UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

                     For the Fiscal Year Ended June 30, 2004

                                       OR

|_|   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 0-12957

                      ENZON PHARMACEUTICALS, INC.(GRAPHIC)
             (Exact name of registrant as specified in its charter)

             DELAWARE                                            22-2372868
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

685 Route 202/206, Bridgewater, New Jersey                         08807
 (Address of principal executive offices)                        (zip code)

                                 (908) 541-8600
              (Registrant's telephone number, including area code)

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<S>                                                          <C>
Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.01 par value;
                                                             Preferred Stock Purchase Rights
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      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|

      The aggregate market value of the Common Stock, par value $.01 per share,
held by non-affiliates based upon the reported last sale price of the Common
Stock on December 31, 2003, was approximately $516,057,000.

      As of September 7, 2004, there were 43,756,134 shares of Common Stock, par
value $.01 per share, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on December 7, 2004, to be filed
with the Commission not later than 120 days after the close of the registrant's
fiscal year, has been incorporated by reference, in whole or in part, into Part
III Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K.

<PAGE>

                           ENZON PHARMACEUTICALS, INC.

                          2004 Form 10-K Annual Report

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

                                     PART I
Item 1.  Business                                                              4
Item 2.  Properties                                                           33
Item 3.  Legal Proceedings                                                    34
Item 4.  Submission of Matters to a Vote of Security Holders                  34

                                    PART II

Item 5.  Market for the Registrant's Common Equity, Related Stockholder
         Matters, and Issuer Purchases of Equity Securities                   35
Item 6.  Selected Financial Data                                              36
Item 7.  Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                          36
Item 7A. Quantitative and Qualitative Disclosures About Market Risk           61
Item 8.  Financial Statements and Supplementary Data                          62
Item 9.  Changes in and Disagreements With Accountants on Accounting and
                 Financial Disclosure                                         62
Item 9A. Controls and Procedures                                              62

                                    PART III

Item 10. Directors and Executive Officers of the Registrant                   63
Item 11. Executive Compensation                                               63
Item 12. Security Ownership of Certain Beneficial Owners and Management
                  and Related Stockholder Matters                             63
Item 13. Certain Relationships and Related Transactions                       63
Item 14. Principal Accounting Fees and Services                               63

                                     PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K      64

ABELCET(R), ADAGEN(R), CLEAR(R), MARQIBO(R), ONCASPAR(R), and SCA(R) are our
registered trademarks. Other trademarks and trade names used in this annual
report are the property of their respective owners.

All information on this Form 10-K is as of September 13, 2004 and the Company
undertakes no obligation to update this information.


This Annual Report contains forward-looking statements, which can be identified
by the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should" or "anticipates" or the negative thereof, or other variations
thereof, or comparable terminology, or by discussions of strategy. No assurance
can be given that the future results covered by the forward-looking statements
will be achieved. The matters set forth in the section entitled Risk Factors in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," constitute cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results indicated in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results indicated
in such forward-


                                       2
<PAGE>

looking statements.

We maintain a website at www.enzon.com to provide information to the general
public and our stockholders on our products, resources and services along with
general information on Enzon and its management, career opportunities, financial
results and press releases. Copies of our most recent Annual Report on Form
10-K, our Quarterly Reports on Form 10-Q and our other reports filed with the
Securities and Exchange Commission, or SEC, can be obtained, free of charge as
soon as reasonably practicable after such material is electronically filed with,
or furnished to the SEC, from our Investor Relations Department by calling
908-541-8777, through an e-mail request from our website at
www.enzon.com/request or through the SEC's website by clicking the direct link
from our website at www.enzon.com/request or directly from the SEC's website at
www.sec.gov. Our website and the information contained therein or connected
thereto are not intended to be incorporated into this Annual Report on Form
10-K.

Our Board of Directors has adopted a Code of Conduct that is applicable to all
of our directors, officers and employees. Any material changes made to our Code
of Conduct or any waivers granted to any of our directors and executive officers
will be publicly disclosed by filing a current report on Form 8-K within five
business days of such material change or waiver. We intend to make copies of the
charters of the Finance and Audit Committee, the Nominating and Corporate
Governance Committee and the Compensation Committee of our Board of Directors,
which comply with the recently adopted corporate governance rules of the Nasdaq
National Market, available on our website at www.enzon.com. A copy of our Code
of Conduct is available upon request by contacting our Investor Relations
Department by calling 908-541-8777 or through an e-mail request from our website
at www.enzon.com/request.


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<PAGE>

PART I

Item 1. BUSINESS

Overview

      We are a biopharmaceutical company that is focused on the discovery,
development, manufacture, and commercialization of pharmaceutical products in
three areas of therapeutic focus: oncology and hematology, transplantation, and
infectious disease. Our strategy is designed to broaden our revenues and product
pipeline through internal research and development efforts complemented by
strategic transactions that provide access to marketed products and promising
clinical compounds.

      We have developed or acquired four human therapeutic products that we
currently market: ABELCET(R) (amphotericin B lipid complex injection),
ONCASPAR(R) (pegaspargase), ADAGEN(R) (pegademase bovine injection), and
DEPOCYT(R) (cytarabine liposome injection). We market our products through our
specialized North American sales force that calls upon oncologists,
hematologists, and specialists in the areas of transplantation and infectious
disease. We also receive royalties on sales of PEG-INTRON(R), a PEG-enhanced
version of Schering-Plough's product, INTRON(R) A (interferon alfa-2b,
recombinant), as well as a share of certain revenues received by Nektar
Therapeutics ("Nektar") on sales of Hoffmann-La Roche's PEGASYS(R), a
PEG-enhanced version of ROFERON(R)-A (interferon alfa-2a recombinant).

      ABELCET is a lipid complex formulation of amphotericin B used primarily in
the hospital to treat immuno-compromised patients with invasive fungal
infections. It is indicated for the treatment of invasive systemic fungal
infections in patients who are intolerant of conventional amphotericin B therapy
or for whom conventional amphotericin B therapy has failed. ABELCET provides
patients with the broad-spectrum efficacy of conventional amphotericin B, while
causing significantly lower kidney toxicity than conventional amphotericin B.
ONCASPAR is a PEG-enhanced version of a naturally occurring enzyme called
L-asparaginase. It is currently approved in the U.S., Canada, and Germany and is
used in conjunction with other chemotherapeutics to treat patients with acute
lymphoblastic leukemia who are hypersensitive or allergic to native or
unmodified forms of L-asparaginase. ADAGEN is used to treat patients afflicted
with a type of Severe Combined Immunodeficiency Disease, or SCID, also known as
the Bubble Boy Disease, which is caused by the chronic deficiency of the
adenosine deaminase enzyme, or ADA. DEPOCYT is an injectable chemotherapeutic
approved for the treatment of patients with lymphomatous meningitis.

      PEG-INTRON is a PEG-enhanced version of Schering-Plough's alpha interferon
product, INTRON A. We designed PEG-INTRON to allow for less frequent dosing and
to yield greater efficacy as compared to INTRON A. Our worldwide partner for
PEG-INTRON, Schering-Plough, has received approval in the United States and the
European Union for PEG-INTRON as a monotherapy and for use in combination with
REBETOL(R) (ribavirin, USP) capsules for the treatment of chronic hepatitis C in
adult patients not previously treated with alpha-interferon. In April 2004,
Schering-Plough reported that it has submitted a New Drug Application to the
Ministry of Health, Labor and Welfare ("MHLW") in Japan seeking marketing
approval in for PEG-INTRON in combination with REBETOL for the treatment of
chronic hepatitis C. The MHLW is conducting a priority review of the
application. PEG-INTRON is also being evaluated for use as long term maintenance
monotherapy in cirrhotic patients that have failed previous treatment (COPILOT
study). PEG-INTRON is also being evaluated in several investigator-sponsored
clinical trials, including a Phase 3 clinical trial for high risk malignant
melanoma, and several earlier stage clinical trials for other oncology
indications.

      Our drug development programs focus on human therapeutics for
life-threatening diseases through applications of our macromolecular engineering
technology platform, including our proprietary PEG (polyethylene glycol)
modification and single-chain antibody (SCA(R)) technologies. We also complement
our internal research and development efforts with strategic transactions and
partnerships that provide access to promising clinical compounds. MARQIBO(R)
(vincristine sulfate liposomes injection), which was formerly referred to as
Onco TCS and which we are jointly developing with our partner Inex
Pharmaceuticals Corporation ("Inex"), is currently being evaluated for marketing
approval by the United States Food and Drug Administration ("FDA"). We are also
internally developing two late-stage clinical compounds, Pegamotecan and ATG
FRESENIUS S, and we have various other compounds at earlier stages of
development that we are developing independently or


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<PAGE>

through strategic partnerships.

      MARQIBO was designed to increase the effectiveness and reduce the side
effects of the widely used, off-patent, anticancer drug vincristine. MARQIBO is
vincristine encapsulated in Inex's proprietary sphingosomal drug delivery
technology. In January 2004, we entered into a North American development and
commercialization agreement with Inex for MARQIBO. MARQIBO is based on Inex's
novel sphingsomal drug delivery technology, which by loading vincristine into
lipid carriers provides prolonged blood circulation and accumulation and
extended drug release at the tumor sites. In preclinical studies, MARQIBO has
been shown to offer a sustained delivery of vincristine at tumor sites. These
characteristics are intended to increase the effectiveness and reduce the
adverse effects of MARQIBO, as compared to vincristine. In May 2004, the FDA
accepted a New Drug Application ("NDA") seeking marketing approval for MARQIBO
as a single-agent treatment for relapsed aggressive non-Hodgkin's lymphoma
("NHL") for patients previously treated with at least two combination
chemotherapy regimens. The target date for completion of FDA review is January
15, 2005. In addition to relapsed, aggressive NHL, along with Inex, we are also
exploring the development of MARQIBO for a variety of other cancers including
first-line aggressive NHL in combination with other chemotherapeutic agents.

      Pegamotecan is a PEG-enhanced version of camptothecin, a compound in the
class of molecules called topoisomerase I inhibitors. Camptothecin has been
shown in clinical testing to be potent against certain tumor types, but its
previous clinical development by others has been discontinued due to significant
side effects and poor solubility. We have demonstrated in preclinical studies
that Pegamotecan preferentially accumulates in tumors and has comparable or
better efficacy compared to other cytotoxic compounds, including a currently
marketed topoisomerase I inhibitor. In January 2004, patient dosing was
initiated in a pivotal clinical trial designed to evaluate Pegamotecan as a
single-agent therapy for the treatment of gastric and gastroesophageal junction
cancers in patients who had received prior chemotherapy.

      ATG-FRESENIUS S is a polyclonal antibody preparation used for T-lymphocyte
suppression in organ transplant patients in order to prevent organ graft
rejection. ATG-FRESENIUS S is currently marketed by Fresenius Biotech GmbH
("Fresenius") in over 60 countries worldwide. In June 2003, we in-licensed the
North American rights to ATG-FRESENIUS S from Fresenius. We believe
ATG-FRESENIUS S has advantages over competitive monoclonal antibody products on
the market because unlike monoclonal antibodies, which target one specific
receptor, polyclonal antibodies target numerous receptors in the immunologic
process. We also believe ATG-FRESENIUS has advantages over other polyclonal
antibody products on the market because the product preferentially targets and
depletes only activated T-cells, rather than activated and non-activated
T-cells. The activated T-cells are those which may potentially result in an
immunologic attack on the transplanted organ leading to its rejection. For solid
organ transplantation, ATG-FRESENIUS S has been shown to be effective, typically
leading to a substantial improvement of graft survival. Clinicians have
demonstrated that ATG-FRESENIUS S can be administered conveniently as a single
high dose just prior to the surgical procedure. Moreover, clinicians have
reported using ATG-FRESENIUS S for conditioning regimens and prevention of graft
versus host disease in bone marrow transplantation. We intend to pursue
marketing approval for ATG-FRESENIUS S in the U.S. by initiating a pivotal
clinical trail for this product subject to, and in accordance with, the U.S.
Food and Drug Administration (FDA) requirements during the second half of
calendar year 2004.

      We have also out-licensed our proprietary PEG and SCA technology on our
own and through our strategic partners Nektar Therapeutics ("Nektar") and
Micromet AG ("Micromet"). There are currently two PEG products licensed through
our Nektar partnership in late-stage clinical development, MACUGEN(TM)
(pegaptanib sodium injection) for age-related macular degeneration and diabetic
macular edema and Celltech Group's CDP870, an anti-TNF-alpha PEGylated antibody
fragment in development for the treatment of rheumatoid arthritis and Crohn's
disease. In August 2004, Eyetech Pharmaceuticals, Inc. and its worldwide
development and commercialization partner, Pfizer, announced the FDA's
acceptance of an NDA for MACUGEN(TM) for the treatment of neovascular
age-related macular degeneration. The FDA has designated the MACUGEN(TM) NDA for
Priority Review.

      We manufacture ABELCET, ADAGEN, and ONCASPAR in two facilities in the
United States. DEPOCYT is manufactured by SkyePharma. PEG-INTRON is manufactured
and marketed by Schering-


                                       5
<PAGE>

Plough.

Marketed Products

      ABELCET

      ABELCET is a lipid complex formulation of amphotericin B used primarily in
the hospital to treat immuno-compromised patients with invasive fungal
infections. It is indicated for the treatment of invasive systemic fungal
infections in patients who are intolerant of conventional amphotericin B therapy
or for whom conventional amphotericin B therapy has failed. ABELCET provides
patients with the broad-spectrum efficacy of conventional amphotericin B, while
providing significantly lower kidney toxicity than amphotericin B.

      We acquired the North American rights to ABELCET from Elan in November
2002 for $360.0 million, plus acquisition costs. As part of the acquisition, we
also acquired the operating assets associated with the development, manufacture,
sales and marketing of ABELCET in North America, including a 56,000 square foot
manufacturing facility in Indianapolis, Indiana. In addition to North American
distribution rights we also acquired the rights to develop the product in Japan.

      Invasive fungal infections are life-threatening complications often
affecting patients with compromised immune systems, such as those suffering from
cancer, HIV, and recipients of organ or bone marrow transplants. They can be
caused by a multitude of different fungal pathogens that attack the patient's
weakened immune system. Effective treatment is critical and can mean the
difference between life and death, and often must be initiated even in the
absence of a specific diagnosis.

      The increase in severe fungal infections is primarily driven by advances
in medical treatment, such as increasingly aggressive chemotherapy procedures
and advances in organ and bone marrow transplantation procedures. These advances
have caused an increase in the number of immuno-compromised patients who are at
risk from a variety of fungal infections, which are normally combated by an
individual's healthy immune system. For these patients, such infections
represent a major mortality risk.

      Amphotericin B, the active ingredient in ABELCET, is a broad-spectrum
polyene anti-fungal agent that is believed to act by penetrating the cell wall
of a fungus, thereby killing it. In its conventional form, amphotericin B is
particularly toxic to the kidneys, an adverse effect that often restricts the
amount that can be administered to a patient. While still exhibiting residual
nephrotoxicity, ABELCET is able to deliver therapeutic levels of amphotericin B
while significantly reducing the kidney toxicity associated with the
conventional drug.

      It has been suggested in published papers that the enhanced therapeutic
index of ABELCET relative to conventional amphotericin B is due in part to the
selective release of active amphotericin B at the sites of infection. It has
also been suggested that this release may occur through the action of
phospholipases that are released by the fungus itself or by activated host
cells, including phagocytic, vascular smooth muscle, or capillary endothelial
cells.

      The clinical utility of ABELCET has been documented in a multi-center
database developed for clinicians to share and exchange information regarding
the clinical course of invasive fungal infections and clinical experience with
ABELCET. The Collaborative Exchange of Antifungal Research (CLEAR(R)) database
is one of the most comprehensive registries in fungal disease. CLEAR encompasses
retrospectively gathered data from over 3,500 patient records, collected from
1996 to 2000 from over 120 institutions in the United States and Canada.

      The CLEAR database supports the efficacy and safety of ABELCET across a
wide spectrum of fungal pathogens (both yeasts and molds) and broad spectrum of
patients. Additionally and of particular significance, the CLEAR database also
documents the efficacy and safety of ABELCET in rapidly emerging, more difficult
to treat and often treatment resistant pathogens such as Fusarium, Zygomycetes,
and Candida (Krusei and Glabrata). The CLEAR registry reflects the largest known
registry in these emerging fungal pathogens.


                                       6
<PAGE>

      In March 2004, to build upon the value of our CLEAR patient registry, we
launched CLEAR II(TM). CLEAR II(TM) is a multi-center registry developed by and
for clinicians to share and exchange information regarding the clinical course
of invasive fungal infections and clinical experience with ABELCET, and other
antifungal drugs. We developed CLEAR II(TM) together with former CLEAR steering
committee members, clinicians, and other advisors. CLEAR II(TM) utilizes the
speed and flexibility of web-based data collection to provide participating
research centers with online, real-time data that is collected from patients in
multiple sites across North America and accessed via the internet. Unlike the
CLEAR database, which is limited to clinical experience with ABELCET, CLEAR
II(TM) will also include data on patients treated with other antifungal agents.

      ONCASPAR

      ONCASPAR is a PEG-enhanced version of a naturally occurring enzyme called
L-asparaginase from E. coli. It is currently approved in the U.S., Canada, and
Germany and is used in conjunction with other chemotherapeutics to treat
patients with acute lymphoblastic leukemia who are hypersensitive or allergic to
native, i.e., unmodified, forms of L-asparaginase. We received United States
marketing approval from the FDA for ONCASPAR in February 1994. During 2002, we
amended our license agreement with Aventis Pharmaceuticals, Inc. U.S.
("Aventis") to reacquire the rights to market and distribute ONCASPAR in the
United States, Canada, Mexico, and the Asia/Pacific region in return for a
payment of $15.0 million and a royalty of 25% on our net sales of the product
through 2014. MEDAC GmbH has the exclusive right to market ONCASPAR in most of
Europe and parts of Asia.

      L-asparaginase is an enzyme which depletes the amino acid asparagine,
which certain leukemic cells are dependent upon for survival. Other companies
market unmodified L-asparaginase in the U.S. for pediatric acute lymphoblastic
leukemia and in Europe to treat adult acute lymphoblastic leukemia,
non-Hodgkin's lymphoma, and pediatric acute lymphoblastic leukemia. The
therapeutic value of unmodified L-asparaginase is limited by its short
half-life, which requires every-other-day injections, and its propensity to
cause a high incidence of allergic reactions. We believe that ONCASPAR offers
significant therapeutic advantages over unmodified L-asparaginase. ONCASPAR has
a significantly increased half-life in blood, allowing every-other-week
administration, and it causes fewer allergic reactions.

      ADAGEN

      ADAGEN is used to treat patients afflicted with a type of Severe Combined
Immunodeficiency Disease, or SCID, also known as the Bubble Boy Disease, which
is caused by the chronic deficiency of the adenosine deaminase enzyme ("ADA").
We received United States marketing approval from the FDA for ADAGEN in March
1990, ADAGEN represents the first successful application of enzyme replacement
therapy for an inherited disease. SCID results in children being born without
fully functioning immune systems, leaving them susceptible to a wide range of
infectious diseases. Currently, the only alternative to ADAGEN treatment is a
well-matched bone marrow transplant. Injections of unmodified ADA are not
effective because of its short circulating life (less than 30 minutes) and the
potential for immunogenic reactions to a bovine-sourced enzyme. The attachment
of PEG to ADA allows ADA to achieve its full therapeutic effect by increasing
its circulating life and masking the ADA to avoid immunogenic reactions.

      The ADA enzyme in ADAGEN is obtained from bovine intestine. We purchase
this enzyme from the world's only FDA-approved supplier, Hoffmann-LaRoche
Diagnostics GmbH ("Roche Diagnostics"), based in Germany, which until 2002
supplied ADA derived from cattle in Germany. In November 2000, bovine spongiform
encephalopathy ("BSE"), also known as mad cow disease, was detected in certain
cattle herds in Germany. During 2002, in order to comply with FDA requirements,
our supplier secured a new source of bovine intestines from New Zealand, which
has no confirmed cases of BSE in its cattle herds. There is evidence of a link
between the agent that causes BSE in cattle and a new variant form of
Creutzfeld-Jakob disease or nvCJD in humans. Based upon the use of certain
purification steps taken in the manufacture of ADAGEN and from our analysis of
relevant information concerning this issue, we consider the risk of product
contamination to be low. However, the lengthy incubation period of BSE and the
absence of a validated test for the BSE agent in pharmaceutical products make it
impossible to be absolutely certain that ADAGEN is free of the agent that causes
nvCJD. To date, cases of nvCJD have been rare in the United Kingdom, where large
numbers of BSE-infected cattle are


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known to have entered the human food chain. To date, no cases of nvCJD have been
linked to ADAGEN or, to our knowledge, any other pharmaceutical product,
including vaccines manufactured using bovine derived materials from countries
where BSE has been detected. Nonetheless, at the present time, there may be some
risk that bovine-derived pharmaceutical products, including ADAGEN, could give
rise to nvCJD.

      In September, 2003, Roche Diagnostics notified us that it has elected to
terminate our ADA supply agreement as of as of June 12, 2004. We are currently
seeking to develop recombinant ADA as an alternative to the bovine derived
product. This is a difficult and expensive undertaking as to which success
cannot be assured. Roche Diagnostics has indicated that it will continue to
supply us with our requirements of ADA for a reasonable period of time after
termination of our supply agreement as we work to develop another source of ADA.
If we are unable to secure an alternative source of ADA before Roche Diagnostics
discontinues supplying the material to us, we will likely experience inventory
shortages and potentially a period of product unavailability and/or a long term
inability to produce ADAGEN. If this occurs, it will have a measurable (and
potentially material) negative impact on our business and results of operations
and it could potentially result in significant reputational harm and regulatory
difficulties.

      We are marketing ADAGEN on a worldwide basis. We utilize independent
distributors in certain territories including the United States, Europe and
Australia. Currently, 78 patients in 13 countries are receiving ADAGEN therapy.
We believe some newborns with ADA-deficient SCID go undiagnosed and we are
therefore focusing our marketing efforts for ADAGEN on new patient
identification.

      We are required to maintain a permit from the United States Department of
Agriculture ("USDA") in order to import ADA. This permit must be renewed on an
annual basis. As of October 1, 2003, the USDA issued a permit to us to import
ADA through October 1, 2004.

      DEPOCYT

      DEPOCYT is an injectable chemotherapeutic approved for the treatment of
patients with lymphomatous meningitis. It is a sustained release formulation of
the chemotherapeutic agent, cytarabine or Ara-C. DEPOCYT gradually releases
cytarabine into the cerebral spinal fluid (CSF) resulting in a significantly
extended half-life, prolonging the exposure to the therapy and allowing for more
uniform CSF distribution. This extends the dosing interval to once every two
weeks, as compared to the standard twice-weekly intrathecal chemotherapy dosing
of cytarabine. We acquired the North American rights to DEPOCYT from SkyePharma
in December 2002.

      Lymphomatous meningitis is a debilitating form of neoplastic meningitis, a
complication of cancer that is characterized by the spread of cancer to the
central nervous system and the formation of secondary tumors within the thin
membranes surrounding the brain. Neoplastic meningitis can affect all levels of
the central nervous system, including the cerebral hemispheres, cranial nerves,
and spinal cord. Symptoms can include numbness or weakness in the extremities,
pain, sensory loss, double-vision, loss of vision, hearing problems, and
headaches. Neoplastic meningitis is often not recognized or diagnosed in
clinical practice. Autopsy studies have found higher rates of neoplastic
meningitis than those observed in clinical practice. These autopsy studies
suggest that 5% of all cancer patients will develop neoplastic meningitis during
the course of their illness.

      In a randomized, multi-center trial of patients with lymphomatous
meningitis, treated either with 50 mg of DEPOCYT administered every 2 weeks or
standard intrathecal chemotherapy administered twice a week, DEPOCYT achieved a
complete response rate of 41% compared with a complete response rate of 6% for
unencapsulated cytarabine. In this study, complete response was prospectively
defined as (i) conversion of positive to negative CSF cytology and (ii) the
absence of neurologic progression. DEPOCYT also demonstrated an increase in the
time to neurologic progression of 78.5 days for DEPOCYT versus 42 days for
unencapsulated cytarabine. There are no controlled trials, however, that
demonstrate a clinical benefit resulting from this treatment, such as
improvement in disease related symptoms, increased time to disease progression,
or increased survival.

      PEG-INTRON

      PEG-INTRON is a PEG-enhanced version of Schering-Plough's recombinant
alpha-interferon product INTRON A. Linking INTRON A to PEG results not only in a
prolonged half-life, allowing for once weekly


                                       8
<PAGE>

dosing, but also greater efficacy as compared to unmodified INTRON-A.
Schering-Plough currently markets INTRON A for 16 major antiviral and oncology
indications worldwide. Historically the largest indication for INTRON A is
hepatitis C. INTRON A is also used to treat certain types of cancer. Our
worldwide partner for PEG-INTRON, Schering-Plough, has received approval for the
treatment of adult patients with chronic hepatitis C as a monotherapy and in
combination with REBETOL capsules in the United States and the European Union.
Schering-Plough has also submitted a New Drug Application in Japan seeking
marketing approval for PEG-INTRON in combination with REBETOL for the treatment
of chronic hepatitis C. Schering-Plough is also evaluating PEG-INTRON as a long
term maintenance monotherapy (COPILOT study) and in a separate study, PEG-INTRON
is being evaluated in combination with REBETOL as a treatment for hepatitis C
patients who did not respond to or had relapsed following previous
interferon-based therapy. PEG-INTRON is also being evaluated in several
investigator-sponsored trials as a potential treatment for various cancers,
including a Phase 3 study for high risk malignant melanoma.

      Under our licensing agreement with Schering-Plough, we have received
milestone payments and we receive royalties on Schering-Plough's worldwide sales
of PEG-INTRON. Schering-Plough is responsible for all manufacturing, marketing
and development activities for PEG-INTRON.

      Hepatitis C

      Hepatitis C represents a serious and widespread disease affecting millions
of people worldwide. According to the World Health Organization, there are
approximately 170 million chronic cases of hepatitis C worldwide.

      According to The Centers for Disease Control and Prevention there are
approximately 3.9 million Americans infected with the hepatitis C virus (HCV),
of whom approximately 2.7 million are characterized as having chronic hepatitis
C infection. A substantial number of people in the United States who were
infected with hepatitis C more than 10 years ago are thought to have contracted
the virus through blood transfusions. Prior to 1992, the blood supply was not
screened for the hepatitis C virus. In addition, the majority of people infected
with the virus are thought to be unaware of the infection because the hepatitis
C virus can incubate for 10 or more years before patients become symptomatic.
Schering-Plough estimates that of 3.9 million Americans infected with HCV, only
1 million have been diagnosed and, of that number, about half are going
untreated.

      We believe that the number of people infected with the hepatitis C virus
in Europe is comparable to that in the United States. Japan is another very
large hepatitis C market, with an estimated 2 million people infected with HCV.
Schering-Plough states that it is the market leader today in Japan with its
INTRON A and REBETOL combination therapy, and is moving forward with its plans
to introduce the combination PEG-INTRON/REBETOL treatment for chronic hepatitis
C.

      In the pivotal Phase III clinical study results, Schering-Plough reported
that PEG-INTRON plus REBETOL achieved an overall rate of sustained virologic
response ("SVR") of 54% in previously untreated adult patients with chronic
hepatitis C, compared to 47% for patients treated with REBETRON (INTRON A plus
REBETOL). When analyzed on an optimized dose/body-weight basis, SVR was 61%. In
2001, researchers performed a retrospective analysis on the pivotal clinical
data in a study designed to evaluate the effect of adherence to therapy on
treatment outcome for HCV patients receiving PEG-INTRON and REBETOL. Analysis of
SVR rates according to patient compliance during therapy showed that patients
receiving greater than or equal to 80% of their total interferon dose and
greater than or equal to 80% of their ribavirin dose for greater than or equal
to 80% of the expected duration of therapy had enhanced SVR rates compared to
patients who were not adherent to therapy.

      During June 2002, the National Institutes of Health (NIH) issued a
consensus statement asserting that the most effective treatment for hepatitis C
is combination therapy with PEGylated interferon and ribavirin for a period of
48 weeks. The consensus statement also provided recommendations on how to
broaden the treatment population as well as how to prevent transmission of the
virus.

      Hoffmann-La Roche markets PEGASYS, a PEGylated version of its alpha
interferon product ROFERON-A, in both North America and Europe. PEGASYS competes
directly with PEG-INTRON. Schering-Plough and Hoffmann-LaRoche have been the
major competitors in the global alpha-interferon


                                       9
<PAGE>

hepatitis C market since the approval of INTRON A and ROFERON-A. Since its
launch in December 2002, PEGASYS has taken market share away from PEG-INTRON and
the overall market for pegylated alpha interferon in the treatment of hepatitis
C has not increased sufficiently to offset the effect PEGASYS sales have had on
sales of PEG-INTRON. As a result, quarterly sales of PEG-INTRON and the
royalties we receive on those sales have declined in recent quarters. We cannot
assure you that PEGASYS will not continue to gain market share at the expense of
PEG-INTRON, which could result in lower PEG-INTRON sales and lower royalties to
us.

      PEG-INTRON is the only pegylated alpha interferon product approved for
dosing according to patient body weight, an important factor that affects
patient response to pegylated alpha interferon treatment. Schering-Plough
initiated a new marketing campaign in the fall of 2003 to reinforce the efficacy
message of weight-based therapy with PEG-INTRON in combination with REBETOL and
has intensified its efforts to stabilize and recapture market share in order to
regain global leadership in the hepatitis C market.

