---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---

FORM 10-Q

(Mark One)

|x  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934 
|-- | ------------------------------------------------------------------------------------------
|   |                                                                                           
|   | For the quarterly period ended March 31, 2004.                                            
|   |                                                                                           
|OR
|   |                                                                                           
|o  | 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:  0-27718

|NEOSE TECHNOLOGIES, INC.                                           
|-------------------------------------------------------------------
|                                                                   
|(Exact name of registrant
as specified in its charter)             
|                                                                   
|Delaware                                                           
|                                                                   
|(State
  or other jurisdiction of 
  incorporation or organization)
|                                                                   
|102
  Witmer Road                                                  
|Horsham,
  Pennsylvania                                            
|                                                                   
|(Address
  of principal executive offices)                         
|                                                                   
|(215)
  315-9000                                                   
|                                                                   
|(Registrants
  telephone number, including area code)             

Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yesx
No
o

Indicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).

Yes
xNoo

Indicate
the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date: 
19,948.921 shares of common stock, $.01 par value, were outstanding as
of April 20, 2004.

---

---

NEOSE TECHNOLOGIES, INC.
(a development-stage company)

INDEX

|           |                                                                                                                                           | Page
|---------- | ----------------------------------------------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                                                           |     
|           |                                                                                                                                           |     
|PART I.    | FINANCIAL INFORMATION:                                                                                                                    |     
|           |                                                                                                                                           |     
|Item 1.    | Financial Statements (unaudited)                                                                                                          |     
|           |                                                                                                                                           |     
|           | Balance Sheets as of December 31, 2003 and March 31,
  2004                                                                               | 3   
|           |                                                                                                                                           |     
|           | Statements of Operations for the three months ended
  March 31, 2003 and 2004, and for the period from inception through March 31,
  2004 | 4   
|           |                                                                                                                                           |     
|           | Statements of Cash Flows for the three months ended
  March 31, 2003 and 2004, and for the period from inception through March 31,
  2004 | 5   
|           |                                                                                                                                           |     
|           | Notes to Financial Statements                                                                                                             | 6   
|           |                                                                                                                                           |     
|Item 2.    | Managements Discussion and Analysis of Financial
  Condition and Results of Operations                                                   | 10  
|           |                                                                                                                                           |     
|Item 3.    | Quantitative and Qualitative Disclosure About Market
  Risk                                                                               | 20  
|           |                                                                                                                                           |     
|Item 4.    | Controls and Procedures                                                                                                                   | 21  
|           |                                                                                                                                           |     
|PART II.   | OTHER INFORMATION:                                                                                                                        |     
|           |                                                                                                                                           |     
|Item 6.    | Exhibits and Reports on Form 8-K                                                                                                          | 21  
|           |                                                                                                                                           |     
|SIGNATURES |                                                                                                                                           | 23  
|           |                                                                                                                                           |     

2

---

---

PART I.     FINANCIAL
INFORMATION

Item
1.        Financial Statements

NEOSE TECHNOLOGIES, INC.(a development-stage
company)

BALANCE SHEETS(unaudited)
(in thousands, except per share amounts)

|                                                                                                                        |  | December
  31, 2003 |   | March
  31, 2004 |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------- | - | ---------------- | -
|                                                                                                                        |  |                     |   |                  |  
|Assets                                                                                                                  |  |                     |   |                  |  
|Current assets:                                                                                                         |  |                     |   |                  |  
|Cash and cash
  equivalents                                                                                             |  |                     | $ | 48,101           |  
|Marketable securities                                                                                                   |  |                     |   | 4,959            |  
|Restricted funds                                                                                                        |  |                     |   | 901              |  
|Prepaid expenses and
  other current assets                                                                             |  |                     |   | 917              |  
|                                                                                                                        |  |                     |   |                  |  
|Total
  current assets                                                                                                  |  |                     |   | 54,878           |  
|Property and
  equipment, net                                                                                           |  |                     |   | 37,192           |  
|Acquired intellectual
  property, net                                                                                   |  |                     |   | 1,910            |  
|Other assets                                                                                                            |  |                     |   | 865              |  
|                                                                                                                        |  |                     |   |                  |  
|Total assets                                                                                                            |  |                     | $ | 94,845           |  
|                                                                                                                        |  |                     |   |                  |  
|                                                                                                                        |  |                     |   |                  |  
|Liabilities
  and Stockholders Equity                                                                                  |  |                     |   |                  |  
|Current liabilities:                                                                                                    |  |                     |   |                  |  
|Current portion of
  long-term debt and capital lease obligations                                                       |  |                     | $ | 2,231            |  
|Accounts payable                                                                                                        |  |                     |   | 2,342            |  
|Accrued compensation                                                                                                    |  |                     |   | 2,510            |  
|Accrued expenses                                                                                                        |  |                     |   | 2,433            |  
|Deferred revenue                                                                                                        |  |                     |   | 4,333            |  
|                                                                                                                        |  |                     |   |                  |  
|Total
  current liabilities                                                                                             |  |                     |   | 13,849           |  
|Long-term debt and capital lease obligations                                                                            |  |                     |   | 8,370            |  
|Other liabilities                                                                                                       |  |                     |   | 413              |  
|                                                                                                                        |  |                     |   |                  |  
|Total
  liabilities                                                                                                     |  |                     |   | 22,632           |  
|                                                                                                                        |  |                     |   |                  |  
|Stockholders equity:                                                                                                   |  |                     |   |                  |  
|Preferred stock, $.01
  par value, 5,000 shares
            authorized, none
  issued                                   |  |                     |   | -                |  
|Common stock, $.01 par
  value, 30,000 shares
            authorized;
  19,935 and 19,949 shares issued and outstanding |  |                     |   | 199              |  
|Additional paid-in
  capital                                                                                            |  |                     |   | 217,849          |  
|Deferred compensation                                                                                                   |  |                     |   | (96              | )
|Deficit accumulated
  during the development-stage                                                                      |  |                     |   | (145,739         | )
|                                                                                                                        |  |                     |   |                  |  
|Total
  stockholders equity                                                                                            |  |                     |   | 72,213           |  
|                                                                                                                        |  |                     |   |                  |  
|Total liabilities and stockholders equity                                                                              |  |                     | $ | 94,845           |  
|                                                                                                                        |  |                     |   |                  |  

The accompanying notes are an integral part of these
financial statements.

