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

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UNITED STATES
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 fiscal year ended May 31, 2004

[ ] 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). [X] Yes [ ] No

As of November 28, 2003, 16,171,067 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 28, 2003) held by non-affiliates of the Registrant was
$81,412,872 (14,060,945 shares at $5.79 per share).

As of July 31, 2004, there were 21,404,439 shares of the Registrant's
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for its 2004 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.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This document contains forward-looking statements concerning, among other
things, our future business plans and strategies and clinical and regulatory
developments affecting our PolyHeme(R) blood substitute product. These
forward-looking statements are identified by the use of such terms as "intends,"
"expects," "plans," "estimates," "anticipates," "should," "believes" and similar
terms. These forward-looking statements involve inherent risks and
uncertainties. Our actual results may therefore differ materially from those
predicted by the forward-looking statements because of various factors and
possible events, including those discussed below under "Risk Factors." These
forward-looking 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. We do
not undertake any obligation to update or publicly release any revisions to
forward-looking statements to reflect events, circumstances or changes in
expectations after the date such statements are made. All subsequent written and
oral forward-looking statements attributable to Northfield or any person acting
on our behalf are qualified by this cautionary statement.

PART I

ITEM 1. 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 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 well tolerated when infused in patients in clinical
trials in sufficient quantities for 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 are currently enrolling patients in a Pivotal Phase III Prehospital
Trial in which PolyHeme is being 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 begins at
the scene of the injury or in the ambulance and continues 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 address a critical, unmet medical need.

As of August 14, 2004, 12 clinical sites in the United States were
enrolling patients in our Pivotal Phase III Prehospital Trial. Each of these
sites is designated as a Level I trauma center because of its capacity to treat
the most severely injured trauma patients. We anticipate that a total of
approximately 25 or more clinical sites across the United States will eventually
participate in the trial. The trial has an expected enrollment of 720 patients.

As part of our trial protocol, an independent data monitoring committee, or
IDMC, consisting of independent medical and biostatistical experts is
responsible for periodically evaluating the safety data from the trial and
making recommendations relating to the continuation or modification of the trial
protocol to minimize any identified risks to patients. The protocol includes
four planned evaluations by the IDMC that occur after predefined numbers of
patients have been enrolled and monitored for a 30-day follow up period. The
IDMC will focus its initial review on mortality and serious adverse events and
will review all safety data as the trial continues. We will receive a
recommendation from the IDMC after each review, but we will not have access to
the trial data reviewed by the IDMC until the trial is completed.

In July 2004, the IDMC recommended that our Pivotal Phase III Prehospital
Trial continue without modification based on the committee's initial review of
blinded data on mortality and serious adverse events from the first predefined
evaluation of the patients enrolled in the trial.

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 in situations of
compassionate use in life-threatening situations. The observations in these
trials have indicated the potential clinical utility of PolyHeme in the
treatment of urgent blood loss and life-threatening hemoglobin levels. In a
trial of hospitalized trauma patients, an analysis of the data revealed that
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 for this type of product and represents the
greatest potential market opportunity. We believe we are the only company in our
field with an oxygen-carrying blood substitute that has been rapidly infused at
doses as high as 20 units (1,000 grams) or twice the blood volume of the average
adult.

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, Form 8-Ks and other
documents that we file with or furnish to the Securities and Exchange
Commission, or "SEC" as soon as reasonably practicable after filing with the
SEC. The information contained on our Web
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site, or on other Web sites linked to our Web site, is not a part of this
document. We have adopted a written code of business conduct and ethics that
applies to all Northfield directors, officers and employees. Our code of
business conduct and ethics is available on our Web site. In the event that we
make changes in, or provide waivers from, the provisions of our code of business
conduct and ethics that the SEC requires us to disclose, we intend to disclose
these events on our Web site to the extent permitted under the listing
requirements of the Nasdaq Stock Market.

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 are transfused in the United States each year, of which
approximately 8.4 million units are 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, chemical modification,
purification and formulation to produce PolyHeme. Hemoglobin is first extracted
from red blood cells and filtered to remove impurities. The 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 suggest the potential
life-sustaining capacity of PolyHeme when used as treatment for massive,
life-threatening blood loss in lieu of blood.

4

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 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 potential 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 are transfused in
the United States each year, of which approximately 8.4 million units are
administered to patients suffering the effects of acute blood loss. Patient
charges for the units of blood used in the United States each year 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.

