with the cost of established therapies or other new
technologies or products. The development of blood substitute products is a
rapidly evolving field. Competition is intense and expected to increase. Several
companies have developed or are in the process of developing technologies which
are, or in the future may be, the basis for products which will compete with
PolyHeme. Certain of these companies are pursuing different approaches or means
of accomplishing the therapeutic effects sought to be achieved through the use
of PolyHeme. Many of these companies have substantially greater financial
resources, larger research and development staffs, more extensive facilities and
more experience than Northfield in testing, manufacturing, marketing and
distributing medical products. We cannot ensure that one or more other companies
will not succeed in developing technologies or products which will become
available for commercial use prior to PolyHeme, which will be more effective or
less costly than PolyHeme or which would otherwise render PolyHeme obsolete or
non-competitive. During the past year, a bovine-source hemoglobin-based
oxygen-carrier was approved for human use in South Africa, and an application
for marketing approval for one human-source hemoglobin-based oxygen-carrier was
filed in Canada and the United Kingdom.

WE DO NOT HAVE EXPERIENCE IN THE SALE AND MARKETING OF MEDICAL PRODUCTS

If approved for commercial sale, we intend to market PolyHeme in the United
States using our own sales force. We have no experience in the sale or marketing
of medical products. Our ability to implement our sales and marketing strategy
for the United States will depend on our ability to recruit, train and retain a
marketing staff and sales force with sufficient technical expertise. We cannot
ensure that we will be able to establish an effective marketing staff and sales
force, that the cost of establishing such a marketing staff and sales force will
not exceed revenues from the sale of PolyHeme or that our marketing and sales
efforts will be successful.

WE HAVE A HISTORY OF LOSSES AND OUR FUTURE PROFITABILITY IS UNCERTAIN

From Northfield's inception through May 31, 2001, we have incurred net
operating losses totaling $87,498,000. We will require substantial additional
expenditures to complete clinical trials, to pursue regulatory approval for
PolyHeme, to establish commercial scale manufacturing processes and facilities,
and to establish marketing, sales and administrative capabilities. These
expenditures are expected to result in substantial losses for at least the next
several years. The expense and the time required to realize any product revenues
or profitability are highly uncertain. We cannot ensure that we will be able to
achieve product revenues or profitability on a sustained basis or at all.

THE MARKET MAY NOT ACCEPT OUR PRODUCT

We anticipate that the market price for PolyHeme, if FDA approval is
received, will exceed the cost of transfused blood. Competitors may also develop
new technologies or products which are more effective or less costly than
PolyHeme. We cannot ensure that the price of PolyHeme, considered in relation to
PolyHeme's expected benefits, will be perceived by health care providers and
third party payors as cost-effective, or that the price of PolyHeme will be
competitive with transfused blood or with other new technologies or products.
Our results of operations may be adversely affected if the price of PolyHeme is
not considered cost-effective or if PolyHeme does not otherwise receive market
acceptance.

OUR PATENTS AND OTHER PROPRIETARY RIGHTS MAY NOT PROTECT OUR TECHNOLOGY

Our ability to compete effectively with other companies will depend, in
part, on our ability to protect and maintain the proprietary nature of our
technology. We cannot be certain as to the degree of protection offered by our
patents or as to the likelihood that additional patents in the United States and
certain other countries

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will be issued based upon pending patent applications. Patent applications in
the United States are maintained in secrecy until patents are issued. We cannot
be certain that we were the first creator of the inventions covered by our
patents or pending patent applications or that we were the first to file patent
applications for our inventions. The high costs of enforcing patent and other
proprietary rights may also limit the degree of protection afforded to us. We
also rely on unpatented proprietary technology, and we cannot ensure that others
may not independently develop the same or similar technology or otherwise obtain
access to our proprietary technology. We cannot ensure that our patents or other
proprietary rights will be determined to be valid or enforceable if challenged
in court or administrative proceedings or that we will not become involved in
disputes with respect to the patents or proprietary rights of third parties. An
adverse outcome from these proceedings could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third
parties or require us to stop using this technology, any of which would result
in a material adverse effect on our results of operations.