3

---

---

NEOSE
TECHNOLOGIES, INC.(a development-stage company)

STATEMENTS
OF OPERATIONS(unaudited)
(in thousands, except per share amounts)

|                                                                                                  |  | Three
  months    |        | Period
  from        |  
|------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | -------------------- | -
|                                                                                                  |  | ended
  March 31, |        | inception            |  
|                                                                                                  |  |                   |        | (January
  17, 1989) |  
|                                                                                                  |  | 2003              |        | 2004                 |  
|                                                                                                  |  |                   |        |                      |  
|                                                                                                  |  |                   |        |                      |  
|Revenue from collaborative agreements                                                             |  | $                 | 70     |                      | $
|                                                                                                  |  |                   |        |                      |  
|Operating expenses:                                                                               |  |                   |        |                      |  
|Research and development                                                                          |  |                   | 5,619  |                      |  
|Marketing, general and
  administrative                                                           |  |                   | 3,005  |                      |  
|                                                                                                  |  |                   |        |                      |  
|Total
  operating expenses                                                                        |  |                   | 8,624  |                      |  
|                                                                                                  |  |                   |        |                      |  
|Operating loss                                                                                    |  |                   | (8,554 | )                    |  
|Other income                                                                                      |  |                   | -      |                      |  
|Impairment of equity securties                                                                    |  |                   | -      |                      |  
|Interest income                                                                                   |  |                   | 170    |                      |  
|Interest expense                                                                                  |  |                   | (37    | )                    |  
|                                                                                                  |  |                   |        |                      |  
|Net loss                                                                                          |  | $                 | (8,421 | )                    | $
|                                                                                                  |  |                   |        |                      |  
|Basic and diluted net loss per share                                                              |  | $                 | (0.53  | )                    | $
|                                                                                                  |  |                   |        |                      |  
|Weighted-average shares outstanding used in
       computing basic and diluted net loss per share |  |                   | 15,801 |                      |  
|                                                                                                  |  |                   |        |                      |  

The accompanying notes are an integral part of these
financial statements.

4

---

---

NEOSE TECHNOLOGIES, INC.(a development-stage
company)STATEMENTS OF CASH FLOWS(unaudited)
(in thousands)

|                                                                                        |  | Three months ended |         | Period from        |  
|--------------------------------------------------------------------------------------- |  | ------------------ | ------- | ------------------ | -
|                                                                                        |  | March 31,          |         | inception          |  
|                                                                                        |  |                    |         | (January 17, 1989) |  
|                                                                                        |  | 2003               |         | 2004               |  
|                                                                                        |  |                    |         |                    |  
|Cash flows from operating activities:                                                   |  |                    |         |                    |  
|Net loss                                                                                |  | $                  | (8,421  | )                  | $
|Adjustments to
  reconcile net loss to cash used in
            operating
  activities: |  |                    |         |                    |  
|Depreciation
  and amortization                                                         |  |                    | 1,048   |                    |  
|Loss
  on disposition of property and equipment                                         |  |                    |         |                    |  
|Non-cash
  compensation                                                                 |  |                    | -       |                    |  
|Common
  stock issued for non-cash and other charges                                    |  |                    | -       |                    |  
|Changes
  in operating assets and liabilities:                                          |  |                    |         |                    |  
|Prepaid
  expenses and other current and non-current assets                             |  |                    | (888    | )                  |  
|Accounts
  payable                                                                      |  |                    | (256    | )                  |  
|Accrued
  compensation                                                                  |  |                    | (612    | )                  |  
|Accrued
  expenses                                                                      |  |                    | (249    | )                  |  
|Deferred
  revenue                                                                      |  |                    | -       |                    |  
|Other
  liabilities                                                                     |  |                    | 2       |                    |  
|                                                                                        |  |                    |         |                    |  
|Net
  cash used in operating activities                                                 |  |                    | (9,376  | )                  |  
|                                                                                        |  |                    |         |                    |  
|Cash flows from investing activities:                                                   |  |                    |         |                    |  
|Purchases of property
  and equipment                                                   |  |                    | (353    | )                  |  
|Proceeds from
  sale-leaseback of equipment                                             |  |                    | -       |                    |  
|Purchases of
  marketable securities                                                    |  |                    | (18,259 | )                  |  
|Proceeds from sales of
  marketable securities                                          |  |                    | -       |                    |  
|Proceeds from
  maturities of and other changes in marketable
            securities    |  |                    | 10,000  |                    |  
|Purchase of acquired
  technology                                                       |  |                    | -       |                    |  
|Investment in equity
  securities                                                       |  |                    | -       |                    |  
|Impairment of equity
  securities                                                       |  |                    |         |                    |  
|                                                                                        |  |                    |         |                    |  
|Net
  cash used in investing activities                                                 |  |                    | (8,612  | )                  |  
|                                                                                        |  |                    |         |                    |  
|Cash flows from financing activities:                                                   |  |                    |         |                    |  
|Proceeds from issuance
  of debt                                                        |  |                    | 2,954   |                    |  
|Repayment of debt                                                                       |  |                    | (115    | )                  |  
|Restricted cash
  related to debt                                                       |  |                    | (302    | )                  |  
|Proceeds from issuance
  of preferred stock, net                                        |  |                    | -       |                    |  
|Proceeds from issuance
  of common stock, net                                           |  |                    | 16,435  |                    |  
|Proceeds from exercise
  of stock options and warrants                                  |  |                    | -       |                    |  
|Acquisition of
  treasury stock                                                         |  |                    | -       |                    |  
|Dividends paid                                                                          |  |                    | -       |                    |  
|                                                                                        |  |                    |         |                    |  
|Net
  cash provided by financing activities                                             |  |                    | 18,972  |                    |  
|                                                                                        |  |                    |         |                    |  
|Net increase (decrease) in cash and cash equivalents                                    |  |                    | 984     |                    |  
|Cash and cash equivalents, beginning of period                                          |  |                    | 31,088  |                    |  
|                                                                                        |  |                    |         |                    |  
|Cash and cash equivalents, end of period                                                |  | $                  | 32,072  |                    | $
|                                                                                        |  |                    |         |                    |  

The accompanying notes are an integral part of these
financial statements.

5

---

---

NEOSE
TECHNOLOGIES, INC.(a development-stage company)

NOTES
TO FINANCIAL STATEMENTS(unaudited)

1.     Basis
of Presentation

We
have used accounting principles generally accepted in the United States for
interim financial information to prepare our unaudited financial statements:

| |  | As of March 31, 2004;                                                
| | - | ---------------------------------------------------------------------
| |  | For the three months ended March 31, 2003 and 2004;
  and            
| |  | For the period from inception (January 17, 1989) to
  March 31, 2004.

