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, 2003
[ ] 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. [X]

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

As of November 29, 2002, 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 November 29, 2002) held by non-affiliates of the Registrant was
$45,764,148 (11,556,603 shares at $3.96 per share).

As of July 31, 2003, there were 16,158,732 shares of the Registrant's
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for its 2003 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 document 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 undue 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.

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

Northfield Laboratories Inc. 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(R) blood substitute product is a solution of chemically
modified hemoglobin derived from human blood. PolyHeme simultaneously restores
lost blood volume and hemoglobin levels and is designed for rapid, massive
infusion. PolyHeme requires no cross-matching, and is therefore immediately
available and compatible with all blood types. PolyHeme has an extended shelf
life compared to blood. We believe PolyHeme is the only blood substitute in
development that has been safely infused in clinical trials in sufficient
quantities to be useful in the treatment of urgent, large volume blood loss in
trauma and surgical settings, with a particular focus on situations where
donated blood is not immediately available.

We have received clearance from the U.S. Food and Drug Administration, or
FDA, to proceed with a pivotal Phase III trial in which PolyHeme will be used
for the first time in civilian, urban trauma settings to treat severely injured
patients in hemorrhagic shock before they reach the hospital. Under this
protocol, treatment with PolyHeme will begin at the scene of the injury or in
the ambulance and continue during transport and the initial 12 hour post-injury
period in the hospital. Since blood is not presently carried in ambulances, the
use of PolyHeme in this setting has the potential to improve survival and
thereby address a critical, unmet medical need.

We also recently received a response from FDA on our request for Special
Protocol Assessment, or SPA, for our urban ambulance trial, confirming that
agreement had been reached on the primary endpoints for the protocol and the
broad concepts for clinical indications those endpoints would support. The
response also provided comments and recommendations regarding the collection and
analysis of the trial data. We are implementing these steps before enrollment
begins to ensure that the results of the trial will be appropriate to support a
marketing application for product approval. Agreements that are part of an SPA
become part of the administrative record and may only be changed by mutual
agreement of the parties, or if FDA identifies a substantial scientific issue
relevant to safety or efficacy after the trial has begun.

We are currently in contact with over 40 potential clinical sites in an
effort to complete the trial at the earliest possible date. We anticipate that
approximately 20 Level I trauma centers throughout the United States will
eventually participate in the PolyHeme trial, which has an expected enrollment
of 720 patients. The process of public disclosure and community consultation
required under the regulations is underway at a number of potential trial sites
across the country.

We have previously conducted Phase II and Phase III clinical trials of
PolyHeme at multiple locations in the United States in trauma and emergency
surgical applications, in elective surgical procedures, and as life-saving
therapy in situations of compassionate use. The observations in these trials
have demonstrated the potential clinical utility of PolyHeme in the treatment of
urgent blood loss and life-threatening hemoglobin levels. In these trials in
hospitalized trauma patients, PolyHeme significantly improved survival compared
to historical control patients who did not receive blood. Our trials have
involved 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 world-wide clinical need and has the
greatest market opportunity. We believe we are the only company in our field
with an oxygen-carrying blood substitute that has been rapidly infused at such
high doses -- as much as 20 units (1,000 grams) or twice the blood volume of the
average adult.

In August 2001, we submitted a Biologics License Application, or BLA, to
FDA seeking approval to market PolyHeme for use in the treatment of urgent,
life-threatening blood loss. In November 2001, FDA issued a refuse to file
letter relating to our BLA. We subsequently had numerous meetings with FDA and
were successful in reaching consensus with FDA on our current clinical
development plan for PolyHeme.

Our principal executive offices are located at 1560 Sherman Avenue, Suite
1000, Evanston, Illinois 60201-4800, and our telephone number is (847) 864-3500.
We maintain an Internet Web site at www.northfieldlabs.com. We make available
free of charge on our Web site our Form 10-Ks, Form 10-Qs,

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8-Ks and other documents that we file with or furnish to the Securities and
Exchange Commission as soon as reasonably practicable after filing with the SEC.
The information contained on our Web site, or on other Web sites linked to our
Web site, is not a part of this document.

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 14 million
units of blood were transfused in the United States in 2002, of which
approximately 8.4 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 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.

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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 14 million units of blood were transfused in
the United States in 2002, of which approximately 8.4 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 2002 for the
treatment of acute blood loss represent a multi-billion dollar market. 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 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

In March 2003, we received FDA approval to initiate a pivotal Phase III
trial in which PolyHeme will be used for the first time in civilian, urban
trauma settings to treat severely injured patients in hemorrhagic shock before
they reach the hospital. Under this protocol, treatment with PolyHeme will begin
at the scene of the injury or in the ambulance and continue during transport and
the initial 12 hour post-injury period in the hospital. Since blood is not
presently carried in ambulances, the use of PolyHeme in this setting has the
potential to improve survival and thereby address a critical, unmet medical
need.