      In February 2004, Schering-Plough launched the PEG-INTRON REDIPEN(TM)
injection. The PEG-INTRON REDIPEN provides the proven efficacy of PEG-INTRON in
an easy-to-use precision dosing pen that replaces a traditional vial and
syringe. Currently, it is the only pen delivery system approved for
administering PEGylated alpha interferon therapy.

      In May 2004, a nationwide clinical study was initiated involving 2,880
patients that will directly compare PEG-INTRON versus PEGASYS, both used in
combination with ribavirin (IDEAL study). Schering-Plough, in collaboration with
leading medical centers, is conducting the comparative study in response to
requests by the hepatitis C medical and patient communities, and to clear up
misperceptions in the marketplace about PEG-INTRON and PEGASYS. The trial will
compare the efficacy and safety of individualized weight-based dosing with
PEG-INTRON and REBETOL versus PEGASYS, which is administered as a fixed dose to
all patients regardless of individual body weight, and COPEGUS(R) (ribavirin,
USP) dosed either at 1,000 mg or 1,200 mg, in U.S. patients with genotype 1
chronic hepatitis C. Genotype 1 of the hepatitis C virus is the most common
worldwide, the most difficult to treat successfully, and accounts for about 70%
of hepatitis C infections among Americans.

      Cancer

      INTRON A is also used in the treatment of cancer and is approved for
several indications worldwide, including adjuvant treatment to surgery in
patients with malignant melanoma. PEG-INTRON is being evaluated in several
investigator-sponsored clinical trials, including a Phase 3 clinical trial for
high-risk malignant melanoma. PEG-INTRON is also being evaluated in several
Phase 2 studies as a stand-alone drug or in combination therapy. Two Phase 2
studies are being conducted to evaluate PEG-INTRON alone and in combination with
thalidomide in patients with gliomas and a Phase 2 study is being conducted to
evaluate PEG-INTRON in combination with the monoclonal antibody Avastin(R)
(bavacizumab) for patients with gastrointestinal carcinoid tumors. PEG-INTRON is
also being evaluated in several Phase 2 studies as a potential treatment for
ovarian epithelial, peritoneal cavity or fallopian tube cancers; metastatic
kidney cancer; and stage IV melanoma.

Products Under Development

MARQIBO(R)

      In January 2004, we entered into a strategic partnership with Inex to
develop and commercialize Inex's proprietary oncology product MARQIBO
(vincristine sulfate liposomes injection), formerly referred to as Onco TCS.
MARQIBO is comprised of the widely used, off-patent, anticancer drug
vincristine, encapsulated in Inex's sphingosomal technology. Vincristine belongs
to the class of anti-cancer compounds known as mitotic inhibitors. Mitotic
inhibitors can inhibit or stop mitosis or inhibit enzymes from making proteins
needed for the reproduction of the cancer cell. Mitotic inhibitors interfere
with the cell cycle of cell division, working during the M phase of the cell
cycle.

      Vincristine's potency has resulted in it being a long-standing cornerstone
in many chemotherapy


                                       10
<PAGE>

regimens. However when administered in its native form at its indicated
therapeutic dose, patients often experience dose-limiting neurotoxicities.
Consequently, physicians often cap the dosage at a maximum of 2.0 mg per dose,
which we believe may prevent the optimal dose of native vincristine from being
administered. In clinical studies MARQIBO was safely administered at
approximately twice the dose intensity, thus potentially offering increased
efficacy, as compared to vincristine.

      In preclinical studies, sphingosomal technology has been shown to offer a
targeted, increased, and sustained delivery of vincristine to tumor sites. These
combined benefits may provide an extended window for MARQIBO to kill cancer
cells during mitosis, a brief but critical phase during cell growth and
division.

      In clinical studies, MARQIBO has been administered safely at uncapped
doses, which significantly exceeded the dose levels typically administered for
conventional vincristine, while maintaining a similar side effect profile to
vincristine.

      In the multi-center pivotal Phase 2/3 trial 119 NHL patients who had not
responded to their previous therapy or had responded and subsequently relapsed
were treated with MARQIBO. MARQIBO was administered at 2.0 mg/m2 with no dosage
cap as a one hour infusion every two weeks. Prior to enrollment in this study,
the 119 patients had received on average four other therapies and 72% had
disease that was "resistant" to their last treatment. "Resistant" disease is
defined as not responding to their previous treatment or relapsing within six
months after their previous treatment. After treatment with MARQIBO, the overall
response rate was 25%, including seven patients (6% of patients) whose tumors
were completely eliminated (complete response) and 23 patients (19% of patients)
whose tumor volume was reduced by more than 50% (partial response). An
additional 31 patients (26% of patients) had their disease stabilized while
being treated with MARQIBO.

      The median duration of response for the 30 responding patients was
approximately three months from first documentation of response as measured by
computed tomography imaging (CT scan), which is typically taken approximately 2
months after the start of treatment. The primary side effect in the pivotal
study was neurotoxicity, which is the typical side effect seen with vincristine,
the active agent in MARQIBO. The neurotoxic effects were observed primarily
after many treatment cycles, whereas signs of efficacy were typically observed
within the first weeks of treatment. All patients had prior exposure to
neurotoxic agents.

      In May 2004, the FDA accepted an NDA for MARQIBO. The target date for
completion of review of the NDA is January 15, 2005. The NDA is seeking
marketing approval for MARQIBO as a single-agent treatment for patients with
relapsed aggressive non-Hodgkin's lymphoma (NHL) previously treated with at
least two combination chemotherapy regimens.

      The NDA was submitted under the provisions of Subpart H of the Food, Drug
and Cosmetic Act. The Accelerated Approval regulations are intended to make
promising products for life-threatening diseases available to the market on the
basis of preliminary evidence prior to formal demonstration of patient benefit.
These regulations provide a path to approval using clinical data from a
single-arm trial. The risk of non-approval with an NDA submitted under Subpart H
is higher than those associated with a standard NDA review because of, among
other things, the smaller number of patients and more limited data. To the
extent the FDA challenges or invalidates any of the clinical trial data, the
risks are greater with a Subpart H review that the remaining data will not be
sufficient to support regulatory approval. Even if approval is obtained,
approvals granted under Subpart H are provisional and require a written
commitment to complete post-approval clinical studies that formally demonstrate
patient benefit. Securing FDA approval based on a single-arm trial, such as the
trial underlying the MARQIBO NDA, is a particular challenge and approval can
never be assured. If approved, we plan to market MARQIBO through our North
American specialty sales force, which currently targets the oncology market.

      In addition to relapsed aggressive NHL, along with Inex we are also
exploring the development of MARQIBO for a variety of other cancers, including
Hodgkin's disease, acute lymphoblastic leukemia, pediatric malignancies, and
first-line aggressive NHL in combination with other chemotherapeutic agents.

      The current standard first-line treatment for the aggressive form of NHL
is the CHOP chemotherapy


                                       11
<PAGE>

combination, comprising the drugs cyclophosphamide, doxorubicin hydrochloride,
ONCOVIN(R) (vincristine) and prednisone, every three weeks for six to eight
cycles.

      In June 2004 at the Annual Meeting of the American Society of Clinical
Oncology (ASCO), clinicians presented follow-up results from a Phase 2
open-label trial conducted at The University of Texas M. D. Anderson Cancer
Center in Houston, Texas in which patients were treated with CHOP in which the
ONCOVIN(R) (vincristine) component was substituted with MARQIBO. In this trial,
those patients diagnosed with B-cell lymphoma also received RITUXAN(R)
(rituximab).

      Of the 68 evaluable patients 63 patients, or 93% of patients, responded to
the therapy. Sixty-two patients had their tumors completely eliminated for a
complete response rate of 91% and one patient's tumor volume decreased by more
than 50% for a partial response rate of 1% and an overall response rate of 93%.

      Of the 68 patients, 37 patients were over the age of 60 years and 91% of
these patients were complete responders. In the 31 patients under the age of 60
years, 90% were complete responders and 3% were partial responders. Treatment
was well tolerated by both groups with 6% of patients withdrawing from treatment
due to adverse events.

      Investigators also presented positive patient survival data. At a median
follow-up of 22 months, median progression-free survival and median overall
survival had not yet been reached. Overall survival was 99% (one death) and
progression-free survival was 87% (nine relapses). Progression-free survival for
the elderly patient group was 86% (five relapses) and 87% for the younger
patient group (four relapses).

      In addition to NHL, vincristine is also used in treatment regimens for
Hodgkin's disease, acute lymphoblastic leukemia, multiple myeloma, and other
solid tumors. We have estimated that in 2002, approximately 100,000 patients
were treated with vincristine and nearly 57% of those patients were NHL
patients.

      NHL is the fifth-leading cause of cancer deaths in the U.S. (23,400
estimated in 2003) and the sixth-leading cause of cancer deaths in Canada (2,800
estimated in 2003), according to estimates of the American and Canadian Cancer
Societies. According to the American Cancer Society, an estimated 54,370 new
cases of NHL will be diagnosed with, and an estimated 19,410 people will die of,
NHL in the U.S. in 2004.

      PEGAMOTECAN

      Pegamotecan is a PEG-enhanced version of camptothecin, a small molecule
that is a potent anticancer compound in the class of topoisomerase I inhibitors.
Camptothecin was originally developed at the National Institutes of Health
("NIH") and is now off patent.

      For many years, camptothecin has been known to be a highly potent
cytotoxic agent but its low solubility and systemic toxicity has rendered the
product not suitable for human use. Two camptothecin derivatives, topotecan and
irinotecan, have been approved by the FDA for the treatment of small-cell lung,
ovarian, and colorectal cancers. These two products together achieved 2002
worldwide sales of approximately $970 million.

      We have linked PEG and camptothecin so that it forms a prodrug, i.e., a
compound that is converted into the active drug within the body. The PEG
component confers a long circulating half-life and allows the compound to
accumulate in tumor sites. Animal tests have shown that Pegamotecan has better
or equal efficacy compared to other cytotoxic compounds, including other
topoisomerase I inhibitors. At the June 2004 ASCO meeting, clinical
investigators presented results from a Phase 2 study in which Pegamotecan was
evaluated as a single-agent treatment for gastric and gastroesophageal junction
cancers. In this open-label study, 35 patients with gastric and gastroesophageal
junction cancers were treated, of which 28 patients were treatment naive and
seven patients had received one prior chemotherapy regimen. Of the 35 patients
treated, 19 or 54% experienced a response or stabilization of disease. Five
patients (14%) achieved a partial response and 14 patients (40%) experienced
stable disease. Additionally, Pegamotecan showed promising activity based on


                                       12
<PAGE>

time to response and duration of response. For those patients that achieved a
partial response, the median time to response was 46 days, with a range of 40
days to 124 days, and the median duration of response was 127 days, with a range
of 108 days to 208 days.

      In January 2004 we initiated patient dosing in a clinical trial designed
to evaluate Pegamotecan as a single-agent therapy for gastric and
gastroesophageal junction cancers in patients whose disease progressed following
prior chemotherapy. We are focusing our late-stage Pegamotecan development
program on second-line therapy for gastric and gastroesophageal junction
cancers, as there are no single-agent drug approvals for these indications and
therefore, these indications offer the potential to qualify for Accelerated
Approval under Subpart H of the U.S. Food and Drug Act.

      The annual incidence of adenocarcinoma of the stomach and gastroesophageal
junction is approximately 800,000 new cases worldwide, with approximately 24,000
of these occurring in the United States. The median survival for patients with
advanced stages of these cancers from the time of diagnosis is approximately 7-8
months, and there is currently no drug approved for second-line treatment.

      ATG-FRESENIUS S

      ATG-FRESENIUS S is a polyclonal antibody preparation used for T-lymphocyte
suppression in organ transplant patients, which we in-licensed in June 2003 for
North American development and marketing from Fresenius Biotech GmbH
("Fresenius"). ATG-FRESENIUS S was first approved in September 1983 in Germany
for the prevention and treatment of acute rejection in solid organ
transplantation. To date, more than 40,000 patients in over 60 countries outside
the United States have used ATG-FRESENIUS S. Currently, the product is not
approved for use in North America.

      Dramatic advances in immunology, surgery, and tissue preservation have
transformed organ transplantation from experimental to routine over the past few
decades. Of the world's seven major pharmaceutical markets (U.S., France,
Germany, Italy, Spain, UK, and Japan), the U.S. is by far the single largest
solid organ transplant market. According to the United Network for Organ Sharing
or UNOS, in 2003 the U.S. accounted for over 23,000 organ transplantations. Of
this total, nearly 14,000 were kidney transplants.

      The immune system includes a host of targets that are impacted by the
transplant process. Monoclonal antibodies will, by definition, target only one
specific receptor such as the IL-2 receptor (Simulect/Zenapax). ATG-FRESENIUS S
is a polyclonal antibody preparation that binds to a number of targets
simultaneously, providing potentially enhanced efficacy through a more
comprehensive treatment of the immunological cascade. Thymoglobulin(R)
(anti-thymocyte globulin (rabbit)), which is marketed by Genzyme in the U.S., is
the market leading polyclonal antibody preparation for the prevention of organ
rejection in kidney transplant patients in the U.S. ATG-FRESENIUS S differs from
Thymoglobulin in a number of significant ways, particularly because it
preferentially targets and depletes only activated T-cells, rather than
activated and non-activated T-cells, leading us to believe it will emerge
successfully in the clinic and allow us to compete in the market effectively.

      Under our agreement with Fresenius, we are responsible for North American
clinical development and regulatory approval, and Fresenius is responsible for
supplying the drug and all manufacturing aspects necessary to obtain U.S.
regulatory approval. For the first indication (prevention of rejection in solid
organ transplantation) Fresenius will provide clinical supplies at no charge to
us. In September 2004 we made a milestone payment to Fresenius of $1.0 million
upon FDA approval of an Investigational New Drug Application ("IND") for
ATG-FRESENIUS S and we are obligated to make another milestone payment of $1.0
million upon submission of a Biologics License Application ("BLA"). Subject to
and in accordance with FDA requirements, we expect to initiate a pivotal
clinical trial for ATG FRESENIUS S for the prophylaxis of acute organ rejection
in patients receiving an organ graft before the end of calendar 2004.

      SS1P

      SS1P is a fusion protein, or immunotoxin, consisting of a disulfide linked
antibody fragment linked to domains II and III of Pseudomonas exotoxin A. The
antibody fragment targets mesothelin, a cell surface


                                       13
<PAGE>

antigen over expressed in mesothelioma, ovarian and pancreatic cancers.
Importantly, mesothelin is only minimally expressed in normal pancreas,
pancreatitis (inflammation of the pancreas), benign pancreatic adenoma, or
elsewhere in the body.

      In November 2003, we announced a Collaborative Research and Development
Agreement (CRADA) with the NIH. The development program will center on the
recombinant immunotoxin SS1P.

      Currently, the National Cancer Institute ("NCI") is conducting Phase 1
studies to determine the optimal dosing regimen and maximum tolerated dose for
SS1P. Together with the NCI, we plan to begin a Phase 2 clinical trial during
the first half of calendar 2005. Our development plan will initially focus on
mesothelioma and pancreatic cancer.

      Preclinical Pipeline

      Our macromolecular engineering platform may be applicable to other
potential products. We are currently conducting preclinical studies with respect
to additional PEG-enhanced and SCA compounds. We will continue to seek
opportunities to develop and commercialize other PEG-enhanced products on our
own and through co-commercialization partnerships.

      As part of our strategic alliance with Micromet, we have generated several
new SCA compounds against undisclosed targets in the fields of inflammatory and
autoimmune diseases. In June 2004, we extended this collaboration to move the
first of these newly created SCAs toward clinical development. We will share
development costs and future revenues with Micromet.

      As part of our strategic alliance with Nektar, we have agreed to jointly
develop up to three compounds using Nektar's pulmonary or super-critical fluid
platforms. The first compound currently under development is a Nektar
formulation of leuprolide acetate administered through the pulmonary route.
Leuprolide is a peptide analog used to treat prostate cancer and endometriosis.
Nektar is currently conducting preclinical studies on the compound that will be
used to file a U.S. IND, which we expect to file during the second half of
calendar 2004. Nektar is responsible for all costs to bring the product to the
IND stage as well as formulation and manufacturing of the product. We will be
responsible for the clinical development, regulatory filings and
commercialization of the final product.

Research and Development

      To date, our primary sources of new clinical products have been our
internal research and development activities and the licensing of compounds from
third parties, such as ATG-FRESENIUS S and MARQIBO. Research and development
expenses for the fiscal years ended June 30, 2004, 2003 and 2002 were
approximately $34.8 million, $21.0 million and $18.4 million, respectively. In
addition, the Company acquired the commercialization rights in the United
States, Canada and Mexico to MARQIBO a product being developed jointly developed
with Inex. In January 2004 the Company made a $12.0 million up front payment
which has been expensed as acquired in-process research and development.

      Our research and development activities during fiscal 2004 concentrated
primarily on the advancement of our late-stage product pipeline, namely
Pegamotecan, ATG FRESENIUS S, and our shared product development costs with Inex
for MARQIBO. We expect our research and development expenses for fiscal 2005 and
beyond will be at significantly higher levels as we continue to advance our
late-stage product pipeline and additional compounds enter clinical trials.

      Our internal research and development activities focus on applying our
proprietary PEG and SCA technologies to a pipeline of development candidates and
developing products accessed through strategic transactions, such as MARQIBO.

Proprietary Technologies


                                       14
<PAGE>

      Macromolecular Engineering

      Our proprietary drug development programs focus on engineering biologic
therapeutics or macromolecules. Since our inception, our core expertise has been
in modifying large molecule biologics through macromolecular engineering in
order to increase efficacy, improve safety profiles, generate improved versions
of existing therapeutics, and advance these drugs through development to
commercialization.

      Macromolecular Engineering is the process by which the pharmaceutical
features of macromolecules, such as proteins, peptides or oligonucleotides are
optimized through processes that include site-specific amino acid exchanges,
site selective modification with our proprietary polyethylene glycol or PEG
technology, or antibody engineering through our proprietary Single-Chain
Antibody or SCA technology. Given the advancements in genomics and proteomics
over recent years, we believe a wealth of opportunity exists across this field.
These advancements have resulted in the discovery of a significant number of
exquisitely specific and highly biologically active macromolecules, which often
lack the features needed for effective therapeutics, such as adequate
circulating half-life, physical or metabolic stability, and overcoming adverse
immunological responses that can render a compound ineffective. Through the
application of our Macromolecular Engineering expertise, we have transformed
several macromolecules into successful therapeutics, including PEG-INTRON,
ONCASPAR, and ADAGEN.

      In addition to our internal drug research and development activities, we
are also committed to broadening our pipeline and technology base through
in-licensing opportunities and strategic partnerships.

      PEG Technology

      Our proprietary PEG technology involves the covalent attachment of PEG to
therapeutic proteins or small molecules for the purpose of enhancing therapeutic
value. PEG is a relatively non-reactive and non-toxic polymer that is frequently
used in food and pharmaceutical products. We have demonstrated, both in our
marketed products and our products under development, that for some proteins and
small molecules, we can impart significant pharmacologic advantages over the
unmodified forms of the compound by modifying a compound using our PEG
technology.

      These advantages include:

            o     extended circulating life,

            o     lower toxicity,

            o     increased drug stability, and

            o     enhanced drug solubility.


                                       15
<PAGE>

                               [GRAPHIC OMITTED]

                     A depiction of a PEG-enhanced molecule.

      For years, we have applied and continually improved our PEG technology to
engineer macromolecules to improve the pharmacologic characteristics of
potential or existing macromolecule therapeutics. We modify macromolecules with
PEG for the purpose of prolonging half-life and reducing toxicities. In some
cases, PEG can render a macromolecule therapeutically effective, where the
unmodified form had only limited clinical utility. For example, some
macromolecules frequently induce an immunologic response rendering them
therapeutically ineffective. When PEG is attached, it disguises the
macromolecule and reduces recognition by the patient's immune system. PEG
conjugation can also reduce dosing frequency and delay clearance of the active
drug resulting in an improved therapeutic effect.

      We have also developed a PEG technology that allows us to apply PEG to
small molecules. We are currently applying this technology to develop a
PEG-enhanced version of an anti-cancer compound. Like macromolecules, many
anti-cancer compounds of potentially significant therapeutic value possess
undesired pharmacologic characteristics such as toxicity, poor solubility, and
limited half-life. The attachment of PEG to anti-cancer compounds extends their
circulatory life and, at the same time, greatly increases the solubility of
these compounds. We attach PEG to macromolecules or anti-cancer compounds by
means of proprietary linker chemistries, which can be designed to incorporate a
stable chemical bond between the parent molecule and PEG or designed to release
the parent molecule over time in the proximity of the targeted tissue. By
inactivating and then reactivating the compound in the body we create a prodrug
version of such compounds. These attributes may significantly enhance the
therapeutic value of new and already marketed drugs with otherwise limited
utility.

      We possess significant expertise and intellectual property in the methods
by which PEG can be attached to a compound, the selection of appropriate sites
on the compound to which PEG is attached, and the amount and type of PEG used to
tailor the PEG technology to produce the desired results for the particular
substance being modified.

      SCA Technology

      Antibodies are proteins produced by the immune system in response to the
presence in the body of antigens, such as bacteria, viruses or other disease
causing agents. Antibodies of identical molecular structure that bind to a
specific target are called monoclonal antibodies. Over the past few years,
several monoclonal antibodies have been approved for therapeutic use and have
achieved significant clinical and commercial success. Much of the clinical
utility of monoclonal antibodies results from the affinity and specificity with
which they bind to their targets, as well as a long circulating life due to
their relatively large size and their so-called effector function. Monoclonal
antibodies, however, are not well suited for use in acute indications where a
short half-life is advantageous or where their large size inhibits them from
reaching the area of potential


                                       16
<PAGE>

therapeutic activity.

      SCAs are genetically engineered versions of antibodies incorporating only
a small portion of the antibody, namely the antigen binding domains designated
variable light (VL) and variable heavy (VH). SCA proteins are designed to expand
on the therapeutic and diagnostic applications possible with monoclonal
antibodies. SCAs have the binding specificity and affinity of monoclonal
antibodies and, in their native form, are about one-fifth to one-sixth of the
size of a monoclonal antibody, typically giving them very short half-lives. SCAs
differ from monoclonal antibodies in various respects, which may offer benefits
for certain applications:

      o     faster clearance from the body,

      o     greater tissue penetration for both diagnostic imaging and therapy,

      o     a significant decrease in immunogenicity when compared with
            mouse-based antibodies,

      o     easier and more cost effective scale-up for manufacturing when
            compared with monoclonal antibodies,

      o     enhanced screening capabilities which allow for the more rapid
            assessment of SCA proteins of desired specificity using high
            throughput screening methods, and

      o     the potential for non-parenteral application.


                                       17
<PAGE>

                     [Graphic Omitted]        [Graphic Omitted]

                     A depiction of a         A depiction of a
                    Monoclonal Antibody     Single-Chain Antibody


      Comparison of a standard monoclonal antibody and a single-chain antibody.

      In addition to these benefits, fully human SCAs can be isolated directly
from human SCA libraries without the need for re-cloning or grafting procedures.
In specific formats, SCAs are also suitable for intracellular expression
allowing for their use, among other things, as inhibitors of gene expression.

      We, along with numerous other academic and industrial laboratories, have
demonstrated through in vitro testing the binding specificity of dozens of SCAs.
We, in collaboration with the NCI, have shown in published preclinical studies
that SCAs localize to specific tumors and rapidly penetrate the tumors.

 SCAs Under Development

      In June 2004, we amended our April 2002 agreement with Micromet, a private
company based in Germany, after we successfully completed the first phase of
this multi-year strategic collaboration. Under the terms of the amended
agreement, Enzon and Micromet combined our significant patent estates and
complementary expertise in single-chain antibody technology. During the first
phase of the collaboration, we established a research and development unit at
Micromet's facility in Germany and generated several new SCA compounds against
undisclosed targets in the fields of inflammatory and autoimmune diseases. In
June 2004, we extended this collaboration to move the first of these newly
created SCAs toward clinical development.

      Together with Micromet, we also continue to market our combined patent
estates in the field of SCA technology with Micromet being the exclusive
marketing partner. Since the start of the alliance, Micromet has granted four
non-exclusive research licenses on behalf of the partnership. Resulting revenues
are to be used for Micromet's and Enzon's joint SCA development activities.

      In addition, prior to our collaboration with Micromet, we granted, SCA
licenses to several companies. These licenses generally provide for milestone
payments and royalties from the development and commercialization of any
resulting SCA product.

      The most advanced SCA-based compound is our licensee Alexion's
pexelizumab. Pexelizumab is an SCA directed against complement protein C5, which
is a component of the body's normal defense against foreign pathogens.
Inappropriate complement activation during cardiopulmonary bypass graft surgery
("CABG") and myocardial infarction can lead to clinical problems. In July 2004,
Alexion announced that they and their collaboration partner for pexelizumab,
Procter & Gamble Pharmaceuticals, Inc. (Procter & Gamble), have initiated
patient enrollment for a pivotal Phase 3 trial in patients undergoing coronary
artery bypass graft


                                       18
<PAGE>

surgery (PRIMO-CABG-2). Alexion also reported in June 2004 that they, together
with Procter & Gamble, had reached agreement with the FDA on the design for the
PRIMO-CABG-2 study under the Special Protocol Assessment process. The study is
expected to enroll approximately 4,000 patients in North America and Europe.
PRIMO-CABG-2 represents the second Phase 3 trial conducted in CABG patients.
Alexion expects that, if successful, this trial will complete the filing package
that will serve as the primary basis of review for the approval of a Biologics
License Application ("BLA") for the CABG indication.

      Alexion is also enrolling patients in a pivotal Phase 3 trial in patients
experiencing acute myocardial infarction (APEX-AMI). The study is expected to
enroll approximately 8,500 patients in North America, Europe, Australia, and New
Zealand over the next 24 to 36 months.

      Schering-Plough Agreement

      In November 1990, we entered into an agreement with Schering-Plough under
which Schering-Plough agreed to apply our PEG technology to develop a modified
form of Schering-Plough's INTRON A. Schering-Plough is responsible for
conducting and funding the clinical studies, obtaining regulatory approval, and
marketing and manufacturing the product worldwide on an exclusive basis and we
are entitled to receive royalties on worldwide sales of PEG-INTRON for all
indications. The royalty percentage to which we are entitled will be lower in
any country where a pegylated alpha-interferon product is being marketed by a
third party in competition with PEG-INTRON, where such third party is not
Hoffmann-La Roche.

      In June 1999, we amended our agreement with Schering-Plough, which
resulted in an increase in the effective royalty rate that we receive for
PEG-INTRON sales. In exchange, we relinquished our option to retain exclusive
U.S. manufacturing rights for this product. In addition, we granted
Schering-Plough a non-exclusive license under some of our PEG patents relating
to branched or U-PEG technology. This license gave Schering-Plough the ability
to sublicense rights under these patents to any party developing a competing
interferon product. In August 2001, Schering-Plough, pursuant to a cross-license
agreement entered into as part of the settlement of certain patent lawsuits,
granted Hoffmann-La Roche a sublicense under our branched PEG patents to allow
Hoffmann-La Roche to make, use, and sell its pegylated alpha-interferon product,
PEGASYS.

      Under this agreement, Schering-Plough was obligated to pay and has paid us
a total of $9.0 million in milestone payments, none of which are refundable. We
do not supply Schering-Plough with PEG-INTRON or any other materials and our
agreement with Schering-Plough does not obligate Schering-Plough to purchase or
sell specified quantities of any product. Schering-Plough's obligation to pay us
royalties on sales of PEG-INTRON terminates, on a country-by-country basis, upon
the later of the date the last patent of ours to contain a claim covering
PEG-INTRON expires in the country or 15 years after the first commercial sale of
PEG-INTRON in such country. These milestone payments were recognized when
received, as the earnings process was complete. Schering-Plough has the right to
terminate this agreement at any time if we fail to maintain the requisite
liability insurance of $5.0 million. Either party may terminate the agreement
upon a material breach of the agreement by the other party that is not cured
within 60 days of written notice from the non-breaching party or upon
declaration of bankruptcy by the other party.

      Aventis License Agreements

      During 2002, we amended our license agreement with Aventis to reacquire
the rights to market and distribute ONCASPAR in the United States, Mexico,
Canada and the Asia/Pacific region. In return for the marketing and distribution
rights we paid Aventis $15.0 million and are obligated to pay a 25% royalty on
net sales of ONCASPAR through 2014. The license agreement may be terminated by
Aventis earlier upon 60 days' notice if we fail to make the required royalty
payments or we decide to cease selling ONCASPAR. Following the expiration of the
agreement in 2014, all rights will revert back to us, unless the agreement is
terminated earlier because we fail to make royalty payments or cease to sell
ONCASPAR. Prior to the amendment, Aventis was responsible for marketing and
distribution of ONCASPAR. Under the previous agreement, Aventis paid us a
royalty on net sales of ONCASPAR of 27.5% on annual sales up to $10.0 million
and 25% on annual sales exceeding $10.0 million. These royalty payments included
Aventis' cost of purchasing ONCASPAR from us under a supply agreement.


                                       19
<PAGE>

      The amended license agreement prohibits Aventis from making, using or
selling an asparaginase product in the U.S. or a competing PEG-asparaginase
product anywhere in the world until the later of the expiration of the agreement
or, if the agreement is terminated earlier, five years after termination. If we
cease to distribute ONCASPAR or if we fail to make the required royalty
payments, Aventis has the option to distribute the product in the territories
under the original license.