Our
unaudited financial statements do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In our opinion, the unaudited
financial statements include all the normal recurring adjustments that are
necessary for a fair presentation of the financial position, results of
operations, and cash flows for the periods presented. You should not base your
estimate of our results of operations for 2004 solely on our results of
operations for the three months ended March 31, 2004. You should read these
unaudited financial statements in combination with:

| |  | The other Notes in this section;                                                                                                                               
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Managements Discussion and Analysis of Financial
  Condition and Results of Operations appearing in the following section; and                              
| |  | The Financial Statements, including the Notes to the
  Financial Statements, included in our Annual Report on Form 10-K for the year
  ended December 31, 2003.

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

2.     Revenue
Recognition

Revenue from collaborative agreements
consists of upfront fees, research and development funding, and milestone
payments. Non-refundable upfront fees are deferred and amortized to revenue
over the related estimated performance period. Periodic payments for research
and development activities are recognized over the period in which we perform
those activities under the terms of each agreement. Revenue resulting from the
achievement of milestone events stipulated in the agreements is recognized when
the milestone is achieved.

During the three months ended March 31, 2004,
we recognized revenue of $1,250,000, all of which related to our collaboration
agreements with Novo Nordisk A/S. Approximately $215,000 of the revenue
recognized during the quarter ended March 31, 2004 represented the amortization
of the non-refundable, upfront fee received from Novo Nordisk upon execution of
the agreements in November 2003. The remaining revenue of $1,035,000 was
recognized in connection with our research and development activities conducted
under the agreements during the quarter ended March 31, 2004.

6

---

---

In April 2004, we entered into an agreement
with BioGeneriX AG, a company of the ratiopharm Group, to use our
proprietary GlycoPEGylation technology to develop a long-acting,
next-generation version of granulocyte colony stimulating factor (G-CSF).  Under the agreement, we and BioGeneriX will
pursue development and commercialization of a next-generation G-CSF. The
parties will share equally preclinical expenses, and BioGeneriX will fund the entire
clinical development program. If we and BioGeneriX proceed to
commercialization, we will have commercial rights in the U.S., Canada, Mexico
and Japan. BioGeneriX will have commercial rights in Europe and rest of world.
Each company will receive royalties on product sales in the other companys
territory. In connection with the agreement, we received from BioGeneriX a
non-refundable, upfront fee, which will be amortized to revenue over the
expected period in which we perform activities under the agreement.

3.     Long-term
Debt and Capital Lease Obligation

In March 2004, we borrowed $941,000 to
finance the purchase of equipment and facility improvements, which
collateralize the amount borrowed. The terms of the financing require us to pay
monthly principal and interest payments over 48 months at an interest rate of
8.09%. During the 12 months ending March 31, 2005, 2006, 2007, 2008, and 2009
we will be required to make principal repayments totaling $204,000, $240,000,
$261,000, $218,000, and $18,000, respectively, under this agreement.

In February 2004, we entered into a capital
lease obligation for equipment with a book value of $184,000, which was
calculated using an assumed incremental annual borrowing rate of 8.66%. The
terms of the lease require us to make monthly payments through February 2009.
Under this agreement, we will be required to make principal repayments totaling
$31,000, $34,000, $37,000, $40,000, and $40,000 during the 12 months ending
March 31, 2005, 2006, 2007, 2008, and 2009, respectively.

During the three
months ended March 31, 2004, we and a bank entered into agreements under which
the bank acquired and reissued the $1,000,000 outstanding of our tax-exempt
Industrial Development Authority bonds. In addition, we borrowed $8,000,000
from the bank, of which $1,800,000 was combined with $1,100,000 of our
restricted cash for the purpose of paying in full the $2,900,000 outstanding of
our taxable Industrial Development Authority bonds. The remaining $6,200,000
borrowed funded improvements to our leased facility, which we occupied in April
2004, in Horsham, PA.

The interest rate
on the bond and bank debt will vary quarterly, depending on LIBOR rates. We
will have the option each quarter to incur interest on the outstanding
principal at a LIBOR-based variable interest rate or a fixed rate offered by
our bank.

For the $1,000,000
of tax-exempt debt, we will make
quarterly, interest-only payments for ten years followed by a single repayment
of principal at the end of the ten-year loan period. For the remaining
$8,000,000 borrowed, we will make quarterly, interest-only payments through
March 31, 2005. Commencing on March 31, 2005, we will make quarterly principal
payments of $222,000 plus interest over the remaining nine years of the
ten-year loan period.

To provide credit support for these
borrowings, we granted a mortgage to our bank on the land and building where
our present headquarters are located, as well as on improvements, certain
equipment, and other tangible personal property. Under our agreements with the
bank, we

7

---

---

agreed
to limit our total outstanding debt to $22,000,000. As of March 31, 2004, our
total  outstanding debt was $16,300,000.
At any time after the fourth year of the loan period, or if we fail to maintain
a minimum required cash and short-term investments balance of at least
$22,000,000, our bank has the option to require additional collateral from us
in the form of a security interest in certain cash and short-term investments,
or in the form of a letter of credit, which may have the effect of requiring us
to repay the outstanding loan balance to the bank.

4.     Stockholders
Equity

During the three months ended March 31, 2004,
participating employees purchased 8,456 shares of common stock pursuant to our
employee stock purchase plan, resulting in net proceeds of $86,000. In
addition, during the first quarter of 2004, we received proceeds of $30,000
upon the exercise of options to purchase 5,250 shares of common stock.

5.     Separation
Agreement

During the quarter ended March 31, 2003, we
entered into a non-competition agreement with our former Chief Executive
Officer, Stephen A. Roth. Under this agreement, we agreed to pay him $39,622
per month for 24 months and, should he leave our board of directors during such
two-year period, continue his stock option vesting and exercisability. Upon
entering into the agreement, we recorded a liability of $882,000, which
represented the present value of the future payments, and a corresponding asset
for the value of the non-competition commitment. The asset will be amortized to
marketing, general and administrative expense on our statements of operations
over the two-year term of the agreement. As of March 31, 2004, the present
value of remaining minimum payments under this agreement was $419,000.

6.     Stock-based
Compensation

We apply the intrinsic value method of
accounting for all stock-based employee compensation in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. We record deferred compensation for option grants to employees
for the amount, if any, by which the market price per share exceeds the
exercise price per share.