In June 2003, we received a response from FDA on our request for Special
Protocol Assessment, or SPA, for our urban ambulance trial, confirming that
agreement had been reached on the primary endpoints for the
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protocol and the broad concepts for clinical indications those endpoints would
support. The response also provided comments and recommendations regarding the
collection and analysis of the trial data. We are implementing these steps
before enrollment begins to ensure that the results of the trial will be
appropriate to support a marketing application for product approval. Agreements
that are part of an SPA become part of the administrative record and may only be
changed by mutual agreement of the parties, or if FDA identifies a substantial
scientific issue relevant to safety or efficacy after the trial has begun.

We are currently in contact with over 40 potential clinical sites in an
effort to complete the trial at the earliest possible date. We anticipate that
approximately 20 Level I trauma centers throughout the United States will
eventually participate in the PolyHeme trial, which has an expected enrollment
of 720 patients. The process of public disclosure and community consultation
required under the regulations is underway at a number of potential trial sites
across the country.

In August 2001, we submitted a Biologics License Application, or BLA, to
FDA seeking approval to market PolyHeme for use in the treatment of urgent,
life-threatening blood loss. In November 2001, FDA issued a refuse to file
letter relating to our BLA. We subsequently had numerous meetings with FDA and
were successful in reaching consensus with FDA on our current clinical
development plan for PolyHeme.

TRAUMA AND EMERGENCY SURGICAL APPLICATIONS

We have previously conducted clinical trials of PolyHeme in trauma and
emergency surgical applications at multiple hospitals in the United States,
including both civilian and military institutions. These clinical trials were
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 were infused with up to 20 units (1000
grams) of PolyHeme. This unprecedented dose is equivalent to twice the blood
volume of an average adult.

Our clinical protocol allowed us to assess the life-sustaining capacity of
PolyHeme following massive blood loss when blood was not used for resuscitation
and the red blood cell hemoglobin level fell 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 was
75%. This improvement demonstrates the ability of PolyHeme to effectively
transport oxygen. The important safety observations were that none of the
toxicities historically associated with other hemoglobin solutions have been
identified in our clinical experience.

We analyzed the data from our trauma trials and considered our regulatory
position based on our findings. We were pleased with the results from these
trials, which demonstrated 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 surgical procedures.
We submitted our BLA to FDA in August 2001 based on the strength of these data.

ELECTIVE SURGICAL APPLICATIONS

We have also conducted clinical trials of PolyHeme in elective surgical
applications at multiple locations in the United States. Our clinical protocol
for these trials was a randomized controlled study in which elective surgical
patients were 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 was the same as
that for trauma -- high dose, rapid infusion for acute blood loss -- the
clinical endpoint for these trials was the elimination of the use of banked
blood. Due to the complexity of the clinical protocol, however, patient accrual
progressed slowly. As a result, we closed the elective surgery protocol after
our BLA was submitted. We anticipate other potential trials in elective surgery
in the future.

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COMPASSIONATE USE

We continue to enroll patients on a case by case basis in situations of
compassionate use on an emergent basis in life-threatening situations. We
provide PolyHeme as life-saving treatment in situations of immunologic
incompatibility with the available supply of blood, or religious objection to
donated blood. Each case is reviewed to be certain that the use of PolyHeme may
be beneficial in treating a patient who would otherwise have a high risk of
mortality. We will continue this support on an on-going basis.

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
would supply us with up to 160,000 units per year of packed red cells, the
source material for PolyHeme. 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. If we secure a partnership with a
pharmaceutical company with expertise in marketing this strategy will change.

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, now Pfizer Inc., 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

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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 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. Some 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. A bovine-source
hemoglobin-based oxygen-carrier has been approved for human use in South Africa
and a BLA was submitted to FDA for its use in the United States.

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, 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 FDA of an
Investigational New Drug application, clinical trials in humans to establish the
safety and effectiveness of the product, the submission to FDA of a 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 submitted
there is an initial review by FDA to be sure that all of the required elements
are included in the submission. There can be no assurance that the filing will
be accepted for filing or that FDA may not issue a refusal to file, or RTF. If
an RTF is issued, there is opportunity for dialogue between the sponsor and FDA
in an effort to resolve all concerns. There can be no assurance that such a
dialogue will be successful in leading to the filing of the BLA. If the
submission is filed, 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 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 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 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. 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 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 eight 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,

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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 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
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 our technology, any of which would result in a material adverse effect on
our results of operations and our financial position.