WE DEPEND ON THE SERVICES OF A LIMITED NUMBER OF KEY PERSONNEL

Our success is highly dependent on the continued services of a limited
number of skilled managers and scientists. The loss of any of these individuals
could have a material adverse effect on us. In addition, our success will
depend, among other factors, on the recruitment and retention of additional
highly skilled and experienced management and technical personnel. We cannot
ensure that we will be able to retain existing employees or to attract and
retain additional skilled personnel on acceptable terms given the competition
for such personnel among numerous large and well-funded pharmaceutical and
health care companies, universities and non-profit research institutions.

PART II

ITEM 2. PROPERTIES

We currently lease a manufacturing facility located in Mt. Prospect,
Illinois, and maintain our principal executive offices in Evanston, Illinois.
The leases for our manufacturing facility and executive offices extend through
August 2004 and February 2006, respectively. We have the option to extend the
existing lease for two additional five-year periods for the manufacturing
facility. Rent expense for our 2001 fiscal year was $810,000. We believe our
present manufacturing facility is capable of producing sufficient quantities of
PolyHeme for all of our clinical trials in the United States.

Currently, we have a manufacturing capacity of approximately 10,000 units
of PolyHeme per year. We have leased additional space adjacent to our existing
manufacturing facility but have not yet committed to the buildout of this space.
The initial engineering studies on the additional space have been completed and
indicate that an additional capacity of 75,000 units of PolyHeme per year could
be developed in approximately 16 to 20 months at a cost of $26 to $30 million.

ITEM 3. LEGAL PROCEEDINGS.

As of May 31, 2001, we were not a party to any material pending legal
proceedings.

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

None.

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PART III

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

MARKET INFORMATION

The following table sets forth, for the periods indicated, the range of
high and low sales prices for our common stock on the Nasdaq National Market.
These prices do not include retail markups, markdowns or commissions.

HOLDERS OF RECORD

As of May 31, 2001, there were approximately 500 holders of record and
approximately 11,600 beneficial owners of our common stock. There were as of
that date no issued and outstanding shares of our preferred stock.

DIVIDENDS

We have never declared or paid dividends on our capital stock and do not
anticipate declaring or paying any dividends in the foreseeable future.

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ITEM 6. SELECTED FINANCIAL DATA.

The selected financial data set forth below for, and as of the end of, each
of the years in the five-year period ended May 31, 2001 and for the period from
June 19, 1985 (inception) through May 31, 2001 were derived from Northfield's
financial statements, which financial statements have been audited by KPMG LLP,
independent certified public accountants.

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

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

(2) Excludes 640,500 shares reserved for issuance upon the exercise of stock
options outstanding as of May 31, 2001. Additional stock options for a total
of 446,500 shares and 170,000 shares, respectively, were available for grant
as of May 31, 2001 under our employee stock option plans and stock option
plan for outside directors.

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

Since Northfield's incorporation in 1985, we have devoted substantially all
of our efforts and resources to the research, development and clinical testing
of our potential product, PolyHeme. We have incurred operating losses during
each year of our operations since inception and expect to incur substantial
additional operating losses for the next several years. From Northfield's
inception through May 31, 2001, we have incurred operating losses totaling
$87,498,000.

Our success will depend on several factors, including our ability to obtain
Food and Drug Administration regulatory approval of PolyHeme and our
manufacturing facilities, obtain sufficient quantities of blood to manufacture
PolyHeme in commercial quantities, manufacture and distribute PolyHeme in a
cost-effective manner, and enforce our patent positions. We have experienced
significant delays in the development and clinical testing of PolyHeme. We
cannot ensure that we will be able to achieve these goals or that we will be
able to realize product revenues or profitability on a sustained basis or at
all.