We have elected to adopt only the disclosure
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS No. 123), as amended by Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. The following table illustrates the
effect on our net loss and basic and diluted net loss per share if we had
recorded compensation expense for the estimated fair value of our stock-based
employee compensation, consistent with SFAS No. 123 (in thousands, except per
share data):

8

---

---

|                                                                                                                                            |  | Three months ended
  March 31, |        
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | -------
|                                                                                                                                            |  |                                |        
|                                                                                                                                            |  | 2003                           |        
|                                                                                                                                            |  |                                |        
|Net loss  as reported                                                                                                                      |  | $                              | (8,421 
|                                                                                                                                            |  |                                |        
|Add:
  Stock-based employee compensation expense
            included in reported net loss                                                  |  |                                | 11     
|                                                                                                                                            |  |                                |        
|Deduct:
  Total stock-based employee compensation
            expense determined under fair value-based
  method for all
            awards |  |                                | (3,870 
|                                                                                                                                            |  |                                |        
|Net loss  pro forma                                                                                                                        |  | $                              | (12,280
|                                                                                                                                            |  |                                |        
|                                                                                                                                            |  |                                |        
|Basic and diluted net loss
  per share  as reported                                                                                        |  | $                              | (0.53  
|                                                                                                                                            |  |                                |        
|Basic and diluted net loss
  per share  pro forma                                                                                          |  | $                              | (0.78  

7.     Net
Loss Per Share

Basic
and diluted net loss per share are presented in conformity with Statement of
Financial Accounting Standards No. 128, Earnings
Per Share. Basic net loss per share is computed by dividing net loss by
the weighted-average number of common shares outstanding for the period.
Diluted net loss per share reflects the potential dilution from the exercise or
conversion of securities into common stock. For the three months ended March 31, 2003 and 2004, the effects
of the exercise of outstanding stock options and warrants to purchase 4,650,376
and 5,116,228 shares, respectively, were antidilutive; accordingly, they were
excluded from the calculation of diluted net loss per share.

8.     Supplemental
Disclosure of Cash Flow Information

The
following table contains additional cash flow information for the periods
reported (in thousands).

9

---

---

|                                                                                 |  | Three months ended |     | Period from        |  
|-------------------------------------------------------------------------------- |  | ------------------ | --- | ------------------ | -
|                                                                                 |  | March 31,          |     | inception          |  
|                                                                                 |  |                    |     | (January 17, 1989) |  
|                                                                                 |  | 2003               |     | 2004               |  
|                                                                                 |  |                    |     |                    |  
|Supplemental disclosure of cash flow information:                                |  |                    |     |                    |  
|Cash paid for interest                                                           |  | $                  | 52  |                    | $
|                                                                                 |  |                    |     |                    |  
|Non- compete agreement                                                           |  | $                  | 882 |                    | $
|                                                                                 |  |                    |     |                    |  
|Non-cash investing activities:                                                   |  |                    |     |                    |  
|Increase (decrease) in
  accrued property and equipment                          |  | $                  | (41 | )                  | $
|                                                                                 |  |                    |     |                    |  
|Assets
  acquired under capital leases and tenant improvement loan               |  | $                  | -   |                    | $
|                                                                                 |  |                    |     |                    |  
|Non-cash financing activities:                                                   |  |                    |     |                    |  
|Conversion of debt
  into common stock                                           |  | $                  | -   |                    | $
|                                                                                 |  |                    |     |                    |  
|Issuance of common
  stock for dividends                                         |  | $                  | -   |                    | $
|                                                                                 |  |                    |     |                    |  
|Issuance of common
  stock to employees in lieu of
            cash compensation |  | $                  | -   |                    | $
|                                                                                 |  |                    |     |                    |  

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

CAUTIONARY
STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION ACT OF 1995:

This
report and the documents incorporated by reference herein contain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. When used in this report and the documents
incorporated herein by reference, the
words anticipate, believe, estimate, may, expect, intend, and
similar expressions are generally intended to identify forward-looking
statements. These forward-looking statements include, among others, the
statements in Managements Discussion and Analysis of Financial Condition and
Results of Operations about our:

| |  | estimate
  of the length of time that our existing cash, cash equivalents and marketable
  securities, expected revenue, and interest income will be adequate to finance
  our operating and capital requirements;                             
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expected
  losses;                                                                                                                                                                                                                             
| |  | expectations
  for future capital requirements;                                                                                                                                                                                                
| |  | expectations
  for increases in operating expenses;                                                                                                                                                                                            
| |  | expectations
  for increases in research and development, and marketing, general and
  administrative expenses in order to develop products, manufacture commercial
  quantities of reagents and  products,
  and commercialize our technology;
| |  | expectations
  for the development of an improved EPO, G-CSF, and subsequent proprietary
  drug candidates;                                                                                                                                    
| |  | expectations
  for incurring additional capital expenditures for renovations of our
  facilities;                                                                                                                                              
| |  | expectations
  for generating revenue; and                                                                                                                                                                                                     

10

---

---

| |  | ability
  to enter into new or expanded collaboration agreements and the ability of our
  existing collaboration partners to develop and commercialize products
  incorporating our technologies.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
actual results could differ materially from the results expressed in, or
implied by, these forward-looking statements. Potential risks and uncertainties
that could affect our actual results include the following:

| |  | our
  ability to obtain the funds necessary for our operations;                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | our
  ability to renovate our facilities as required for our operations;                                               
| |  | our
  ability to develop and commercialize any therapeutic proteins or to
  commercialize our technologies;            
| |  | our
  ability to develop commercial-scale manufacturing processes;                                                     
| |  | our
  ability to enter into and maintain collaborative arrangements;                                                   
| |  | our
  ability to obtain adequate sources of proteins and reagents;                                                     
| |  | our
  ability to meet forecasted project timelines;                                                                    
| |  | our
  ability to expand and protect our intellectual property and to operate
  without infringing the rights of others;
| |  | our
  ability to compete successfully in an intensely competitive field;                                               
| |  | our
  ability to attract and retain key personnel; and                                                                 
| |  | general
  economic conditions.                                                                                         

These
and other risks and uncertainties that could affect our actual results are
discussed in this report and in our other filings with the Securities and
Exchange Commission, particularly the section entitled Factors Affecting The
Companys Prospects of our Annual Report on Form 10-K filed February 17,
2004.  Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, events, levels of activity, performance, or achievements. We do
not assume responsibility for the accuracy and completeness of the
forward-looking statements other than as required by applicable law.

We
do not undertake any duty to update after the date of this report any of the
forward-looking statements in this report to conform them to actual results.

You
should read this section in combination with the Managements Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
December 31, 2003, included in our Annual Report on Form 10-K and in our 2003 Annual Report to Stockholders.

Overview

We
are a biopharmaceutical company focused on improving protein therapeutics using
our proprietary technologies. Our core technologies, GlycoAdvance and
GlycoPEGylation, enable us to manipulate, enzymatically, the carbohydrate
structures of glycoproteins, and thereby pursue the objective of improving the
therapeutic profiles of proteins that have already been marketed or
substantially developed.  Our business
strategy is to use our technologies to improve proteins for which there exists
a substantial body of data demonstrating safety and efficacy.  We intend to apply this strategy to
next-generation products that we are developing on our own or in

11

---

---

collaboration
with others.  We also expect to use our
technologies, through strategic partners, to improve products of other parties.