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 2003, 2002 and 2001, our research and development expenses
totaled $8,819,000, $8,843,000 and $9,437,000, 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, 2003, we had 63 employees, of whom 55 were involved in
research and development and eight were responsible for financial and other
administrative matters. We also had consulting arrangements with 13 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.

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 ARE REQUIRED TO CONDUCT ADDITIONAL CLINICAL TRIALS IN THE FUTURE.

The results of our clinical trials conducted to date are not sufficient to
demonstrate adequately the safety and effectiveness of PolyHeme in order to
obtain approval from FDA for the commercial sale of PolyHeme. We are preparing
to commence enrollment in a pivotal Phase III trial in which PolyHeme will be
used for the first time in civilian trauma applications to treat severely
injured patients before they reach the hospital. Under this protocol, treatment
with PolyHeme will begin at the scene of the injury and continue during
transport to the hospital by ambulance. This trial is likely to be expensive and
time-consuming and the timing of 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
planned 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 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.

10

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 FDA. 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. We cannot ensure that, even after extensive
clinical trials, regulatory approval will ever be obtained for PolyHeme. We will
be required to file a Biologics License Application, or BLA, with FDA in order
to obtain regulatory approval for the commercial sale of PolyHeme in the United
States. Under FDA guidelines, FDA may comment upon the acceptability of a BLA
following its submission. After a BLA is submitted there is an initial review by
FDA to be sure that all of the required elements are included in the submission.
There can be no assurance that the submission will be accepted for filing or
that FDA may not issue a refusal to file, or RTF. If an RTF is issued, there is
opportunity for dialogue between the sponsor and FDA in an effort to resolve all
concerns. There can be no assurance that such a dialogue will be successful in
leading to the filing of the BLA. If the submission is filed, there can be no
assurance that the full review will result in product approval. 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. FDA continues to
review products even after they receive agency approval. If and when FDA
approves PolyHeme, its manufacture and marketing will be subject to ongoing
regulation, including compliance with current good manufacturing practices,
adverse event reporting requirements and FDA's general prohibitions against
promoting products for unapproved or "off-label" uses. We are also subject to
inspection and market surveillance by FDA for compliance with these and other
requirements. Any enforcement action resulting from failure, even by
inadvertence, to comply with these requirements could affect the manufacture and
marketing of PolyHeme. In addition, FDA could withdraw a previously approved
product from the market upon receipt of newly discovered information. FDA could
also require us to conduct additional, and potentially expensive, studies in
areas outside our approved indicated uses.

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 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.

11

WE HAVE A HISTORY OF LOSSES, OUR FUTURE PROFITABILITY IS UNCERTAIN AND OUR
FINANCIAL STATEMENTS ARE SUBJECT TO A GOING CONCERN EXPLANATORY PARAGRAPH BY OUR
INDEPENDENT ACCOUNTANTS.

From Northfield's inception through May 31, 2003, we have incurred net
operating losses totaling $110,466,000. 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 and are expected to substantially exceed our available capital
resources. 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. As a
result of these factors, our independent accountants have included an
explanatory paragraph in their audit opinion based on uncertainty regarding our
ability to continue as a going concern.

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

We will be required to raise additional capital to achieve commercial
production of PolyHeme. Our future capital requirements will depend on many
factors, including the scope and results of our 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. Our independent
accountants have included an explanatory paragraph in their audit opinion based
on uncertainty regarding our ability to continue as a going concern. A statement
of this type may interfere with our ability to issue our securities to the
public or in private transactions. 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 commercial manufacturing capabilities will have a
material adverse effect on sales 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 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.

12

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 up to 160,000 units per year
of packed red cells, the source material for PolyHeme. 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.

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. Some 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. A bovine-source hemoglobin-based oxygen-carrier has been
approved for human use in South Africa and a BLA is under review by FDA for its
use in the United States.

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.

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.

13

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 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.

OUR PROFITABILITY WILL BE AFFECTED IF WE INCUR PRODUCT LIABILITY CLAIMS IN
EXCESS OF OUR INSURANCE COVERAGE.

The testing and marketing of medical products, even after FDA approval,
have an inherent risk of product liability. We maintain limited product
liability insurance coverage for our clinical trials in the total amount of $10
million. However, our profitability will be adversely affected by a successful
product liability claim in excess of our insurance coverage. We cannot guarantee
that product liability insurance will be available in the future or be available
on reasonable terms.

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.

HEALTH CARE REFORM AND CONTROLS ON HEALTH CARE SPENDING MAY LIMIT THE PRICE WE
CAN CHARGE FOR POLYHEME AND THE AMOUNT WE CAN SELL.