      Medac License Agreement

      In January 2003, we renewed an exclusive license to Medac GmbH ("Medac"),
a private company based in Germany, to sell ONCASPAR and any PEG-asparaginase
product developed by us or Medac during the term of the agreement in most of
Europe and part of Asia. Our supply agreement with Medac provides for Medac to
purchase ONCASPAR from us at certain established prices. Under the license
agreement, Medac is responsible for obtaining additional approvals and
indications in the licensed territories, beyond the currently approved
hypersensitive indication in Germany. Under the agreement, Medac is required to
meet certain minimum purchase requirements. The term of the agreement is for
five years and will automatically renew for an additional five years if Medac
meets or exceeds certain diligence requirements and thereafter the agreement
will automatically renew for an additional two years unless either party
provides written notice of its intent to terminate the agreement at least 12
months prior to the scheduled expiration date. Following the expiration or
termination of the agreement, all rights granted to Medac will revert back to
Enzon.

      Inex Development and Commercialization Agreements

      In January 2004, we entered into a strategic partnership with Inex
Pharmaceuticals Corporation ("Inex") to develop and commercialize Inex's
proprietary oncology product MARQIBO. In connection with the strategic
partnership we entered into a Product Supply Agreement, a Development Agreement,
and a Co-Promotion Agreement with Inex. The agreements contain cross termination
provisions under which termination of one agreement triggers termination of all
the agreements.

      Under the terms of the agreements, we receive the exclusive
commercialization rights for MARQIBO for all indications in the United States,
Canada and Mexico. The lead indication for MARQIBO is relapsed aggressive
non-Hodgkin's lymphoma (NHL) for which a New Drug Application (NDA) to the
United States Food and Drug Administration (FDA) was filed on March 15, 2004.
The product is also in numerous phase II clinical trials for several other
cancer indications, including first-line NHL.

      Upon execution of the related agreements we made a $12.0 million up-front
payment to Inex, which has been determined to be an acquisition of in-process
research and development as the payment was made prior to FDA approval, and
therefore expensed in our Statement of Operations for the quarter ended March
31, 2004. In addition, we will be required to pay up to $20.0 million upon
MARQIBO being approved by the FDA and development milestones and sales-based
bonus payments could total $43.75 million, of which $10.0 million is payable
upon annual sales first reaching $125.0 million, and $15.0 million is payable
upon annual sales first reaching $250.0 million. We will also be required to pay
Inex a percentage of commercial sales of MARQIBO and this percentage will
increase as sales reach certain predetermined thresholds.

      We will share equally with Inex the future development costs to obtain and
maintain marketing approvals in North America for MARQIBO, and we will pay all
sales and marketing costs and certain other post-approval clinical development
costs typically associated with commercialization activities. We plan to market
MARQIBO to the oncology market through our North American sales force, which
currently markets ABELCET, ONCASPAR, and DEPOCYT. Inex has the option of
complementing our sales efforts by co-promoting MARQIBO through the formation of
a dedicated North American sales and medical science liaison force. The costs of
building Inex's co-promotion force will be shared equally by both companies and
we will record all sales in the licensed territories. Inex retains manufacturing
rights and we will reimburse Inex for the manufacture and supply of the drug at
manufacturing cost plus five percent.

      The agreements will expire on a country by country basis upon the
expiration of the last patent covering the licensed product in each particular
country or 15 years after the first commercial sale in such country, whichever
is later. The agreements are also subject to earlier termination under various
circumstances.


                                       20
<PAGE>

We may terminate the agreements at any time upon 90 days notice, in connection
with which we must pay a $2.0 million termination fee. Inex has completed the
submission of its NDA, therefore if we terminate the agreement we must pay the
$2.0 million fee. In addition, if at any time we determine that it has no
interest in commercializing the product in any country, then Inex may terminate
the agreement with respect to such country. Either party may terminate the
agreements upon a material breach and failure to cure by the other party. In
addition, either party may terminate the agreements upon the other party's
bankruptcy. Generally, the termination of the agreements with respect to a
particular country shall terminate our license with respect to MARQIBO, and
preclude us from marketing the product, in that country. However, if we
terminate the agreements because of Inex's breach or bankruptcy, the licenses
granted by Inex will continue, Inex will be obligated to provide us a right of
reference to Inex's regulatory dossiers and facilitate a transfer to us of the
technology necessary to manufacture the product. In addition, after such
termination, Inex will be obligated to exercise commercially reasonable efforts
to ensure we have a continuous supply of product until we, exercising
commercially reasonable efforts, have secured an alternative source of supply.

      We may also explore the acquisition and joint development of other cancer
drugs with Inex.

      Fresenius Development and Supply Agreement

      In June 2003, we entered into a development and supply agreement with
Fresenius, which provides us with exclusive development and distribution rights
in North America for the polyclonal antibody preparation, ATG-FRESENIUS S. The
agreement term is ten years, commencing upon FDA approval of the first
indication for ATG-FRESENIUS S, with an option to extend the term for an
additional ten years. The agreement may be terminated early by us if we
determine the project not to be feasible. In addition, either party may
terminate the agreement early upon a material breach by the other party. If
Fresenius terminates the agreement upon a material breach by us, we will be
obligated to transfer to Fresenius any IND or marketing approval that we may
have obtained. Further, Fresenius may terminate the agreement if we fail to
satisfy the following diligence requirements: (i) enrollment of the first
patient for the first clinical trial within six months after the FDA has
approved an IND for the first indication; and (ii) receipt of marketing approval
in the U.S. within six years after the first IND is approved and the first
patient enrolled.

      Under this agreement, we are responsible for obtaining regulatory approval
of the product in the U.S. In September 2004, we made a milestone payment to
Fresenius of $1.0 million upon FDA approval of the first IND and we are
obligated to make another milestone payment of $1.0 million upon our submission
of a BLA to the FDA. Fresenius will be responsible for manufacturing and
supplying the product to us and we are required to purchase all of the finished
product from Fresenius for net sales of the product in North America. We will
purchase finished product at 40% of net sales, which percentage can be reduced
should certain defined sales targets be exceeded. We are required to purchase a
minimum of $2.0 million of product in the first year after commercial
introduction and $5.0 million in the second year, with no minimum purchase
requirements thereafter. Fresenius will supply the product to us without charge
for the clinical trials for the first indication. For subsequent trials, we will
purchase the clinical supplies from Fresenius.

      Micromet Alliance

      In April 2002, we entered into a multi-year strategic collaboration with
Micromet, a private company based in Munich, Germany, to identify and develop
the next generation of antibody-based therapeutics. In June 2004 we amended this
agreement and extended this collaboration until September 2007. During the first
phase of the collaboration, the partnership generated several new SCA compounds
against undisclosed targets in the fields of inflammatory and autoimmune
diseases. We extended our collaboration with Micromet to move the first of these
newly created SCAs toward clinical development. Under the terms of the amended
agreement, Enzon and Micromet will continue to share development costs and
future revenues for the joint development project.

      Following the termination or expiration of the agreement, the rights to
antibody-based therapeutics identified or developed by Enzon and Micromet will
be determined in accordance with the United States rules of inventorship. In
addition, we will acquire the rights to any PEGylation inventions. The agreement
can be terminated by either party upon a material breach of the agreement by the
other party.


                                       21
<PAGE>

      In addition to the research and development collaboration, in 2002 we made
an $8.3 million investment in Micromet in the form of a note of Micromet which
was amended in June 2004. This note bears interest of 3% and is payable in March
2007. This note is convertible into Micromet Common Stock at a price of 15.56
euros per share at the election of either party. During the year ended June 30,
2004 we recorded a write-down of the carrying value of this investment, which
resulted in a non-cash charge of $8.3 million.

      We hold core intellectual property in SCAs. These fundamental patents,
combined with Micromet's key patents in SCA linkers and fusion protein
technology, generate a compelling technology platform for SCA product
development. We have entered into a cross-license agreement with Micromet
regarding each of our respective SCA intellectual property estates and jointly
market our combined SCA technology to third parties. Micromet is the exclusive
marketing partner and is instituting a comprehensive licensing program on behalf
of the partnership. Any resulting revenues from the license agreements executed
by Micromet on behalf of the partnership will be used for Micromet's and our
joint SCA development activities. Several SCA molecules have been used in
clinical trials. Our licensee, Alexion is currently enrolling patients in a
pivotal Phase 3 trial in patients undergoing coronary artery bypass graft
surgery and a pivotal Phase 3 trial in patents experiencing acute myocardial
infarction (heart attack).

      Nektar Alliance

      In January 2002, we entered into a broad strategic alliance with Nektar,
formerly Inhale Therapeutic Systems, Inc. that includes several components.

      The companies entered into a product development agreement to jointly
develop three products to be specified over time using Nektar's Enhance(TM)
pulmonary delivery platform and SEDS(TM) supercritical fluids platform. Nektar
is responsible for formulation development, delivery system supply, and in some
cases, early clinical development. We have responsibility for most clinical
development and commercialization. This agreement terminates in January 2007
unless terminated earlier by either party upon 90 days notice of a material
breach or 15 days notice of a payment default. Upon termination of the
agreement, the obligations of the parties to conduct development activities will
expire, but such termination shall not affect rights of either party that have
accrued (e.g., with respect to the ownership of intellectual property or the
right to certain payments) prior thereto.

      The two companies will also explore the development of single-chain
antibody (SCA) products for pulmonary administration.

      We have entered into a cross-license agreement with Nektar under which
each party also cross-licensed to the other party certain patents. We also
granted Nektar the right to grant sub-licenses under certain of our PEG patents
to third parties. We will receive a royalty or a share of profits on final
product sales of any products that use our patented PEG technology. We receive
approximately 0.5% or less of Hoffmann-La Roche's sales of PEGASYS, which
represents equal profit sharing with Nektar on this product. There are currently
two PEG products licensed through our Nektar partnership that are being
evaluated in late-stage clinical trials, MACUGEN(TM) (pegaptanib sodium
injection), for age-related macular degeneration and diabetic macular edema, and
CDP870, an anti-TNF therapy for rheumatoid arthritis. We retain the right to use
all of our PEG technology and certain of Nektar's PEG technology for our own
product portfolio, as well as those products we develop in co-commercialization
collaborations with third parties. This agreement expires upon the later of the
expiration of the last licensed patent or the date the parties are no longer
required to pay royalties. Either party may terminate the agreement upon a
material breach of the agreement by the other party that is not cured within 90
days of the receipt of written notice from the non-breaching party or upon the
declaration of bankruptcy by the other party.

      We purchased $40 million of newly issued Nektar convertible preferred
stock in January 2002. The preferred stock is convertible into Nektar common
stock at a conversion price of $22.79 per share. In the event Nektar's common
stock price three years from the date of issuance of the


                                       22
<PAGE>

preferred stock or earlier in certain circumstances is less than $22.79, the
conversion price will be adjusted down, although in no event will it be less
than $18.23 per share. Conversion of the preferred stock into common stock can
occur anywhere from 1 to 4 years following the issuance of the preferred stock
or earlier in certain circumstances. As a result of a continued decline in the
price of Nektar's common stock, which the Company determined was
other-than-temporary, during December 31, 2002 the Company recorded a write-down
of the carrying value of its investment in Nektar, which resulted in a non-cash
charge of $27.2 million. During the year ended June 30, 2004, we converted the
preferred stock into common stock and sold approximately 50% of our investment
in Nektar, which resulted in a net gain on investments of $11.0 million and cash
proceeds of $17.4 million.

      The two companies also agreed in January 2002 to a settlement of the
patent infringement suit we filed in 1998 against Nektar's subsidiary,
Shearwater Polymers, Inc. Nektar has a license under the contested patents
pursuant to the cross-license agreement. We received a one-time payment of $3.0
million from Nektar to cover expenses incurred in defending our branched PEG
patents.

  SkyePharma Agreements

      In January 2003, we entered into a strategic alliance with SkyePharma, PLC
based on a broad technology access agreement. The two companies will draw on
their combined drug delivery technology and expertise to jointly develop up to
three products for future commercialization. These products will be based on
SkyePharma's proprietary platforms in the areas of oral, injectable and topical
drug delivery, supported by technology to enhance drug solubility and our
proprietary PEG modification technology, for which we received a $3.5 million
technology access fee. SkyePharma will receive a $2.0 million milestone payment
for each product based on its own proprietary technology that enters Phase 2
clinical development. Certain research and development costs related to the
technology alliance will be shared equally, as will future revenues generated
from the commercialization of any jointly-developed products.

      Effective December 31, 2002, we also licensed the North American rights to
SkyePharma's DEPOCYT(R), an injectable chemotherapeutic approved for the
treatment of patients with lymphomatous meningitis. Under the terms of the
agreement, we paid SkyePharma a license fee of $12.0 million. SkyePharma
manufactures DEPOCYT and we purchase finished product at 35% of net sales, which
percentage can be reduced should a defined sales target be exceeded. We have
recorded the $12.0 million license fee as an intangible asset, which is being
amortized over a ten year period.

      We were required to purchase minimum levels of finished product for
calendar year 2003 equal to 90% of the previous year's sales of DEPOCYT by
SkyePharma and are required to purchase finished product equal to $5.0 million
in net sales for each subsequent calendar year ("Minimum Annual Purchases")
through the remaining term of the agreement. SkyePharma is also entitled to a
milestone payment of $5.0 million if our sales of the product exceed a $17.5
million annual run rate for four consecutive quarters and an additional
milestone payment of $5.0 million if our sales exceed an annualized run rate of
$25.0 million for four consecutive quarters. We are also responsible for a $10.0
million milestone payment if the product receives approval for all neoplastic
meningitis prior to December 31, 2006. This milestone payment will be
incrementally reduced if the approval is received subsequent to December 31,
2006 to a minimum payment of $5.0 million for an approval after December 31,
2007.

      Our license is for an initial term of ten years and is automatically
renewable for successive two-year terms thereafter. Either party may terminate
the agreement early upon a material breach by the other party, which breach the
other party fails to cure within 60 days after receiving notice thereof.
Further, SkyePharma will be entitled to terminate the agreement early if we fail
to satisfy our Minimum Annual Purchases. In addition, we will be entitled to
terminate the agreement early if a court or government agency renders a decision
or issues an order that prohibits the manufacture, use or sale of the product in
the U.S. If a therapeutically equivalent generic product enters the market and
DEPOCYT's market share decreases, we will enter into good faith discussions in
an attempt to agree on a reduction in our payment obligations to SkyePharma and
a fair allocation of the economic burdens resulting from the market entry of the
generic product. If we are unable to reach an agreement within 30 days, then
either party may terminate the agreement, which termination will be effective
180 days after giving notice thereof. After termination of the agreement,


                                       23
<PAGE>

we will have no further obligation to each other, except the fulfillment of
obligations that accrued prior thereto (e.g., deliveries, payments, etc.). In
addition, for six months after any such termination, we will have the right to
distribute any quantity of product we purchased from SkyePharma prior to
termination.

      Medeus Manufacturing Agreement

      On November 22, 2002, we acquired from Elan Corporation plc ("Elan") the
North American rights and operational assets associated with the development,
manufacture, sales and marketing of ABELCET for $360 million plus acquisition
costs. This transaction is being accounted for as a business combination. As
part of the ABELCET acquisition, we entered into a long-term manufacturing and
supply agreement with Elan, under which we continue to manufacture two products
ABELCET and MYOCET. In February 2004, Elan sold its European sales and marketing
business to Medeus Pharma Ltd. ("Medeus") and transferred the manufacturing and
supply agreement to Medeus. Under the terms of the 2002 ABELCET acquisition
agreement, Medeus has the right to market ABELCET in any markets outside of the
U.S., Canada and Japan. ABELCET is approved for use in approximately 26
countries for primary and/or refractory invasive fungal infections.

      Our agreement with Medeus, as successor to Elan, requires that we supply
Medeus with ABELCET and MYOCET through November 21, 2011. For the period from
November 22, 2002 until June 30, 2004, we supplied ABELCET and MYOCET at fixed
transfer prices which approximated our manufacturing cost. From July 1, 2004 to
the termination of the agreement, we will supply these products at our
manufacturing cost plus fifteen percent.

      The agreement also provides that until June 30, 2004, we will calculate
the actual product manufacturing costs on an annual basis and, to the extent
that this amount is greater than the respective transfer prices, Medeus will
reimburse us for such differences. Conversely, if such actual manufacturing
costs are less than the transfer price, we will reimburse Medeus for such
differences.

      During February 2004 Elan Corporation, plc, sold its ABELCET and MYOCET
European business to Medeus Pharma, Ltd. ("Medeus") As part of this transaction
the Company's long-term manufacturing and supply agreement with Elan was
assigned to Medeus. In connection with the closing of this sale the Company and
Elan settled a dispute over the manufacturing cost of products produced for Elan
resulting in the payment and recognition of manufacturing revenue related to
approximately $1.7 million of revenue not previously recognized given the
uncertainty of the contractual amount.

Sales and Marketing

      We have a North American sales and marketing team comprised of a
hospital-based sales force which markets ABELCET and a specialty oncology sales
force which markets ONCASPAR and DEPOCYT. In fiscal 2004, we began training each
sales force with respect to the other's product(s) and, leveraging existing
customer relationships, each sales force has begun to cross market the other's
product(s). We have provided exclusive marketing rights to Schering-Plough for
PEG-INTRON worldwide and to MEDAC GmbH for ONCASPAR in most of Europe and Asia.
We do not market any products through the use of direct-to-consumer advertising.

      ABELCET is utilized in North America by hospitals, clinics and alternate
care sites who treat patients with invasive fungal infections. In the United
States, ABELCET is sold primarily to drug wholesalers who, in turn, sell the
product to hospitals and certain other third parties. In some cases, ABELCET is
sold by us directly to institutions. We maintain contracts with a majority of
our customers which allows those customers to purchase product directly from
wholesalers. These contracts generally provide for pricing based on annual
purchase volumes.

      We market ONCASPAR and DEPOCYT in North America through our specialty
oncology sales force to hospital oncology centers, oncology clinics and oncology
physicians. We utilize an independent distributor in North America who sells the
products to these customers.

      We are marketing ADAGEN on a worldwide basis. We utilize independent
distributors in certain territories, including the United States, Europe and
Australia.

Manufacturing and Raw Materials

      In the manufacture of ABELCET, we combine amphotericin B with DMPC and
DMPG (two lipid materials) to produce an injectable lipid complex formulation of
amphotericin B. We currently have two suppliers of


                                       24
<PAGE>

amphotericin B and have a long-term supply agreement with our primary supplier,
which is scheduled to terminate on March 31, 2006. We also have two suppliers of
the lipid materials, neither of which is under a long term supply agreement. We
believe that the current levels of inventory that we maintain, coupled with
having two suppliers of materials, should provide us with sufficient time to
find an alternative supplier, if it becomes necessary.

      In the manufacture of ADAGEN and ONCASPAR, we combine activated forms of
PEG with unmodified proteins. We do not have a long-term supply agreement for
the raw polyethylene glycol material that we use in the manufacturing of our PEG
products. Instead, we maintain a level of inventory, which we believe should
provide us sufficient time to find an alternate supplier of PEG, in the event it
becomes necessary, without materially disrupting our business.

      ADAGEN and ONCASPAR use our early PEG technology which is not as advanced
as the PEG technology used in PEG-INTRON and our products under development.
Due, in part, to certain limitations of using our earlier PEG technology, we
have had and will likely continue to have certain manufacturing problems with
ADAGEN and ONCASPAR.

      Manufacturing and stability problems required us to implement voluntary
recalls for one batch of ADAGEN in March 2001 and certain batches of ONCASPAR in
June 2002, July 2004 and September 2004.

      During 1998, we began to experience manufacturing problems with one of our
FDA-approved products, ONCASPAR. The problems were due to increased levels of
white particulates in batches of ONCASPAR, which resulted in an increased
rejection rate for this product. During fiscal 1999, we agreed with the FDA to
temporary labeling and distribution restrictions for ONCASPAR and instituted
additional inspection and labeling procedures prior to distribution. During May
1999, the FDA required us to limit distribution of ONCASPAR to only those
patients who are hypersensitive to native L-asparaginase. As a result of certain
manufacturing changes we made, the FDA withdrew this distribution restriction in
November 1999.

      In July 1999, the FDA conducted an inspection of our manufacturing
facility in connection with our product license for ADAGEN. Following that
inspection, the FDA documented several deviations from Current Good
Manufacturing Practices, known as cGMP, in a Form 483 report. We provided the
FDA with a corrective action plan. In November 1999, the FDA issued a warning
letter citing the same cGMP deviations listed in the July 1999 Form 483, but it
also stated that the FDA was satisfied with our proposed corrective actions. As
a result of the deviations, the FDA decided not to approve product export
requests from us for ONCASPAR until it determined that all noted cGMP deviations
were either corrected or in the process of being corrected. This restriction was
removed in August 2000.

      Since January 2000, the FDA and the MCA, the European equivalent of the
FDA, have conducted follow-up inspections as well as routine inspections of our
manufacturing facility related to ABELCET, ONCASPAR and ADAGEN. Following
certain of these inspections, the FDA has issued Form 483 reports, citing
deviations from cGMP. We received the most recent Form 483 reports in April 2004
for our New Jersey and Indianapolis manufacturing facilities. We have or are in
the process of responding to such reports with corrective action plans.

Patents and Intellectual Property Rights

      Patents are very important to us in establishing the proprietary rights to
the products we have developed or licensed. The patent position of
pharmaceutical or biotechnology companies, including our position, can be
uncertain and involve complex legal, scientific and factual questions. If our
intellectual property positions are challenged, invalidated or circumvented, or
if we fail to prevail in potential future intellectual property litigation, our
business could be adversely affected. We have been issued 114 patents in the
U.S., many of which have foreign counterparts. These patents, without
extensions, are expected to expire beginning in 2004 through 2022. We have also
filed and currently have pending 43 patent applications in the U.S. Under our
license agreements, we have access to large portions of Micromet's and Nektar's
patent estates as well as a small number of individually licensed patents. Of
the patents owned or licensed by us, 7 relate to PEG-INTRON, 17 relate to
ABELCET, 3 relate to DEPOCYT, 11 relate to Pegamotecan and 18 relate to MARQIBO.
Although we believe that our patents provide adequate protection for the conduct
of our business, we cannot assure you that such patents:


                                       25
<PAGE>

   o  will be of substantial protection or commercial benefit to us,

   o  will afford us adequate protection from competing products, or

   o  will not be challenged or declared invalid.

      We also cannot assure you that additional United States patents or foreign
patent equivalents will be issued to us.

      Patents for individual products extend for varying periods according to
the date of patent filing or grant and the legal term of patents in the various
countries where patent protection is obtained. The actual protection afforded by
a patent, which can vary from country to country, depends upon the type of
patent, the scope of its coverage and the availability of legal remedies in the
country.

      The expiration of a product patent or loss of patent protection resulting
from a legal challenge normally results in significant competition from generic
products against the covered product and, particularly in the U.S., can result
in a significant reduction in sales of the pioneer product. In some cases,
however, we can continue to obtain commercial benefits from:

   o  product manufacturing trade secrets;

   o  patents on uses for products;

   o  patents on processes and intermediates for the economical manufacture of
      the active ingredients;

   o  patents for special formulations of the product or delivery mechanisms and
      conversion of the active ingredient to OTC products.

      The effect of product patent expiration or loss also depends upon:

   o  the nature of the market and the position of the product in it;

   o  the growth of the market;

   o  the complexities and economics of manufacture of the product; and

   o  the requirements of generic drug laws.

      The patent covering our original PEG technology, which we had licensed
from Research Corporation Technologies, Inc., contained broad claims covering
the attachment of PEG to polypeptides. However, this United States patent and
its corresponding foreign patents have expired. Based upon the expiration of the
Research Corporation patent, other parties may make, use, or sell products
covered by the claims of the Research Corporation patent, subject to other
patents, including those which we hold. We have obtained and intend to continue
to pursue patents with claims covering improved methods of attaching or linking
PEG to therapeutic compounds. We also have obtained patents relating to the
specific composition of the PEG-modified compounds that we have identified or
created. We will continue to seek such patents as we develop additional
PEG-enhanced products. We cannot assure you that any of these patents will
enable us to prevent infringement by unauthorized third parties or that
competitors will not develop competitive products outside the protection that
may be afforded by our patents.

      We are aware that others have also filed patent applications and have been
granted patents in the United States and other countries with respect to the
application of PEG to proteins and other compounds. Owners of any such patents
may seek to prevent us or our collaborators from making, using or selling our
products.

      During January 2002, we settled a patent infringement suit we had brought
against Shearwater Corporation Inc., a company that produces the branched PEG,
or U-PEG, used in Hoffmann-La Roche's product, PEGASYS, a PEG-modified version
of its alpha interferon product ROFERON-A. The settlement was part of a broad
strategic alliance we formed with Nektar, Shearwater Corporation's parent
corporation, in which Nektar agreed to pay us $3.0 million to cover our expenses
incurred in defending our branched PEG patents and pay us 50% of any revenues it
receives for the manufacture of Hoffmann-La Roche's PEGASYS. In addition, Enzon
and Nektar agreed to cross license certain of their PEG intellectual property
estates to each other. Also, Nektar has the right to sublicense certain of our
PEG patents to third parties and we will receive a


                                       26
<PAGE>

royalty or a share of profit on final product sales. We retained the rights to
use our PEG patents for our own proprietary products and products we may develop
with co-commercialization partners.

      During August 2001, Schering-Plough granted a sublicense to Hoffmann-La
Roche under our branched PEG patents to allow Hoffmann-La Roche to make, use and
sell its pegylated alpha-interferon product, PEGASYS, as part of the settlement
of a patent infringement lawsuit related to PEG-INTRON. During August 2001, we
dismissed a patent infringement suit we had brought against Hoffmann-La Roche
relating to PEGASYS as a result of the sublicense by Schering-Plough of our
branched PEG patents for PEGASYS to Hoffmann-La Roche.

      In the field of SCA proteins, we have several United States and foreign
patents and pending patent applications, including a patent granted in August
1990 covering the genes needed to encode SCA proteins.

      In November 1993, Curis Inc. (formerly known as Creative BioMolecules
Inc.) signed cross-license agreements with us in the field of our SCA protein
technology and Curis' Biosynthetic Antibody Binding Site protein technology. In
July 2001, Curis reported that it had entered into a purchase and sale agreement
with Micromet AG, a German Corporation, pursuant to which Curis assigned its
single chain polypeptide technology to Micromet. In April 2002, we entered into
a cross-license agreement with Micromet for our respective SCA intellectual
property and have decided to jointly market such intellectual property with
Micromet.

      Through our acquisition of ABELCET, we acquired several U.S. and Canadian
patents claiming the use and manufacture of ABELCET.

      In general, Enzon has obtained licenses from various parties which it
deems to be necessary or desirable for the manufacture, use, or sale of its
products. These licenses generally require Enzon to pay royalties to the parties
on product sales. In addition, other companies have filed patent applications or
have been granted patents in areas of interest to Enzon. There can be no
assurance any licenses required under such patents will be available for license
on acceptable terms or at all.

      We also sell our products under trademarks that we consider in the
aggregate to be of material importance. Trademark protection continues in some
countries for as long as the mark is used and, in other countries, for as long
as it is registered. Registrations generally are for fixed, but renewable,
terms.

Government Regulation

      The FDA and comparable regulatory agencies in state and local
jurisdictions and in foreign countries impose substantial requirements on the
clinical development, manufacture and marketing of pharmaceutical products.
These agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval and promotion of our
products. All of our products will require regulatory approval before
commercialization. In particular, therapeutic products for human use are subject
to rigorous preclinical and clinical testing and other requirements of the
Federal Food, Drug, and Cosmetic Act and the Public Health Service Act,
implemented by the FDA, as well as similar statutory and regulatory requirements
of foreign countries. Obtaining these marketing approvals and subsequently
complying with ongoing statutory and regulatory requirements is costly and time
consuming. Any failure by us or our collaborators, licensors or licensees to
obtain, or any delay in obtaining, regulatory approval or in complying with
other requirements, could adversely affect the commercialization of products
that we are then developing and our ability to receive product or royalty
revenues.

      The steps required before a new drug or biological product may be
distributed commercially in the United States generally include:

      o     conducting appropriate preclinical laboratory evaluations of the
            product's chemistry, formulation and stability, and animal studies
            to assess the potential safety and efficacy of the product,

      o     submitting the results of these evaluations and tests to the FDA,
            along with manufacturing information and analytical data, in an
            Investigational New Drug Application, or IND,

      o     making the IND effective after the resolution of any safety or
            regulatory concerns of the FDA,


                                       27
<PAGE>

      o     obtaining approval of Institutional Review Boards, or IRBs, to
            introduce the drug or biological product into humans in clinical
            studies,

      o     conducting adequate and well-controlled human clinical trials that
            establish the safety and efficacy of the drug or biological product
            candidate for the intended use, typically in the following three
            sequential, or slightly overlapping stages:

                  Phase I. The drug or biologic is initially introduced into
                  healthy human subjects or patients and tested for safety, dose
                  tolerance, absorption, metabolism, distribution and excretion,

                  Phase II. The drug or biologic is studied in patients to
                  identify possible adverse effects and safety risks, to
                  determine dose tolerance and the optimal dosage, and to
                  collect initial efficacy data,

                  Phase III. The drug or biologic is studied in an expanded
                  patient population at multiple clinical study sites, to
                  confirm efficacy and safety at the optimized dose, by
                  measuring a primary endpoint established at the outset of the
                  study,

      o     submitting the results of preliminary research, preclinical studies,
            and clinical studies as well as chemistry, manufacturing and control
            information on the drug or biological product to the FDA in a New
            Drug Application, or NDA, for a drug product, or a Biologics License
            Application, or BLA, for a biological product, and

      o     obtaining FDA approval of the NDA or BLA prior to any commercial
            sale or shipment of the drug or biological product.

      An NDA or BLA must contain, among other things, data derived from
nonclinical laboratory and clinical studies which demonstrate that the product
meets prescribed standards of safety, purity and potency, and a full description
of manufacturing methods. The biological product may not be marketed in the
United States until a biological license is issued.