We anticipate that research and development expenses will increase during
the foreseeable future. These expected increases are attributable to anticipated
future clinical trials, monitoring and reporting the results of these trials and
continuing process development associated with improving our manufacturing
capacity to permit commercial-scale production of PolyHeme. We expect that
general and administrative expenses will increase over the foreseeable future
due to increased expenses relating to the expansion of our organization in
support of launching commercial operations.

RESULTS OF OPERATIONS

We reported no revenues for the fiscal years ended May 31, 2001, 2000 or
1999. From Northfield's inception through May 31, 2001, we have reported total
revenues of $3,000,000, all of which were derived from licensing fees.

OPERATING EXPENSES

Operating expenses for our fiscal years ended May 31, 2001, 2000 and 1999
totaled $12,222,000, $11,453,000 and 9,972,000, respectively. Measured on a
percentage basis, fiscal 2001 operating expenses exceeded fiscal 2000 expenses
by 6.7%, while fiscal 2000 operating expenses exceeded fiscal 1999 expenses by
14.9%.

For the year ended May 31, 2001, research and development expenses totaled
$9,437,000, representing an increase of $244,000, or 2.7%, from the year ended
May 31, 2000. The composition of the expenditures has changed as higher
manufacturing employment levels and salary increases have pushed labor costs up,
partially offset by reductions in purchased services related to clinical trial
field work.

For the year ended May 31, 2000, research and development expenses totaled
$9,193,000, representing an increase of $1,532,000, or 20.0%, from the year
ended May 31, 1999. The year over year difference is due to increased expenses
for clinical trials, expansion of our manufacturing organization, validation
services and amortization of previously capitalized engineering costs.

We anticipate that research and development expenses will continue to
increase for the foreseeable future. Increased costs are being planned for
additional multi-center clinical trials, third party clinical monitoring,
biostatistical analysis and report preparation and production.

General and administrative expenses for fiscal 2001 totaled $2,786,000
compared to expenses of $2,260,000 for fiscal 2000, representing an increase of
$526,000, or 23.3%. The increase is due primarily to increased professional
fees.

General and administrative expenses for fiscal 2000 totaled $2,260,000
compared to expenses of $2,311,000 for fiscal 1999, representing a decrease of
$51,000, or 2.2%. The decrease was primarily due to lower non-cash expenses as
the depreciation stream on our corporate leasehold improvements ended.

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We anticipate that general and administration expenses will likely increase
over the next several quarters as the expense of the development of sales,
marketing and distribution capabilities will be incurred.

INTEREST INCOME

Interest income in fiscal 2001 equaled $2,048,000, or a $238,000 decrease
from the $2,286,000 in interest income reported in fiscal 2000. Higher interest
rates early in fiscal 2001 partially offset lower available investment balances
to account for the decrease. Currently available short-term interest rates are
yielding over 2.5 percentage points less than the rates available for the
comparable prior year period.

Interest income in fiscal 2000 equaled $2,286,000, or a $270,000 decrease
from the $2,556,000 in interest income reported in fiscal 1999. Lower available
investment balances were the primary reason for the decrease in interest income.

Without additional cash inflows, interest income will decline significantly
over the next several quarters. If we were to spend at current rates and earn
interest at current short-term money rates, interest income in fiscal 2002 would
decline by approximately 50% compared to fiscal 2001.

NET LOSS

The net loss for the year ended May 31, 2001 was $10,175,000, or $.71 per
basic share, compared to a net loss of $9,167,000, or $.64 per basic share, for
the year ended May 31, 2000. The increase in the loss per basic share is
primarily the result of higher professional fees which increased over the course
of the year as well as increased labor costs.

The net loss for the year ended May 31, 2000 was $9,167,000, or $.64 per
basic share, compared to a net loss of $7,416,000, or $.53 per basic share, for
the year ended May 31, 1999. The increase in the loss per basic share was the
result of the increased expense of conducting our clinical trials, increased
expenditures for validation services combined with the expansion of our
manufacturing organization and facilities.