We believe the most appropriate use for PolyHeme is in the treatment of
acute blood loss. The principal clinical settings in which patients experience
acute blood loss are unplanned blood loss in trauma, emergency surgery, and
other causes of urgent hemorrhage, and planned blood loss in elective surgery.
For trauma and emergency surgical procedures, the immediate availability and
universal compatibility of PolyHeme may provide significant advantages over
transfused blood by avoiding the delay and opportunities for error associated
with blood typing. In elective surgery, PolyHeme has the potential to increase
transfusion safety for patients and health care professionals. The initial
indication for use we are seeking for PolyHeme is for the treatment of urgent,
life-threatening blood loss in trauma and resultant surgical settings where
blood may not be immediately available. This indication has the potential to
improve survival and address a critical, unmet medical need.

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 eventually useful. We also believe PolyHeme may be used
by Emergency Medical Technicians in ambulances, medical helicopters and other
prehospital settings. In addition, the military has expressed a high level of
interest in oxygen-carrying products for the resuscitation of battlefield
casualties.

CLINICAL TRIALS

We are currently enrolling patients in a Pivotal Phase III Prehospital
Trial in which PolyHeme is being 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 begins at
the scene of the injury or in the ambulance and continues during transport and
the initial 12 hour post-injury period in the hospital.

5

Since blood is not presently carried in ambulances, the use of PolyHeme in this
setting has the potential to improve survival and address a critical, unmet
medical need.

As of August 14, 2004, 12 clinical sites in the United States were
enrolling patients in our Pivotal Phase III Prehospital Trial. Each of these
sites is designated as a Level I trauma center because of its capacity to treat
the most severely injured trauma patients. We anticipate that a total of
approximately 25 or more clinical sites across the United States will eventually
participate in the trial. The trial has an expected enrollment of 720 patients.

As part of our trial protocol, an independent data monitoring committee, or
IDMC, consisting of independent medical and biostatistical experts is
responsible for periodically evaluating the safety data from the trial and
making recommendations relating to the continuation or modification of the trial
protocol to minimize any identified risks to patients. The protocol includes
four planned evaluations by the IDMC that occur after predefined numbers of
patients have been enrolled and monitored for a 30-day follow up period. The
IDMC will focus its initial review on mortality and serious adverse events and
will review all safety data as the trial continues. We will receive a
recommendation from the IDMC after each review, but we will not have access to
the trial data reviewed by the IDMC until the trial is completed.

In July 2004, the IDMC recommended that our Pivotal Phase III Prehospital
Trial continue without modification based on the committee's initial review of
blinded data on mortality and serious adverse events from the first predefined
evaluation of the patients enrolled in the trial.

Our Pivotal Phase III Prehospital Trial is being conducted under federal
regulations that allow research to be conducted in certain emergent,
life-threatening situations using an exception from the requirement for informed
patient consent. Participation by each clinical trial site is overseen by a
local Institutional Review Board, or IRB. The IRB is an independent body
composed of medical, scientific and nonscientific members whose responsibility
is to ensure the protection of the rights, safety and well-being of patients
enrolled in clinical trials. Under the applicable federal regulations, an IRB
may give approval for patient enrollment in trials in emergency situations
without requiring individual informed consent provided specific criteria are
met. The patients must be in a life-threatening situation and the experimental
therapy being evaluated must offer patients the potential for direct clinical
benefit in the form of increased survival. Before enrollment can begin, the
regulations require public disclosure of information about the trial, including
the potential risks and expected benefits. Consultation must also occur with
representatives of the community where the study will be conducted and from
which the study population will be drawn. The process is individualized and must
be tailored to the specific community and patient population involved. Each of
the clinical sites participating in our current trial has completed the required
public disclosure and community consultation procedures and received local IRB
approval to enroll patients in accordance with the trial protocol.

We have reached agreement with FDA on Special Protocol Assessment, or SPA,
for our Pivotal Phase III Prehospital Trial. SPA is an agreement between FDA and
a trial sponsor confirming the primary endpoints for the trial protocol and the
broad concepts for clinical indications those endpoints would support in a
marketing application. FDA's response to our request for SPA also provided
comments and recommendations regarding the collection and analysis of the trial
data. We have implemented these steps in an effort to ensure that the results of
our trial will be appropriate to support a marketing application for product
approval.

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-

6

threatening levels. The anticipated survival rate at the life-threatening red
blood cell hemoglobin levels that occurred in these patients was less than 20%
based on the published literature. The observed survival rate in 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 to date.

We analyzed the data from our trauma trials and considered our regulatory
position based on our findings. We believe the results from these trials
indicate a 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. Based on the strength of
these data, 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 refusal to file
letter relating to our BLA. We subsequently had numerous meetings with FDA and
were successful in reaching consensus with FDA on our Phase III study with
PolyHeme.