We
have incurred operating losses each year since our inception. As of March 31,
2004, we had an accumulated deficit of approximately $155.2 million. We expect
additional losses in 2004 and over the next several years as we expand product
research and development efforts, increase manufacturing scale-up activities
and, potentially, begin sales and marketing activities. We have financed our
operations through private and public offerings of equity securities, proceeds
from debt financings, and revenues from our collaborative agreements.

We
believe that our existing cash, cash equivalents, and marketable securities,
expected revenue from collaborations and license arrangements, proceeds under
the agreements with a bank we entered into during the three months ended March
31, 2004, and interest income should be sufficient to meet our operating and
capital requirements into 2005, although changes in our collaborative
relationships or our business, whether or not initiated by us, may cause us to
deplete our cash, cash equivalents, and marketable securities sooner than the
above estimate.

Under
our agreements with a bank we entered into during the three months ended March
31, 2004, we have agreed to limit our total outstanding debt to $22.0 million.
As of March 31, 2004, our total outstanding debt was approximately $16.3
million. At any time after the fourth year of the ten-year loan period, or if
we fail to maintain a minimum required cash and short-term investments balance
of at least $22.0 million, the bank has the option to require additional
collateral from us in the form of a security interest in certain cash and
short-term investments, or in the form of a letter of credit, which may have
the effect of requiring us to repay the outstanding loan balance to the bank.
See Long-term Debt  Proceeds from 2004 Arrangements  Credit Agreement in
the Liquidity and Capital Resources section of this Form 10-Q for a description
of the material features of this borrowing.

Liquidity and Capital Resources

Overview

We
had $44,891,000 in cash, cash equivalents, and marketable securities as of
March 31, 2004, compared to $53,060,000 as of December 31, 2003. The decrease
for 2004 was primarily attributable to the use of cash to fund our operating
activities, capital expenditures, and debt repayments. These uses of cash were
partially offset by proceeds from debt financings and cash inflows from our
collaborative agreements.

The
development of next-generation proprietary protein therapeutics, which we are
pursuing both independently and in collaboration with selected partners, will
require substantial expenditures by us and our collaborators. To finance those
expenditures, we plan to continue financing our operations through private and
public offerings of equity securities, proceeds from debt financings, and
revenues from existing and future collaborative agreements. Because our 2004
revenues could be substantially affected by entering into new collaborations
and on the financial terms of any new collaborations, we cannot estimate our
2004 revenues. Other than revenues from our collaborations with Novo Nordisk
and BioGeneriX, and any future collaborations with others, we expect to
generate no significant revenues until such time as products incorporating our
technologies are commercialized, which is not expected during the next several
years. We expect an additional several years to elapse before we can expect to

12

---

---

generate sufficient cash flow from operations to
fund our operating and investing requirements. Accordingly, we will need to
raise substantial additional funds to continue our business activities and fund
our operations beyond 2004.

Significant
2004 Cash Flows

During
the three months ended March 31, 2004, our operating activities consumed
$10,749,000. In addition, we invested $3,968,000 in capital expenditures, and
made debt principal repayments of $4,426,000. Partially offsetting these
expenditures were $9,941,000 in proceeds from debt financings and $901,000 from
the use of restricted cash to make debt repayments. We also entered into a
capital lease obligation during the three months ended March 31, 2004 for
equipment with an aggregate book value of $184,000. During the three months
ended March 31, 2004, participating employees purchased 8,456 shares of common
stock pursuant to our employee stock purchase plan, resulting in net proceeds
of $86,000. In addition, during the first quarter of 2004, we received proceeds
of $30,000 upon the exercise of options to purchase 5,250 shares of common
stock.

Long-term
Debt  Proceeds from 2004 Arrangements

In
this section, we describe the material features of our new issuances of debt,
and capital lease obligations entered into, during 2004. In the following
section, Long-term Debt  Other Arrangements, we describe the material
features of long-term debt arrangements entered into in prior years.

Credit
Agreement

During
the three months ended March 31, 2004, we and a bank entered into agreements
under which the bank acquired and reissued the $1,000,000 outstanding of our
tax-exempt Industrial Development Authority bonds. In addition, we borrowed
$8,000,000 from the bank, of which $1,800,000 was combined with $1,100,000 of
our restricted cash for the purpose of paying in full the $2,900,000
outstanding of our taxable Industrial Development Authority bonds. The
remaining $6,200,000 borrowed funded improvements to our leased facility, which
we occupied in April 2004, in Horsham, PA.

Initially,
the interest rate on the bond and bank debt will vary quarterly, depending on
LIBOR rates. We will have the option each quarter to incur interest on the
outstanding principal at a LIBOR-based variable interest rate or a fixed rate offered
by our bank.

For
the $1,000,000 of tax-exempt debt, we will make quarterly, interest-only payments on the related
$1,000,000 debt for ten years followed by a single repayment of principal at
the end of the ten-year loan period. For the remaining $8,000,000 borrowed, we
will make quarterly, interest-only payments through March 31, 2005. Commencing
on March 31, 2005, we will make quarterly principal payments of $222,000 plus
interest payments over the remaining nine years of the ten-year loan period.

To
provide credit support for these borrowings, we granted a mortgage to our bank
on the land and building where our present headquarters are located, as well as
on improvements, certain equipment, and other tangible personal property. Under
our agreements with the bank, we agreed to limit our total outstanding debt to
$22,000,000. As of March 31, 2004, our total

13

---

---

outstanding
debt was $16,300,000. At any time after the fourth year of the loan period, or
if we fail to maintain a minimum required cash and short-term investments
balance of at least $22,000,000, our bank has the option to require additional
collateral from us in the form of a security interest in certain cash and
short-term investments, or in the form of a letter of credit, which may have
the effect of requiring us to repay the outstanding loan balance to the bank.

Equipment
Loan

In
March 2004, we borrowed $941,000 to finance the purchase of equipment and
facility improvements, which collateralize the amount borrowed. The terms of
the financing require us to pay monthly principal and interest payments over 48
months at an interest rate of 8.09%. During the 12 months ending March 31,
2005, 2006, 2007, 2008, and 2009 we will be required to make principal and interest
payments totaling $267,000, $291,000, $291,000, $229,000, and $19,000,
respectively, under this agreement.