LIQUIDITY AND CAPITAL RESOURCES

From Northfield's inception through May 31, 2001, we have used cash in
operating activities and for the purchase of property, plant, equipment and
engineering services in the amount of $87,289,000. For the years ended May 31,
2001 and 2000, these cash expenditures totaled $9,813,000 and $11,097,000,
respectively. The year over year decrease is due primarily to the prior year
expansion of our manufacturing facilities.

We have financed our research and development and other activities to date
through the public and private sale of equity securities and, to a more limited
extent, through the license of product rights. As of May 31, 2001, we had cash
and marketable securities totaling $28,698,000.

We believe our existing capital resources will be adequate to satisfy our
operating capital requirements and maintain our existing manufacturing plant and
office facilities for approximately the next 24-30 months. Thereafter, we are
likely to require substantial additional capital to continue our operations. We
are currently unable to fund the construction of a large-scale greenfield
manufacturing facility, which is estimated to cost approximately $45 million,
without raising substantial additional capital. Currently, we have manufacturing
capacity of approximately 10,000 units. Initial engineering on the leased space
adjacent to our existing manufacturing facility is completed. This engineering
indicates an additional capacity of 75,000 units could be developed in
approximately 16-20 months at a cost of $26-30 million. Like a large-scale
greenfield manufacturing facility, significant additional funding will be
required before the smaller scale expansion facility could be completed.
Northfield has not yet committed to the build-out of a smaller scale expansion
facility. We view the smaller scale expansion facility as financially prudent
yet large enough for commercial viability.

After filing for product approval with the FDA, Northfield will focus on
raising additional capital. We estimate that we will require at least $40
million in additional funding to build a smaller scale expansion

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facility (75,000 unit), fund the subsequent working capital needs and support an
expanded manufacturing and marketing organization.

We may issue additional equity or debt securities to the public or enter
into collaborative arrangements with strategic partners which could provide us
with additional funding or absorb expenses we would otherwise be required to
pay. Any one or a combination of these sources may be utilized to raise the
required funding. Business or market conditions may not be favorable which would
cause a delay in the commercialization of our product.

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

ITEM 7(A) QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The Company currently does not have any foreign currency exchange risk. The
Company invests its cash and cash equivalents in government securities,
certificates of deposit and money market funds. These investments are subject to
interest rate risk. However, due to the nature of the Company's short-term
investments, it believes that the financial market risk exposure is not
material. A one percentage point decrease on an investable balance of $28.7
million would decrease interest income by $287,000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See the index to Financial Statements on page 20. See footnote 10 to the
Financial Statements on page 35 for Supplementary Quarterly Data. These
Financial Statements are incorporated by reference into this document.

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

We have not had a disagreement on any matter of accounting principles or
financial statement disclosure with our independent accountants during our 2001,
2000 or 1999 fiscal years.

PART III

ITEMS 10 THROUGH 13.

The information specified in Items 10 through 13 of Form 10-K has been
omitted in accordance with instructions to Form 10-K. We expect to file with the
Commission in August 2001, pursuant to Regulation 14A, a definitive proxy
statement which will contain the information required to be included in Items 10
through 13 of Form 10-K.

PART IV

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

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

(1) and (2) See the Index to Financial Statements on page 20.

(3) See Description of Exhibits on page 36.

b) None.

c) See Description of Exhibits on page 36.

d) None.

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20

FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS

20
21

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Northfield Laboratories Inc.:

We have audited the accompanying balance sheets of Northfield Laboratories
Inc. (a company in the development stage) as of May 31, 2001 and 2000 and the
related statements of operations, shareholders' equity (deficit), and cash flows
for each of the years in the three-year period ended May 31, 2001 and for the
cumulative period from June 19, 1985 (inception) through May 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northfield Laboratories Inc.
(a company in the development stage) as of May 31, 2001 and 2000, and the
results of its operations and its cash flows for each of the years in the
three-year period ended May 31, 2001 and for the cumulative period from June 19,
1985 (inception) through May 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.