      The approval process can take a number of years and often requires
substantial financial resources. The results of preclinical studies and initial
clinical trials are not necessarily predictive of the results from large-scale
clinical trials, and clinical trials may be subject to additional costs, delays
or modifications due to a number of factors, including the difficulty in
obtaining enough patients, clinical investigators, drug supply, or financial
support. The FDA has issued regulations intended to accelerate the approval
process for the development, evaluation and marketing of new therapeutic
products intended to treat life-threatening or severely debilitating diseases,
especially where no alternative therapies exist. If applicable, this procedure
may shorten the traditional product development process in the United States.
Similarly, products that represent a substantial improvement over existing
therapies may be eligible for priority review with a target approval time of six
months. Nonetheless, approval may be denied or delayed by the FDA or additional
trials may be required. The FDA also may require testing and surveillance
programs to monitor the effect of approved products that have been
commercialized, and the agency has the power to prevent or limit further
marketing of a product based on the results of these post-marketing programs.
Upon approval, a drug product or biological product may be marketed only in
those dosage forms and for those indications approved in the NDA or BLA,
although information about off-label indications may be distributed in certain
circumstances.

      In addition to obtaining FDA approval for each indication for which the
manufacturer may market the drug, each domestic drug product manufacturing
establishment must register with the FDA, list its drug products with the FDA,
comply with Current Good Manufacturing Practices and permit and pass inspections
by the FDA. Moreover, the submission of applications for approval may require
additional time to complete manufacturing stability studies. Foreign
establishments manufacturing drug products for distribution in the United States
also must list their products with the FDA and comply with Current Good
Manufacturing Practices. They also are subject to periodic inspection by the FDA
or by local authorities under agreement with the FDA.

      Any products manufactured or distributed by us pursuant to FDA approvals
are subject to extensive continuing regulation by the FDA, including
record-keeping requirements and a requirement to report adverse


                                       28
<PAGE>

experiences with the drug. In addition to continued compliance with standard
regulatory requirements, the FDA also may require post-marketing testing and
surveillance to monitor the safety and efficacy of the marketed product. Adverse
experiences with the product must be reported to the FDA. Product approvals may
be withdrawn if compliance with regulatory requirements is not maintained or if
problems concerning safety or efficacy of the product are discovered following
approval.

      The Federal Food, Drug, and Cosmetic Act also mandates that drug products
be manufactured consistent with Current Good Manufacturing Practices. In
complying with the FDA's regulations on Current Good Manufacturing Practices,
manufacturers must continue to spend time, money and effort in production,
record-keeping, quality control, and auditing to ensure that the marketed
product meets applicable specifications and other requirements. The FDA
periodically inspects drug product manufacturing facilities to ensure compliance
with Current Good Manufacturing Practices. Failure to comply subjects the
manufacturer to possible FDA action, such as:

      o     warning letters,

      o     suspension of manufacturing,

      o     seizure of the product,

      o     voluntary recall of a product,

      o     injunctive action, or

      o     possible civil or criminal penalties.

      To the extent we rely on third parties to manufacture our compounds and
products, those third parties will be required to comply with Current Good
Manufacturing Practices. We have undertaken a voluntary recall of certain lots
of products in the past, and future recalls and costs associated with Current
Good Manufacturing Practices are possible.

      Even after FDA approval has been obtained, and often as a condition to
expedited approval, further studies, including post-marketing studies, may be
required. Results of post-marketing studies may limit or expand the further
marketing of the products. If we propose any modifications to the product,
including changes in indication, manufacturing process, manufacturing facility
or labeling, an NDA or BLA supplement may be required to be submitted to the
FDA.

      Products manufactured in the United States for distribution abroad will be
subject to FDA regulations regarding export, as well as to the requirements of
the country to which they are shipped. These latter requirements are likely to
cover the conduct of clinical trials, the submission of marketing applications,
and all aspects of product manufacture and marketing. Such requirements can vary
significantly from country to country. As part of our strategic relationships
our collaborators may be responsible for the foreign regulatory approval process
of our products, although we may be legally liable for noncompliance.

      We are also subject to various federal, state and local laws, rules,
regulations and policies relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with our research
work. Although we believe that our safety procedures for handling and disposing
of such materials comply with current federal, state and local laws, rules,
regulations and policies, the risk of accidental injury or contamination from
these materials cannot be entirely eliminated.

      We cannot predict the extent of government regulation which might result
from future legislation or administrative action. In this regard, although the
Food and Drug Administration Modernization Act of 1997 modified and created
requirements and standards under the Federal Food, Drug, and Cosmetic Act with
the intent of facilitating product development and marketing, the FDA is still
in the process of implementing the Food and Drug Administration Modernization
Act of 1997. Consequently, the actual effect of these developments on our
business is uncertain and unpredictable.


                                       29
<PAGE>

      Moreover, we anticipate that Congress, state legislatures and the private
sector will continue to review and assess controls on health care spending. Any
such proposed or actual changes could cause us or our collaborators to limit or
eliminate spending on development projects and may otherwise impact us. We
cannot predict the likelihood, nature or extent of adverse governmental
regulation that might result from future legislative or administrative action,
either in the United States or abroad. Additionally, in both domestic and
foreign markets, sales of our proposed products will depend, in part, upon the
availability of reimbursement from third-party payors, such as government health
administration authorities, managed care providers, private health insurers and
other organizations. Although Congress enacted the Medicare Prescription Drug
Modernization and Improvement Act of 2003, which established a general Medicare
outpatient prescription drug benefit beginning in 2006, significant uncertainty
often exists as to the reimbursement status of newly approved health care
products. In addition, third-party payors are increasingly challenging the price
and cost-effectiveness of medical products and services. There can be no
assurance that our proposed products will be considered cost-effective or that
adequate third-party reimbursement will be available to enable us to maintain
price levels sufficient to realize an appropriate return on our investment in
product research and development.

      We are also subject to federal and state laws regulating our relationships
with physicians, hospitals, third party payors of health care, and other
customers. The federal anti-kickback statute, for example, prohibits the willful
and knowing payment of any amount to another party with the intent to induce the
other party to make referrals for health care services or items payable under
any federal health care program. In recent years the federal government has
substantially increased enforcement and scrutiny of pharmaceutical manufacturers
with regard to the anti-kickback statute and other federal fraud and abuse
rules.

      PEG-INTRON was approved in the European Union and the United States for
the treatment of hepatitis C in May 2000 and January 2001, respectively. ABELCET
was approved in the United States in November 1995 and in Canada in September
1997. ONCASPAR was approved for marketing in the United States and Germany in
1994 and in Canada in December 1997 for patients with acute lymphoblastic
leukemia who are hypersensitive to native forms of L-asparaginase, and in Russia
in April 1993 for therapeutic use in a broad range of cancers. ADAGEN was
approved by the FDA in March 1990. DEPOCYT received U.S. approval in April 1999.
Except for these approvals, none of our other products have been approved for
sale and use in humans in the United States or elsewhere.

      With respect to patented products, delays imposed by the government
approval process may materially reduce the period during which we will have the
exclusive right to exploit them.

Competition

      General

      Competition in the biopharmaceutical industry is intense and based
significantly on scientific and technological factors. These factors include the
availability of patent and other protection of technology and products, the
ability to commercialize technological developments and the ability to obtain
governmental approval for testing, manufacturing and marketing. We compete with
specialized biopharmaceutical firms and large pharmaceutical companies in North
America, Europe and elsewhere, with respect to both research and development of
product candidates and commercialization of approved products. These companies,
as well as academic institutions, governmental agencies and private research
organizations, also compete with us in recruiting and retaining highly qualified
scientific personnel and consultants. All of the companies offering competing
products are larger than us and have substantially greater resources. Certain of
these companies, especially Merck and Pfizer, are able to compete effectively
with us largely by virtue of their superior resources and the market's
familiarity with their "brand names" regardless of the technical advantages or
disadvantages of their products.

      ABELCET

      The intravenous or IV anti-fungal market in which ABELCET competes is a
highly competitive market. The products used to treat fungal infections are
classified into four classes of drugs: CAB or


                                       30
<PAGE>

Conventional Amphotericin B lipid-based amphotericin B formulations, triazoles
and echinocandins. While we compete with all of these drugs, ABELCET is
predominately used in more severely ill patients.

      CAB is a broad-spectrum polyene anti-fungal agent that is believed to act
by penetrating the cell wall of a fungus, thereby killing it. In its
conventional form, amphotericin B is particularly toxic to the kidneys, an
adverse effect that often restricts the amount that can be administered to a
patient. CAB is sold today as a significantly lower cost generic drug. Its usage
has been declining, however, due to these toxicities.

      The lipid-based formulations of amphotericin B include ABELCET,
AMBISOME(R) (marketed by Fujisawa/Gilead) and AMPHOTEC(R) (marketed by
Intermune, Inc.). These formulations provide the efficacy of CAB while limiting
the toxicities that are inherent in CAB usage. Ambisome has proven to be a
significant competitor to ABELCET. Recently, Fugisawa/Gilead has reduced the
price of AMBISOME in certain geographic markets, increasing the competitive
pressure on ABELCET. To the extent we are not able to address this competitive
pressure successfully or we deem it necessary to reduce the price of ABELCET in
order to address this competitive threat, market share or revenues or both could
decrease, which could have a material adverse effect on our business, financial
condition or results of operations.

      The triazoles, which include DIFLUCAN(R) (marketed by Pfizer), SPORONOX(R)
(marketed by Janssen Pharmaceuticals) and VFEND(R) (also marketed by Pfizer)
have the least reported incidence of side effects versus all other antifungals.
Triazoles are generally thought to be limited by a narrower spectrum of activity
and have issues with drug-to-drug interactions and acquired resistance. The
majority of triazole units sold in the U.S. are attributed to DIFLUCAN. DIFLUCAN
in particular is often used in "less compromised" patients as prophylaxis or as
first-line empirical therapy. DIFLUCAN patients are often switched to an
amphotericin B product once a clinician is convinced that a patient has a fungal
infection. VFEND is a second-generation triazole approved in May 2002 and is
available in intravenous and oral formulations. VFEND carries a broader spectrum
of activity than first generation triazoles and is indicated for the treatment
of invasive aspergillosis, scedosporium apiospermum and fusariosis in patients
intolerant of, or refractory to, other therapy. However, it carries with it a
narrower spectrum of activity versus CAB and the lipid amphotericin B
formulations, while also retaining the same potential for drug-to-drug
interactions and resistance issues as the first generation triazoles.

      The newest class of products to enter the IV anti-fungal market are the
echinocandins. These exhibit fewer of the CAB side effects but, like the
triazoles, have a more limited spectrum of activity and less clinical data
supporting widespread use across a variety of fungal pathogens. CANCIDAS
(marketed by Merck) was approved in the U.S. in January 2001 and is the first
echinocandin to receive FDA approval. CANCIDAS is indicated for the treatment
invasive aspergillosis in patients who are refractory to or intolerant of other
therapies, esophageal candidiasis and candidemia. Additional echinocandin
products are in late-stage clinical development by pharmaceutical companies.

      PEGylation

      We are aware that other companies are conducting research on chemically
modified therapeutic proteins and that certain companies are modifying
pharmaceutical products, including proteins, by attaching PEG. In addition,
other companies have received FDA approval for PEGylated compounds, including,
Amgen's NEULASTA(R) (pegfilgrastin) and Pfizer's SOMAVERT(R) (pegvisomant for
injection). Other than PEG-INTRON, our ONCASPAR and ADAGEN products, Hoffmann-La
Roche's PEGASYS, Amgen's NEULASTA, and Pfizer's SOMAVERT, we are not aware of
any PEG-modified therapeutic proteins that are currently available commercially
for therapeutic use. Nevertheless, other drugs or treatments that are currently
available or that may be developed in the future, and which treat the same
diseases as those that our products are designed to treat, may compete with our
products.

      ADAGEN

      Prior to the development of ADAGEN, the only treatment available to
patients afflicted with adenosine deaminase or ADA-deficient SCID was a
well-matched bone marrow transplant. Completing a successful transplant depends
upon finding a matched donor, the probability of which is low. At present,
researchers at the NIH have been treating SCID patients with gene therapy, which
if successfully


                                       31
<PAGE>

developed, would compete with, and could eventually replace ADAGEN as a
treatment. The theory behind gene therapy is that cultured T-lymphocytes that
are genetically engineered and injected back into the patient will express the
deficient adenosine deaminase enzyme permanently and at normal levels. To date,
patients in gene therapy clinical trials have not been able to stop ADAGEN
treatment and, therefore, the trials have been inconclusive.

      ONCASPAR

      Current standard treatment of patients with acute lymphoblastic leukemia
includes administering unmodified L-asparaginase along with the drugs
vincristine, prednisone and daunomycin. Studies have shown that long-term
treatment with L-asparaginase increases the disease-free survival in high risk
patients. ONCASPAR, our PEG-modified L-asparaginase product, is used to treat
patients with acute lymphoblastic leukemia who are hypersensitive to unmodified
forms of L-asparaginase. Currently, there is one unmodified form of
L-asparaginase (ELSPAR(R)) available in the United States and several available
in Europe. We believe that ONCASPAR has two advantages over these unmodified
forms of L-asparaginase: increased circulating blood life and generally reduced
immunogenicity.

      PEG-INTRON

      The current market in the U.S. and Europe for PEGylated alpha interferon
products is highly competitive. PEG-INTRON, marketed by Schering-Plough,
competes directly with Hoffmann-La Roche's PEGASYS. Schering-Plough and
Hoffman-La Roche have been the major competitors in the global alpha interferon
market since the approval of their unmodified alpha interferon products, INTRON
A and ROFERON-A, respectively. Since its launch, PEGASYS has taken market share
away from PEG-INTRON, and the over all market for pegylated alpha interferon in
the treatment of Hepatitis C has not increased enough to offset the effect the
increasing PEGASYS sales have had on sales of PEG-INTRON. As a result, quarterly
sales of PEG-INTRON and the royalties we receive on those sales have declined in
recent quarters. We cannot assure you that PEGASYS will not continue to gain
market share at the expense of PEG-INTRON, which could result in lower
PEG-INTRON sales and royalties to us.

      DEPOCYT

      DEPOCYT competes against generic unmodified or Ara-C cytarabine, as well
as methotrexate, another generic drug, in the treatment of lymphomatous
meningitis. Both of these drugs have been used for oncology treatment for
decades and DEPOCYT does not have the same level of clinical experience as these
drugs. Clinical trials have demonstrated, however, that DEPOCYT provides certain
clinical advantages versus generic cytarabine. In a randomized, multi-center
trial of patients with lymphomatous meningitis, treated either with 50 mg of
DEPOCYT administered every 2 weeks or standard intrathecal chemotherapy
administered twice a week, results showed that DEPOCYT achieved a complete
response rate of 41% compared with a complete response rate of 6% for
unencapsulated cytarabine. In this study, complete response was prospectively
defined as (i) conversion of positive to negative CSF cytology and (ii) the
absence of neurologic progression. DEPOCYT has also demonstrated an increase in
the time to neurologic progression of 78.5 days for DEPOCYT versus 42 days for
unencapsulated cytarabine. There are no controlled trials, however, that
demonstrate a clinical benefit resulting from this treatment, such as
improvement in disease related symptoms, increased time to disease progression,
or increased survival.

      Products Under Development

      We are indepently developing Pegamotecan and we are jointly developing
MARQIBO with our partner Inex for the treatment of patients with gastric or
gastroesophageal junction cancers and Non-Hodgkins Lymphoma ("NHL"), who have
failed or relapsed previous therapy or therapies, respectively. Currently, there
are no other FDA approved products for these indications. Any product or
technologies that are directly or indirectly successful in treating NHL could
negatively impact the market potential for MARQIBO. Any product or technologies
that are directly or indirectly successful in treating gastric and
gastroesophageal junction cancers could negatively impact the market potential
for Pegamotecan.

      ATG-FRESENIUS S will compete with Genzyme Corporation's THYMOGLOBULIN, a
polyclonal


                                       32
<PAGE>

antibody already approved for the prevention of organ rejection in kidney
transplant patients, as well as several other antibody products marketed by
large pharmaceutical companies.

      SCA's

      There are several technologies which compete with our SCA protein
technology, including chimeric antibodies, humanized antibodies, human
monoclonal antibodies, recombinant antibody Fab fragments, low molecular weight
peptides and mimetics. These competing technologies can be categorized into two
areas:

      o     those modifying monoclonal antibodies to minimize immunological
            reaction to a foreign protein, which is the strategy employed with
            chimeric, humanized, and human monoclonal antibodies, and

      o     those creating smaller portions of monoclonal antibodies, such as
            Fab fragments and low molecular weight peptides.

      We believe that the smaller size of our SCA proteins should permit better
penetration into the tumor, result in rapid clearance from the blood and be
suitable for fusion proteins, such as immunotoxins. A number of organizations
have active programs in SCA proteins. We believe that our patent position on SCA
proteins will likely require companies that have not licensed our SCA protein
patents to obtain licenses under our patents in order to commercialize their
products. We cannot be sure, however, that other companies will not develop
competing SCAs or other technologies that are not blocked by our SCA patents.

Employees

      As of June 30, 2004, we employed 359 persons, including 32 persons with
Ph.D. or MD degrees. At that date, 80 employees were engaged in research and
development activities, 161 were engaged in manufacturing, 118 were engaged in
sales, marketing and administration. None of our employees are covered by a
collective bargaining agreement. All of our employees are covered by
confidentiality agreements. We consider our relations with our employees to be
good.

Item 2. Properties

      As part of the ABELCET transaction, we assumed ownership of a 56,000
square foot manufacturing facility in Indianapolis, Indiana which produces
ABELCET along with other products we manufacture for others on a contract basis.
Our Indianapolis facility is not subject to any mortgage.

      The following are all of the facilities that we currently lease:

<TABLE>
<CAPTION>
                                                Approx.      Approx.
                            Principal           Square       Annual            Lease
      Location              Operations          Footage       Rent           Expiration
      --------              ----------          -------       ----           ----------
<S>                    <C>                       <C>        <C>            <C>
20 Kingsbridge Road    Research & Development    56,000     $581,000(1)       July 31, 2021
Piscataway, NJ

300 Corporate Ct.          Manufacturing         24,000     $183,000(2)    October 31, 2012
S. Plainfield, NJ

685 Route 202/206         Administrative         25,000     $613,000(3)    January 31, 2008
Bridgewater, NJ
</TABLE>

(1)   Under the terms of the lease, annual rent increases over the remaining
      term of the lease from $581,000 to $773,000.

(2)   Under the terms of the lease, annual rent increases over the remaining
      term of the lease from $183,000 to $228,000.


                                       33
<PAGE>

(3)   Under the terms of the lease, annual rent increases over the remaining
      term of the lease from $613,000 to $638,000.

      We believe that our facilities are well maintained and generally adequate
for our present and future anticipated needs.

Item 3. Legal Proceedings

      There is no pending material litigation to which we are a party or to
which any of our property is subject.

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

      None.


                                       34
<PAGE>

                                     PART II

Item 5. Market for the Registrant's Common Equity,
        Related Stockholder Matters, an Issuer Purchases of Equity Securities

      Our common stock is traded on the NASDAQ National Market under the trading
symbol "ENZN".

      The following table sets forth the high and low sale prices for our common
stock for the years ended June 30, 2004 and 2003, as reported by the NASDAQ
National Market. The quotations shown represent inter-dealer prices without
adjustment for retail markups, markdowns or commissions, and may not necessarily
reflect actual transactions.

             Year Ended June 30, 2004        High            Low
                                          ----------      ---------
                  First Quarter             $13.90         $10.51
                  Second Quarter             12.52          10.28
                  Third Quarter              18.40          11.97
                  Fourth Quarter             16.20          10.86

             Year Ended June 30, 2003
                  First Quarter              25.00          16.46
                  Second Quarter             20.90          15.50
                  Third Quarter              19.32          11.00
                  Fourth Quarter             15.68          11.16

      As of September 13, 2004, there were 1,566 holders of record of our common
stock.

      We have never declared or paid any cash dividends on our common stock and
do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to fund the development and growth of
our business.

Equity Compensation Plan Information

      The following table sets forth information regarding outstanding options
and shares reserved for future insurance under our equity compensation plans as
of June 30, 2004 (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                                     Number of securities
                                                                                   remaining available for
                             Number of securities to       Weighted-average         future issuance under
                             be issued upon exercise      exercise price of       equity compensation plans
                             of outstanding options,     outstanding options,       (excluding securities
      Plan Category            warrants and rights       warrants and rights        reflected in column a)
-------------------------    -----------------------    ---------------------     -------------------------
                                       (a)                       (b)                         (c)
<S>                                   <C>                      <C>                          <C>
   Equity compensation
    plans approved by
    security holders                  4,838                    $25.90                       3,410

   Equity compensation
    plans not approved
    by security holders                  --                        --                          --
                             -----------------------    ---------------------     -------------------------
   Total                              4,838                    $25.90                       3,410
                             =======================    =====================     =========================
</TABLE>


                                       35
<PAGE>

Item 6. Selected Financial Data

      Set forth below is our selected financial data for the five fiscal years
ended June 30, 2004.

Consolidated Statement of Operations Data ( in thousands, except per share
data):

<TABLE>
<CAPTION>
                                                                   Years Ended June 30,
                                                  ---------------------------------------------------------
                                                    2004       2003        2002         2001         2000
                                                  --------   --------   ---------    ---------    ---------
<S>                                               <C>        <C>        <C>          <C>          <C>
Consolidated Statements of Operations Data:
 Total revenues                                   $169,571   $146,406   $  75,805    $  31,588    $  17,018
 Cost of sales                                      46,986     28,521       6,078        3,864        4,888
 Research and development expenses                  34,769     20,969      18,427       13,052        8,383
 Write-down of carrying value of investment          8,341     27,237          --           --           --
 Acquired in process research and development       12,000         --          --           --           --
 Other operating expenses                           60,433     39,782      16,687       11,796       12,956
 Operating income (loss)                             7,042     29,897      34,613        2,876       (9,209)
 Interest and dividend income                       13,396      8,942      18,681        8,401        2,943
 Interest expense                                   19,829     19,828      19,829          275            4
 Other income (expense), net                         3,860     26,938       3,218           11          (36)
 Income tax provision (benefit)                      1,592        223      (9,123)        (512)          --
 Net earnings available for common stockholders      2,877     45,726      45,806       11,525       (6,306)
 Net earnings per common shares
  Basic                                           $   0.07   $   1.06   $    1.07    $    0.28    ($   0.17)
  Diluted                                         $   0.07   $   1.05   $    1.04    $    0.26    ($   0.17)

<CAPTION>

                                                                    Years Ended June 30,
                                                  ---------------------------------------------------------

                                                    2004       2003        2002         2001         2000
                                                  --------   --------   ---------    ---------    ---------
<S>                                                <C>        <C>         <C>          <C>          <C>
Consolidated Balance Sheet Data:
  Current assets                                   170,353    152,847     221,462      455,521       57,581
  Current liabilities                               31,664     34,345      19,701        9,410        8,172
  Total assets                                     724,863    728,566     610,748      549,675      130,252
  Other long-term obligations                        1,655      2,637         552        1,276        1,118
  Long-term debt                                   400,000    400,000     400,000      400,000           --
  Total stockholders' equity                       291,544    291,584     190,495      138,989      120,962
</TABLE>

Item 7. Management's Discussion and Analysis of Financial
        Condition and Results of Operations

Company Overview

      We are a biopharmaceutical company that discovers, develops, manufactures
and markets enhanced therapeutics for life-threatening diseases through the
application of our proprietary technologies, as well as through strategic
transactions and partnerships Our revenues are comprised of sales of four FDA
approved products as well as royalties on sales of products that use our
technology. In addition, we manufacture several products for other companies in
our manufacturing facility. Our expenditures relate to the development of
additional products under various stages of development, as well as costs
related to the sales and manufacture of our products.

Liquidity and Capital Resources

      Total cash reserves, including cash, cash equivalents and marketable
securities, as of June 30, 2004 were $186.2 million, as compared to $153.3
million as of June 30, 2003. The increase is primarily the result of net cash
provided by operations of $37.1 million, purchase of acquired in process
research and development of $12.0 million and cash proceeds of $7.8 million
related to our sale of 880,075 shares of Nektar common stock and marketable
securities. We invest our excess cash primarily in United States
government-backed securities and investment-grade corporate debt securities.


                                       36
<PAGE>

      During the year ended June 30, 2004, net cash generated from operating
activities was $37.1 million, principally reflecting our net income of $2.9
million, depreciation and amortization of $22.1 million, other non-cash charges
provided of $10.2 million, acquired in process research and development of $12.0
million, write-down of the carrying value of Micromet of $8.3 million, and a net
increase in operating assets and liabilities of $2.0 million. During the year
ended June 30, 2003, net cash generated from operating activities was $58.2
million, primarily reflecting our net income of $45.7 million and the effect of
non-cash amounts for the merger termination fee of $34.6 million, the write-down
of the carrying value of an investment of $27.2 million, depreciation and
amortization of $13.8 million, deferred taxes of $4.4 million, and lower working
capital of $10.5 million. During the year ended June 30, 2002, net cash
generated from operating activities was $29.6 million, primarily reflecting our
net income of $45.8 million and the effect of non-cash amounts for the
depreciation and amortization, deferred taxes of $9.0 million, and increased
working capital of $7.2 million.

      Net cash used in by investing activities totaled $12.8 million for the
year ended June 30, 2004 as compared to $106.4 million and $231.1 million for
the years ended June 30, 2003 and 2002, respectively. Cash provided by investing
activities during the year ended June 30, 2004 consisted of net proceeds from
marketable securities of $5.6 million, which was offset by cash used in
investing activities of $6.4 million for purchases of property and equipment and
$12.0 million for acquired in process research and development. Cash used in
investing activities during the year ended June 30, 2003 related to $11.2
million for purchases of property and equipment, $369.3 million for the
acquisition of the North American ABELCET business, and $12.2 million for the
North American license of DEPOCYT. These items were partly offset by net
proceeds from marketable securities totaling $286.3 million for the year ended
June 30, 2003. Cash used in investing activities for the year ended June 30,
2002 related to $7.5 million for purchases of property and equipment, $15.0
million of product rights related to the reacquisition of ONCASPAR, and $48.3
million of other investments. These items were offset by net purchases of
marketable securities of $160.3 million.

      Net cash provided by financing activities for the years ended June 30,
2004, 2003, and 2002 was $527,000, $1.1 million, and $5.1 million, respectively.
Financing activities for the year ended June 30, 2004 were related to proceeds
from common stock issued under our stock option plans. Financing activities for
the year ended June 30, 2003 were primarily related to proceeds from common
stock issued under our stock options plans and payment of preferred stock
dividends. Financing activity for the year ended June 30, 2002 was related to
proceeds from common stock issued under our stock option plans.

      As of June 30, 2004, we had $400.0 million of 4.5% convertible
subordinated notes outstanding. The notes bear interest at an annual rate of
4.5%. Interest is payable on January 1 and July 1 of each year. Accrued interest
on the notes was $9.0 million as of June 30, 2004. The holders may convert all
or a portion of the notes into common stock at any time on or before July 1,
2008. The notes are convertible into our common stock at a conversion price of
$70.98 per share, subject to adjustment in certain events. The notes are
subordinated to all existing and future senior indebtedness. On or since July 7,
2004, we may redeem any or all of the notes at specified redemption prices, plus
accrued and unpaid interest to the day preceding the redemption date. The notes
will mature on July 1, 2008 unless earlier converted, redeemed at our option or
redeemed at the option of the note-holder upon a fundamental change, as
described in the indenture for the notes. Neither we nor any of our subsidiaries
are subject to any financial covenants under the indenture. In addition, neither
we nor any of our subsidiaries are restricted under the indenture from paying
dividends, incurring debt, or issuing or repurchasing our securities.

      In August 2003, we entered into a Zero Cost Protective Collar arrangement
with a financial institution to reduce the exposure associated with the 1.5
million shares of common stock of NPS we received as part of the merger
termination agreement with NPS. By entering into this equity collar arrangement
and taking into consideration the underlying put and call option strike prices,
the terms are structured so that our investment in NPS stock, when combined with
the value of the Collar, should secure ultimate cash proceeds in the range of
85%-108% of the negotiated fair value per share of $23.47 (representing a 4.85%
discount off of the closing price of NPS common stock on the day before the
collar was executed). The Collar is considered a derivative hedging instrument
under SFAS No. 133 and as such, we periodically measure its fair value and
recognize the derivative as an asset or a liability. The change in fair value is
recorded as either other comprehensive income (See Note 3) or in the Statement
of Operations depending on the portion of the derivative designated and
effective as a hedge. As of June 30, 2004, the market


                                       37
<PAGE>

value of NPS' common stock was $21.00 per share. When the underlying shares
become unrestricted and freely tradable, we are required to deliver to the
financial institution as posted collateral, a corresponding number of shares of
NPS common stock. During the year ended June 30, 2004, we sold and re-purchased
1,125,000 shares respectively of common stock of NPS. The unrealized gain
previously included in other comprehensive income prior to the sale and
repurchase with respect to these shares aggregating $1.8 million for the year
ended June 30, 2004, was recognized in the Statements of Operations and is
included in "Other Income". With respect to the remaining 375,000 shares of NPS
common stock, as of June 30, 2004, $38,000 has been recorded in comprehensive
income for the year ended June 30, 2004, net of income taxes. The fair value of
the Collar represents a receivable from the counterparty of $1.7 million at June
30, 2004. In addition, the time value component of the Collar represents a gain
of $1.7 million for the year ended June 30, 2004, was recorded as "Other Income"
in the Statement of Operations. The Collar will mature in four separate
three-month intervals beginning November 2004 through August 2005, at which time
we will receive the proceeds from the sale of the securities. The amount due at
each maturity date will be determined based on the market value of NPS' common
stock on such maturity date. The contract requires us to maintain a minimum cash
balance of $30.0 million and additional collateral up to $10.0 million (as
defined) under certain circumstances with the financial institution. The strike
prices of the put and call options are subject to certain adjustments in the
event we receive a dividend from NPS.