2004
Capital Lease Obligation

In
February 2004, we entered in to a capital lease obligation for equipment with a
book value of $184,000, which was calculated using an assumed incremental
annual borrowing rate of 8.66%. The terms of the lease require us to make
monthly payments through February 2009. Under this agreement, we will be
required to make lease payments totaling $46,000, $46,000, $46,000, $46,000,
and $42,000 during the 12 months ending March 31, 2005, 2006, 2007, 2008, and
2009, respectively.

Long-term
Debt  Other Arrangements

In
this section, we describe the material features of our debt arrangements that
did not involve new borrowings during 2004. In the previous section, Long-term
Debt  Proceeds from 2004 Arrangements, we describe the material features of
long-term debt arrangements entered into during 2004.

Equipment
Loans

In
December 2003, we borrowed $1,201,000 to finance the purchase of equipment and
facility improvements, which collateralize the amount borrowed. The terms of
the financing require us to pay monthly principal and interest payments over 48
months at an interest rate of 8.66%. During the 12 months ending March 31,
2005, 2006, 2007, and 2008, we will be required to make principal and interest
payments totaling $366,000, $366,000, $359,000, and $269,000, respectively,
under this agreement.

In
September 2003, we borrowed $831,000 to finance the purchase of equipment and
facility improvements, which collateralize the amount borrowed. The terms of
the financing require us to pay monthly principal and interest payments over 48
months at an interest rate of 8.35%. During the 12 months ending March 31,
2005, 2006, 2007, and 2008, we will be required to make principal and interest
payments totaling $269,000, $269,000, $224,000, and $93,000, respectively,
under this agreement.

In
March 2003, we borrowed $2,954,000 to finance the purchase of equipment, which
collateralize the amount borrowed. The terms of the financing require us to pay
monthly

14

---

---

principal
and interest payments over 42 months at an interest rate of 8.35%. During the
12 months ending March 31, 2005, 2006, and 2007, we will be required to make
principal and interest payments totaling $976,000, $976,000, and $570,000,
respectively, under this agreement.

In
December 2002, we borrowed $2,261,000 to finance the purchase of equipment,
which collateralize the amount borrowed. The terms of the financing require us
to pay monthly principal and interest payments over 36 months at an interest
rate of 8.0%. During the 12 months ending March 31, 2005 and 2006, we will be
required to make principal and interest payments totaling $850,000 and
$708,000, respectively, under this agreement.

Capital
Lease Obligations

In
September 2003, we entered into a capital lease for $354,000 of equipment. The
terms of the lease required us to make an initial payment of $90,000 followed
by monthly payments through September 2006. Under this agreement, we will be
required to make lease payments totaling $99,000, $99,000, and $50,000 during
the 12 months ending March 31, 2005, 2006, and 2007, respectively. We also
entered into a capital lease obligation during September 2003 for $60,000 of
software. The terms of the lease require us to make monthly payments through
September 2008. Under this agreement, we will be required to make lease payments
totaling $16,000, $16,000, $16,000, $16,000, and $8,000 during the 12 months
ending March 31, 2005, 2006, 2007, 2008, and 2009, respectively.

In
June 2003, we entered into a capital lease for $119,000 of equipment. The terms
of the lease required us to make an initial payment of $31,000 followed by
monthly payments through June 2006. Under this agreement, we will be required
to make lease payments totaling $37,000, $37,000, and $9,000 during the 12
months ending March 31, 2005, 2006, and 2007, respectively.

In
April and May 2003, we entered into capital leases for $254,000 of equipment.
The terms of the leases require us to make monthly payments through April 2006.
Under these agreements, we will be required to make lease payments totaling
$96,000, $96,000, and $4,000 during the 12 months ending March 31, 2005, 2006,
and 2007, respectively.

In
November 2002, we entered into a capital lease for $50,000 of equipment. The
terms of the lease require us to make monthly payments over 36 months. Under
this agreement, we will be required to make lease payments totaling $19,000 and
$14,000 during the 12 months ending March 31, 2005 and 2006, respectively.

Capital Expenditures

During
the three months ended March 31, 2004, we invested $3,968,000 in property,
equipment, and building improvements. Of this amount, $3,430,000 was invested
in leasehold improvements that are described below. In addition, we entered into capital lease
obligations for equipment with an aggregate book value of $184,000. We
anticipate additional capital expenditures during 2004 of approximately $6.0 million, of which $1.3 million was accrued at
March 31, 2004 for the facility renovations described below. We may finance
some or all of our capital expenditures through the issuance of new debt or
equity. If we issue new debt, we may be required to maintain a minimum cash and
investments balance, or to transfer cash into an escrow account to
collateralize some portion of the debt, or both.

15

---

---

We
entered into a lease agreement in 2002 for a 40,000 square foot building, which
we intended to convert into laboratory and office space. Later in 2002, we
suspended plans to complete these renovations. In November 2003, we reinitiated
renovation activities at an expected additional cost of $6,300,000, which was
incremental to $4,081,000 previously invested in these renovations, on
approximately 25,000 square feet of the facility, leaving approximately 15,000
square feet available for future expansion. Our construction-in-progress at
March 31, 2004 included $9,101,000 in renovations to this facility. During the
three months ended March 31, 2004, we
entered into agreements with a bank for the purpose of funding these
improvements. See Long-term Debt  Proceeds from 2004 Arrangements 
Credit Agreement in the Liquidity and Capital Resources section of this Form
10-Q for a description of the material features of this borrowing.

Summary of Contractual Obligations

A
summary of our obligations to make future payments under contracts existing as
of December 31, 2003 is included in Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, of our Annual Report
on Form 10-K for the year ended December 31, 2003. The Liquidity and Capital
Resources section of this Form 10-Q describes additional obligations from
contracts entered into during the three months ended March 31, 2004.

Off-Balance Sheet Arrangements

We
are not involved in any off-balance sheet arrangements that have or are
reasonably likely to have a material future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources.

Critical Accounting Policies and
Estimates

A
discussion of our critical accounting policies and estimates is included in
Item 7, Managements Discussion and Analysis of Financial Condition and Results
of Operations, of our Annual Report on Form 10-K for the year ended December
31, 2003. There have not been any changes or additions to our critical
accounting policies during the three months ended March 31, 2004.

Results of Operations

Our
net loss for the three months ended March 31, 2003 and 2004 was $8,421,000 and
$9,503,000, respectively. The following section explains the changes between
the reporting periods in each component of net loss.

Revenue
from Collaborative Agreements

Revenues
from collaborative agreements for the three months ended March 31, 2003 and
2004 were $70,000 and $1,250,000, respectively. Our revenues from collaborative agreements
have historically been derived from a few major collaborators. Our
collaborative agreements provide for some or all of the following elements:
upfront fees, research and development funding, milestone revenues, and
royalties on product sales.