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 in August 2001. We anticipate other potential trials in
elective surgery in the future.

COMPASSIONATE USE

We have enrolled patients on a case by case basis in situations of
compassionate use in life-threatening situations. We have provided PolyHeme as
treatment in situations of immunologic incompatibility with the available supply
of blood, or religious objection to donated blood. Each case was reviewed to be
certain that the use of PolyHeme might be beneficial in treating a patient who
would otherwise have a high risk of mortality.

MANUFACTURING AND MATERIAL SUPPLY

We use a proprietary process of separation, filtration, chemical
modification, purification and formulation 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 may also consider 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
7

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. This
quantity of blood would permit us to operate a manufacturing facility producing
approximately 75,000 units of PolyHeme per year. 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 presently intend to market
PolyHeme with our own sales force in the United States. We have retained a
consulting firm to evaluate the potential market and assist us in developing an
effective sales and marketing plan for PolyHeme. We may also consider entering
into collaborative relationships with strategic partners which could involve
arrangements relating to the sale and marketing of PolyHeme.

We have entered into license agreements with Pfizer Inc., formerly known as
Pharmacia Corporation, and Hemocare Ltd., an Israeli corporation, to develop,
manufacture and distribute PolyHeme in certain European, Middle Eastern and
African countries. The license agreements permit Pfizer 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 Pfizer an exclusive license to manufacture,
promote and sell PolyHeme in a territory encompassing the United Kingdom,
Germany, the Scandinavian countries and certain countries in the Middle East.
Under the terms of the license agreement, Pfizer has the right, upon
consultation with us, to promote and sell PolyHeme in the licensed territory
under its own trademark. The license agreement with Pfizer 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 Pfizer'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 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
8

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.

Sangart, Inc. has announced that it has received regulatory approval to
conduct a Phase II clinical trial in Sweden of a hemoglobin-based blood
substitute intended for use in elective and emergency orthopedic surgical
applications. Synthetic Blood International, Inc., which is developing a
perfluorocarbon-based blood substitute, has announced plans to begin Phase II
clinical trials of its product in surgical patients. Biopure Corporation, which
is developing a bovine-source blood substitute product, filed a BLA with FDA in
2002 relating to the use of its product in orthopedic surgical applications.
Biopure announced in December 2003 that FDA had raised a number of questions
regarding the safety and efficacy of its product and that it had been requested
to conduct additional animal studies to address FDA's concerns. Biopure also
announced recently that it was initiating a Phase II clinical trial of its
product in South Africa. Alliance Pharmaceutical Corp., Baxter International
Inc. and Hemosol Corporation have announced that they have suspended clinical
trials of their blood substitute products.

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.

GOVERNMENT REGULATION

The commercial 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 submission
will be accepted for filing or that FDA may not issue a refusal to file, or RTF.
If a 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 efficacy of the product in the setting of its intended use. The
results of preclinical and clinical testing are submitted to the FDA from time
to time throughout the trial process. In addition, before approval for the
commercial sale of a product can be obtained, results of the
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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, clinical trials or manufacturing data may be
requested during the FDA review process and may delay product approval. After
FDA approval for its initial indication(s), 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 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 and several pending U.S. patent
applications, relating to PolyHeme, its uses and certain of our manufacturing
processes. We have obtained counterpart patents and have additional patent
applications pending in Canada, Israel and various European Union countries. Our
United States patents have expiration dates that extend to 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 also
continue to assess our manufacturing processes for improvements and in
preparation for FDA's required pre-approval inspection.

In fiscal 2004, 2003 and 2002, our research and development expenses
totaled $10,777,000, $8,819,000 and $8,843,000, 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, 2004, we had 63 employees, of whom 55 were involved in
research and development and 8 were responsible for financial and other
administrative matters. We also had consulting arrangements with 19 individuals
as of that date. None of our employees are represented by labor unions, and we
are not aware of
10

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 COMPLETE OUR CURRENT CLINICAL TRIAL BEFORE WE MAY SELL
POLYHEME COMMERCIALLY AND WE MAY BE 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 currently
conducting a Pivotal Phase III Prehospital Trial in which PolyHeme is being 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 begins at the scene of the injury,continues during transport to
the hospital by ambulance and further in the hospital. This trial will 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 current clinical trial
successfully or that FDA will not require us to conduct additional clinical
trials of PolyHeme in the future. If FDA approval for the commercial sale of
PolyHeme is obtained, it may include significant limitations on the indicated
uses for which PolyHeme may be marketed. Our business, financial condition and
results of operations are critically dependent on receiving FDA approval of
PolyHeme. A significant delay in our clinical trial or a failure to achieve FDA
approval for 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 our clinical trial at any time if it is believed that the
subjects participating in the trial are being exposed to unacceptable health
risks.