      Our current sources of liquidity are our cash reserves; interest earned on
such cash reserves; short-term investments; marketable securities; sales of
ADAGEN(R), ONCASPAR(R), DEPOCYT(R) and ABELCET(R); and royalties earned, which
are primarily related to sales of PEG-INTRON(R); and contract manufacturing
revenue. Based upon our current planned research and development activities and
related costs and our current sources of liquidity, we anticipate our current
cash reserves and expected cash flow from operations will be sufficient to meet
our capital, debt service and operational requirements for the foreseeable
future.

      While we believe that our cash, cash reserves and investments will be
adequate to satisfy our capital needs for the foreseeable future, we may seek
additional financing, such as through future offerings of equity or debt
securities or agreements with collaborators with respect to the development and
commercialization of products, to fund future operations and potential
acquisitions. We cannot assure you, however, that we will be able to obtain
additional funds on acceptable terms, if at all.

Off-Balance Sheet Arrangements

      As part of our ongoing business, we do not participate in transactions
that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities ("SPE"), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow limited purposes. As of June 30, 2004 we are not involved in any SPE
transactions.

Contractual Obligations

      Our major outstanding contractual obligations relate to our operating
leases, inventory purchase commitments, our convertible debt and our license
agreements with collaborative partners.

      As of June 30, 2004, we had $400.0 million of convertible subordinated
notes outstanding. The notes bear interest at an annual rate of 4.5%. Interest
is payable on January 1 and July 1 of each year beginning January 2, 2002.
Accrued interest on the notes was $9.0 million as of June 30, 2004 (which was
paid on July 1, 2004). The holders may convert all or a portion of the notes
into common stock at any time on or before July 1, 2008. The notes are
convertible into our common stock at a conversion price of $70.98 per share,
subject to adjustment in certain events. The notes are subordinated to all
existing and future senior indebtedness. On or after July 7, 2004, we may redeem
any or all of the notes at specified redemption prices, plus accrued and unpaid
interest to the day preceding the redemption date. The notes will mature on July
1, 2008 unless earlier converted, redeemed at our option or redeemed at the
option of the note-holder upon a fundamental change, as described in the
indenture for the notes. Neither we nor any of our subsidiaries are subject to
any financial covenants under the indenture. In addition, neither we nor any of
our subsidiaries are restricted under the indenture from paying dividends,
incurring debt or issuing or repurchasing our securities.


                                       38
<PAGE>

      We have a multi-year strategic collaboration with Micromet, a private
company, to combine our patent estates and complementary expertise in
single-chain antibody (SCA) technology to create a leading platform of
therapeutic products based on antibody fragments. We have an obligation to fund
50% of research and development expenses for certain activities relating to SCA
for the collaboration through September 2007.

      We have a multi-year strategic alliance with Nektar whereby the companies
have entered into a product development agreement to jointly develop three
products to be specified over time using Nektar's enhance pulmonary delivery
platform and supercritical fluids platform. We have an obligation to fund most
clinical development and commercialization costs for the collaboration through
January 2007.

      Our strategic alliance with SkyePharma PLC ("SkyePharma") provides for the
two Companies to combine their drug delivery technology and expertise to jointly
develop up to three products for future commercialization. Research and
development costs related to the jointly developed products will be shared
equally based on an agreed upon annual budget, and future revenues generated
from the commercialization of jointly-developed products will also be shared
equally. In addition, SkyePharma is entitled to a $2.0 million milestone payment
for each product based on its own proprietary technology that enters Phase II
clinical development.

      Under our exclusive license for the right to sell, market and distribute
SkyePharma's DEPOCYT product, we are required to purchase minimum levels of
finished product for calendar 2003 of 90% of the previous year sales by
SkyePharma and a sales level of $5.0 million for each subsequent calendar year.
SkyePharma is also entitled to a milestone payment of $5.0 million if our sales
of the product exceed a $17.5 million annualized run rate for four consecutive
quarters and an additional milestone payment of $5.0 million if Enzon's sales
exceed an annualized run rate of $25 million for four consecutive quarters. We
are also responsible for a $10.0 million milestone payment if the product
receives approval for all neoplastic meningitis prior to December 31, 2006. This
milestone payment is incrementally reduced if the approval is received
subsequent to December 31, 2006 to a minimum payment of $5.0 million for an
approval after December 31, 2007.

      Under our agreement with Fresenius Biotech ("Fresenius") we are
responsible for North American clinical development, approval, and
commercialization of ATG-FRESENIUS S. In September 2004, the Company made a $1.0
million milestone payment to Fresenius upon FDA approval of an Investigational
New Drug Application. We are obligated to make another milestone payment
of $1.0 million upon submission of a Biologics License Application. Upon the
commercialization of the product in North America, we will purchase the finished
product from Fresenius at a specified percentage of net sales.

      During January 2004, we entered into a strategic partnership with Inex. We
are obligated to make a milestone payment of up to $20.0 million to Inex upon
MARQIBO receiving accelerated approval from the FDA. Additional development
milestones and sales-based bonus payments could total $43.75 million, of which
$10.0 million is payable upon annual sales first reaching $125.0 million and
$15.0 million is payable upon annual sales first reaching $250.0 million. Inex
will also receive a percentage of commercial sales of MARQIBO and this
percentage will increase as sales reach certain predetermined thresholds.

      The Company leases three facilities in New Jersey. Total future minimum
lease payments and commitments for operating leases total $15.7 million.

      Contractual obligations represent future cash commitments and liabilities
under agreements with third parties, and exclude contingent liabilities for
which we cannot reasonably predict future payment.

      The following chart represents our contractual cash obligations aggregated
by type as of June 30, 2004 (in millions):


                                       39
<PAGE>

<TABLE>
<CAPTION>
                                                             Payments due by period
                                          -----------------------------------------------------------------
Contractual Obligations and                        Less than                                    More than 5
Commercial Commitments                    Total      1 Year       2 - 3 Years     4 - 5 Years      years
                                          ------   ---------      -----------     -----------   -----------
<S>                                       <C>        <C>             <C>             <C>           <C>
Long-term debt including current
  portion                                 $400.0     $   --          $   --          $400.0        $   --
Operating lease obligations                 15.7        1.5             2.9             2.1           9.2
Inventory purchase obligations              45.0        5.0            10.0            10.0          20.0
Interest due on long-term debt              81.0       18.0            36.0            18.0           9.0

                                          ------     ------          ------          ------        ------
Totals                                    $541.7     $ 24.5          $ 48.9          $430.1        $ 38.2
                                          ======     ======          ======          ======        ======
</TABLE>

This table does not include milestone commitments of $60.6 million which are
only payable upon the occurrence of future events.

Fiscal Years Ended June 30, 2004, 2003, and 2002

      Revenues. Total revenues for the year ended June 30, 2004 were $169.6
million compared to $146.4 million for the year ended June 30, 2003 and $75.8
million for the year ended June 30, 2002. The components of revenues are product
sales, contract manufacturing revenues, royalties we earn on the sale of our
products by others, and contract revenues.

      Net product sales for the year ended June 30, 2004 increased by 82% to
$107.9 million compared to $59.3 million for the year ended June 30, 2003. The
increase in sales was due to increased sales of each of our four internally
marketed products: ABELCET(R), DEPOCYT(R), ADAGEN(R) and ONCASPAR(R). During
November 2002, we acquired the North American ABELCET business from Elan. During
the year ended June 30, 2004, we recorded sales of ABELCET in North America of
$67.7 million for the year ended June 30, 2004, as compared to $28.4 million for
the year ended June 30, 2003. During January 2003, we obtained an exclusive
license for the right to sell, market, and distribute SkyePharma's DEPOCYT in
North America. During the year ended June 30, 2004, we recorded DEPOCYT sales of
$5.0 million as compared to $2.5 million for year ended June 30, 2003. The
increase in net sales of ABELCET and DEPOCYT was principally due to the
acquisition of the product during the year ended June 30, 2003. Sales of
ONCASPAR increased by 46% to $18.1 million for the year ended June 30, 2004 from
$12.4 million for the year ended June 30, 2003. This was a result of additional
sales and marketing efforts to support ONCASPAR. In June 2002, we reacquired the
North American rights to market and distribute ONCASPAR in North America for
certain territories which were previously licensed to Aventis. Sales of ADAGEN
increased by 7% for the year ended June 30, 2004 to $17.1 million, as compared
to $16.0 million for the year ended June 30, 2003 due to an increase in the
number of patients receiving the drug.

      Net product sales increased by 167% to $59.3 million for the year ended
June 30, 2003 from $22.2 million for the year ended June 30, 2002. The increase
in net sales was due to the commencement of sales of ABELCET in North America in
November 2002 and DEPOCYT(R) in January 2003, and increased sales of ADAGEN and
ONCASPAR. During the year ended June 30, 2003, we recorded $28.4 million related
to sales of ABELCET in North America. During the year ended June 30, 2003, we
recorded DEPOCYT sales of $2.5 million. Sales of ONCASPAR increased by 43% to
$12.4 million for the year ended June 30, 2003, compared to $8.7 million for the
year ended June 30, 2002. In June 2002, we reacquired the rights to market and
distribute ONCASPAR in North America and certain other territories, which we
previously exclusively licensed to Aventis. Sales of ADAGEN increased by 19% for
the year ended June 30, 2003 to $16.0 million, as compared to $13.5 million for
the year ended June 30, 2002 due to an increase in the number of patients
receiving the drug.

      Contract manufacturing revenue for the year ended June 30, 2004 was $12.9
million, as compared to $8.7 million for the comparable period of the prior
year. Contract manufacturing revenue is related to the manufacture and sale of
ABELCET for the international market and other contract manufacturing revenue.
As part of the ABELCET acquisition in November 2002, we entered into a long-term
manufacturing and supply agreement with Elan, under which we continue to
manufacture two products, MYOCET and ABELCET for the European market. During
February 2004, Elan sold its European sales and marketing business to Medeus
Pharma Ltd ("Medeus") and transferred the manufacturing and supply agreement to
Medeus. Approximately $1.7 million of the $12.9 million of revenues recorded
during the year ended June 30, 2004 related to a payment of $1.7 million from
Elan for invoices that had been previously disputed by Elan and therefore, not
previously recognized as revenue.


                                       40
<PAGE>

      Contract manufacturing revenue for the year ended June 30, 2003 is related
to the manufacture and sale of ABELCET for the international market and other
contract manufacturing revenue, which began in November 2002 as part of the
ABELCET acquisition. Contract manufacturing revenue for the year ended June 30,
2003 was $8.7 million.

      Royalties for the year ended June 30, 2004 decreased to $47.7 million
compared to $77.6 million for the year ended June 30, 2003. The decrease was
primarily due to decreased sales of PEG-INTRON by Schering-Plough, our marketing
partner, due to competitive pressure from the competing pegylated alpha
interferon product, PEGASYS(R), which Hoffmann-La Roche launched as a
combination therapy for hepatitis C in December 2002.

      Royalties for the year ended June 30, 2003 increased to $77.6 million as
compared to $53.3 million for the year ended June 30, 2002. The increase was
primarily due to the increased sales by Schering-Plough, our marketing partner,
of PEG-INTRON in combination with REBETOL in the U.S. and increased sales of
PEG-INTRON in Europe.

      Due to the competitive pressure from PEGASYS, we believe royalties from
sales of PEG-INTRON may continue to decrease in the near term. This decrease may
be offset by the potential launch of PEG-INTRON in combination with REBETOL in
Japan. In April 2004, Schering-Plough announced a New Drug Application was filed
in Japan for PEG-INTRON combination therapy. Since its launch, PEGASYS has taken
market share away from PEG-INTRON in the U.S. and Europe and the overall market
for pegylated alpha interferon in the treatment of hepatitis C has not increased
enough to offset the effect PEGASYS sales have had on sales of PEG-INTRON. As a
result, quarterly sales of PEG-INTRON and the royalties we receive on those
sales have declined in recent quarters. We cannot assure you that PEGASYS will
not continue to gain market share at the expense of PEG-INTRON, which could
result in lower PEG-INTRON sales and royalties to us.

      Based on our focused marketing efforts for ABELCET we believe that we have
been able to stabilize the pressure from the introduction of new products in the
antifungal market, namely Pfizer's VFEND(R) and Merck's CANCIDAS(R). Given the
highly competitive landscape of the antifungal market, we expect ABELCET to have
modest growth over the next year.

      We expect ADAGEN sales to grow over the next year at similar levels to
those achieved for the year ended June 30, 2004. We expect ONCASPAR sales to
continue to grow, but at a pace slower then the 46% growth rate achieved in
fiscal 2004. ONCASPAR sales may decline if we are unable to correct certain
manufacturing problems that have caused us to recall two lots in recent months.
We expect DEPOCYT sales to gain modestly from the current sales level of
approximately $1.0 million to $1.2 million per quarter. However, we cannot
assure you that any particular sales levels of ABELCET, ADAGEN, ONCASPAR,
DEPOCYT or PEG-INTRON will be achieved or maintained.

      Contract revenues for the year ended June 30, 2004 increased to $1.0
million as compared to $811,000 for the year ended June 30, 2003 and $293,000
for the year ended June 30, 2002. The increase was due to the recognition of
revenue over the entire fiscal year related to payments received from the
licensing of our PEG technology to SkyePharma. In connection with such
licensing, we received a payment of $3.5 million in January 2003, which is being
recognized into income based on the term of the related agreement.

      We had export sales and royalties recognized on export sales of $44.3
million for the year ended June 30, 2004, $40.2 million for the year ended June
30, 2003 and $26.3 million for the year ended June 30, 2002. Of these amounts,
sales in Europe and royalties recognized on sales in Europe, were $34.7 million
for the year ended June 30, 2004, $35.5 million for the year ended June 30, 2003
and $24.9 million for the year ended June 30, 2002.

      Cost of Sales and Manufacturing Revenue. Cost of sales and manufacturing
revenue, as a percentage of net product sales and manufacturing revenue,
decreased to 39% for the year ended June 30, 2004 as compared to 42% for the
year ended June 30, 2003. The decrease was principally due to the higher 2003


                                       41
<PAGE>

inventory costs as a result of certain purchase accounting adjustments to the
inventory acquired with the ABELCET acquisition, which was sold during the year
ended June 30, 2003, as well as manufacturing revenue with no related costs due
to a payment of $1.7 million from Elan for invoices that had been previously
disputed by Elan and therefore not previously recognized as income.

      Cost of sales and manufacturing revenue, as a percentage of net product
sales and manufacturing revenue, for the year ended June 30, 2003 was 42% as
compared to 27% in 2002. The increase was due to higher cost of sales for
ABELCET due to certain purchase accounting adjustments to the acquired inventory
totaling $8.6 million and as a result of unabsorbed capacity costs. The increase
was also due to our reacquisition of ONCASPAR, which resulted in increased cost
of sales for the product. Under the reacquisition agreement, we made a $15.0
million payment to Aventis in June 2002 and we pay Aventis 25% royalty on net
sales of ONCASPAR. The royalty and amortization of the $15.0 million payment
over a 14 year period are included in cost of sales for the product, accounting
for an increase in cost of sales as a percentage of sales.

      Research and Development. Research and development expenses increased by
$13.8 million or 66% to $34.8 million for the year ended June 30, 2004, as
compared to $21.0 million for the same period last year. The increase was
primarily due to (i) increased spending of approximately $2.5 million related to
our single chain antibody collaboration with Micromet AG; (ii) increased
spending on our two late stage development programs, Pegamotecan of
approximately $1.2 million and ATG Fresenius S, of approximately $3.0 million;
(iii) increased spending of approximately $2.0 million related to our strategic
partnership with Inex on Inex's proprietary oncology product MARQIBO; (iv)
increased preclinical spending of $1.7 million; and (v) increased
personnel-related expenses of approximately $3.4 million.

      Research and development expenses for the year ended June 30, 2003
increased by $2.6 million or 14% to $21.0 million as compared to $18.4 million
in 2002. The increase was primarily due to (i) increased spending of
approximately $1.7 million related to our single chain antibody collaboration
with Micromet AG; (ii) increased spending on our two late stage development
programs, Pegamotecan and ATG FRESENIUS S, of approximately $1.4 million. These
increases were partially offset by a decrease of approximately $500,000 in costs
as a result of our January 2003 decision to suspend our PEG-paclitaxel program.

      Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 2004 increased by $16.4
million to $47.0 million, as compared to $30.6 million in 2003. The increase was
primarily due to (i) increased sales and marketing expenses of approximately
$11.3 million related to the hiring of our North American sales force in
connection with our acquisition of ABELCET; (ii) increased sales and marketing
expense of approximately $2.7 million related to the continued build out of a
sales and marketing presence in oncology for ONCASPAR and DEPOCYT; and (iii)
increased costs of approximately $2.4 million that were primarily attributable
to personnel-related expenses.

      Selling, general and administrative expenses for the year ended June 30,
2003 increased by $14.1 million to $30.6 million, as compared to $16.5 million
in 2002. The increase was primarily due to (i) increased sales and marketing
expense of approximately $10.8 million related to the acquisition of ABELCET and
the subsequent hiring of our North American sales force; (ii) increased sales
and marketing expense of approximately $4.2 million due to the reacquisition of
marketing and distribution rights for ONCASPAR from Aventis and the subsequent
establishment of a sales and marketing presence in oncology; and (iii) increased
costs of approximately $626,000 that were primarily attributable to
personnel-related expenses. These increases were partially offset by a reduction
in legal expense of approximately $1.5 million related to the settlement of the
prior year's patent litigation with Nektar. During January 2002, we settled our
patent infringement suit with Nektar and entered into a broad collaboration.

      Amortization. Amortization expense increased to $13.4 million for the year
ended June 30, 2004, as compared to $9.2 million for the year ended June 30,
2003 and $142,000 for the year ended June 30, 2002, as a result of the
intangible assets acquired in connection with the ABELCET acquisition during
November 2002. Amortization of intangible assets is provided over their
estimated lives ranging from 3-15 years on a straight-line basis.

      Acquired In Process Research and Development. Acquired in process research
and development for the year ended June 30, 2004 of $12.0 million was due to an
up-front payment to Inex related to the execution of our strategic partnership
and related agreements entered into with Inex related to MARQIBO (a


                                       42
<PAGE>

development-stage product).

      Write-down of investment. During the year ended June 30, 2004, we recorded
a write-down of the carrying value of our investment in Micromet, which resulted
in a non-cash charge of $8.3 million. In April 2002, we entered into a
multi-year strategic collaboration with Micromet, which was amended in June
2004, to identify and develop antibody-based therapeutics. We made an $8.3
million investment into Micromet in the form of a convertible note due to Enzon
that is payable in March 2007 and bears interest at 3%. This note is convertible
into Micromet common stock at the election of either party. We based our
decision to write-down the note due an other-than-temporary decline in the
estimated fair value of this investment.

      In January 2002, we entered into a broad strategic alliance with Nektar to
co-develop products utilizing both companies' proprietary drug delivery
platforms. As a part of this agreement, we purchased $40.0 million of newly
issued Nektar convertible preferred stock which is currently convertible into
Nektar common stock at a conversion price of $22.79 per share. Under the cost
method of accounting, investments are carried at cost and are adjusted only for
other-than-temporary declines in fair value, and additional investments. As a
result of a continued decline in the price of Nektar's common stock, which was
determined to be other-than-temporary, we recorded a write-down of the carrying
value of our investment in Nektar, which resulted in a non-cash charge of $27.2
million. The adjustment was calculated based on an assessment of the fair value
of the investment at the time of the write-down.

      The estimated fair value of the Nektar preferred stock was determined by
multiplying the number of shares of common stock that would be received based on
the conversion rate in place as of the date of the agreement, ($22.79 per share)
by the closing price of Nektar common stock on December 31, 2002, less a 10%
discount to reflect the fact that the shares were not convertible as of December
31, 2002, the valuation date.

      Other income (expense) Other income (expense) for the year ended June 30,
2004 was an expense of $2.6 million, as compared to other income of $16.1
million for the year ended June 30, 2003. Other income (expense) includes: net
investment income, interest expense, and other income.

      Net investment income for the year ended June 30, 2004 increased by $4.5
million to $13.4 million for the year ended June 30, 2004, as compared to $8.9
million for the year ended June 30, 2003. The increase was primarily due to a
net realized gain of $11.0 million principally related to the sale of
approximately 50% of the Company's investment in Nektar. The increase was
partially offset by a decrease in our interest-bearing investment as a result of
our previous years purchase of the North American rights to ABELCET in November
2002 for a cash payment of $360.0 million plus acquisition costs, as well as a
decrease in interest rates.

      Net investment income for the year ended June 30, 2003 decreased by $9.8
million to $8.9 million for the year ended June 30, 2003, as compared to $18.7
million for the year ended June 30, 2002. The decrease was primarily due to a
reduction in our interest-bearing investments resulting from our purchase of the
North American rights to ABELCET in November 2002 for a cash payment of $360.0
million plus acquisition costs, as well as a decrease in interest rates.

      Interest expense was $19.8 million for each of the years ended June 30,
2004, 2003, and 2002. Interest expense is related to $400.0 million in 4.5%
convertible subordinated notes, which were outstanding for each of the periods.

      During the year ended June 30, 2003, we recorded NPS merger termination
income of $26.9 million. This amount reflects the aggregate consideration of
$34.6 million we received related to the mutual termination of our proposed
merger with NPS Pharmaceuticals, Inc. in June 2003 net of $7.7 million in costs
incurred related to the proposed merger with NPS (primarily investment banking,
legal, and accounting fees).

      Other income increased by approximately $3.8 million to $3.9 million for
the year ended June 30, 2004, as compared to $41,000 for the year ended June 30,
2003. The increase in other income was related to a derivative instrument we
entered into as a protective collar arrangement to reduce our exposure
associated with the 1.5 million shares of NPS common stock. During the year
ended June 30, 2004, we recorded other income of $1.7 million to reflect the
change in the fair value of this derivative hedging instrument and $1.8 million
on the sale of NPS Common Stock.


                                       43
<PAGE>

      Other income (expense) decreased to $41,000 for the year ended June 30,
2003 as compared to $3.2 million for the prior year, primarily due to a $3.0
million payment received from Nektar in the prior year in connection with the
settlement of the patent infringement suit against Nektar's subsidiary
Shearwater Corporation, Inc. This one-time payment was reimbursement for
expenses we incurred in defending our branched PEG patent.

      Income Taxes. For the year ended June 30, 2004 the Company recognized a
net tax expense of approximately $1.6 million for federal and state purposes.
Income tax expense for the year ended June 30, 2004 is comprised of a tax
provision for income taxes payable and a charge of $2.7 million primarily
related to an increase in the Company's valuation allowance for certain research
and development tax credits and capital losses that we believe it is now more
likely than not that we may not be able to utilize. We continue to believe it is
more likely than not that we will be able to utilize the majority of our net
operating loss carryforwards and tax credits. During the year ended June 30,
2004, we sold approximately $3.2 million of our state net operating loss
carryforwards for proceeds of $254,000 (which was recorded as a tax benefit) and
we purchased approximately $23.5 million of gross state net operating loss
carryforwards for $1.5 million.

      For the year ended June 30, 2003, we recognized net tax expense of
approximately $223,000. Certain tax expense, primarily related to the NPS
settlement in June 2003, was offset by the reduction in the valuation allowance
based on our net operating loss carryforwards expected to be utilized in the
future. We believe it is more likely than not that we will be able to utilize
the majority of our net operating loss carryforwards and tax credits, and we
therefore recognized $67.5 million of net deferred tax assets. Of these assets,
approximately $54.7 million related to net operating losses from stock option
exercises which, pursuant to SFAS No. 109, Accounting for Income Taxes, was
recorded as an increase in additional paid in capital and not as a credit to
income tax expense. The remaining benefit from the reduction of the valuation
allowance totaled $11.2 million and was recorded as an income tax benefit in the
Statement of Operations. During the year ended June 30, 2003, we sold
approximately $6.0 million of our state net operating loss carryforwards for
proceeds of $474,000 (which was recorded as a tax benefit) and we purchased
approximately $11.8 million of gross state net operating loss carryforwards for
$1.1 million.

Critical Accounting Policies

      In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in Management's Discussion and Analysis of
Financial Condition and Results of Operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results of operations and requires
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.

      Our consolidated financial statements are presented in accordance with
accounting principles that are generally accepted in the United States. All
professional accounting standards effective as of June 30, 2004 have been taken
into consideration in preparing the consolidated financial statements. The
preparation of the consolidated financial statements requires estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures. Some of those estimates are subjective and
complex, and, consequently, actual results could differ from those estimates.
The following accounting policies have been highlighted as significant because
changes to certain judgments and assumptions inherent in these policies could
affect our consolidated financial statements.

      Revenues from product sales and manufacturing revenue are recognized at
the time of shipment and a provision is made at that time for estimated future
credits, chargebacks, sales discounts, rebates and returns. These sales
provision accruals, except for rebates which are recorded as a liability, are
presented as a reduction of the accounts receivable balances. We continually
monitor the adequacy of the accruals by comparing the actual payments to the
estimates used in establishing the accruals. We ship product to customers
primarily FOB shipping point and utilize the following criteria to determine
appropriate revenue recognition: pervasive evidence of an arrangement exists,
delivery has occurred, selling price is fixed and determinable and collection is
reasonably assured.

      Royalties under our license agreements with third parties are recognized
when earned through the sale of the product by the licensor net of any estimated
future credits, chargebacks, sales discount rebates and refunds.


                                       44
<PAGE>

      Contract revenues are recorded as the earnings process is completed.
Non-refundable milestone payments that represent the completion of a separate
earnings process are recognized as revenue when earned, upon the occurrence of
contract-specified events and when the milestone has substance. Non-refundable
payments received upon entering into license and other collaborative agreements
where we have continuing involvement are recorded as deferred revenue and
recognized ratably over the estimated service period.

      Under the asset and liability method of Statement of Financial Accounting
Standards ("SFAS") No. 109, deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. A
valuation allowance on net deferred tax assets is provided for when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. We have significant net deferred tax assets, primarily related to net
operating loss and other carryforwards, and continue to analyze what level of
the valuation allowance is needed taking into consideration the expected future
performance of the Company.

      We assess the carrying value of our cost method investments in accordance
with SFAS No. 115 and SEC Staff Accounting Bulletin (SAB) No. 59. Commencing
with the first quarter of fiscal 2005 the Company will evaluate investments in
accordance with EITF 03-01, the Meaning of Other-Than-Temporary Impairment and
its application to Certain Investments. An impairment write-down is recorded
when a decline in the value of an investment is determined to be
other-than-temporary. These determinations involve a significant degree of
judgment and are subject to change as facts and circumstances changes.

      In accordance with the provisions of SFAS No. 142, goodwill and intangible
assets determined to have an indefinite useful life acquired in a purchase
business combination, are not subject to amortization, are tested at least
annually for impairment, and are tested for impairment more frequently if events
and circumstances indicate that the asset might be impaired. The Company
completed its annual goodwill impairment test on May 31, 2004, which indicated
that goodwill was not impaired. An impairment loss is recognized to the extent
that the carrying amount exceeds the asset's fair value. This determination is
made at the Company level because the Company is in one reporting unit and
consists of two steps. First, the Company determines the fair value of its
reporting unit and compares it to its carrying amount. Second, if the carrying
amount of its reporting unit exceeds its fair value, an impairment loss is
recognized for any excess of the carrying amount of the reporting unit's
goodwill over the implied fair value of that goodwill. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit in a
manner similar to a purchase price allocation, in accordance with FASB Statement
No. 141, Business Combinations. The residual fair value after this allocation is
the implied fair value of the Company's goodwill. Recoverability of amortizable
intangible assets is determined by comparing the carrying amount of the asset to
the future undiscounted net cash flow to be generated by the asset. The
evaluations involve amounts that are based on management's best estimate and
judgment. Actual results may differ from these estimates. If recorded values are
less than the fair values, no impairment is indicated. SFAS No. 142 also
requires that intangible assets with estimated useful lives be amortized over
their respective estimated useful lives.

      The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded on the
date of grant of options to employees and members of the Board of Directors only
if the current market price of the underlying stock exceeded the exercise price.
SFAS No. 123, Accounting for Stock-Based Compensation, established accounting
for stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure requirements of SFAS
No. 123, as amended.

      When the exercise price of employee or director stock options is less than
the fair value of the underlying stock on the grant date, the Company records
deferred compensation for the difference and amortizes this amount to expense
over the vesting period of the options. Options or stock awards issued to
non-employees and consultants are recorded at their fair value as determined in
accordance with SFAS No. 123 and EITF No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services and recognized over the related
vesting period.


                                       45
<PAGE>

Recently Issued Accounting Standards

      In December 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 (revised December 2003) ("FIN46-R"), Consolidation of
Variable Interest Entities, which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and accordingly should consolidate the entity.
FIN 46-R replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities ("FIN 46"), which was issued in January 2003. FIN 46-R requires that if
an entity has a controlling financial interest in a variable interest entity,
the assets, liabilities and results of activities of the variable interest
entity should be included in the consolidated financial statements of the
entity. The provisions of FIN 46-R are effective immediately to those entities
that are considered to be special-purpose entities. For all other arrangements,
the FIN 46-R provisions are required to be adopted at the beginning of the first
interim or annual period ending after March 15, 2004. As of June 30, 2004 the
Company is not a party to transactions contemplated under FIN 46-R.