The federal government and private insurers have considered ways to change,
and have changed, the manner in which health care services are provided in the
United States. Potential approaches and changes in recent years include controls
on health care spending and the creation of large purchasing groups. In the
future, it is possible that the government may institute price controls and
limits on Medicare and Medicaid spending. These controls and limits might affect
the payments we collect from sales of our product. Assuming we succeed in
bringing PolyHeme to market, uncertainties regarding future health care reform
and private market practices could affect our ability to sell PolyHeme in large
quantities at profitable pricing.

UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT COULD AFFECT OUR PROFITABILITY.

Sales of medical products largely depend on the reimbursement of patients'
medical expenses by governmental health care programs and private health
insurers. There is no guarantee that governmental health care programs or
private health insurers will reimburse our sales of PolyHeme, or permit us to
sell our product at high enough prices to generate a profit.

14

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 2003 fiscal year was $821,760. 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 $30 to $35 million.

ITEM 3. LEGAL PROCEEDINGS.

As of May 31, 2003, we were not a party to any material pending legal
proceedings.

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

None.

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.

15

HOLDERS OF RECORD

As of May 31, 2003, there were approximately 450 holders of record and
approximately 11,000 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.

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, 2003 and for the period from
June 19, 1985 (inception) through May 31, 2003 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 959,000 shares reserved for issuance upon the exercise of stock
options outstanding as of May 31, 2003. Additional stock options for a total
of 493,000 shares and 140,000 shares, respectively, were available for grant
as of May 31, 2003 under our employee stock option plans and stock option
plan for outside directors.

16

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, 2003, we have incurred operating losses totaling
$110,466,000.

We will be required to complete our planned Phase III clinical trials and
obtain FDA regulatory approval before PolyHeme can be sold commercially. The FDA
regulatory process is subject to significant risks and uncertainties, including
those described above under "Risk Factors." We therefore cannot at this time
reasonably estimate the timing of any future revenues from the commercial sale
of PolyHeme. The costs incurred by Northfield to date and during each period
presented below in connection with our development of PolyHeme are described in
the Statements of Operations and in note 10 of notes to our financial
statements.

Our success will depend on several factors, including our ability to obtain
FDA 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, enforce our
patent positions and raise sufficient capital to fund these activities. 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.

RESULTS OF OPERATIONS

We reported no revenues for the fiscal years ended May 31, 2003, 2002 or
2001. From Northfield's inception through May 31, 2003, 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, 2003, 2002 and 2001
totaled $12,462,000, $11,543,000 and $12,222,000, respectively. Measured on a
percentage basis, fiscal 2003 operating expenses exceeded fiscal 2002 expenses
by 8.0%, while fiscal 2002 operating expenses were lower than fiscal 2001
expenses by 5.6%.

For our 2003 fiscal year, research and development expenses totaled
$8,819,000, representing a decrease of $24,000, or 0.2%, from the prior fiscal
year. Lower clinical trials expense was partially offset by increased
manufacturing costs as we built inventory for our upcoming clinical trials.

We are planning for a significant increase in research activity and related
expense in fiscal 2004. Preparation for our Phase III prehospital trial is
nearing completion and patient enrollment is forecasted to start in the fourth
quarter of the calendar year. Expenses directly related to the trial for fiscal
year 2004 is estimated at $10,000,000. These expenses include per patient
charges by the participating trial sites for the 720 enrollees as well as
expenses for data gathering, analysis and audit, project management, lab
analysis and interim reporting. Northfield is also planning a modest employment
expansion in support of the trial.

For our 2002 fiscal year, research and development expenses totaled
$8,843,000, representing a decrease of $594,000, or 6.3%, from the 2001 fiscal
year. During fiscal 2002, Northfield closed all of its then current clinical
trials, except those relating to compassionate use. The elimination of these
expenses caused fiscal 2002 research and development expenses to be less than
those incurred in fiscal 2001.

General and administrative expenses for fiscal 2003 totaled $3,643,000
compared to expenses of $2,700,000 for fiscal 2002, representing an increase of
$943,000, or 34.9%. The increase was due primarily to costs associated with a
proxy contest in connection with our 2002 annual meeting of stockholders as well
as increased costs associated with our increased public relations focus.

17

General and administrative expenses for fiscal 2002 totaled $2,700,000
compared to expenses of $2,786,000 for fiscal 2001, representing a decrease of
$86,000, or 3.1%. The decrease was due primarily to reduced professional fees.

We anticipate that general and administrative expenses will likely increase
in fiscal 2004. The cost of directors and officers liability insurance has
increased by $140,000 and we expect to incur additional expenses in expanding
the organization in support of planning for the commercialization of PolyHeme.

INTEREST INCOME

Interest income in fiscal 2003 equaled $212,000, representing a decrease of
$614,000, or 74.4%, from the $826,000 in interest income reported in fiscal
2002. Interest income in fiscal 2002 equaled $826,000, representing a decrease
of $1,222,000, or 59.7%, from the $2,048,000 in interest income reported in
fiscal 2001. Significantly lower interest rates and lower available investment
balances accounted for the decrease. Significantly lower interest rates and
lower available investment balances account for the decrease. Currently
available short-term interest rates are yielding less than 1.00%.