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

Our research, development, testing, manufacturing, marketing and
distribution of PolyHeme are, and will continue to be, subject to extensive
regulation, monitoring and approval by 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 submit 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 profitably 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
11

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.

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

From Northfield's inception through May 31, 2004, we have incurred net
operating losses totaling $125,040,000. 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.

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.

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

12

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.

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 may 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.

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
13

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.

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.
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.

14

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.

THE MARKET PRICE OF OUR COMMON STOCK HAS EXPERIENCED SIGNIFICANT VOLATILITY AND
COULD FLUCTUATE IN THE FUTURE.

The market price of our common stock has fluctuated significantly in
response to a number of factors, many are which are beyond our control,
including:

- regulatory developments relating to our PolyHeme blood substitute
product;

- announcements by us relating to the results of our clinical trials of
PolyHeme;

- developments relating to our efforts to obtain additional financing to
fund our operations;

- announcements by us regarding transactions with potential strategic
partners;

- announcements relating to blood substitute products being developed by
our competitors;

- changes in industry trends or conditions;

- our issuance of additional debt or equity securities; and

- sales of significant amounts of our common stock or other securities in
the market.

In addition, the stock market in general, and the Nasdaq National Market
and the biotechnology industry market in particular, have experienced
significant price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of listed companies. These broad
market and industry factors may seriously harm the market price of our common
stock, regardless of our operating performance. In the past, securities class
action litigation has often been instituted following periods of volatility in
the market price of a company's securities. A securities class action suit
against us could result in substantial costs, potential liabilities and the
diversion of our management's attention and resources.

ANTI-TAKEOVER PROVISIONS CONTAINED IN OUR CHARTER AND BYLAWS COULD DISCOURAGE
POTENTIAL TAKEOVER ATTEMPTS.

Our certificate of incorporation contains a "fair price" provision which
requires approval of the holders of at least 80% of our voting stock, excluding
shares held by certain interested stockholders and their affiliates, as a
condition to mergers or certain other business combinations with, or proposed
by, any holder of 15% or more of our voting stock, except in cases where
approval of our disinterested directors is obtained or certain minimum price
criteria and other procedural requirements are satisfied. In addition, our board
of directors has the authority, without further action by our stockholders, to
fix the rights and preferences and issue shares of preferred stock. These
provisions, and other provisions of our certificate of incorporation and bylaws
and Delaware law, may have the effect of deterring hostile takeovers or delaying
or preventing changes in our

15

control or management, including transactions in which stockholders might
otherwise receive a premium for their shares over the then prevailing market
prices.

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 2009 and February 2006, respectively. We have the option to extend the
existing lease for three additional five-year periods for the manufacturing
facility. Rent expense for our 2004 fiscal year was $915,752. 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, 2004, we were not a party to any material pending legal
proceedings.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.

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.

No purchases of our equity securities were made by or on behalf of
Northfield or any affiliated purchaser during our fiscal year ended May 31,
2004.

HOLDERS OF RECORD

As of May 31, 2004, there were approximately 500 holders of record and
approximately 18,000 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, 2004 and for the cumulative
period from June 19, 1985 (inception) through May 31, 2004 were derived from
Northfield's financial statements, which financial statements have been audited
by KPMG LLP, independent registered public accounting firm.

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

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

17

(2) Excludes 1,203,500 shares reserved for issuance upon the exercise of stock
options, 25,500 shares reserved for issuance for restricted share grants
outstanding, and 212,392 shares reserved for issuance for stock warrants as
of May 31, 2004. Additional stock options for a total of 1,024,665 were
available for grant as of May 31, 2004 under our employees stock option
plans and stock option plan for outside directors.

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, 2004, we have incurred operating losses totaling
$125,040,000.

We will be required to complete our Pivotal Phase III Prehospital Trial 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 included in this report and in Note 11 of the 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, 2004, 2003 or
2002. From Northfield's inception through May 31, 2004, 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, 2004, 2003 and 2002
totaled $14,630,000, $12,462,000 and $11,543,000, respectively. Measured on a
percentage basis, fiscal 2004 operating expenses exceeded fiscal 2003 expenses
by 17.4%, while fiscal 2003 operating expenses exceeded fiscal 2002 expenses by
8.0%.