      In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus opinion on EITF 00-21, Revenue Arrangements with Multiple
Deliverables. The consensus provides that revenue arrangements with multiple
deliverables should be divided into separate units of accounting if certain
criteria are met. The consideration for the arrangement should be allocated to
the separate units of accounting based on their relative fair values, with
different provisions if the fair value of all deliverables is not known or if
the fair value is contingent on delivery of specified items or performance
conditions. Applicable revenue recognition criteria should be considered
separately for each separate unit of accounting. EITF 00-21 is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. This adoption did not have any impact on our financial position or results
of operations.

      In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 requires that certain financial
instruments, which under previous guidance were accounted for as equity, must
now be accounted for as liabilities. The financial instruments affected include
mandatorily redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock. SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003 and must be applied to the Company's existing financial
instruments effective July 1, 2003, the beginning of the first fiscal period
after June 15, 2003. The Company adopted SFAS No. 150 on July 1, 2003. The
adoption of this statement did not have a material effect on the Company's
condensed consolidated financial position, results of operations or cash flows.

      In November 2003, the Emerging Issues Task Force ("EITF") reached an
interim consensus on Issue No. 03-01, The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments, to require additional
disclosure requirements for securities classified as available-for-sale or
held-to-maturity for fiscal years ending after December 15, 2003. Those
additional disclosures have been incorporated into the notes to consolidated
financial statements. In March 2004, the EITF reached a final consensus on this
Issue, to provide additional guidance, which companies must follow in
determining whether investment securities have an impairment which should be
considered other-than-temporary. The guidance is applicable for reporting
periods after June 15, 2004. The Company does not expect the adoption under the
final consensus to have a significant impact on our financial position results
of operations and cash flows.

Risk Factors

      Our business is heavily dependent on the continued sale of PEG-INTRON and
ABELCET. If revenues from either of these products fail to increase as
anticipated or materially decline, our financial condition and results of
operations will be materially harmed.

      Our results of operations are heavily dependent on the revenues derived
from the sale and marketing of PEG-INTRON and ABELCET. Under our agreement with
Schering-Plough, pursuant to which Schering-Plough applies our PEG technology to
develop a modified form of Schering-Plough's INTRON A, we are receiving
royalties on worldwide sales of PEG-INTRON. During the fiscal year ended June
30, 2004, total


                                       46
<PAGE>

royalties comprised approximately 28% of our total revenues. Hoffmann-La Roche
recently received FDA and European Union approval for PEGASYS, which competes
with PEG-INTRON in the United States, Europe and Canada. The launch of PEGASYS
has led to greater competitive pressure on PEG-INTRON sales. Since its launch,
PEGASYS has taken market share away from PEG-INTRON and the overall market for
pegylated alpha-interferon in the treatment of Hepatitis C has not increased
sufficiently so as to offset the effect the increasing PEGASYS sales have had on
sales of PEG-INTRON. As a result, quarterly sales of PEG-INTRON and the
royalties we receive on those sales have declined in recent quarters. We cannot
assure you that PEGASYS will not continue to gain market share at the expense of
PEG-INTRON which could result in lower PEG-INTRON sales and lower royalties to
us. Schering-Plough is responsible for conducting and funding the clinical
studies, obtaining regulatory approval, manufacturing and marketing the product
worldwide on an exclusive basis. Schering-Plough received marketing
authorization for PEG-INTRON and in PEG-INTRON and REBETOL capsules as
combination therapy for the treatment of hepatitis C in the U.S. and the
European Union. If Schering-Plough fails to effectively market PEG-INTRON or
discontinues the marketing of PEG-INTRON for these indications, this would have
a material adverse effect on our business, financial condition and results of
operations.

      Even though the use of PEG-INTRON as a stand alone therapy and as
combination therapy with REBETOL has received FDA approval, we cannot assure you
that Schering-Plough will be successful in marketing PEG-INTRON or that
Schering-Plough will not continue to market INTRON A, either as a stand-alone
product or in combination therapy with REBETOL. The amount and timing of
resources dedicated by Schering-Plough to the marketing of PEG-INTRON is not
within our control. If Schering-Plough breaches or terminates its agreement with
us, the commercialization of PEG-INTRON could be slowed or blocked completely.
In addition, any ensuing dispute between us and Schering-Plough would be
expensive and time consuming, which could have a material, adverse effect on our
business, financial condition, and results of operations. Our revenues will be
negatively affected if Schering-Plough continues to market INTRON A in
competition with PEG-INTRON or if it cannot meet the manufacturing demands of
the market. In 2001, Schering-Plough was unable to manufacture sufficient
quantities of PEG-INTRON to meet market demand due to overwhelming demand for
the PEG-INTRON and ribavirin combination therapy. As a result, Schering-Plough
implemented a temporary wait list program for newly enrolled patients in order
to ensure uninterrupted access for those patients already using PEG-INTRON. As
of October 2, 2002, the wait list was terminated as a sufficient quantity of
PEG-INTRON and ribavirin was available to meet market demand.

      ABELCET accounts for $80.6 million or approximately 48% of our total
revenues and we expect that ABELCET will account for a significant portion of
our future total revenues. The entry of new products from Merck and Pfizer in
the antifungal market is currently impacting ABELCET sales, as clinicians
explore the use of these new therapeutic agents. In addition, Fujisawa
Healthcare, Inc. and Gilead Pharmaceuticals are currently marketing AMBISOME,
and InterMune, Inc. is marketing AMPHOTEC, each of which is a liposomal version
of Amphotericin, for the treatment of fungal infections. AMBISOME and AMPHOTEC
compete with ABELCET and sales of these competitive products have resulted in
greater competitive pressure on ABELCET sales. We cannot assure you that
revenues from the sale and marketing of ABELCET will remain at or above current
levels. In addition, our manufacturing facility in Indianapolis manufactures our
entire supply of ABELCET. If sales of ABELCET decline, if the Indianapolis
facility were to cease operations or if there were a long-term supply
interruption due to the facility's decreased production, our financial condition
and results of operations will be materially harmed.

      We may not sustain profitability.

      Prior to the fiscal year ended June 30, 2001, we had incurred substantial
losses. As of June 30, 2004, we had an accumulated deficit of approximately
$24.3 million. Although we earned a profit for the fiscal years ended June 30,
2004, 2003 and 2002, we cannot assure you that we will be able to remain
profitable. Our ability to remain profitable will depend primarily on
Schering-Plough's effective marketing of PEG-INTRON and our effective marketing
of ABELCET, as well as on the rate of growth in our other product sales or
royalty revenue and on the level of our expenses. Our ability to achieve
long-term profitability will depend upon our and our licensees' ability to
obtain regulatory approvals for additional product candidates. Even if our
product candidates receive regulatory approval, we cannot assure you that our
products will achieve market acceptance or will be commercialized successfully
or that our operations will sustain profitability.


                                       47
<PAGE>

      We are subject to extensive regulation. Compliance with these regulations
can be costly, time consuming and subject us to unanticipated delays in
developing our products. The regulatory approval process is highly uncertain and
we may not successfully secure approval for MARQIBO.

      The manufacturing and marketing of pharmaceutical products in the United
States and abroad are subject to stringent governmental regulation. The sale of
any of our products for use in humans in the United States will require the
prior approval of the FDA. Similar approvals by comparable agencies are required
in most foreign countries. The FDA has established mandatory procedures and
safety standards that apply to the clinical testing, manufacture and marketing
of pharmaceutical products. Obtaining FDA approval for a new therapeutic product
may take several years and involve substantial expenditures. ADAGEN was approved
by the FDA in 1990. ONCASPAR was approved in the United States and in Germany in
1994, and in Canada in 1997, in each case for patients with acute lymphoblastic
leukemia who are hypersensitive to native forms of L-asparaginase. ONCASPAR was
approved in Russia in April 1993 for therapeutic use in a broad range of
cancers. PEG-INTRON was approved in Europe and the United States for the
treatment of hepatitis C in May 2000 and January 2001, respectively. ABELCET
received U.S. approval in November 1995 and Canadian approval in September 1997.
DEPOCYT received U.S. approval in April 1999. Except for these approvals, none
of our other products has been approved for sale and use in humans in the United
States or elsewhere.

      We cannot assure you that we or our licensees will be able to obtain FDA
or other relevant marketing approval for any of our other products. In addition,
any approved products are subject to continuing regulation. If we or our
licensees fail to comply with applicable requirements it could result in:

      o     criminal penalties,

      o     civil penalties,

      o     fines,

      o     recall or seizure,

      o     injunctions requiring suspension of production,

      o     orders requiring ongoing supervision by the FDA, or

      o     refusal by the government to approve marketing or export
            applications or to allow us to enter into supply contracts.

      The NDA was submitted under the provisions of Subpart H (Accelerated
Approval of New Drugs for Serious or Life-Threatening Illnesses) of the Food,
Drug and Cosmetic Act. The Accelerated Approval regulations are intended to make
promising products for life-threatening diseases available to the market on the
basis of preliminary evidence prior to formal demonstration of patient benefit
and provide a path to approval using clinical data from a single-arm trial. The
risk of non-approval with a Subpart H NDA are higher than those associated with
a standard NDA review because of, among other things, the smaller number of
patients and more limited data. To the extent the FDA challenges or invalidates
any of the clinical trial data, the risks are greater with a Subpart H review
that the remaining data will not be sufficient to support regulatory approval.
Even if approval is obtained, approvals granted under Subpart H are provisional
and require a written commitment to complete post-approval clinical studies that
formally demonstrate patient benefit. Securing FDA approval based on a
single-arm trial, such as the trial underlying the MARQIBO NDA, is a particular
challenge and approval can never be assured. If approved, we plan to market
MARQIBO through our existing specialty sales force, which currently targets the
oncology market.

      In addition to relapsed aggressive NHL, along with Inex we are also
exploring the development of MARQIBO for a variety of other cancers, including
Hodgkin's disease, acute lymphoblastic leukemia, pediatric malignancies, and
first-line aggressive NHL in combination with other chemotherapeutic agents.

      If we or our licensees fail to obtain or maintain requisite governmental
approvals or fail to obtain or maintain approvals of the scope requested, it
will delay or preclude us or our licensees or marketing partners from marketing
our products. It could also limit the commercial use of our products. Any such
failure or limitation may have a material adverse effect on our business,
financial condition and results of operations.

      We have experienced problems complying with the FDA's regulations for
manufacturing our


                                       48
<PAGE>

products, and have had to conduct voluntary recalls of certain of our products.
These problems could materially harm our business.

      Manufacturers of drugs also must comply with the applicable FDA current
good manufacturing practice ("cGMP") regulations, which include quality control
and quality assurance requirements as well as the corresponding maintenance of
records and documentation. Manufacturing facilities are subject to ongoing
periodic inspection by the FDA and corresponding state agencies, including
unannounced inspections, and must be licensed as part of the product approval
process before they can be used in commercial manufacturing. We or our present
or future suppliers may be unable to comply with the applicable cGMP regulations
and other FDA regulatory requirements. We manufacture ABELCET, ONCASPAR and
ADAGEN. Schering-Plough is responsible for manufacturing PEG-INTRON and
SkyePharma is responsible for manufacturing DEPOCYT.

      ADAGEN and ONCASPAR use our earlier PEG technology which tends to be less
stable than the PEG technology used in PEG-INTRON and our products under
development. Due, in part, to the drawbacks in the earlier technologies we have
had and may continue to have manufacturing problems with these products.

      Manufacturing and stability problems required us to implement voluntarily
recalls for one ADAGEN batch in March 2001 and certain batches of ONCASPAR in
June 2002, July 2004 and September 2004. To date, we have been unable to
identify the cause of the manufacturing and stability problems related to the
batches of ONCASPAR that we voluntarily recalled in July and September 2004 and
preliminary indicators do not rule out that an additional batch of ONCASPAR may
also be affected by manufacturing and stability problems, which we may also
voluntarily recall in the near term. In addition to voluntary recalls, mandatory
recalls can also take place if regulators or courts require them, even if we
believe our products are safe and effective. Recalls result in lost sales of the
recalled products themselves, and can result in further lost sales while
replacement products are manufactured or due to customer dissatisfaction. We
cannot assure you that future product recalls will not materially adversely
affect our business, our financial conditions, results of operations or our
reputation and relationships with our customers.

      During 1998, we experienced manufacturing problems with ONCASPAR. The
problems were due to increased levels of white particulates in batches of
ONCASPAR, which resulted in an increased rejection rate for this product. During
this period we agreed with the FDA to temporary labeling and distribution
restrictions for ONCASPAR and instituted additional inspection and labeling
procedures prior to distribution. In November 1999, as a result of manufacturing
changes we implemented, the FDA withdrew this distribution restriction.

      In July 1999, the FDA conducted an inspection of our manufacturing
facility in connection with our product license for ADAGEN. Following that
inspection, the FDA documented several deviations from cGMP in a Form 483
report. We provided the FDA with a corrective action plan. In November 1999, the
FDA issued a warning letter citing the same cGMP deviations listed in the July
1999 Form 483, but it also stated that the FDA was satisfied with our proposed
corrective actions. As a result of the deviations, the FDA decided not to
approve product export requests from us for ONCASPAR until it determined that
all noted cGMP deviations were either corrected or in the process of being
corrected. This restriction was removed in August 2000.

      Since January 2000, the FDA has conducted follow-up inspections as well as
routine inspections of our manufacturing facilities related to ABELCET, ONCASPAR
and ADAGEN. Following certain of these inspections, the FDA has issued Form 483
reports citing deviations from cGMP, the most recent ones of which were issued
in April 2004 for our New Jersey and Indianapolis manufacturing facilities. We
have or are in the process of responding to such reports with corrective action
plans.

      We are aware that the FDA has conducted inspections of certain of the
manufacturing facilities of Schering-Plough, and those inspections have resulted
in the issuance of Form 483s citing deviations from cGMP.

      If we or our licensees, including Schering-Plough, face additional
manufacturing problems in the future or if we or our licensees are unable to
satisfactorily resolve current or future manufacturing problems, the FDA could
require us or our licensees to discontinue the distribution of our products or
to delay continuation of


                                       49
<PAGE>

clinical trials. In addition, if we or our licensees, including Schering-Plough,
cannot market and distribute our products for an extended period, sales of the
products and customer relationships will suffer, which would adversely affect
our financial results.

      Our clinical trials could take longer to complete and cost more than we
expect.

      We will need to conduct significant additional clinical studies of all of
our product candidates, which have not yet been approved for sale. These studies
are costly, time consuming and unpredictable. Any unanticipated costs or delays
in our clinical studies could harm our business, financial condition and results
of operations.

      A Phase III clinical trial is being conducted for PEG-INTRON for one
cancer indication. Schering-Plough is also in early stage clinical trials for
PEG-INTRON in other cancer indications. Schering-Plough is currently conducting
late-stage strategic clinical trials for treatment of hepatitis C in Japan.
Clinical trials are also being conducted for PEG-INTRON as a long term
maintenance therapy (the COPILOT study) and separately as combination therapy
with REBETOL in patients with chronic hepatitis C who did not respond to or had
relapsed following previous interferon-based therapy. We are currently
conducting a pivotal clinical trial for Pegamotecan and plan to initiate a
pivotal clinical trial for ATG-FRESENIUS S during the remaining of calendar
2004. The rate of completion of clinical trials depends upon many factors,
including the rate of enrollment of patients. The enrollment of patients and the
intensifying competitiveness of patient recruitment activities is increasingly a
delaying factor in the completion of clinical trials. If we or the other
sponsors of these clinical trials are unable to recruit sufficient clinical
patients in such trials during the appropriate period, such trials may be
delayed and will likely incur significant additional costs. In addition, FDA or
institutional review boards may require us to delay, restrict, or discontinue
our clinical trials on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.

      The cost of human clinical trials varies dramatically based on a number of
factors, including:

      o     the order and timing of clinical indications pursued,

      o     the extent of development and financial support from corporate
            collaborators,

      o     the number of patients required for enrollment,

      o     the difficulty of obtaining clinical supplies of the product
            candidate, and

      o     the difficulty in obtaining sufficient patient populations and
            clinicians.

      All statutes and regulations governing the conduct of clinical trials are
subject to change in the future, which could affect the cost of our clinical
trials. Any unanticipated costs or delays in our clinical studies could harm our
business, financial condition and results of operations.

      In some cases, we rely on corporate collaborators or academic institutions
to conduct some or all aspects of clinical trials involving our product
candidates. We will have less control over the timing and other aspects of these
clinical trials than if we conducted them entirely on our own. We cannot assure
you that these trials will commence or be completed as we expect or that they
will be conducted successfully.

      If preclinical and clinical trials do not yield positive results, our
product candidates will fail.

      If preclinical and clinical testing of one or more of our product
candidates does not demonstrate the safety and efficacy of product candidates
for the desired indications, those potential products will fail. Numerous
unforeseen events may arise during, or as a result of, the testing process,
including the following:

      o     the results of preclinical studies may be inconclusive, or they may
            not be indicative of results that will be obtained in human clinical
            trials,

      o     potential products may not have the desired effect or may have
            undesirable side effects or other characteristics that preclude
            regulatory approval or limit their commercial use if approved,


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<PAGE>

      o     results attained in early human clinical trials may not be
            indicative of results that are obtained in later clinical trials,
            and

      o     after reviewing test results, we or our strategic partners may
            abandon projects which we might previously have believed to be
            promising.

      Clinical testing is very costly and can take many years. The failure to
adequately demonstrate the safety and efficacy of a therapeutic product under
development would delay or prevent regulatory approval, which could adversely
affect our business and financial performance.

      In June 2001, we reported that Schering-Plough completed its Phase III
clinical trial, which compared PEG-INTRON to INTRON A in patients with newly
diagnosed chronic myelogenous leukemia or CML. In the study, although PEG-INTRON
demonstrated clinical comparability and a comparable safety profile with INTRON
A, the efficacy results for PEG-INTRON did not meet the protocol-specified
statistical criteria for non-inferiority, the primary endpoint of the study.

Even if we obtain regulatory approval for our products, they may not be accepted
in the marketplace.

      The commercial success of our products will depend upon their acceptance
by the medical community and third-party payors as clinically useful,
cost-effective and safe. Even if our products obtain regulatory approval, we
cannot assure you that they will achieve market acceptance of any kind. The
degree of market acceptance will depend on many factors, including:

      o     the receipt, timing and scope of regulatory approvals,

      o     the timing of market entry in comparison with potentially
            competitive products,

      o     the availability of third-party reimbursement, and

      o     the establishment and demonstration in the medical community of the
            clinical safety, efficacy and cost-effectiveness of drug candidates,
            as well as their advantages over existing technologies and
            therapeutics.

      If any of our products do not achieve market acceptance, we will likely
lose our entire investment in that product, giving rise to a material, adverse
effect on our business, financial condition and results of operations.

      We depend on our collaborative partners. If we lose our collaborative
partners or they do not apply adequate resources to our collaborations, our
product development and financial performance may suffer.

      We rely heavily and will depend heavily in the future on collaborations
with corporate partners, primarily pharmaceutical and biotechnology companies,
for one or more of the research, development, manufacturing, marketing and other
commercialization activities relating to many of our product candidates. If we
lose our collaborative partners, or if they do not apply adequate resources to
our collaborations, our product development and financial performance may
suffer.

      The amount and timing of resources dedicated by our collaborators to their
collaborations with us is not within our control. If any collaborator breaches
or terminates its agreements with us, or fails to conduct its collaborative
activities in a timely manner, the commercialization of our product candidates
could be slowed or blocked completely. We cannot assure you that our
collaborative partners will not change their strategic focus or pursue
alternative technologies or develop alternative products as a means for
developing treatments for the diseases targeted by these collaborative programs.
Our collaborators could develop competing products. In addition, our revenues
will be affected by the effectiveness of our corporate partners in marketing any
successfully developed products. For example, our royalty revenues relating to
PEG-INTRON have declined significantly due to PEG-INTRON'S loss of market share
to Roche's PEGASYS.

      We cannot assure you that our collaborations will be successful. Disputes
may arise between us and our collaborators as to a variety of matters, including
financing obligations under our agreements and


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<PAGE>

ownership of intellectual property rights. These disputes may be both expensive
and time-consuming and may result in delays in the development and
commercialization of products.

      We purchase some of the compounds utilized in our products from a single
source or a limited group of suppliers, and the partial or complete loss of one
of these suppliers could cause production delays and a substantial loss of
revenues. The supplier of the active pharmaceutical ingredient for ADAGEN has
recently elected to terminate its supply agreement with us and we may not be
able to secure an alternative source of supply before this supplier discontinues
supplying us.


      We purchase the unmodified compounds and bulk PEGs utilized in our
approved products and products under development from outside suppliers. We may
be required to enter into supply contracts with outside suppliers for certain
unmodified compounds. For example, we have an agreement with Hoffmann-La Roche
Diagnostics GmbH to produce the unmodified adenosine deaminase enzyme used in
the manufacture of ADAGEN and agreements with Merck & Co., Inc. and Kyowa Hakko
to produce the unmodified forms of L-asparaginase used in the manufacture of
ONCASPAR. We have two suppliers that produce the amphotericin used in the
manufacture of ABELCET, Bristol-Myers Squibb and Alpharma A.p.S. We have a
supply agreement with Bristol-Myers Squibb, but not with Alpharma. If we
experience a delay in obtaining or are unable to obtain any unmodified compound,
including unmodified adenosine deaminase, unmodified L-asparaginase or
amphotericin, on reasonable terms, or at all, it could have a material adverse
effect on our business, financial condition and results of operations. We
purchase the lipids used in the manufacture of ABELCET and the PEGs used in the
manufacture of ONCASPAR and ADAGEN from a limited number of suppliers. We do not
have formal supply agreements with any of these suppliers. No assurance can be
given that alternative suppliers with appropriate regulatory authorizations
could be readily identified if necessary. If we experience delays in obtaining
or are unable to obtain any such raw materials on reasonable terms, or at all,
it could have a material, adverse effect on our business, financial condition
and results of operations.

      If we are required to obtain an alternate source for an unmodified
compound utilized in a product, the FDA and relevant foreign regulatory agencies
will likely require that we perform additional testing to demonstrate that the
alternate material is biologically and chemically equivalent to the unmodified
compound previously used in our clinical trials. This testing could delay or
stop development of a product, limit commercial sales of an approved product and
cause us to incur significant additional expenses. If we are unable to
demonstrate that the alternate material is chemically and biologically
equivalent to the previously used unmodified compound, we will likely be
required to repeat some or all of the preclinical and clinical trials conducted
for the compound. The marketing of an FDA approved drug could be disrupted while
such tests are conducted. Even if the alternate material is shown to be
chemically and biologically equivalent to the previously used compound, the FDA
or relevant foreign regulatory agency may require that we conduct additional
clinical trials with the alternate material.

      Hoffmann-La Roche Diagnostics GmbH ("Roche Diagnostics"), which is based
in Germany, is the only FDA-approved supplier of the adenosine deaminase enzyme,
or ADA, used in ADAGEN. During 2002 we obtained FDA approval of the use of the
ADA enzyme obtained from bovine intestines from cattle of New Zealand origin.
New Zealand currently certifies that it's cattle are bovine spongiform
encephalopathy (BSE or mad cow disease) free. Beginning in September 2002, the
United States Department of Agriculture ("USDA") required all animal-sourced
materials shipped to the United States from any European country to contain a
veterinary certificate that the product is BSE free, regardless of the country
of origin. In September, 2003, Roche Diagnostics notified us that it has elected
to terminate our ADA supply agreement as of as of June 12, 2004. We are
currently seeking to develop recombinant ADA as an alternative to the bovine
derived product. This is a difficult and expensive undertaking as to which
success cannot be assured. Roche Diagnostics has indicated that it will continue
to supply us with our requirements of ADA for a reasonable period of time after
termination of our supply agreement as we work to develop another source of ADA.
If we are unable to secure an alternative source of ADA before Roche Diagnostics
discontinues supplying the material to us, we will likely experience inventory
shortages and potentially a period of product unavailability and/or a long term
inability to produce ADAGEN. If this occurs, it will have a measurable (and
potentially material) negative impact on our business and results of operations
and it could potentially result in significant reputational harm and regulatory
difficulties.


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<PAGE>

      The United States and foreign patents upon which our original PEG
technology was based have expired. We depend on patents and proprietary rights,
which may offer only limited protection against potential infringement and the
development by our competitors of competitive products.

      Research Corporation Technologies, Inc. held the patent upon which our
original PEG technology was based and had granted us a license under such
patent. Research Corporation's patent contained broad claims covering the
attachment of PEG to polypeptides. However, this United States patent and its
corresponding foreign patents expired in December 1996. Based upon the
expiration of the Research Corporation patent, other parties will be permitted
to make, use or sell products covered by the claims of the Research Corporation
patent, subject to other patents, including those which we hold. We have
obtained numerous patents with claims covering improved methods of attaching or
linking PEG to therapeutic compounds. We cannot assure you that any of these
patents will enable us to prevent infringement or that competitors will not
develop alternative methods of attaching PEG to compounds potentially resulting
in competitive products outside the protection that may be afforded by our
patents. We are aware that others have also filed patent applications and have
been granted patents in the United States and other countries with respect to
the application of PEG to proteins and other compounds. However, other than
Hoffmann-La Roche's PEGASYS, we are unaware of any other PEGylated products that
compete with our PEGylated products. The expiration of the Research Corporation
patent or other patents related to PEG that have been granted to third parties
may have a material adverse effect on our business, financial condition and
results of operations.

      The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and processes.
Our success depends, in part, on our ability to develop and maintain a strong
patent position for our products and technologies both in the United States and
in other countries. We have been issued 114 patents in the United States, many
of which have foreign counterparts. These patents, if extensions are not
granted, are expected to expire beginning in 2004 through 2022. We have also
filed and currently have pending 43 patent applications in the United States.
Under our license agreements, we have access to large portions of Micromet's and
Nektar's patent estates as well as a small number of individually licensed
patents. Of the patents owned or licensed by us, 7 relate to PEG-INTRON, 17
relate to ABELCET, 11 relate to Pegamotecan, 3 relate to DEPOCYT and 18 relate
to MARQIBO. Although we believe that our patents provide certain protection from
competition, we cannot assure you that such patents will be of substantial
protection or commercial benefit to us, will afford us adequate protection from
competing products, or will not be challenged or declared invalid. In addition,
we cannot assure you that additional United States patents or foreign patent
equivalents will be issued to us. The scope of patent claims for
biotechnological inventions is uncertain, and our patents and patent
applications are subject to this uncertainty.

      To facilitate development of our proprietary technology base, we may need
to obtain licenses to patents or other proprietary rights from other parties. If
we are unable to obtain such licenses, our product development efforts may be
delayed or blocked.

      We are aware that certain organizations are engaging in activities that
infringe certain of our PEG and SCA technology patents. We cannot assure you
that we will be able to enforce our patent and other rights against such
organizations.

      We expect that there will continue to be significant litigation in the
biotechnology and pharmaceutical industries regarding patents and other
proprietary rights. We have in the past been involved in patent litigation, and
we may likely become involved in additional patent litigation in the future. We
may incur substantial costs in asserting any patent rights and in defending
suits against us related to intellectual property rights. Such disputes could
substantially delay our product development or commercialization activities and
could have a material adverse effect on our business, financial condition and
results of operations.

      We also rely on trade secrets, know-how and continuing technological
advancements to protect our proprietary technology. We have entered into
confidentiality agreements with our employees, consultants, advisors and
collaborators. However, these parties may not honor these agreements, and we may
not be able to successfully protect our rights to unpatented trade secrets and
know-how. Others may independently develop


                                       53
<PAGE>

substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets and know-how.

      Our products may infringe the intellectual property rights of others,
which could increase our costs and negatively affect our profitability.

      Our success also depends on avoiding infringement of the proprietary
technologies of others. In particular, there may be certain issued patents and
patent applications claiming subject matter which we or our collaborators may be
required to license in order to research, develop or commercialize at least some
of our products. In addition, third parties may assert infringement or other
intellectual property claims against us. An adverse outcome in these proceedings
could subject us to significant liabilities to third parties, require disputed
rights to be licensed from third parties or require us to cease or modify the
use of our technology. If we are required to license such technology, we cannot
assure you that a license under such patents and patent applications will be
available on acceptable terms or at all. Further, we may incur substantial costs
defending ourselves in lawsuits against charges of patent infringement or other
unlawful use of another's proprietary technology.

      We have limited sales and marketing experience, which makes us dependent
on our marketing partners.

      We have historically had limited experience in sales, marketing or
distribution. In connection with our acquisition of the North American ABELCET
business from Elan in November 2002, we acquired a 60-person sales and marketing
team. In addition, we have recently acquired marketing rights to DEPOCYT from
SkyePharma and reacquired the rights to market and distribute ONCASPAR in the
United States and certain other countries in June 2002. Prior to these
acquisitions, ADAGEN, which we market on a worldwide basis to a small patient
population, was the only product for which we engaged in the direct commercial
marketing, and therefore, we are significantly dependent on the ABELCET sales
and marketing team to promote ABELCET. We have provided exclusive marketing
rights to Schering-Plough for PEG-INTRON worldwide and to Medac GmbH for
ONCASPAR in most of Europe and parts of Asia. We have an agreement with Nova
Factor, Inc. (formerly known as Gentiva Health Services, Inc.) to purchase and
distribute ADAGEN, ONCASPAR and DEPOCYT in the United States and Canada. To the
extent that we enter into licensing arrangements for the marketing and sale of
our future products, we may not be able to enter into or maintain such
arrangements on acceptable terms, if at all, and any revenues we receive will
depend primarily on the efforts of these third parties. We will not control the
amount and timing of marketing resources that such third parties devote to our
products. In addition, to the extent that we market products directly,
significant additional expenditures and management resources would be required
to increase the size of our internal sales force. In any sales or marketing
effort, we would compete with many other companies that currently have extensive
and well-funded sales operations. Our marketing and sales efforts may be unable
to compete successfully against such other companies.