Interest rates for short-term high grade investments are at near record
lows. Money market rates range from 0.4% to 0.9%, one-year certificates of
deposit are quoted at 1.1% and other investment types provide similar returns.
The combination of extremely low available rates and the accelerating use of
cash will combine to cause fiscal 2004 interest income to be significantly below
fiscal 2003 interest income.

NET LOSS

The net loss for our fiscal year ended May 31, 2003 was $12,250,000, or
$0.86 per share, compared to a net loss of $10,717,000, or $0.75 per share, for
the fiscal year ended May 31, 2002. The increase in the loss per share is
primarily the result of the reduction in interest income, expenses relating to
our 2002 annual meeting of stockholders and increased professional services.

The net loss for our fiscal year ended May 31, 2002 was $10,717,000, or
$.75 per share, compared to a net loss of $10,175,000, or $.71 per share, for
the fiscal year ended May 31, 2001. The increase in the loss per share is
primarily the result of the reduction in interest income. Fiscal 2002 operating
expenses were $679,000 less than those incurred in fiscal 2001, while interest
income in fiscal 2002 was $1,222,000 less than the interest income earned in
fiscal 2001.

LIQUIDITY AND CAPITAL RESOURCES

From Northfield's inception through May 31, 2003, we have used cash in
operating activities and for the purchase of property, plant, equipment and
engineering services in the amount of $110,466,000. For the fiscal years ended
May 31, 2003, 2002 and 2001, these cash expenditures totaled $11,538,000,
$10,310,000 and $9,813,000, respectively. The fiscal 2003 increase in cash
utilization is due primarily to lower interest income, expenses related to our
2002 annual meeting of stockholders, professional services for investor
relations and expense associated with our directors and officers liability
insurance.

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, 2003, we had cash
and marketable securities totaling $6,890,000. In July 2003, we sold 1,892,857
shares of our common stock in an offering transaction that generated gross
proceeds before expenses of $10,600,000. Net proceeds from this offering were
approximately $9.8 million.

We believe our existing capital resources will be adequate to satisfy our
operating capital requirements and maintain our existing manufacturing plant and
office facilities through March 1, 2004. In addition, our existing capital
resources are expected to be sufficient to support expenditures incurred in
connection with our planned Phase III clinical trials during this period.
Thereafter, we will require substantial additional funding to continue our
operations and complete our planned clinical trials.

18

We may issue additional equity or debt securities 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. We
are also pursuing potential sources of government funding. Any one or a
combination of these sources may be utilized to raise additional capital. We
believe our ability to raise additional capital or enter into a collaborative
arrangement with a strategic partner will depend primarily on the results of our
planned clinical trials as well as general conditions in the business and
financial markets. Our inability to raise sufficient levels of capital could
materially delay or prevent the commercialization of PolyHeme, even if it is
approved by FDA.

We cannot ensure that we will be able to achieve product revenues or
profitability on a sustained basis or at all. As a result, our independent
accountants have included an explanatory paragraph in their audit opinion based
on uncertainty regarding our ability to continue as a going concern.

Our capital requirements may vary materially from those now anticipated
because of the timing and 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.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported therein. We believe the
following critical accounting policy reflects our more significant judgments and
estimates used in the preparation of our consolidated financial statements.

NET DEFERRED TAX ASSETS VALUATION

We record our net deferred tax assets in the amount that we expect to
realize based on projected future taxable income. In assessing the
appropriateness of our valuation, assumptions and estimates are required, such
as Northfield's ability to generate future taxable income. In the event we were
to determine that it was more likely than not we would be able to realize our
deferred tax assets in the future in excess of their carrying value, an
adjustment to recognize the deferred tax assets would increase income in the
period such determination was made. As of May 31, 2003, we have recorded a 100%
valuation allowance against our net deferred tax assets.

CONTRACTUAL OBLIGATIONS

The following table reflects a summary of our contractual cash obligations
as of May 31, 2003:

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

(1) The lease for our Evanston headquarters is cancelable with six months notice
combined with a termination payment equal to six months base rent. At May
31, 2003, this penalty would have amounted to $148,500.

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations, (SFAS 143) which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and for the associated asset retirement

19

costs. SFAS 143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and/or normal use of the
assets. The enterprise also is to record a corresponding increase to the
carrying amount of the related long-lived assets (i.e., the associated asset
retirement costs) and to depreciate that cost over the life of the assets. The
liability is changed at the end of each period to reflect the passage of time
and changes in the estimated future cash flows underlying the initial fair value
measurement. Adoption of SFAS 143 is required for fiscal years beginning after
June 15, 2002. Upon adoption of this statement we expect to record an additional
liability of approximately $138,000, as the additional costs required to restore
our leased manufacturing facility back to its move in condition.