During fiscal 2004, research and development expenses totaled $10,777,000,
an increase of $1,958,000, or 22.2%, from fiscal 2003 expenses of $8,819,000.
During fiscal 2004, we began enrolling patients in our Pivotal Phase III
Prehospital Trial. In December 2003, the first trial site was initiated and by
May 31, the number of sites enrolling patients had grown to 11. The expense of
site training, initiation and monitoring along with patient study costs are the
sources of the increased costs.

We anticipate and are planning for significant increases in research and
development spending in fiscal 2005. Available funding is being used to add new
clinical sites and expand patient enrollment. Support for this effort will
include increased patient monitoring, expanded laboratory analyses,
sophisticated data analysis and the manufacture of additional units of PolyHeme.
We are also expending considerable effort and resources in reviewing, and
modifying when necessary, all current plant operations in anticipation of a
required FDA pre-approval inspection.

18

For our 2003 fiscal year, research and development expenses totaled
$8,819,000, representing a decrease of $24,000, or 0.3%, from the prior fiscal
year. During 2003, lower clinical trials expense was partially offset by
increased manufacturing expenses as we stocked PolyHeme for our current clinical
trial.

General and administrative expenses for the fiscal year ended May 31, 2004,
totaled $3,854,000, an increase of $211,000, or 5.8%, from the expenses incurred
in the comparable prior year period. During our 2004 fiscal year, we pursued
significant administrative initiatives to expand and further protect our
intellectual property portfolio and to conduct market research on the commercial
potential of PolyHeme. Expenses in connection with these initiatives accounted
for all of the increases in fiscal 2004. While we have begun the process of
planning for commercialization of PolyHeme, our priority and focus remain
centered on successfully executing our Pivotal Phase III Prehospital Trial.

General and administrative expenses for the year ended May 31, 2003,
totaled $3,643,000 compared to expenses of $2,700,000 for the year ended May 31,
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 costs associated with our increased
public relations focus.

We anticipate modest increases in general and administrative expenses in
fiscal 2005. Business taxes based on the capitalization of the Company will
increase by more than $100,000 in fiscal 2005 as a result of our successful
fundraising efforts in fiscal 2004. We also anticipate increased expenses
related to the development of a new Web site and expansion of business
development activities. We anticipate no other significant administrative
initiatives in fiscal 2005.

INTEREST INCOME

Interest income in fiscal 2004 equaled $131,000, representing a decrease of
$81,000, or 38.2%, from the $212,000 in interest income reported in fiscal 2003.
Lower available investment balances and lower interest rates caused the
decrease. Interest income in fiscal 2003 equaled $212,000, representing a
decrease of $614,000, or 74.3%, from the $826,000 in interest income reported in
fiscal 2002. Significantly lower interest rates and lower available investment
balances accounted for the decrease.

Following our successful fundraising efforts in fiscal 2004, we now
anticipate interest income will increase substantially in fiscal 2005. Interest
rates, however, for short-term high-grade investments remain at historically low
levels. Current money market rates range between .4% and 1.0% and one-year
investments yield in the 2% range. We remain invested at the short-end of the
yield curve with modest expectations for yield improvement over the course of
the year. A 1% rate increase yields $10,000 in additional interest income on a
$1,000,000 investment over a 12-month period.

NET LOSS

The net loss for our fiscal year ended May 31, 2004 was $14,574,000, or
$0.86 per share, compared to a net loss of $12,250,000, or $0.86 per share, for
the fiscal year ended May 31, 2003. The increased net loss was primarily due to
higher research and development costs associated with our Pivotal Phase III
Prehospital Trial. The net loss per share was the same for both fiscal years
because the average number of shares outstanding in the current fiscal year
increased as a result of our recent fundraising efforts and diluted the
increased dollar loss in the current fiscal year.

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 for
fiscal 2003 was primarily the result of the reduction in interest income,
expenses relating to our 2002 annual meeting of stockholders and increased
professional services.

19

LIQUIDITY AND CAPITAL RESOURCES

From Northfield's inception through May 31, 2004, we have used cash in
operating activities and for the purchase of property, plant, equipment and
engineering services in the amount of $122,395,000. For the fiscal years ended
May 31, 2004, 2003 and 2002, these cash expenditures totaled $13,259,000,
$11,538,000 and $10,310,000, respectively. The fiscal 2004 increase in cash
utilization is due primarily to expenses related to our Pivotal Phase III
Prehospital Trial.

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, 2004, we had cash
and marketable securities totaling $42,487,000.