/s/ KPMG LLP

July 2, 2001
Chicago, Illinois

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22

NORTHFIELD LABORATORIES INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

BALANCE SHEETS
MAY 31, 2001 AND 2000

See accompanying notes to financial statements.

22
23

NORTHFIELD LABORATORIES INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 2001, 2000, AND 1999
AND THE CUMULATIVE PERIOD FROM JUNE 19, 1985
(INCEPTION) THROUGH MAY 31, 2001

See accompanying notes to financial statements.

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24

NORTHFIELD LABORATORIES INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MAY 31, 2001, 2000, AND 1999 AND THE CUMULATIVE
PERIOD FROM JUNE 19, 1985 (INCEPTION) THROUGH MAY 31, 2001

24
25

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26

NORTHFIELD LABORATORIES INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MAY 31, 2001, 2000, AND 1999 AND THE CUMULATIVE
PERIOD FROM JUNE 19, 1985 (INCEPTION) THROUGH MAY 31, 2001

See accompanying notes to financial statements.

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27

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28

NORTHFIELD LABORATORIES INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2001, 2000, AND 1999
AND THE CUMULATIVE PERIOD FROM JUNE 19, 1985
(INCEPTION) THROUGH MAY 31, 2001

See accompanying notes to financial statements.

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NORTHFIELD LABORATORIES INC.
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS
MAY 31, 2001 AND 2000

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF OPERATIONS IN THE DEVELOPMENT STAGE

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

BASIS OF PRESENTATION

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

MARKETABLE SECURITIES

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

PROPERTY, PLANT, AND EQUIPMENT

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

CAPITALIZED ENGINEERING COSTS

Capitalized engineering costs include design and other initial engineering
studies relating to a commercial scale facility. During fiscal 2001 and 2000 the
Company capitalized $0 and $359,649, of such engineering costs, respectively.
These costs are being amortized over a three year period, the expected period of
benefit. For the years ended May 31, 2001 and 2000, and 1999, total amortization
cost recorded was $120,000, and $379,674, and 185,544 respectively.

COMPUTATION OF NET LOSS PER SHARE

Basic earnings per share is based on the weighted average number of shares
outstanding and excludes the dilutive effect of unexercised common equivalent
shares. Diluted earnings per share is based on the weighted average number of
shares outstanding and includes the effect of unexercised common equivalent
shares, if their inclusion is not antidilutive. Because the Company reported a
net loss for the years ended May 31, 2001, 2000, and 1999 and the cumulative
period from June 19, 1985 (inception) through May 31, 2001, basic and diluted
per share amounts are the same.

Had the Company reported net earnings for the years ended May 31, 2001,
2000, and 1999 and the cumulative period from June 19, 1985 (inception) through
May 31, 2001, the weighted average number of

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shares outstanding would have been diluted by the following common equivalent
securities (not assuming the effects of applying the treasury stock method):

USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with accounting principles generally accepted in the United States of
America. Actual results could differ from those estimates.

FINANCIAL INSTRUMENTS

The fair values of financial instruments, which consist of marketable
securities (note 2), were not materially different from their carrying values at
May 31, 2001 and 2000.

(2) MARKETABLE SECURITIES

The fair market value of the Company's marketable securities was
$22,464,045 at May 31, 2001, which included gross unrealized holding gains of
$201,204. The fair market value of the Company's marketable securities was
$23,022,457 at May 31, 2000, which included gross unrealized holding losses of
$106,867.

At May 31, 2001, all of the Company's marketable securities were scheduled
to mature in less than one year.