In December 2002, the FASB released SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB
Statement No. 123 (SFAS 148). This Statement amends SFAS 123, to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements. The provisions of
SFAS 148 related to transition from the intrinsic-value to the fair-value method
and annual disclosures are effective for fiscal years ending after December 15,
2002. The provisions of the Statement related to interim disclosures are
effective in financial reports containing financial statements for interim
periods beginning after December 31, 2002. The annual disclosures are included
in the notes to these financial statements.

On May 15, 2003 the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (SFAS
150). The provisions of the Statement will change the classification of certain
freestanding financial instruments that are now classified as equity. Generally,
the Statement is effective for financial instrument arrangements entered into or
modified after May 31, 2003. As of May 31, 2003, the adoption of SFAS 150 does
not have a material effect on the financial position, results of operations, or
cash flows of the Company. The Company is currently evaluating the impact of
SFAS 150 subsequent to May 31, 2003.

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 $6.9
million would decrease interest income by $69,000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See the Table of Contents to Financial Statements on page 22. See Note 10
to the Financial Statements on page 38 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 2003,
2002 or 2001 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 2003, pursuant to Regula-

20

tion 14A, a definitive proxy statement which will contain the information
required to be included in Items 10 through 13 of Form 10-K.

ITEM 14. CONTROLS AND PROCEDURES.

Based on their evaluation as of the end of the period covered by this
report, our Chief Executive Officer and Senior Vice President and Chief
Financial Officer have concluded that Northfield's disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. There
were no significant changes in our internal control over financial reporting
that occurred during our most recent fiscal quarter that has materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

During fiscal 2003, we paid KPMG LLP, our independent accountants, the
following fees:

Audit Fees. For professional services rendered for the audit of our fiscal
year 2003 consolidated financial statements and the review of the financial
statements included in our fiscal year 2003 Forms 10-Q, KPMG billed us a total
of $74,000.

Financial Information System Design and Implementation Fees. KPMG provided
no professional services to us of the nature described in Paragraph (c)(4)(ii)
of Rule 2-01 of Regulation S-X during the fiscal year ended May 31, 2003.

All Other Fees. In addition to the fees described above, KPMG billed us an
aggregate of $21,500 for all other services rendered during fiscal year 2003,
including $4,500 for audit related services concerning the filing of a
registration statement relating to an employee stock option plan and $17,000 for
tax compliance and consultation services.

The audit committee of our board of directors considered whether the
non-audit services rendered by KPMG were compatible with maintaining KPMG's
independence as auditors of our consolidated financial statements, and concluded
that they were.

PART IV

ITEM 16. 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 Table of Contents to Financial Statements on page
22.

(3) See Description of Exhibits on page 40.

b) None.

c) See Description of Exhibits on page 40.

d) None.

21

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

TABLE OF CONTENTS

22

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Northfield Laboratories Inc.:

We have audited the accompanying balance sheets of Northfield Laboratories
Inc. (a company in the development stage) as of May 31, 2003 and 2002, 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, 2003 and for the
cumulative period from June 19, 1985 (inception) through May 31, 2003. 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, 2003 and 2002, and the
results of its operations and its cash flows for each of the years in the
three-year period ended May 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that
Northfield Laboratories Inc. will continue as a going concern. As more fully
described in Note 1, the Company has experienced recurring operating losses and
has an accumulated deficit of $110,466,000 at May 31, 2003. In addition, the
Company expects to experience significant future losses and currently has
insufficient capital resources to fund its continuing operations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.

KPMG LLP

Chicago, Illinois
July 28, 2003

23

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

BALANCE SHEETS
MAY 31, 2003 AND 2002

See accompanying notes to financial statements

24

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

STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 2003, 2002, AND 2001
AND THE CUMULATIVE PERIOD FROM JUNE 19, 1985
(INCEPTION) THROUGH MAY 31, 2003

See accompanying notes to financial statements

25

NORTHFIELD LABORATORIES INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MAY 31, 2003, 2002, AND 2001 AND THE CUMULATIVE
PERIOD FROM JUNE 19, 1985 (INCEPTION) THROUGH MAY 31, 2003

See accompanying notes to financial statements

26

27

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

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MAY 31, 2003, 2002, AND 2001
AND THE CUMULATIVE PERIOD FROM JUNE 19, 1985 (INCEPTION) THROUGH MAY 31, 2003

See accompanying notes to financial statements

28

29

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

STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2003, 2002, AND 2001
AND THE CUMULATIVE PERIOD FROM JUNE 19, 1985
(INCEPTION) THROUGH MAY 31, 2003

See accompanying notes to financial statements

30

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

NOTES TO FINANCIAL STATEMENTS
MAY 31, 2003 AND 2002

(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.