We believe our existing capital resources will be adequate to satisfy our
operating capital requirements, including the expenses we expect will be
incurred in connection with our Pivotal Phase III Prehospital Trial and the
operation of our existing manufacturing plant and office facilities, for
approximately the next 18 to 24 months. Thereafter, we will require substantial
additional funding to continue our operations.

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
clinical trial, 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.

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 AND ESTIMATES

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 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, 2004, we have recorded a 100%
percent valuation allowance against our net deferred tax assets.

20

CONTRACTUAL OBLIGATIONS

The following table reflects a summary of our contractual cash obligations
as of May 31, 2004:

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

(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, 2004, this penalty would have amounted to $152,625.

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

We currently do not have any foreign currency exchange risk. We may invest
our cash and cash equivalents in government agency securities, corporate debt,
certificates of deposit and money market funds. These investments are subject to
interest rate risk. However, due to the nature of our short-term investments, we
believe that the financial market risk exposure is not material. A one
percentage point decrease on our cash and marketable securities balance of $42.5
million at May 31, 2004, would decrease annual interest income by $425,000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See the Table of Contents to Financial Statements on page 23. See Note 11
to the Financial Statements on page 41 for Supplementary Quarterly Data. These
Financial Statements are incorporated by reference into this document.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 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 2004,
2003 or 2002 fiscal years.

ITEM 9A. 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.

PART III

ITEMS 10 THROUGH 14.

The information specified in Items 10 through 14 of Form 10-K has been
omitted in accordance with instructions to Form 10-K. We expect to file with the
SEC in August 2004, pursuant to Regulation 14A, a definitive proxy statement
which will contain the information required to be included in Items 10 through
14 of Form 10-K.

21

PART IV

ITEM 15. 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
23.

(3) See Description of Exhibits on page 42.

(b) On May 14, 2004, the Company filed a form 8-K dated May 12, 2004
relating to a registered direct offering of its common stock (Item
5,7).

(c) See Description of Exhibits on page 42.

(d) None.

22

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

TABLE OF CONTENTS

23

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2004 and 2003, 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, 2004 and for the
cumulative period from June 19, 1985 (inception) through May 31, 2004. 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 the standards of the Public
Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the
results of its operations and its cash flows for each of the years in the
three-year period ended May 31, 2004 and for the cumulative period from June 19,
1985 (inception) through May 31, 2004, in conformity with U.S. generally
accepted accounting principles.

As discussed in Note 4 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations," as of June 1, 2003.

KPMG LLP

Chicago, Illinois
July 12, 2004

24

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

BALANCE SHEETS
MAY 31, 2004 AND 2003

See accompanying notes to financial statements.

25

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

STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 2004, 2003, AND 2002
AND THE CUMULATIVE PERIOD FROM JUNE 19, 1985
(INCEPTION) THROUGH MAY 31, 2004

See accompanying notes to financial statements.

26

(This page intentionally left blank)

27

NORTHFIELD LABORATORIES INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MAY 31, 2004, 2003 AND 2002 AND THE CUMULATIVE PERIOD
FROM JUNE 19, 1985 (INCEPTION) THROUGH MAY 31, 2004

See accompanying notes to financial statements.
28

29

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

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MAY 31, 2004, 2003, AND 2002 AND THE CUMULATIVE PERIOD
FROM JUNE 19, 1985 (INCEPTION) THROUGH MAY 31, 2004

See accompanying notes to financial statements.

30

31

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

STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2004, 2003, AND 2002
AND THE CUMULATIVE PERIOD FROM JUNE 19, 1985
(INCEPTION) THROUGH MAY 31, 2004

See accompanying notes to financial statements.

32

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

NOTES TO FINANCIAL STATEMENTS
MAY 31, 2004 AND 2003

(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.

During the year ended May 31, 2004, Northfield raised $52.8 million in
gross proceeds through common stock offerings. The Company ended the fiscal year
with cash and marketable securities of $42.5 million. Existing capital resources
will be adequate to satisfy operating capital requirements, including the
expenditures the Company expects will be incurred in connection with its Phase
III clinical trial for a period of greater than one year. Thereafter, the
Company will require substantial additional funding to continue its operations.

MARKETABLE SECURITIES

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

PROPERTY, PLANT, AND EQUIPMENT

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

CAPITALIZED ENGINEERING COSTS

Capitalized engineering costs include design and other initial engineering
studies relating to a commercial scale facility. During fiscal 2004 and 2003,
the Company capitalized no engineering costs. Capitalized engineering costs are
being amortized over a three-year period. For the years ended May 31, 2004, 2003
and 2002 amortization cost recorded was $0, $119,649, and $120,000,
respectively. As of May 31, 2003 all capitalized engineering costs have been
amortized.