All
of the revenues recognized during the three months ended March 31, 2004 related
to

16

---

---

our
collaboration agreements with Novo Nordisk A/S. Approximately $215,000 of the
revenue recognized during the quarter ended March 31, 2004 represented the
amortization of the non-refundable, upfront fee received from Novo Nordisk upon
execution of the agreements in November 2003. The remaining revenue of
$1,035,000 was recognized in connection with our research and development
activities conducted under the agreements during the quarter ended March 31,
2004. During the three months ended March 31, 2003, we recognized
revenue of $70,000 under a research and development collaboration.

Because
our 2004 revenues could be substantially affected by entering into new
collaborations and on the financial terms of any new collaborations, we cannot
estimate our 2004 revenues.

Research
and Development Expense

In
January 2003, we announced the selection of an improved erythropoietin (EPO) as
the target for our first proprietary drug development project. EPO is
prescribed to stimulate production of red blood cells, and is approved for sale
in major markets around the world for the treatment of anemia associated with
oncology chemotherapy, end stage renal disease, and chronic renal
insufficiency. Based on proof-of-concept data, we believe it is feasible to
develop a long acting EPO through GlycoPEGylation. During 2004, we are planning
to continue various preclinical development activities.

In
October 2003, we announced the selection of an improved granulocyte colony
stimulating factor (G-CSF) as the target for our second proprietary drug
development project. G-CSF is prescribed to stimulate production of neutrophils
(a type of white blood cell), and is approved for sale in major markets around
the world for treatment of neutropenia associated with oncology chemotherapy.
Based on proof-of-concept data, we believe it is feasible to develop a long
acting G-CSF through GlycoPEGylation. During 2004, we are planning to continue
various preclinical development activities.

In
April 2004, we entered into an agreement with BioGeneriX AG, a company
of the ratiopharm Group, to use our proprietary GlycoPEGylation technology to
develop a long-acting, next-generation version of G-CSF.  Under the agreement, we and BioGeneriX will
pursue development and commercialization of a next-generation G-CSF. The parties
will share equally preclinical expenses, and BioGeneriX will fund the entire clinical
development program. If we and BioGeneriX proceed to commercialization, we will
have commercial rights in the U.S., Canada, Mexico and Japan. BioGeneriX will
have commercial rights in Europe and rest of world. Each company will receive
royalties on product sales in the other companys territory. In connection with
the agreement, we received from BioGeneriX a non-refundable, upfront fee, which
will be amortized to revenue over the expected period in which we perform
activities under the agreement.

We
are working in collaboration with Novo Nordisk to incorporate our technology in
three next-generation versions of marketed proteins, one of which is currently
marketed by Novo Nordisk.

We
are also conducting exploratory research, both independently and with
collaborators, to identify proteins that are likely candidates for development
using our technologies, which may be advanced for development through our own
proprietary drug program or through our

17

---

---

partnering
and licensing program. We are continuing some work on the development of our
other programs, including new applications of our GlycoPEGylation and
GlycoConjugation technologies.

Our
current research and development projects are divided between two categories:
(i) GlycoAdvance and GlycoPEGylation and (ii) Other Glycotechnology Programs,
which includes projects investigating other applications of our intellectual
property. We are exploring the most cost-effective means of continuing some of
the projects classified as Other Glycotechnology Programs. The following chart
sets forth our projects in each of these categories and the stage to which each
has been developed:

|                                                 |  |  | Development
  Stage |  |  | Status                              | 
|------------------------------------------------ |  |  | ------------------- |  |  | ----------------------------------- | 
|                                                 |  |  |                     |  |  |                                     | 
|GlycoAdvance
  and GlycoPEGylation               |  |  |                     |  |  |                                     | 
|                                                 |  |  |                     |  |  |                                     | 
|Improved erythropoietin                          |  |  | Preclinical         |  |  | Active                              | 
|Improved granulocyte
  colony stimulating factor |  |  | Preclinical         |  |  | Active                              | 
|Other protein projects                           |  |  | Research            |  |  | Active                              | 
|                                                 |  |  |                     |  |  |                                     | 
|Other
  Glycotechnology Programs                 |  |  |                     |  |  |                                     | 
|                                                 |  |  |                     |  |  |                                     | 
|Non-protein therapeutic applications             |  |  | Research            |  |  | Active                              | 
|Nutritional applications                         |  |  | N/A                 |  |  | Evaluatingoutlicensingopportunities | 

For
each of our research and development projects, we incur both direct and
indirect expenses. Direct expenses include salaries and other costs of
personnel, raw materials, and supplies for each project. We may also incur
third-party costs related to these projects, such as contract research and
manufacturing, consulting, and preclinical development costs. Indirect expenses
include depreciation expense and the costs of operating and maintaining our
facilities, property, and equipment, to the extent used for our research and
development projects, as well as the costs of general management of our
research and development projects.

Our
research and development expenses were $5,619,000 and $7,878,000 for the three
months ended March 31, 2003 and 2004, respectively. We expect our research and development expenses to be significantly
greater in 2004 than they were in 2003, as a result of the development and
preclinical activities we plan to conduct during the year. The following
table illustrates research and development expenses incurred during 2003 and
2004 in each period for our significant groups of research and development
projects (in thousands).

18

---

---

| |                                    |  | Three months ended March 31, |  
| | ---------------------------------- |  | ---------------------------- | -
| |                                    |  |                              |  
| |                                    |  | 2003                         |  
| |                                    |  |                              |  
| |                                    |  |                              |  
| | GlycoAdvance and
  GlycoPEGylation |  |                              | $
| | Other Glycotechnology
  Programs   |  |                              |  
| | Indirect expenses                  |  |                              |  
| |                                    |  |                              |  
| |                                    |  |                              | $
| |                                    |  |                              |  

GlycoAdvance
and GlycoPEGylation

Our
GlycoAdvance and GlycoPEGylation research and development expenses increased
during the 2004 periods, compared to 2003, primarily due to hiring of
additional employees and increased purchases of supplies and outside services,
including preclinical studies, associated with our proprietary drug development
programs and our agreements with Novo Nordisk.

Other
Glycotechnology Programs

Research
and development expenses related to our Other Glycotechnology Programs
decreased during the 2004 periods, compared to 2003, consistent with our
decision to focus our resources on our GlycoAdvance and GlycoPEGylation
programs.

Indirect
expenses

Our
indirect research and development expenses increased during the 2004 periods,
compared to 2003, primarily due to increases related to additional personnel
and depreciation of capital expenditures.