(3) PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment, at cost, less accumulated depreciation and
amortization, is summarized as follows as of May 31, 2001 and 2000:

Depreciation and amortization expense amounted to $818,816, $789,551, and
$479,595 for the years ended May 31, 2001, 2000, and 1999, respectively. During
the fiscal year ended May 31, 2001, the Company disposed of $1,211,473 of fully
depreciated capital equipment.

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(4) SHAREHOLDERS' EQUITY

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

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

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

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

On September 30, 1991, the Company issued 90,000 additional shares of
common stock for net proceeds of $504,000. These shares were issued as a result
of the exercise of common stock warrants (note 7).

On June 29, 1992, the Company issued 15,000 additional shares of common
stock for net proceeds of $107,040. These shares were issued as a result of the
exercise of common stock warrants (note 7).

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

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

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

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

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

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

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

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

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

During the year ended May 31, 1998, the Company issued 5,000 additional
shares of common stock upon the exercise of stock options for cash at $7.14 per
share for net proceeds of $35,700.

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During the year ended May 31, 1999, the Company issued 142,500 additional
shares of common stock upon the exercise of warrants and stock options for cash
at $8.00 and $7.14 per share, respectively, for net proceeds of $1,124,950.

During the year ended May 31, 2000, the Company issued 2,500 additional
shares of common stock upon the exercise of stock options for cash at $13.38 per
share, for net proceeds of $33,450.

During the year ended May 31, 2001, the Company issued 23,500 additional
shares of common stock upon the exercise of stock options for cash at $6.38 and
$10.81 per share, for net proceeds of $227,455.

(5) INCOME TAXES

As a result of losses incurred to date, the Company has not provided for
income taxes. As of May 31, 2001, the Company had net operating loss
carryforwards for income tax purposes of approximately $88,000,000, which are
available to offset future taxable income, if any, through 2002 to 2021.
Deferred tax assets primarily resulted from net operating loss carryforwards and
differences in the recognition of research and development, compensatory stock
options, and depreciation expenses and the tax benefit from the exercise of
stock options. Additionally, the Company had approximately $2,500,000 of
research and experimentation tax credits and investment tax credits available to
reduce future income taxes through 2021.

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.

The net deferred tax assets as of May 31, 2001 and 2000 are summarized as
follows:

The net change in the valuation allowance during fiscal 2001, 2000, and
1999 was an increase of $2,800,000, $4,400,000, and $2,600,000, respectively.

(6) STOCK OPTION PLAN

The Company's Restated Nonqualified Stock Option Plan (the Employee Stock
Option Plan) lapsed on September 30, 1996. Following the termination of the
plan, all options outstanding prior to the plan termination may be exercised in
accordance with their terms. As of May 31, 2000, options to purchase a total of
77,000 shares of the Company's common stock at prices of $6.38 and $15.19 per
share were outstanding under the Employee Stock Option Plan. These options
expire in 2003 and 2004, ten years after the date of grant.

With an effective date of October 1, 1996, the Company established the
Northfield Laboratories Inc. 1996 Stock Option Plan (the 1996 Option Plan). This
plan provides for the granting of stock options to the Company's directors,
officers, key employees, and consultants. Stock options to purchase a total of
500,000 shares of common stock are available under the 1996 Option Plan. During
the year ended May 31, 2001, the Company granted 64,000 options to purchase
shares of common stock at $10.66 and $15.41 per share. During the year ended May
31, 2000, the Company granted 15,000 options to purchase shares of

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common stock at $12.88 per share, which was below the fair market value of a
share of common stock at $15.69 at the date of grant. The above mentioned
options expire ten years after the date of grant.

With an effective date of June 1, 1999, the Company established the
Northfield Laboratories Inc. 1999 Stock Option Plan (the 1999 Option Plan). This
plan provides for the granting of stock options to the Company's directors,
officers, key employees, and consultants. Stock options to purchase a total of
500,000 shares of common stock are available under the 1999 Option Plan. During
the year ended May 31, 2001, the Company granted 60,000 options to purchase
shares of common stock at $10.88 per share. These options expire in 2011, ten
years after the date of the grant. During the year ended May 31, 2000, the
Company did not grant any options under this plan.