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

33

shares as long as their inclusion is not anti-dilutive. Because the Company
reported a net loss for the years ended May 31, 2004, 2003, and 2002 and the
cumulative period from June 19, 1985 (inception) through May 31, 2004, 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 and warrants.

Of the total options and warrants outstanding as of May 31, 2004, the
Company has 1,048,500 options in-the-money, 155,000 options out-of-the-money,
and 212,392 warrants that were in-the-money, that were excluded from the net
loss per share 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 No. 123, "Accounting for 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 2004, 2003, and 2002:

34

FINANCIAL INSTRUMENTS

The fair market values of financial instruments, which consist of
marketable securities (note 2), were not materially different from their
carrying values at May 31, 2004 and 2003.

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.

(2) MARKETABLE SECURITIES

The fair market value of the Company's marketable securities was $3,441,669
at May 31, 2004, which included gross unrealized holding losses of $2,156. 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.

At May 31, 2004, the Company held only certificates of deposit. All of
these 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, 2004 and 2003:

Depreciation and amortization expense related to property, plant and
equipment amounted to $682,992, $856,199, and $821,244, for the years ended May
31, 2004, 2003, and 2002, respectively.

(4) ASSET RETIREMENT OBLIGATIONS

The Company adopted Statement of Financial Accounting Standards, SFAS No.
143, "Accounting for Asset Retirement Obligations" as of June 1, 2003. The
cumulative effect of the change in accounting principle upon implementation was
to recognize a net asset of $17,800, an increase in liabilities of $92,721 and
an increase in net loss of $74,921, or $0.01 per share.

The obligation relates to the restoration of a leased manufacturing
facility to its original condition. A liability of $100,000 had been recorded in
a prior period.

The Company's asset retirement obligations are included in other
liabilities.

35

The balances and changes thereto are summarized below:

If the change in accounting had been applied retroactively, the Company's
pro forma net loss for the years ended May 31, 2004, 2003 and 2002 would have
been $14,498,877, $12,268,906 and $10,734,807, respectively with no impact on
loss per share for any of the periods. For the cumulative period from June 19,
1985 (inception) through May 31, 2004 the pro forma net loss would have been
$125,134,669 with a $0.01 increase in loss per share.

(5) SHAREHOLDERS' EQUITY

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

On June 7, 1988, the Company issued 413,020 additional shares of common
stock for net proceeds of $9,754,000. In conjunction with this transaction, all
outstanding shares of Series A and Series B convertible preferred stock were
converted to common stock and the Series B warrants were converted to common
stock warrants (note 8). 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.

36

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.

On July 28, 2003, the Company issued 1,892,857 additional shares of common
stock for net proceeds of $9,690,771.

On October 30, 2003, the Company issued 12,335 additional shares of common
stock to directors in the form of stock grants.

On January 16, 2004, the Company issued 25,500 additional restricted shares
of common stock to officers in the form of stock grants.

On January 29, 2004, the Company issued 2,585,965 additional shares of
common stock for net proceeds of $13,872,493.

On February 18, 2004, the Company issued 237,008 additional shares of
common stock for net proceeds of $1,258,223.

On April 15, 2004, the Company issued 409,483 additional shares of common
stock for net proceeds of $2,182,759.

On May 18, 2004, the Company issued 1,954,416 additional shares of common
stock for net proceeds of $21,736,160.

On May 26, 2004, the Company issued 15,000 additional shares of common
stock upon the exercise of a stock option for cash at $6.38 per share for net
proceeds of $95,700.

(6) INCOME TAXES

As a result of losses incurred to date, the Company has not provided for
income taxes. As of May 31, 2004, the Company has net operating loss
carryforwards for income tax purposes of approximately $122,000,000, which are
available to offset future taxable income, if any, from 2005 to 2024. 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 $3,600,000 of research and
experimentation tax credits and investment tax credits available to reduce
future income taxes through 2024.

37

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, 2004 and 2003 are summarized as
follows:

The net change in the valuation allowance for the fiscal years ended May
31, during fiscal 2004, 2003 and 2002 was an increase of $5,600,000, $4,800,000,
and $6,700,000, respectively.