The
process of bringing drugs from the preclinical research and development stage
through Phase I, Phase II, and Phase III clinical trials and FDA approval
is a time consuming and expensive process. Because our announced product
candidates are currently in the preclinical stage and there are a variety of
potential intermediate clinical and non-clinical outcomes that are inherent in
drug development, we cannot reasonably estimate the timing and costs we will
incur to complete these research and development projects. In addition, the
timing and costs to complete our research and development projects will be
affected by the timing and nature of any collaboration agreements we may enter
into with a third party, neither of which we can currently estimate.

Material
cash inflows from proprietary drug development projects are highly uncertain,
and we cannot reasonably estimate the period in which we will begin to receive
material net cash inflows from our major research and development projects.
Cash inflows from development-stage products are dependent on several factors,
including entering into collaborative agreements, the achievement of certain
milestones, and regulatory approvals. We may not receive milestone payments
from any existing or future collaborations if a development-stage product fails
to meet technical or performance targets or fails to obtain the required
regulatory approvals. Further, our revenues from collaborations will be affected
by the level of efforts committed and made by our collaborative partners. Even
if we achieve technical success in developing drug candidates, our

19

---

---

collaborative
partners may not devote the resources necessary to complete development and
commence marketing of these products or they may not successfully market
potential products.

Marketing,
General and Administrative Expense

Marketing,
general and administrative expenses for the three months ended March 31, 2003
and 2004 were $3,005,000 and $2,862,000, respectively.  This decrease is consistent with a slightly
lower general and administrative headcount in 2004, as well as some savings in
consulting and travel.  During 2004, we
expect our marketing, general and administrative expenses to increase by less
than 10% over 2003.

Interest Income and Expense

Interest
income for the three
months ended March 31, 2003 and 2004 was $170,000 and $105,000, respectively.
The decrease during the 2004 period is due to lower average cash, cash
equivalents and marketable securities balances as well as lower interest rates.

Interest
expense for the three
months ended March 31, 2003 and 2004 was $37,000 and $118,000, respectively.
The increase in the 2004 period is due to higher average debt balances. We
expect our interest expense during 2004 to increase due to our entering into an
agreement in January 2004 to borrow $9,000,000, all of which was borrowed
during the first quarter of 2004. See Long-term Debt  Proceeds from 2004 Arrangements
 Credit Agreement in the Liquidity and Capital Resources section of this Form
10-Q for a description of the material features of this debt financing.

Item 3.     Quantitative and
Qualitative Disclosure About Market Risk

Our
holdings of financial instruments are comprised primarily of government agency
securities. All such instruments are classified as securities held to maturity.
We seek reasonable assuredness of the safety of principal and market liquidity
by investing in fixed income rated securities, while at the same time seeking
to achieve a favorable rate of return. Our market risk exposure consists
principally of exposure to changes in interest rates. Our holdings are also
exposed to the risks of changes in the credit quality of issuers. We typically
invest in the shorter-end of the maturity spectrum. As of March 31, 2004, we
held $4.9million in an obligation of a U.S. government agency with an
original maturity of 347 days. The balance of our investment portfolio was held
in money market securities. The approximate principal amount of our investment
portfolio as of March 31, 2004 was $44.9 million. The annualized
weighted-average interest rate for the three months ended March 31, 2004 was
approximately 0.8%.

We
have exposure to changing interest rates on our tax-exempt bonds and variable
rate bank debt, and we are currently not engaged in hedging activities.
Interest on approximately $9.0 million of outstanding indebtedness is at an
interest rate that varies quarterly, depending on LIBOR rates. During the three
months ended March 31, 2004, the annualized weighted-average, interest rate was
approximately 4.0%.

20

---

---

Item 4.     Controls and Procedures

We
carried out an evaluation, under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the
Exchange Act), for financial reporting as of March 31, 2004. Based on that
evaluation, our principal executive officer and principal financial officer
concluded that these controls and procedures are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported as
specified in Securities and Exchange Commission rules and forms. There were no
changes in these controls or procedures identified in connection with the
evaluation of such controls or procedures that occurred during our last fiscal
quarter, or in other factors that have materially affected, or are reasonably
likely to materially affect, these controls or procedures.

Our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. These disclosure controls and procedures include, among other
things, controls and procedures designed to ensure that information required to
be disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure. Our internal controls and
procedures for financial reporting are designed to provide reasonable
assurance, and management believes that they provide such reasonable assurance,
that our transactions are properly authorized, our assets are safeguarded
against unauthorized or improper use, and our transactions are properly
recorded and reported, in order to permit the preparation of our financial
statements in conformity with generally accepted accounting principles.

Our
management group, including our principal executive officer and principal
financial officer, does not expect that our disclosure controls and internal
controls and related procedures will prevent all error and all fraud. A control
system, no matter how well designed and implemented, can provide only
reasonable assurance that the objectives of the control system are met. In
addition, the design and implementation of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered in relation to their costs. The design of any system of controls is
based, in part, upon certain assumptions about the likelihood of future events,
which may prove to be incorrect. Due to the limitations of all control systems,
no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within an organization have been
detected or prevented.

|PART II. | OTHER INFORMATION                  
|-------- | -----------------------------------
|         |                                    
|Item 6.  | Exhibits
  and Reports on Form 8-K.
|         |                                    
|         | (a)                                
|         |                                    
|         |                                    

21

---

---

| |     | 10.2     Financing
  Agreement by and among Montgomery County Industrial Development Authority,
  the Company and Brown Brothers Harriman & Co., dated February 23, 2004.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                          
| |     | 10.3     General
  Security Agreement by the Company to Brown Brothers Harriman & Co., dated
  February 23, 2004.                                                        
| |     |                                                                                                                                                                          
| |     | 10.4     Open-end
  Mortgage and Security Agreement by and between the Company and Brown Brothers
  Harriman & Co., dated February 23, 2004.                             
| |     |                                                                                                                                                                          
| |     | 31.1     Certification
  by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as
  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.    
| |     |                                                                                                                                                                          
| |     | 31.2     Certification
  by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as
  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.    
| |     |                                                                                                                                                                          
| |     | 32.1     Certification
  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.                                     
| |     |                                                                                                                                                                          
| |     | 32.2     Certification
  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.                                     
| |     |                                                                                                                                                                          
| | (b) | Reports on Form 8-K:                                                                                                                                                     
| |     |                                                                                                                                                                          
| |     | On February 12, 2004, we
  filed a Current Report on Form 8-K announcing our fourth quarter and year end
  financial results for 2003.                                   

22

---

---

SIGNATURES

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

|                         | NEOSE TECHNOLOGIES, INC.
|------------------------ | ------------------------
|                         |                         
|                         |                         
|Date:     April 28, 2004 | By:                     
|                         |                         
|                         |                         
|                         |                         
|                         |                         

23

---

---