      We may acquire other companies or products and may be unable to
successfully integrate such companies with our operations.

      We may expand and diversify our operations with acquisitions. Indeed, the
execution of strategic transactions is an important part of our strategy. If we
are unsuccessful in integrating any such company with our operations, or if
integration is more difficult than anticipated, we may experience disruptions
that could have a material adverse effect on our business, financial condition
and results of operations. Some of the risks that may affect our ability to
integrate or realize any anticipated benefits from any acquisition include those
associated with:

      o     unexpected losses of key employees or customers of the acquired
            company;

      o     conforming the acquired company's standards, processes, procedures
            and controls with our operations;

      o     coordinating our new product and process development;

      o     diversion of existing management relating to the integration and
            operation of the acquired company;

      o     hiring additional management and other critical personnel; and


                                       54
<PAGE>

      o     increasing the scope, geographic diversity and complexity of our
            operations.

      We may need to obtain additional financing to meet our future capital
needs, and this financing may not be available when we need it.

      Our current development projects require substantial capital. We may
require substantial additional funds to conduct research activities, preclinical
studies, clinical trials and other activities relating to the successful
commercialization of potential products. In addition, we may seek to acquire
additional products, technologies and companies, which could require substantial
capital. In addition, we cannot be sure that we will be able to continue to
obtain significant revenue from PEG-INTRON. Additional funds from other sources
may not be available on acceptable terms, if at all. If adequate funds are
unavailable from operations or additional sources of financing, we may have to
delay, reduce the scope of or eliminate one or more of our research or
development programs or one or more of our proposed acquisitions of technologies
or companies which could materially and adversely affect our business, financial
condition and operations.

      While we believe that our cash, cash equivalents and investments will be
adequate to satisfy our capital needs for the foreseeable future, our actual
capital requirements will depend on many factors, including:

      o     the level of revenues we receive from our FDA-approved products and
            product candidates,

      o     continued progress of our research and development programs,

      o     our ability to establish additional collaborative arrangements,

      o     changes in our existing collaborative relationships,

      o     progress with preclinical studies and clinical trials,

      o     the time and costs involved in obtaining regulatory clearance for
            our products,

      o     the costs involved in preparing, filing, prosecuting, maintaining
            and enforcing patent claims,

      o     competing technological and market developments, and

      o     our ability to market and distribute our products and establish new
            collaborative and licensing arrangements.

      We may seek to raise any necessary additional funds through equity or debt
financings, collaborative arrangements with corporate partners or other sources
which may be dilutive to existing stockholders. We cannot assure you that we
will be able to obtain additional funds on acceptable terms, if at all. If
adequate funds are not available, we may be required to:

      o     delay, reduce the scope or eliminate one or more of our development
            projects,

      o     obtain funds through arrangements with collaborative partners or
            others that may require us to relinquish rights to technologies,
            product candidates or products that we would otherwise seek to
            develop or commercialize ourselves, or

      o     license rights to technologies, product candidates or products on
            terms that are less favorable to us than might otherwise be
            available.

      We depend on key personnel and may not be able to retain these employees
or recruit additional qualified personnel, which would harm our business.

      Because of the specialized scientific nature of our business, we are
highly dependent upon qualified scientific, technical and managerial personnel,
which include Kenneth J. Zuerblis and Ulrich Grau, Ph.D. There is intense
competition for qualified personnel in the pharmaceutical field. Therefore, we
may not be able to attract and retain the qualified personnel necessary for the
development of our business. Although we have employment agreements with Mr.
Zuerblis and Dr. Grau, our ability to continue to retain them is not assured and
the loss of their services as well as the failure to recruit additional key
scientific, technical and managerial personnel in a timely manner, would harm
our research and development programs and our business.

      We currently do not have a Chief Executive Officer. Since the departure of
our prior CEO, Arthur J. Higgins, who is now Chairman and Chief Executive
Officer of Bayer Health Care, we have been engaged in a


                                       55
<PAGE>

search for a new CEO. We have evaluated numerous candidates and are currently
negotiating with a lead candidate. We anticipate that this person will join us
as CEO in the near future. No assurance can be given as to whether or not this
person will join us as CEO. We are continuing the search process with respect to
other candidates in the event that the lead candidate does not become our new
CEO. If our lead candidate is unable or unwilling to join us as CEO in the near
future, the search process is likely to extend into calendar 2005. An extended
period of time without a CEO could materially, adversely effect our business,
financial conditions or results of operations.

Risks Related To Our Industry

      We face rapid technological change and intense competition, which could
harm our business and results of operations.

      The biopharmaceutical industry is characterized by rapid technological
change. Our future success will depend on our ability to maintain a competitive
position with respect to technological advances. Rapid technological development
by others may result in our products and technologies becoming obsolete.

      Many of our competitors have substantially greater research and
development capabilities and experience and greater manufacturing, marketing and
financial resources than we do. Accordingly, our competitors may develop
technologies and products that are superior to those we or our collaborators are
developing and render our technologies and products or those of our
collaborators obsolete and noncompetitive. In addition, many of our competitors
have much more experience than we do in preclinical testing and human clinical
trials of new drugs, as well as obtaining FDA and other regulatory approval. If
we cannot compete effectively, our business and financial performance would
suffer.

      We face intense competition from established biotechnology and
pharmaceutical companies, as well as academic and research institutions that are
pursuing competing technologies and products. We know that competitors are
developing or manufacturing various products that are used for the prevention,
diagnosis or treatment of diseases that we have targeted for product
development. For example, Hoffmann-La-Roche's PEGASYS has received FDA and
European Union approval for treatment of Hepatitis C as a monotherapy and in
combination with Ribavirin. PEGASYS competes with PEG-INTRON in the United
States and the European Union and has led to intensive competitive pressure on
PEG-INTRON sales. Since its launch, PEGASYS has taken market share away from
PEG-INTRON and the overall market for pegylated alpha-interferon in the
treatment of Hepatitis C has not increased sufficiently so as offset the effect
the increasing PEGASYS sales have had on sales of PEG-INTRON. As a result,
quarterly sales of PEG-INTRON and the royalties we receive on those sales have
declined in recent quarters. We cannot assure you that PEGASYS will not continue
to gain market share at the expense of PEG-INTRON which could result in lower
PEG-INTRON sales and lower royalties to us. Similarly, Fujisawa Healthcare, Inc.
and Gilead Pharmaceuticals are currently marketing AmBisome, and InterMune, Inc.
is marketing Amphotec, each of which is a liposomal version of amphotericin, for
the treatment of fungal infections. AmBisome and Amphotec compete with ABELCET
and sales of these competitive products have resulted in intensive competitive
pressure on ABELCET sales. DEPOCYT, an injectable, sustained release formulation
of the chemotherapeutic agent cytarabine for the treatment of lymphomatous
meningitis, competes with the generic drugs, Cytarabine and Methotrexate, and
ONCASPAR, a PEG-enhanced version of a naturally occurring enzyme called
L-asparaginase, competes with Asparaginase to treat patients with acute
lymphoblastic leukemia.

      Existing and future products, therapies and technological approaches will
compete directly with our products. Current and prospective competing products
may provide greater therapeutic benefits for a specific problem or may offer
comparable performance at a lower cost. Any product candidate that we develop
and that obtains regulatory approval must then compete for market acceptance and
market share. Our product candidates may not gain market acceptance among
physicians, patients, healthcare payors and the medical community.

      We may be sued for product liability.


                                       56
<PAGE>

      Because our products and product candidates are new treatments with
limited, if any, past use on humans, their use during testing or after approval
could expose us to product liability claims. We maintain product liability
insurance coverage in the total amount of $40 million for claims arising from
the use of our products in clinical trials prior to FDA approval and for claims
arising from the use of our products after FDA approval. We cannot assure you
that we will be able to maintain our existing insurance coverage or obtain
coverage for the use of our other products in the future. Also, this insurance
coverage and our resources may not be sufficient to satisfy any liability
resulting from product liability claims, and a product liability claim may have
a material adverse effect on our business, financial condition or results of
operations.

      Because of the uncertainty of pharmaceutical pricing, reimbursement and
healthcare reform measures, we may be unable to sell our products profitably in
the United States.

      The availability of reimbursement by governmental and other third-party
payors affects the market for any pharmaceutical product. In recent years, there
have been numerous proposals to change the healthcare system in the United
States and further proposals are likely. Some of these proposals have included
measures that would limit or eliminate payments for medical procedures and
treatments or subject the pricing of pharmaceuticals to government control. In
addition, government and private third-party payors are increasingly attempting
to contain healthcare costs by limiting both the coverage and the level of
reimbursement of drug products. Consequently, significant uncertainty exists as
to the reimbursement status of newly-approved health care products.

      Our ability to commercialize our products will depend, in part, on the
extent to which reimbursement for the cost of the products and related
treatments will be available from third-party payors. If we or any of our
collaborators succeeds in bringing one or more products to market, we cannot
assure you that third-party payors will establish and maintain price levels
sufficient for realization of an appropriate return on our investment in product
development. In addition, lifetime limits on benefits included in most private
health plans may force patients to self-pay for treatment. For example, patients
who receive ADAGEN are expected to require injections for their entire lives.
The cost of this treatment may exceed certain plan limits and cause patients to
self-fund further treatment. Furthermore, inadequate third-party coverage may
lead to reduced market acceptance of our products. Significant changes in the
healthcare system in the United States or elsewhere could have a material
adverse effect on our business and financial performance.

Risks Related To Our Subordinated Notes and Common Stock

      The price of our common stock has been, and may continue to be, volatile
which may significantly affect the trading price of our notes.

      Historically, the market price of our common stock has fluctuated over a
wide range, and it is likely that the price of our common stock will fluctuate
in the future. The market price of our common stock could be impacted due to a
variety of factors, including:

      o     the results of preclinical testing and clinical trials by us, our
            corporate partners or our competitors,

      o     announcements of technical innovations or new products by us, our
            corporate partners or our competitors,

      o     the status of corporate collaborations and supply arrangements,

      o     regulatory approvals,

      o     government regulation,

      o     developments in patent or other proprietary rights,

      o     public concern as to the safety and efficacy of products developed
            by us or others,

      o     litigation,

      o     acts of war or terrorism in the United States or worldwide, and

      o     general market conditions in our industry.


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<PAGE>

      In addition, due to one or more of the foregoing factors in one or more
future quarters, our results of operations may fall below the expectations of
securities analysts and investors. In that event, the market price of our common
stock could be materially and adversely affected.

      The stock market has recently experienced extreme price and volume
fluctuations. These fluctuations have especially affected the market price of
the stock of many high technology and healthcare-related companies. Such
fluctuations have often been unrelated to the operating performance of these
companies. Nonetheless, these broad market fluctuations may negatively affect
the market price of our common stock.

      Our notes are subordinated to all existing and future indebtedness.

      Our 4.5% convertible subordinated notes are unsecured and subordinated in
right of payment to all of our existing and future senior indebtedness. In the
event of our bankruptcy, liquidation or reorganization, or upon acceleration of
the notes due to an event of default under the indenture and in certain other
events, our assets will be available to pay obligations on the notes only after
all senior indebtedness has been paid. As a result, there may not be sufficient
assets remaining to pay amounts due on any or all of the outstanding notes. We
are not prohibited from incurring debt, including senior indebtedness, under the
indenture. If we were to incur additional debt or liabilities, our ability to
pay our obligations on the notes could be adversely affected. As of June 30,
2004, we had no senior indebtedness outstanding.

      We may be unable to redeem our notes upon a fundamental change.

      We may be unable to redeem our notes in the event of a fundamental change.
Upon a fundamental change, holders of the notes may require us to redeem all or
a portion of the notes. If a fundamental change were to occur, we may not have
enough funds to pay the redemption price for all tendered notes. Any future
credit agreements or other agreements relating to our indebtedness may contain
similar provisions, or expressly prohibit the repurchase of the notes upon a
fundamental change or may provide that a fundamental change constitutes an event
of default under that agreement. If a fundamental change occurs at a time when
we are prohibited from purchasing or redeeming notes, we could seek the consent
of our lenders to redeem the notes or could attempt to refinance this debt. If
we do not obtain a consent, we could not purchase or redeem the notes. Our
failure to redeem tendered notes would constitute an event of default under the
indenture. In such circumstances, or if a fundamental change would constitute an
event of default under our senior indebtedness, the subordination provisions of
the indenture would restrict payments to the holders of notes. A "fundamental
change" is any transaction or event (whether by means of an exchange offer,
liquidation, tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) in connection with which all or substantially all
of our common stock is exchanged for, converted into, acquired for or
constitutes solely the right to receive, consideration which is not all or
substantially all common stock that:

      o     is listed on, or immediately after the transaction or event will be
            listed on, a United States national securities exchange, or

      o     is approved, or immediately after the transaction or event will be
            approved, for quotation on The NASDAQ National Market or any similar
            United States system of automated dissemination of quotations of
            securities prices.

      The term fundamental change is limited to certain specified transactions
and may not include other events that might adversely affect our financial
condition or the market value of the notes or our common stock. Our obligation
to offer to redeem the notes upon a fundamental change would not necessarily
afford holders of the notes protection in the event of a highly leveraged
transaction, reorganization, merger or similar transaction involving us.

      A public market for our notes may fail to develop or be sustained.

      The initial purchasers of the notes, although they have advised us that
they intend to make a market in the notes, are not obligated to do so and may
discontinue this market making activity at any time without notice. In addition,
market making activity by the initial purchasers will be subject to the limits
imposed by the


                                       58
<PAGE>

Securities Act and the Exchange Act of 1934, as amended. As a result, we cannot
assure you that any market for the notes will develop or, if one does develop,
that it will be maintained. If an active market for the notes fails to develop
or be sustained, the trading price of the notes could be materially adversely
affected.

      Events with respect to our share capital could cause the price of our
common stock to decline.

      Sales of substantial amounts of our common stock in the open market, or
the availability of such shares for sale, could adversely affect the price of
our common stock. An adverse effect on the price of our common stock may
adversely affect the trading price of the notes. We had 43.8 million shares of
common stock outstanding as of June 30, 2004. The following securities that may
be exercised for, or are convertible into, shares of our common stock were
issued and outstanding as of June 30, 2004:

      o     Options. Stock options to purchase 4.8 million shares of our common
            stock at a weighted average exercise price of approximately $25.90
            per share; of this total, 2.0 million were exercisable at a weighted
            average exercise price of $35.37 per share as of such date.

      o     Convertible subordinated notes. Notes which will convert to 5.6
            million shares of our common stock at a conversion price of $70.98
            as of such date.

      The shares of our common stock that may be issued under the options and
upon conversion of the Convertible Subordinated Notes are currently registered
with the SEC. The shares of common stock that may be issued upon conversion of
the Convertible Subordinated Notes are eligible for sale without any volume
limitations pursuant to Rule 144(k) under the Securities Act.

      The issuance of preferred stock may adversely affect rights of common
stockholders or discourage a takeover.

      Under our certificate of incorporation, our board of directors has the
authority to issue up to 3.0 million shares of preferred stock and to determine
the price, rights, preferences and privileges of those shares without any
further vote or action by our stockholders. The rights of the holders of common
stock will be subject to, and may be adversely affected by, the rights of the
holders of any shares of preferred stock that may be issued in the future.

      In May 2002, our board of directors authorized shares of Series B
Preferred Stock in connection with its adoption of a stockholder rights plan,
under which we issued rights to purchase Series B Preferred Stock to holders of
the common stock. Upon certain triggering events, such rights become exercisable
to purchase common stock (or, in the discretion of our board of directors,
Series B Preferred Stock) at a price substantially discounted from the then
current market price of the Common Stock. Our stockholder rights plan could
generally discourage a merger or tender offer involving our securities that is
not approved by our board of directors by increasing the cost of effecting any
such transaction and, accordingly, could have an adverse impact on stockholders
who might want to vote in favor of such merger or participate in such tender
offer.

      While we have no present intention to authorize any additional series of
preferred stock, such issuance, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could also
have the effect of making it more difficult for a third party to acquire a
majority of our outstanding voting stock. The preferred stock may have other
rights, including economic rights senior to the Common Stock, and, as a result,
the issuance thereof could have a material adverse effect on the market value of
the common stock.

      We have a significant amount of indebtedness.

      As a result of the initial offering of the notes, our long-term debt is
$400.0 million. This indebtedness has affected us by:

      o     significantly increasing our interest expense and related debt
            service costs, and

      o     making it more difficult to obtain additional financing.


                                       59
<PAGE>

      We may not generate sufficient cash flow from operations to satisfy the
annual debt service payments that will be required under the notes. This may
require us to use a portion of the proceeds of the notes to pay interest or
borrow additional funds or sell additional equity to meet our debt service
obligations. If we are unable to satisfy our debt service requirements,
substantial liquidity problems could result, which would negatively impact our
future prospects.

      The market for unrated debt is subject to disruptions, which could have an
adverse effect on the market price of the notes.

      Our notes have not been rated. As a result, holders of the notes have the
risks associated with an investment in unrated debt. Historically, the market
for unrated debt has been subject to disruptions that have caused substantial
volatility in the prices of such securities and greatly reduced liquidity for
the holders of such securities. If the notes are traded, they may trade at a
discount from their initial offering price, depending on, among other things,
prevailing interest rates, the markets for similar securities, general economic
conditions and our financial condition, results of operations and prospects. The
liquidity of, and trading markets for, the notes also may be adversely affected
by general declines in the market for unrated debt. Such declines may adversely
affect the liquidity of, and trading markets for, the notes, independent of our
financial performance or prospects. In addition, certain regulatory restrictions
prohibit certain types of financial institutions from investing in unrated debt,
which may further suppress demand for such securities. We cannot assure you that
the market for the notes will not be subject to similar disruptions. Any such
disruptions may have an adverse effect on the holders of the notes.


                                       60
<PAGE>

                       RATIO OF EARNINGS TO FIXED CHARGES

      The ratio of earnings to fixed charges was negative for periods before
June 30, 2001 because we incurred net losses in the periods prior to that time.
The dollar amounts of the deficiencies for these periods and the ratio of
earnings to fixed charges for the years ended June 30, 2004, 2003, 2002 and 2001
are disclosed below (dollars in thousands):

<TABLE>
<CAPTION>
                                                               Year Ended June 30,
                                                 -----------------------------------------------
                                                    2004     2003     2002     2001      2000
                                                    ----     ----     ----     ----     -------
<S>                                                  <C>      <C>      <C>     <C>      <C>
Ratio of earnings to fixed charges*.........         1:1      3:1      3:1     21:1     N/A

Deficiency of earnings available to
     cover fixed charges*...................         N/A      N/A      N/A      N/A     ($6,306)
</TABLE>

      *Earnings consist of pre-tax income (loss) plus fixed charges less
capitalized interest and preferred stock dividends. Fixed charges consist of
interest expense, including amortization of debt issuance costs and that portion
of rental expense we believe to be representative of interest.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.

      Our holdings of financial instruments are comprised of debt securities and
time deposits. All such instruments are classified as securities
available-for-sale. We do not invest in portfolio equity securities or
commodities or use financial derivatives for trading purposes. Our debt security
portfolio represents funds held temporarily pending use in our business and
operations. We manage these funds accordingly. We seek reasonable assuredness of
the safety of principal and market liquidity by investing in rated fixed income
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 the majority of our investments in the
shorter-end of the maturity spectrum, and at June 30, 2004 all of our holdings
were in instruments maturing in four years or less.

      The table below presents the principal amounts and related weighted
average interest rates by year of maturity for our investment portfolio as of
June 30, 2004 (in thousands).

<TABLE>
<CAPTION>
                            2005          2006          2007          2008         Total       Fair Value
                           ------------------------------------------------------------------------------
<S>                        <C>           <C>           <C>           <C>           <C>           <C>
Fixed Rate                 $27,263       $41,132       $18,440       $ 9,014       $95,849       $94,701
Average Interest Rate         2.22%         1.92%         2.44%         2.72%         2.18%           --
Variable Rate                   --            --            --            --            --            --
Average Interest Rate           --            --            --            --            --            --
                           -----------------------------------------------------------------------------
                           $27,263       $41,132       $18,440       $ 9,014       $95,849       $94,701
                           =============================================================================
</TABLE>

      Our 4.5% convertible subordinated notes in the principal amount of $400.0
million due July 1, 2008 have fixed interest rates. The fair value of the notes
was approximately $369.0 million at June 30, 2004. The fair value of fixed
interest rate convertible notes is affected by changes in interest rates and by
changes in the price of our common stock.


                                       61
<PAGE>

Item 8. Financial Statements and Supplementary Data

      Financial statements and notes thereto appear on pages F-1 to F-44 of this
Form 10-K Annual Report.

Item 9. Changes in and Disagreements With Accountants
        on Accounting and Financial Disclosure

      Not Applicable.

Item 9A. Controls and Procedures

      Evaluation of disclosure controls and procedures. Based on our
management's evaluation (with the participation of our principal executive
officer and principal financial officer), as of the end of the period covered by
this report, our principal executive officer and principal financial officer has
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act")) 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 within the time periods specified
in Securities and Exchange Commission rules and forms.

      Changes in internal control over financial reporting. There was no change
in our internal control over financial reporting during our fourth fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.


                                       62
<PAGE>

                                    PART III

      The information required by Item 10 - Directors and Executive Officers of
the Registrant; Item 11 - Executive Compensation; Item 12 - Security Ownership
of Certain Beneficial Owners and Management, Item 13 - Certain Relationships and
Related Transactions and Item 14 - Principal Accounting Fees and Services is
incorporated into Part III of this Annual Report on Form 10-K by reference to
the Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
on December 7, 2004.


                                       63
<PAGE>

                                     PART IV

Item 15. Exhibits, Financial Statement Schedules,
         and Reports on Form 8-K

      (a)(1) and (2). The response to this portion of Item 15 is submitted as a
separate section of this report commencing on page F-1.

      (a)(3) and (c). Exhibits (numbered in accordance with Item 601 of
Regulation S-K).

<TABLE>
<CAPTION>
   Exhibit                                                                  Reference
   Number                             Description                              No.
   ------                             -----------                              ---
<S>          <C>                                                           <C>
   2.1       Mutual Termination Agreement and Release by and among
             Enzon Pharmaceuticals, Inc., NPS Pharmaceuticals, Inc.,
             Momentum Merger Corporation, Newton Acquisition
             Corporation and Einstein Acquisition Corporation, dated
             as of June 4, 2003.                                            +/-+/-(3)

   3(i)      Certificate of Incorporation as amended                          ~(3(i))

   3(i)(a)   Amendment to Certificate of Incorporation                          \\(A)

   3(ii)     By laws, as amended                                            ^^(3(ii))

   4.1       Indenture dated as of June 26, 2001, between the Company
             and Wilmington Trust Company, as trustee, including the
             form of 4 1/2% Convertible Subordinated Note due 2008
             attached as Exhibit A thereto                                   +++(4.1)

   4.2       Rights Agreement dated May 17, 2002 between the Company
             and Continental Stock Transfer Trust Company, as rights
             agent                                                               ^(1)

   4.3       First Amendment to the Rights Agreement, dated as of
             February 19, 2003 between the Company and Continental
             Stock Transfer & Trust Company, as rights agent.                  +/-(1)

   10.1      Form of Change of Control Agreements dated as of January         #(10.2)
             20, 1995 entered into with an Executive Officer**

   10.2      Lease - 300-C Corporate Court, South Plainfield, New
             Jersey                                                           =(10.3)

   10.3      Lease dated April 1, 1995 regarding 20 Kingsbridge Road,
             Piscataway, New Jersey                                           #(10.7)

   10.4      Lease 300A-B Corporate Court, South Plainfield, New            ++(10.10)
             Jersey

   10.5      Employment Agreement dated May 9, 2001, between the           ///(10.30)
             Company and Arthur J. Higgins**

   10.6      Amendment dated May 23, 2001, to Employment Agreement
             between the Company and Arthur J. Higgins dated May 9,
             2001**                                                        ///(10.31)

   10.7      Form of Restricted Stock Award Agreement between the
             Company and Arthur J. Higgins**                                 ////(4.3)

   10.8      Modification of Lease Dated May 14, 2003 - 300-C                  @(10.8)
             Corporate Court, South Plainfield, New Jersey

   10.9      Lease - 685 Route 202/206, Bridgewater, New Jersey             ^^^(10.14)

   10.10     Employment Agreement with Ulrich Grau dated as of March 6,     ^^^(10.15)
             2002**

   10.11     2001 Incentive Stock Plan as amended**                          @@(10.23)

   10.12     Development, License and Supply Agreement between the
             Company and Schering Corporation; dated November 14,
             1990, as amended*                                               ~(10.15)

   10.13     Transition Agreement dated July 2, 2002 between the
             Company and Jeffrey McGuire**                                  ~~(10.16)

   10.14     Asset Purchase Agreement between the Company and Elan
             Pharmaceuticals, Inc., dated as of October 1, 2002               \(2.1)

   10.15     License Agreement between the Company and Elan
             Pharmaceuticals, Inc., dated November 22, 2002                ~~~(10.18)

   10.16     Option Agreement between the Company and Arthur J.
             Higgins, dated as of December 3, 2002**                       ~~~(10.19)
</TABLE>


                                   64
<PAGE>

<TABLE>
<S>          <C>                                                           <C>
   10.17     Form of Restricted Stock Agreement between the Company
             and Arthur J. Higgins **                                      ~~~(10.20)

   10.18     Royalty Agreement between the Company and Vivo
             Healthcare Corporation, dated as of October 16, 2002**        ~~~(10.21)

   10.19     Assignment Agreement between the Company and Vivo
             Healthcare Corporation, dated as of October 16, 2002**        ~~~(10.22)

   10.20     Restricted Stock Purchase Agreement dated as of June 4,
             2003 by and between Enzon Pharmaceuticals, Inc. and NPS
             Pharmaceuticals, Inc.                                          +/-+/-(4)

   10.21     Registration Rights Agreement dated as of June 4, 2003
             by and between Enzon Pharmaceuticals, Inc. and NPS
             Pharmaceuticals, Inc.                                          +/-+/-(5)

   10.22     Outside Directors' Compensation Arrangement                           <|

   10.23     Amendment No. 2 to Employment Agreement with Arthur
             Higgins dated December 3, 2003                                 @@(10.24)

   10.24     Amended and Restated Employment Agreement with Ulrich
             Grau dated December 5, 2003                                    @@(10.25)

   10.25     Restricted Stock Award Agreement with Ulrich Grau dated
             December 5, 2003                                               @@(10.26)

   10.26     Separation Agreement with Arthur Higgins dated May 10,
             2004                                                           @@@(10.27)

   10.27     Development Agreement with Inex Pharmaceuticals dated
             January 19, 2004***                                            @@@(10.28)

   10.28     Product Supply Agreement with Inex Pharmaceuticals dated
             January 19, 2004***                                            @@@(10.29)


   10.29     Co-Promotion Agreement with Inex Pharmaceuticals dated
             January 19, 2004***                                            @@@(10.30)

   10.30     Employment Agreement with Kenneth J. Zuerblis dated June
             14, 2004, along with a form of Restricted Stock Award
             Agreement between the Company and Mr. Zuerblis executed
             as of June 14, 2004 and a form of Consulting Agreement
             between the Company and Mr. Zuerblis.                                  <|

   10.31     Executive Deferred Compensation Plan                                   <|

   12.1      Computation of Ratio of Earnings to Fixed Charges                      <|

   21.0      Subsidiaries of Registrant                                             <|

   23.0      Consent of KPMG LLP                                                    <|

   31.1      Certification of Chief Executive Officer pursuant to
             Section 302 of the Sarbanes-Oxley Act of 2002                          <|

   31.2      Certification of Chief Financial Officer pursuant to
             Section 302 of the Sarbanes-Oxley Act of 2002                          <|

   32.1      Certification of Chief Executive Officer pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002                          <|

   32.2      Certification of Chief Financial Officer pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002                          <|
</TABLE>

<|    Filed herewith

=     Previously filed as an exhibit to the Company's Registration Statement on
      Form S-18 (File No. 2-88240-NY) and incorporated herein by reference
      thereto.

++    Previously filed as an exhibit to the Company's Annual Report on Form 10-K
      for the fiscal year ended June 30, 1993 and incorporated herein by
      reference thereto.

+++   Previously filed as an exhibit to the Company's Registration Statement on
      Form S-3 (File No. 333-67509) filed with the Commission and incorporated
      herein by reference thereto.


                                       65
<PAGE>

#     Previously filed as an exhibit to the Company's Quarterly Report on Form
      10-Q for the quarter ended March 31, 1995 and incorporated herein by
      reference thereto.

///   Previously filed as an exhibit to the Company's Current Report on Form 8-K
      filed with the Commission on June 13, 2001 and incorporated herein by
      reference thereto.

////  Previously filed as an exhibit to the Company's Registration Statement on
      Form S-8 (File No. 333-64110) filed with the Commission and incorporated
      herein by reference thereto.

^     Previously filed as an exhibit to the Company's Form 8-A (File No.
      000-12957) filed with the Commission on May 22, 2002 and incorporated
      herein by reference thereto.

^^    Previously filed as an exhibit to the Company's Current Report on Form 8-K
      filed with the Commission on May 22, 2002 and incorporated herein by
      reference thereto.

~     Previously filed as an exhibit to the Company's Annual Report on Form 10-K
      for the fiscal year ended June 30, 2002 and incorporated herein by
      reference thereto.