(7) 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, 2004, options to purchase a total of
6,000 shares of the Company's common stock at $6.38 per share were outstanding
under the Employee Stock Option Plan. These options expire in 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, 2004 the Company did not grant any options to purchase shares of common
stock. 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, 2004, 2003 and 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 shares of common stock are available under the 1999 Option Plan. During
the year ended May 31, 2004, the Company granted 23,000 options to purchase
shares of common stock at $7.13 per share. These options expire in 2013, ten
years after the date of grant. 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 date of grant.

With an effective date of January 1, 2003, the Company established the New
Employee Stock Option Plan (the "New Employee Plan"). This plan provides for the
granting of stock options to the Company's new

38

employees. Stock options to purchase a total of 350,000 shares are available
under the New Employee Plan. During the year ended May 31, 2004, the Company
granted 75,000 options to purchase shares of common stock at prices of $7.43 and
$7.57. These options expire in 2013 or ten years after date of grant. 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 of grant.

With an effective date of September 17, 2003, the Company established 2003
Equity Compensation Plan. This plan provides for the granting of stock, stock
options and various other types of equity compensation to the Company's
employees, non-employee directors and consultants. Stock options to purchase a
total of 750,000 shares are available under the 2003 Equity Compensation Plan.
During the year ended May 31, 2004, the Company granted 261,500 options to
purchase shares of common stock at prices between $5.94 and $15.15. These
options expire in 2013 and 2014 or ten years after date of grant. During the
year ended May 31, 2004, the Company granted and issued 12,335 common shares to
directors and the Company granted 25,500 restricted common shares to employees.
These shares have a two-year vesting period. Restricted stock grants in January
2004 totaled 25,500 shares. At May 31, 2004, the amount of related deferred
compensation reflected in shareholders' equity was $155,620. The amortization of
deferred compensation for the year ended May 31, 2004, was $35,630.

Additional information on shares subject to options is as follows:

The following table summarizes information about stock options outstanding
at May 31, 2004:

(8) 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.

39

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.

In connection with a share offering dated July 28, 2003, the Company issued
a warrant to purchase 56,786 shares of common stock at $7.75 per share. The
warrant becomes exercisable on July 28, 2004 and expires on July 29, 2008. The
Black-Scholes fair value of this warrant is $282,794. The assumptions used to
calculate the Black-Scholes value were as follows: the risk-free interest rate
was 3.1%, the expected life was five years and the expected volatility was
82.9%.

In connection with a share offering dated January 29, 2004, the Company
issued a warrant to purchase 96,974 shares of common stock at $6.88 per share.
The warrant becomes exercisable on January 29, 2005 and expires on January 30,
2009. The Black-Scholes fair value of this warrant is $414,079. The assumptions
used to calculate the Black-Scholes value were as follows: the risk-free
interest rate was 3.2%, the expected life was five years and the expected
volatility was 74.4%.

In connection with a share offering dated May 18, 2004, the Company issued
a warrant to purchase 58,632 shares of common stock at $13.73 per share. The
warrant becomes exercisable on May 18, 2005 and expires on May 17, 2009. The
Black-Scholes fair value of this warrant is $484,887. The assumptions used to
calculate the Black-Scholes value were as follows: the risk-free interest rate
was 4.4%, the expected life was five years and the expected volatility was
77.8%.

(9) LEASES/COMMITMENTS

Rent expense amounted to $915,752, $821,760, and $835,661 for the years
ended May 31, 2004, 2003, and 2002, respectively.

The Company lease for its research and manufacturing facility expires
August 30, 2009 and includes the option to renew the lease for three successive
five-year terms. The lease is collateralized by a $49,200 security deposit as of
May 31, 2004.

The Company lease for its corporate facility expires February 14, 2006. The
Company has the option to cancel the lease upon giving written notice six months
prior to termination as well as paying a penalty equal to six months rent
calculated at the rate payable on the date of notice. As of May 31, 2004, this
penalty would have amounted to $152,625. The lease is secured by a security
deposit of $19,250 as of May 31, 2004.

At May 31, 2004, future minimum lease payments under the operating leases
are as follows:

(10) 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, 2004, 2003, and 2002 amounted to $169,758, $145,307 and $157,294,
respectively.

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(11) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table shows our quarterly unaudited financial information for
the eight quarters ended May 31, 2004. We have prepared this information on the
same basis as the annual information presented in other sections of this report.
In management's opinion this information reflects fairly, in all material
respects, the results of its operations. You should not rely on the operating
results for any quarter to predict the results for any subsequent period or for
the entire fiscal year. You should be aware of possible variances in our future
quarterly results. See "Risk Factors" in the body of this document.

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EXHIBITS

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

43

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this August 13,
2004.

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 13, 2004.