GOING CONCERN UNCERTAINTY

The financial statements of the Company have been presented based on the
assumption that the Company will continue as a going concern. The Company,
however, may not be able to continue as going concern because it expects to
experience significant future losses and currently has insufficient capital
resources to fund its continuing operations. The Company believes its existing
capital resources will be adequate to satisfy its operating capital requirements
and maintain its existing manufacturing plant and office facilities through
March 1, 2004. In addition, the Company expects its existing capital resources
will be sufficient to support expenditures incurred in connection with the
Company's planned Phase III clinical trials during this period. Thereafter, the
Company will require substantial additional funding to continue its operations
and complete its planned clinical trials.

The Company raised $10,600,000 in gross proceeds through an offering of its
common stock in July 2003. See Note 11, Subsequent Events. The Company may issue
additional equity or debt securities or enter into collaborative arrangements
with strategic partners, which could provide the Company with additional funding
or absorb expenses the Company would otherwise be required to pay. The Company
is also pursuing potential sources of government funding. Any one or a
combination of these sources may be utilized to raise additional capital. The
Company believes its ability to raise additional capital or enter into a
collaborative arrangement with a strategic partner will depend primarily on the
results of its planned clinical trials as well as general conditions in the
business and financial markets. There can be no assurance that the Company will
be successful in raising additional capital. The Company's inability to raise
sufficient levels of capital could materially delay or prevent the
commercialization of its PolyHeme blood substitute product and could result in
the cessation of the Company's business. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

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.

31

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 2003 and 2002,
the Company capitalized no engineering costs. Capitalized engineering costs are
being amortized over a three-year period. For the years ended May 31, 2003, 2002
and 2001 amortization cost recorded was $119,649, $120,000 and $120,000,
respectively. As of May 31, 2003 all capitalized engineering costs have been
amortized. The net book value as of May 31, 2003 is zero.

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 dilutive effect of unexercised common
equivalent shares as long as their inclusion is not anti-dilutive. Because the
Company reported a net loss for the years ended May 31, 2003, 2002, and 2001 and
the cumulative period from June 19, 1985 (inception) through May 31, 2003, basic
and diluted per share amounts are the same.

The following potential common share instruments have been excluded from
the computation of per share amounts for all periods presented as their effect
on per share calculations is anti-dilutive. The share amounts represent an
average annual balance of all outstanding options.

Of the total options outstanding as of May 31, 2003, the Company has
331,000 options in-the-money and 628,000 options out-of-the-money that were
excluded from the EPS calculation.

EMPLOYEE STOCK COMPENSATION

The Company applies the intrinsic value method of APB Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations in
accounting for options granted to directors, officers, and key employees under
the plans. Accordingly, compensation cost is recorded on the date of grant only
if the current market price of the underlying stock exceeds the exercise price.
Had compensation cost for the Company's stock option plans been determined using
the fair value method prescribed by SFAS 123, Accounting for

32

Stock Based Compensation (SFAS 123) 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 SFAS 123,
the fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in fiscal 2003, 2002, and 2001:

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, 2003 and 2002.

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.

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations, (SFAS 143) which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and for the associated asset retirement
costs. SFAS 143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and/or normal use of the
assets. The enterprise also is to record a corresponding increase to the
carrying amount of the related long-lived assets (i.e., the associated asset
retirement costs) and to depreciate that cost over the life of the assets. The
liability is changed at the end of each period to reflect the passage of time
and changes in the estimated future cash flows underlying the initial fair value
measurement. Adoption of SFAS 143 is required for fiscal years beginning after
June 15, 2002. Upon adoption of this statement we expect to record an additional
liability of approximately $138,000, as the additional costs required to restore
our leased manufacturing facility back to its move in condition.

In December 2002, the FASB released SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB
Statement No. 123 (SFAS 148). This Statement amends SFAS 123, to provide
alternative methods of transition for a voluntary change to the fair value
method of
33

accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements. The provisions of SFAS 148
related to transition from the intrinsic-value to the fair-value method and
annual disclosures are effective for fiscal years ending after December 15,
2002. The provisions of the Statement related to interim disclosures are
effective in financial reports containing financial statements for interim
periods beginning after December 31, 2002. The annual disclosures are included
in the notes to these financial statements.

On May 15, 2003 the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (SFAS
150). The provisions of the Statement will change the classification of certain
freestanding financial instruments that are now classified as equity. Generally,
the Statement is effective for financial instrument arrangements entered into or
modified after May 31, 2003. As of May 31, 2003, the adoption of SFAS 150 does
not have a material effect on the financial position, results of operations, or
cash flows of the Company. The Company is currently evaluating the impact of
SFAS 150 subsequent to May 31, 2003.