In September 1994, the Company adopted the Nonqualified Stock Option Plan
for Outside Directors (Directors Plan) which provides for the granting of
nonqualified stock options to directors of the Company who are neither employees
of nor consultants to the Company and who were not directors of the Company
prior to June 1, 1994. Stock options to purchase a total of 200,000 shares of
common stock are available under the Directors Plan. During the year ended May
31, 2001, the Company granted 15,000 options to purchase shares of common stock
at $11.18 per share. These shares expire in 2011. During the year ended May 31,
2000, the Company granted no options to purchase shares of common stock.

The Company applies the intrinsic value method to account for options
granted to directors, officers, and key employees under the plans. Accordingly,
compensation cost is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price. Had compensation cost
for the Company's stock option plans been determined using the fair value
method, the Company's net loss and net loss per share would have been the pro
forma amounts indicated below:

For purposes of calculating the compensation cost consistent with using the
fair value method, the fair value of each option grant is estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 2001, 2000, and 1999:

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Additional information on shares subject to options is as follows:

The following table summarizes information about stock options outstanding
at May 31, 2001:

(7) STOCK WARRANTS

In connection with demand notes dated September 23, 1986, the Company
issued warrants to purchase a total of 90,000 shares of common stock at $5.60
per share. The warrants were exercised on September 30, 1991 (note 4).

In connection with a demand note dated July 2, 1987, the Company issued
warrants to purchase a total of 3,000 shares of Series B convertible preferred
stock at $35.68 per share. On June 7, 1988, these warrants were converted to
common stock warrants to purchase 15,000 shares of common stock at $7.14 per
share. The warrants were exercised on June 29, 1992 (note 4).

On March 13, 1993, the Company granted warrants to purchase 125,000 shares
of common stock of the Company at $13.00 per share. These warrants were canceled
on August 3, 1994 and were reissued at $8.00 per share. These warrants were
exercised on May 13, 1999 (note 4).

(8) LEASES

Rent expense amounted to $809,721, $747,055, and $499,491 for the years
ended May 31, 2001, 2000, and 1999, respectively.

The Company has renewed the lease for its corporate facility which now
expires in February 2006. The terms of the renewed lease are substantially the
same as the original lease. The Company has the option to cancel the lease after
February 15, 2002, upon giving written notice at least six months prior to
termination, as well as paying a penalty equal to six months rent of $144,375 at
February 15, 2002.

The Company has renewed the lease for its research and manufacturing
facility which now expires in August 2004. The terms of the renewed lease are
substantially the same as the original lease. The lease is collateralized by a
$49,200 security deposit as of May 31, 2001.

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At May 31, 2001, future minimum lease payments under the operating leases
are as follows:

(9) EMPLOYEE BENEFIT PLAN

Effective January 1, 1994, the Company established a defined contribution
401(k) savings plan covering each employee of the Company satisfying certain
minimum length of service requirements. Matching contributions to the accounts
of plan participants are made by the Company in an amount equal to 33% of each
plan participant's before-tax contribution, subject to certain maximum
contribution limitations, and are made at the discretion of the Company.
Expenses incurred under this plan for Company contributions for the years ended
May 31, 2001, 2000, and 1999 amounted to $145,051, $129,496, and $118,167,
respectively.

(10) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table shows our quarterly unaudited financial information for
the eight quarters ended May 31, 2001. We have prepared this information on the
same basis as the annual information presented in other sections of this report.
In management's opinion this information reflects fairly, in all material
respects, the results of its operations. You should not rely on the operating
results for any quarter to predict the results for any subsequent period or for
the entire fiscal year. You should be aware of possible variances in our future
quarterly results. See "Risk Factors" in the body of this document.

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EXHIBITS

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

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this August 3,
2001.

NORTHFIELD LABORATORIES INC.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities indicated on August 3, 2001.