(2) MARKETABLE SECURITIES

The fair market value of the Company's marketable securities was $1,992,860
at May 31, 2003, which included gross unrealized holding gains of $563. The fair
market value of the Company's marketable securities was $715,360 at May 31,
2002, which included gross unrealized holding losses of $4,640.

At May 31, 2003, 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, 2003 and 2002:

Depreciation and amortization expense related to property, plant and
equipment amounted to $856,199, $821,244, and $818,816, for the years ended May
31, 2003, 2002, and 2001, respectively.

(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

34

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.

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.

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.

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, respectively, for net proceeds of $227,455.

35

5) INCOME TAXES

As a result of losses incurred to date, the Company has not provided for
income taxes. As of May 31, 2003, the Company has net operating loss
carryforwards for income tax purposes of approximately $110,000,000, which are
available to offset future taxable income, if any, from 2004 to 2023. Deferred
tax assets primarily resulted from net operating loss carryforwards and
differences in the recognition of research and development and depreciation
expenses. Additionally, the Company has approximately $3,300,000 of research and
experimentation tax credits and investment tax credits available to reduce
future income taxes through 2023.

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, 2003 and 2002 are summarized as
follows:

The net change in the valuation allowance for the fiscal years ended May
31, during fiscal 2003, 2002 and 2001 was an increase of $4,800,000, $6,700,000,
and $2,800,000, 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, 2003, 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.

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, 2003 the Company granted 30,000 options to purchase shares of common stock
at $4.09 per share. These options expire in 2012 or ten years after the date of
grant. During the year ended May 31, 2002, the Company did not grant any options
to purchase shares of common stock.

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 years ended May 31, 2003 and May 31, 2002 the Company did not grant any
options from this plan.

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

36

shares of common stock are available under the 1999 Option Plan. During the year
ended May 31, 2003, the Company granted 265,000 options to purchase shares of
common stock between $3.62 and $7.14 per share. These options expire in 2012 and
2013, ten years after the date of the grant. During the year ended May 31, 2002,
the Company granted 54,500 options to purchase shares of common stock at $7.83
and $14.17 per share. These options expire in 2011 and 2012, ten years after the
date of grant.

With an effective date of January 1, 2003, the Company established New
Employee Stock Option Plan (the New Employee Plan). This plan provides for the
granting of stock options to the Company's new employees. Stock options to
purchase a total of 350,000 shares are available under the New Employee Plan.
During the year ended May 31, 2003, the Company granted 10,000 options to
purchase shares of common stock at $3.62 per share. These options expire in 2013
or ten years after the date.

Additional information on shares subject to options is as follows:

The following table summarizes information about stock options outstanding
at May 31, 2003:

(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.

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.

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.

37

(8) LEASES/COMMITMENTS

Rent expense amounted to $821,760, $835,661, and $809,721 for the years
ended May 31, 2003, 2002, and 2001, respectively.

The Company lease for its research and manufacturing facility expires
August 30, 2004 and includes the option to renew the lease for (2) successive
5-year terms. The lease is collateralized by a $49,200 security deposit as of
May 31, 2003.

The Company lease for its corporate facility expires February 14, 2006. The
Company has the option to cancel the lease upon giving written notice 6 months
prior to termination as well as paying a penalty equal to 6 months rent
calculated at the rate payable on the date of notice. As of May 31, 2003, this
penalty would have amounted to $148,500. The lease is secured by a security
deposit of $19,250 as of May 31, 2003.

At May 31, 2003, 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, 2003, 2002, and 2001 amounted to $145,307, $157,294 and $145,051,
respectively.

(10) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table shows our quarterly unaudited financial information for
the eight quarters ended May 31, 2003. 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.

38

(11) SUBSEQUENT EVENT

On July 28, 2003, the Company issued 1,892,857 shares of registered common
stock for gross proceeds of $10,600,000. The transaction includes a 60-day
option period for investors to purchase an additional 567,857 shares of common
stock at a per share price of $5.60. If the option is fully exercised this would
generate additional gross proceeds to the Company of $3,180,000. As part of the
transaction, the Company issued a warrant to the placement agent in the amount
of 3% of the shares issued. The warrant has a five-year life and is exercisable
anytime between the first and fifth anniversary of the transaction. The warrant
exercise price is $7.75 per share.

39

EXHIBITS

- -------------------------
* 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).

41

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 8,
2003.

NORTHFIELD LABORATORIES INC.

By: /s/ STEVEN A. GOULD, M.D.
------------------------------------
Steven A. Gould, M.D.
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 8, 2003.