~~    Previously filed as an exhibit to the Company's Quarterly Report on Form
      10-Q for the quarter ended September 30, 2002 and incorporated herein by
      reference thereto.

~~~   Previously filed as an exhibit to the Company's Quarterly Report on Form
      10-Q for the quarter ended December 31, 2002 and incorporated herein by
      reference thereto.

\     Previously filed as an exhibit to the Company's Current Report on Form 8-K
      filed on October 2, 2002 and incorporated herein by reference thereto.

\\    Previously filed as an exhibit to the Company's Current Report on Form 8-K
      filed on December 10, 2002 and incorporated herein by reference thereto.

+/-   Previously filed as an exhibit to the Company's Form 8-A12G/A (File No.
      000-12957) filed with the Commission on February 20, 2003 and incorporated
      herein by reference thereto.

+/+/- Previously filed as an exhibit to the Company's Amendment No. 1 to
      Schedule 13D (File No. 005-46256) filed with the Commission on February
      28, 2003 and incorporated herein by reference thereto.

@     Previously filed as an exhibit to the Company's Annual Report on Form 10-K
      for the fiscal year ended June 30, 2003.

@@    Previously filed as a exhibit to the Company's Quarterly Report on Form
      10-Q for the quarter ended December 31, 2003.

@@@   Previously filed as an exhibit to the Company's Quarterly Report on Form
      10-Q for the quarter ending March 31, 2004.

*     Copy omits information for which confidential treatment has been granted.

**    Required to be filed pursuant to Item 601(b) (10) (ii) (A) or (iii) of
      Regulation S-K.

***   Portions of this exhibit have been redacted and filed separately with the
      Commission pursuant to a confidential treatment request.


                                       66
<PAGE>

(b) Reports on Form 8-K.

      On April 26, 2004, we filed with the Commission a Current Report on Form
8-K dated April 23, 2004 reporting Robert L. Parkinson's resignation from our
Board of Directors.

      On May 5, 2004, we filed with the Commission a Current Report on Form 8-K
dated May 5, 2004 reporting our financial results for the quarter ended March
31, 2004.

      On May 21, 2004, we filed with the Commission a Current Report on Form 8-K
dated May 21, 2004 reporting that the New drug Application (NDA) for MARQIBO
(vincristine sulfate liposomes injection) has been accepted by the United States
Food and Drug Administration (FDA) and has been granted a standard review
designation.

      On June 8, 2004, we filed with the Commission a Current Report on Form 8-K
dated June 7, 2004 reporting a summary of clinical advancements at the 40th
Annual Meeting of the American Society of Clinical Oncology (ASCO) in New
Orleans, Louisiana.

      On August 3, 2004, we filed with the Commission a Current Report on Form
8-K dated August 2, 2004 reporting that Nektar Therapeutics had entered into a
license agreement with Pfizer involving our PEG technology.

      On August 13, 2004, we filed with the Commission a Current Report on Form
8-K dated August 9, 2004 reporting with sadness the passing of one of our
directors, David W. Golde, M.D.

      On August 17, 2004, we filed with the Commission a Current Report on Form
8-K dated August 17, 2004 reporting our financial results for the year ended
June 20, 2004.


                                       67
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of section 13 or 15(d) 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.

                                     ENZON PHARMACEUTICALS, INC.
                                     (Registrant)


Dated: September 13, 2004            by:/S/ Kenneth J. Zuerblis
                                        ---------------------------------
                                     Kenneth J. Zuerblis
                                     Executive Vice President Finance,
                                     Chief Financial Officer
                                     (Principal Executive Officer)

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
             Name                                     Title                           Date
             ----                                     -----                           ----
<S>                                     <C>                                    <C>
/S/ Kenneth J. Zuerblis                 Executive Vice President Finance,      September 13, 2004
--------------------------------        (Principal Executive Officer)
Kenneth J. Zuerblis                     Chief Financial Officer
                                        (Principal Financial and
                                        Accounting Officer) and
                                        Corporate Secretary


/S/ Arthur J. Higgins                   Chairman of the Board                  September 13, 2004
--------------------------------
Arthur J. Higgins


/S/ Rolf A. Classon                     Director                               September 13, 2004
--------------------------------
Rolf A. Classon


/S/ Rosina B. Dixon                     Director                               September 13, 2004
--------------------------------
Rosina B. Dixon


/S/ Robert LeBuhn                       Director                               September 13, 2004
--------------------------------
Robert LeBuhn
</TABLE>


                                       68
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

                                      Index

                                                                        Page
                                                                        ----

Report of Independent Registered Public Accounting Firm                  F-2

Consolidated Financial Statements:
           Consolidated Balance Sheets - June 30, 2004 and 2003          F-3
           Consolidated Statements of Operations - Years ended
            June 30, 2004, 2003 and 2002                                 F-4
           Consolidated Statements of Stockholders' Equity -
            Years ended June 30, 2004, 2003 and 2002                     F-5
           Consolidated Statements of Cash Flows - Years ended
            June 30, 2004, 2003 and 2002                                 F-7
           Notes to Consolidated Financial Statements - Years ended
            June 30, 2004, 2003 and 2002                                 F-8

Consolidated Financial Statement Schedule:
           Schedule II - Valuation and Qualifying Accounts               F-44


                                      F-1
<PAGE>

             Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Enzon Pharmaceuticals, Inc.:

We have audited the consolidated financial statements of Enzon Pharmaceuticals,
Inc. and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
consolidated financial statement schedule as listed in the accompanying index.
These consolidated financial statements and consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
consolidated financial statement schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Enzon
Pharmaceuticals, Inc. and subsidiaries as of June 30, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2004, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.


/s/KPMG LLP

Short Hills, New Jersey
August 17, 2004


                                      F-2
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             June 30, 2004 and 2003
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                       2004            2003
                                                                    ---------       ---------
<S>                                                                 <C>             <C>
ASSETS
 Current assets:
    Cash and cash equivalents                                       $  91,532       $  66,752
    Short-term investments                                             27,119          25,047
    Accounts receivable, net                                           25,977          33,173
    Inventories                                                        11,215          11,786
    Deferred tax assets                                                 9,133          14,564
    Other current assets                                                5,377           1,525
                                                                    ---------       ---------
           Total current assets                                       170,353         152,847
                                                                    ---------       ---------
Property and equipment, net                                            34,859          32,593
Marketable securities                                                  67,582          61,452
Investments in equity securities                                       37,906          56,364
Deferred tax assets                                                    61,502          52,889
Amortizable intangible assets, net                                    194,067         211,975
Goodwill                                                              150,985         150,985
Other assets                                                            7,609           9,461
                                                                    ---------       ---------
                                                                      554,510         575,719
                                                                    ---------       ---------
Total assets                                                        $ 724,863       $ 728,566
                                                                    =========       =========
LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
    Accounts payable                                                $   8,663       $  12,809
    Accrued expenses                                                   14,001          10,262
    Accrued interest                                                    9,000           9,000
    Income taxes payable                                                   --           2,274
                                                                    ---------       ---------
             Total current liabilities                                 31,664          34,345
                                                                    ---------       ---------
     Accrued rent                                                         343             449
     Unearned revenue                                                   1,312           2,188
     Notes payable                                                    400,000         400,000
                                                                    ---------       ---------
                                                                      401,655         402,637
                                                                    ---------       ---------
Commitments and contingencies
Stockholders' equity:
     Common stock-$.01 par value, authorized 90,000,000 shares
       issued and outstanding 43,750,934 shares in 2004 and
       43,518,359 shares in 2003                                          438             435
    Additional paid-in capital                                        322,486         322,488
    Accumulated other comprehensive loss                               (3,546)           (159)
    Deferred compensation                                              (3,571)         (4,040)
    Accumulated deficit                                               (24,263)        (27,140)
                                                                    ---------       ---------
Total stockholders' equity                                            291,544         291,584
                                                                    ---------       ---------
Total liabilities and stockholders' equity                          $ 724,863       $ 728,566
                                                                    =========       =========
</TABLE>

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


                                      F-3
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    Years ended June 30, 2004, 2003 and 2002
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                        2004            2003           2002
                                                     ---------       ---------       --------
<S>                                                  <C>             <C>             <C>
Revenues:
    Product sales, net                               $ 107,922       $  59,264       $ 22,183
    Manufacturing revenue                               12,911           8,742             --
    Royalties                                           47,707          77,589         53,329
    Contract revenue                                     1,031             811            293
                                                     ---------       ---------       --------
           Total revenues                              169,571         146,406         75,805
                                                     ---------       ---------       --------
Costs and expenses:
   Cost of sales and manufacturing revenue              46,986          28,521          6,078
   Research and development                             34,769          20,969         18,427
   Selling, general and administrative                  47,001          30,571         16,545
   Amortization of acquired intangibles                 13,432           9,211            142
   Write-down of carrying value of investment            8,341          27,237             --
   Acquired in process research and development         12,000              --             --
                                                     ---------       ---------       --------
           Total costs and expenses                    162,529         116,509         41,192
                                                     ---------       ---------       --------
Operating income                                         7,042          29,897         34,613
                                                     ---------       ---------       --------
Other income (expense):
    Investment income, net                              13,396           8,942         18,681
    Interest expense                                   (19,829)        (19,828)       (19,829)
    Merger termination fee, net                             --          26,897             --
    Other                                                3,860              41          3,218
                                                     ---------       ---------       --------
                                                        (2,573)         16,052          2,070
                                                     ---------       ---------       --------
Income before tax provision (benefit)                    4,469          45,949         36,683
    Tax provision (benefit)                              1,592             223         (9,123)
                                                     ---------       ---------       --------
Net income                                           $   2,877       $  45,726       $ 45,806
                                                     =========       =========       ========

Basic earnings per common share                      $    0.07       $    1.06       $   1.07
                                                     =========       =========       ========
Diluted earnings per common share                    $    0.07       $    1.05       $   1.04
                                                     =========       =========       ========

Weighted average number of common
 shares outstanding - basic                             43,350          43,116         42,726
                                                     =========       =========       ========
Weighted average number of common shares
and dilutive potential common shares
outstanding                                             43,522          43,615         44,026
                                                     =========       =========       ========
</TABLE>

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


                                      F-4
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    Years ended June 30, 2004, 2003 and 2002
                                 (In thousands)

<TABLE>
<CAPTION>
                                             Preferred stock       Common stock
                                          --------------------  -------------------
                                                                                       Additional
                                          Number of     Par     Number of     Par        Paid-in
                                            Shares     Value      Shares     Value       Capital
                                          ---------    -----    ----------   -----       -------
<S>                                           <C>           <C>   <C>       <C>         <C>
Balance, June 30, 2001,                        7            --    41,991    $   420     $ 257,682
Common stock issued for exercise of
   non-qualified stock options                --            --     1,009         10         5,172
Amortization of deferred compensation         --            --        --         --            --
Comprehensive income:
  Net income                                  --            --        --         --            --
  Net change in unrealized gain on
    available for sale securities             --            --        --         --            --
                                            -------     ------    ------    -------     ---------
  Total comprehensive income                  --            --        --         --            --
                                            -------     ------    ------    -------     ---------
Balance, June 30, 2002                         7            --    43,000    $   430       262,854

Common stock issued for exercise of
  Non-qualified stock options                 --            --       305          3         1,370
Issuance of restricted common stock           --            --       200          2         3,558
Conversion and redemption of preferred
stock                                         (7)           --        14         --           (25)
Amortization of deferred compensation         --            --        --         --            --
Dividends on preferred stock                  --            --        --         --            --
Tax benefit recognized related to stock
option exercises                              --            --        --         --        54,731
Comprehensive income:
  Net income                                  --            --        --         --            --
  Net change in unrealized gain on
    available for sale securities             --            --        --         --            --
                                            -------     -------   ------    -------     ---------
  Total comprehensive income                  --            --        --         --            --
                                            -------     -------   ------    -------     ---------
Balance, June 30, 2003, carried forward       --            --    43,519    $   435     $ 322,488

<CAPTION>
                                          Accumulative     Other
                                         Comprehensive    Deferred      Accumulated
                                         Income (Loss)  Compensation      Deficit          Total
                                         -------------  ------------      -------          -----
<S>                                          <C>           <C>           <C>             <C>
Balance, June 30, 2001,                      $   885       ($1,509)      ($118,489)      $ 138,989
Common stock issued for exercise of
   non-qualified stock options                    --            --              --           5,182
Amortization of deferred compensation             --           307              --             307
Comprehensive income:
  Net income                                      --            --          45,806          45,806
  Net change in unrealized gain on
    available for sale securities                211            --              --             211
                                             -------       -------       ---------       ---------
  Total comprehensive income                     211            --          45,806          46,017
                                             -------       -------       ---------       ---------
Balance, June 30, 2002                       $ 1,096       $(1,202)      $ (72,683)      $ 190,495

Common stock issued for exercise of
  Non-qualified stock options                     --            --              --           1,373
Issuance of restricted common stock               --        (3,560)             --              --
Conversion and redemption of preferred
stock                                             --            --              --             (25)
Amortization of deferred compensation             --           722              --             722
Dividends on preferred stock                      --            --            (183)           (183)
Tax benefit recognized related to stock
option exercises                                  --            --              --          54,731
Comprehensive income:
  Net income                                      --            --          45,726          45,726
  Net change in unrealized loss on
    available for sale securities             (1,255)           --              --          (1,255)
                                             -------       -------       ---------       ---------
  Total comprehensive income                  (1,255)           --          45,726          44,471
                                             -------       -------       ---------       ---------
Balance, June 30, 2003, carried forward        ($159)      ($4,040)       ($27,140)      $ 291,584
</TABLE>

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


                                      F-5
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
                         Years ended 2004, 2003 and 2002
                                 (In thousands)

<TABLE>
<CAPTION>
                                                  Preferred stock        Common stock
                                                ------------------    ------------------
                                                                                            Additional
                                                Number of     Par     Number of     Par       Paid-in
                                                  Shares     Value      Shares     Value      Capital
                                                ---------   ------    ----------   -----      -------
<S>                                               <C>       <C>         <C>        <C>       <C>
Balance, June 30, 2003, brought forward              --        --       43,519     $ 435     $ 322,488
Common stock issued for exercise of
   non-qualified stock options                       --        --           97         1           526
Issuance of restricted common stock                  --        --          340         4         4,072
Cancellation of restricted common stock              --        --         (215)       (2)       (4,478)
Common stock issued for Independent
  Director's Stock Plan                              --        --           10        --           143
Amortization of deferred compensation                --        --           --        --            --
Other                                                --        --           --        --          (265)
Comprehensive income:
  Net income                                         --        --           --        --            --
  Net change in unrealized loss on
    available for sale securities,
    net of reclassification adjustments              --        --           --        --            --
  Net change in unrealized loss on NPS               --        --           --        --            --
    investment                                    -----     -----      -------     -----     ---------
  Total comprehensive income (loss)                  --        --           --        --            --
                                                  -----     -----      -------     -----     ---------
Balance, June 30, 2004                               --        --       43,751     $ 438     $ 322,486
                                                  =====     =====      =======     =====     =========

<CAPTION>

                                                    Accumulative      Other
                                                    Comprehensive    Deferred      Accumulated
                                                    Income (Loss)  Compensation      Deficit       Total
                                                    -------------  ------------      -------       -----
<S>                                                    <C>           <C>            <C>          <C>
Balance, June 30, 2003, brought forward                  ($159)      ($4,040)       ($27,140)    $ 291,584
Common stock issued for exercise of
   non-qualified stock options                              --            --              --           527
Issuance of restricted common stock                         --        (4,076)             --            --
Cancellation of restricted common stock                     --         3,163              --        (1,317)
Common stock issued for Independent
  Director's Stock Plan                                     --            --              --           143
Amortization of deferred compensation                       --         1,382              --         1,382
Other                                                       --            --              --          (265)
Comprehensive income:
  Net income                                                --            --           2,877         2,877
  Net change in unrealized loss on
    available for sale securities,
    net of reclassification adjustments                   (120)           --              --          (120)
  Net change in unrealized loss on NPS investment       (3,267)           --              --        (3,267)
                                                       -------       -------        --------     ---------
  Total comprehensive income (loss)                     (3,387)           --           2,877          (510)
                                                       -------       -------        --------     ---------
Balance, June 30, 2004                                 ($3,546)      ($3,571)       ($24,263)    $ 291,544
                                                       =======       =======        ========     =========
</TABLE>

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


                                      F-6
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    Years Ended June 30, 2004, 2003 and 2002
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                  2004          2003          2002
                                                                --------     ---------     ---------
<S>                                                             <C>          <C>           <C>
Cash flows from operating activities:
    Net income                                                  $  2,877     $  45,726     $  45,806
    Adjustments to reconcile net income to
    net cash provided by operating activities:
      Depreciation and amortization                               22,072        13,264           972
      Amortization of bond premium/discount                          939        (1,261)       (2,680)
      Amortization of debt issue costs                             1,829         1,829         1,829
      Gain on sale of equity investment                          (12,777)       (2,318)       (1,185)
      Deferred income taxes                                        1,592        (4,379)       (9,000)
      Acquired in process research and development                12,000            --            --
      Non-cash (credit) expense for stock based compensation         (57)          830           391
      Non-cash write down of carrying value of  investment         8,341        27,237            --
      Change in fair value of derivative                          (1,728)           --            --
      Non-cash merger termination fee                                 --       (34,552)           --
 Changes in operating assets and liabilities:
    Decrease (increase) in accounts receivable, net                7,196        (7,123)      (14,963)
    Decrease (increase) in inventories                               571        (1,000)         (362)
    (Increase) decrease in other current assets                   (1,017)        2,649        (1,337)
    Decrease (increase) in deposits                                   23           571          (386)
    (Decrease) increase in accounts payable                       (4,146)        8,283          (144)
    Increase in accrued expenses                                     444         6,276         1,981
    Increase in accrued interest                                      --            --         8,750
    (Decrease) increase in income taxes payable                   (2,274)        2,274            --
    Increase in accrued rent                                        (106)         (104)          (29)
    Increase in unearned revenue                                   1,312            --            --
                                                                --------     ---------     ---------
      Net cash provided by operating activities                   37,091        58,202        29,643
                                                                --------     ---------     ---------
Cash flows from investing activities:
    Purchase of property and equipment                            (6,430)      (11,225)       (7,503)
    Purchase of intangible asset                                      --            --       (15,000)
    Purchase of acquired in process research and development     (12,000)           --            --
    Acquisition of ABELCET business                                   --      (369,265)           --
    License of DEPOCYT product                                        --       (12,186)           --
    Purchase of cost method investments                               --            --       (48,341)
    Proceeds from sale of cost method investments                 46,923            --            --
    Proceeds from sale of marketable securities                   33,444       371,544       271,734
    Purchase of marketable securities                            (79,315)     (142,232)     (511,997)
    Maturities of marketable securities                            4,540        57,000        80,260
    Decrease in long-term investments                                 --            --          (260)
                                                                --------     ---------     ---------
      Net cash used in investing activities                      (12,838)     (106,364)     (231,107)
                                                                --------     ---------     ---------
Cash flows from financing activities:
    Proceeds from issuance of common stock                           527         1,265         5,098
    Redemption of preferred stock                                     --           (26)
    Preferred stock dividend paid                                     --          (183)           --
                                                                --------     ---------     ---------
      Net cash provided by financing activities                      527         1,056         5,098
                                                                --------     ---------     ---------
      Net increase (decrease) in cash and cash equivalents        24,780       (47,106)     (196,366)
Cash and cash equivalents at beginning of year                    66,752       113,858       310,224
                                                                --------     ---------     ---------
Cash and cash equivalents at end of year                        $ 91,532     $  66,752     $ 113,858
                                                                ========     =========     =========
</TABLE>

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


                                      F-7
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                    Years ended June 30, 2004, 2003 and 2002

(1)   Company Overview

      Enzon Pharmaceuticals, Inc. ("Enzon" or "Company") is a biopharmaceutical
company that develops, manufactures and markets enhanced therapeutics for
life-threatening diseases through the application of its proprietary
technologies. The Company was originally incorporated in 1981. The Company's
operations include sales of ADAGEN(R), ONCASPAR(R), DEPOCYT(R) and ABELCET,
royalties earned, which are primarily earned on sales of PEG-INTRON(R); contract
manufacturing revenue; and license fees. The manufacturing and marketing of
pharmaceutical products in the United States is subject to stringent
governmental regulation, and the sale of any of the Company's products for use
in humans in the United States requires the prior approval of the United States
Food and Drug Administration ("FDA").

(2)   Summary of Significant Accounting Policies

      Principles of Consolidation

      The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation. The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

      Cash Equivalents

      The Company considers all highly liquid debt instruments with original
maturities not exceeding three months to be cash equivalents. Cash equivalents
consist primarily of U.S. Government instruments, commercial paper, and money
market funds.

      Marketable Securities

      The Company classifies its investments in debt and marketable equity
securities as available-for-sale since the Company does not have the intent to
hold them to maturity. Debt and marketable equity securities are carried at fair
market value, with the unrealized gains and losses (which are deemed to be
temporary), net of related tax effect, included in the determination of
comprehensive income and reported in stockholders' equity. The fair value of
substantially all securities is determined by quoted market prices.

      The cost of the debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. The amortization, along with realized
gains and losses, is included in interest income. The cost of securities is
based on the specific identification method.

      A decline in the market value of any security below cost that is deemed to
be other than temporary results in a reduction in carrying amount to fair value.
The impairment is charged to earnings and a new cost basis for the security is
established. Dividend and interest income are recognized when earned.


                                      F-8
<PAGE>

      As of June 30, 2004, the aggregate fair value of investments with
unrealized losses have been in a continuous unrealized loss position for less
than 12 months.


                                      F-9
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The amortized cost, gross unrealized holding gains or losses, and fair
value for the Company's available-for-sale securities by major security type at
June 30, 2004 were as follows (in thousands):

                                            Gross        Gross
                                          Unrealized   Unrealized
                             Amortized     Holding      Holding     Fair Market
                               Cost         Gains       Losses         Value*
                             ---------    ----------   ----------   -----------
      U.S. Government
         agency debt         $  24,017    $       5    $    (351)    $  23,671
      U.S. corporate debt       71,832            6         (808)       71,030
                             ---------    ---------    ---------     ---------
                             $  95,849    $      11    $  (1,159)    $  94,701
                             =========    =========    =========     =========

*     Included in short-term investments $27,119 and marketable securities
      $67,582.

      The amortized cost, gross unrealized holding gains or losses, and fair
value for securities available-for-sale by major security type at June 30, 2003
were as follows (in thousands):

                                            Gross        Gross
                                          Unrealized   Unrealized
                             Amortized     Holding      Holding     Fair Market
                               Cost         Gains       Losses         Value*
                             ---------    ----------   ----------   -----------
      U.S. Government
         agency debt         $  26,518    $     166    $      --     $  26,684
      U.S. corporate debt       59,804           11           --        59,815
                             ---------    ---------    ---------     ---------
                             $  86,322    $     177    $      --     $  86,499
                             =========    =========    =========     =========

*     Included in short-term investments $25,047 and marketable securities
      $61,452.

      The amortized cost, gross unrealized holding gains or losses, and fair
value for securities available-for-sale by major security type at June 30, 2002
were as follows (in thousands):

                                            Gross        Gross
                                          Unrealized   Unrealized
                             Amortized     Holding      Holding     Fair Market
                               Cost         Gains       Losses         Value*
                             ---------    ----------   ----------   -----------
      U.S. Government
         agency debt         $ 339,638    $   2,052    $      --     $ 341,690
      U.S. corporate debt       29,764           --         (298)       29,466
                             ---------    ---------    ---------     ---------
                             $ 369,402    $   2,052    ($    298)    $ 371,156
                             =========    =========    =========     =========

*     Included in short-term investments $75,165 and marketable securities
      $295,991.


                                      F-10
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      Gross realized gains from the sale of investment securities included in
net income for the years ended June 30, 2004, 2003 and 2002 were $12.8 million,
$2.3 million and $1.2 million, respectively.

      Maturities of debt securities classified as available-for-sale at June 30,
2004 were as follows (in thousands):

           Years ended June 30,         Amortized Cost     Fair Market Value
                                       ----------------   -------------------
           2005                             $27,263              $27,119
           2006                              41,132               40,569
           2007                              18,440               18,180
           2008                               9,014                8,833
                                            -------              -------
                                            $95,849              $94,701
                                            =======              =======

      Financial instruments

      The carrying values of cash and cash equivalents, accounts receivable,
other assets, accounts payable and accrued expenses included in the Company's
consolidated balance sheets approximated their fair values at June 30, 2004 and
2003.

      Revenue Recognition

      Revenues from product sales and manufacturing revenue are recognized at
the time of shipment and a provision is made at that time for estimated future
credits, chargebacks, sales discounts, rebates and returns (estimates are based
on historical trends). These sales provision accruals, except for rebates which
are recorded as a liability, are presented as a reduction of the accounts
receivable balances and totaled $9.5 million, including $7.8 million in reserves
for chargebacks, as of June 30, 2004. For June 30, 2003 these sales provision
accruals are presented as a reduction of the accounts receivable balances,
except for rebates which are recorded as a liability, and totaled $8.1 million,
including $6.3 million in reserves for chargebacks. The Company continually
monitors the adequacy of the accrual by comparing the actual payments to the
estimates used in establishing the accrual. The Company ships product to
customers primarily FOB shipping point and utilizes the following criteria to
determine appropriate revenue recognition: pervasive evidence of an arrangement
exists, delivery has occurred, selling price is fixed and determinable and
collection is reasonably assured.

      Royalties under the Company's license agreements with third parties are
recognized when earned through the sale of product by the licensor. The Company
does not participate in the selling or marketing of products for which it
receives royalties.

      In accordance with SAB 104, upfront nonrefundable fees associated with
license and development agreements where the Company has continuing involvement
in the agreement are recorded as deferred revenue and recognized over the
estimated service period. If the estimated service period is subsequently
modified, the period over which the up-front fee is recognized is modified
accordingly on a prospective basis. SAB No. 104 updates the guidance in SAB No.
101 and requires companies to identify separate units of accounting based on the
consensus reached on Emerging Issues Task Force ("EITF") Issue No 00-21.
"Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). EIFT 00-21
provides guidance on how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into separate
units of accounting for revenue recognition purposes, and if this division is
required, how the arrangement consideration should be allocated among the
separate units of accounting, EITF 00-21 is effective for revenue arrangements
entered into in quarters beginning after June 15, 2003. If the deliverables in a
revenue arrangement constitute separate units of accounting according to the
EITF's separation criteria, the revenue-recognization policy must be determined
for each identified unit. If the arrangement is a single unit of accounting
under the separation criteria the revenue-recognition policy must be determined
for the entire arrangement. The adoption of EITF 00-21 did not impact the
Company's historical consolidated financial position or results or operations,
but could affect the timing or pattern of revenue recognition for future
collaborative research and/or license agreements. Prior to the adoption of EITF
00-21, revenues from the achievement of research and development milestones,
which represent the achievement of a significant step in the research and
development process, were recognized when and if the milestones were achieved.

      Inventories

      Inventories are carried at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method and includes the cost of raw
materials, labor and overhead.


                                      F-11
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      Property and Equipment

      Property and equipment are stated at cost. Depreciation of fixed assets is
provided by straight-line methods over estimated useful lives. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is recognized in
operations for the period. Amortization of leasehold improvements is calculated
using the straight-line method over the remaining term of the lease or the life
of the asset, whichever is shorter. The cost of repairs and maintenance is
charged to operations as incurred; significant renewals and improvements are
capitalized.

      Business Combinations

      In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, SFAS No. 141 requires that all business combinations be accounted
for under a single method-the purchase method. Current U.S. Accounting Standards
no longer permit the use of the pooling-of-interests method. SFAS No. 141
requires that the purchase method be used for business combinations initiated
after June 30, 2001. Subsequent to SFAS No. 141 becoming effective, the Company
completed the acquisition of the North American ABELCET business, which was
accounted for using the purchase method of accounting.

      Goodwill and Other Intangible Assets

      Goodwill represents the excess of costs over the fair value of
identifiable net assets of businesses acquired. The Company adopted the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of July 1,
2002. In accordance with the provisions of SFAS No. 142, goodwill and other
intangible assets determined to have an indefinite useful life acquired in a
purchase business combination are not subject to amortization, are tested at
least annually for impairment, and are tested for impairment more frequently if
events and circumstances indicate that the asset might be impaired. The Company
completed its annual goodwill impairment test on May 31, 2004, which indicated
that goodwill was not impaired. An impairment loss is recognized to the extent
that the carrying amount exceeds the asset's fair value. This determination is
made at the Company level because the Company is in one reporting unit and
consists of two steps. First, the Company determines the fair value of its
reporting unit and compares it to its carrying amount. Second, if the carrying
amount of its reporting unit exceeds its fair value, an impairment loss is
recognized for any excess of the carrying amount of the reporting unit's
goodwill over the implied fair value of that goodwill. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit in a
manner similar to a purchase price allocation, in accordance with FASB Statement
No. 141, Business Combinations. The residual fair value after this allocation is
the implied fair value of the company's goodwill. Recoverability of amortizable
intangible assets is determined by comparing the carrying amount of the asset to
the future undiscounted net cash flow to be generated by the asset. The
evaluations involve amounts that are based on management's best estimate and
judgment. Actual results may differ from these estimates. If recorded values are
less than the fair values, no impairment is indicated. SFAS No. 142 also
requires that intangible assets with estimated useful lives be amortized over
their respective estimated useful lives. At the time of adoption of SFAS No.
142, the Company did not have any goodwill or other intangible assets with an
indefinite useful life. As of June 30, 2004, the Company does not have
intangibles with indefinite useful lives, other than goodwill.

      Accounting for Impairment of Long-Lived Assets

      In accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived


                                      F-12
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      Assets, such as property, plant, and equipment and purchased intangibles
subject to amortization are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the consolidated balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer depreciated. The
assets and liabilities of a disposed group classified as held for sale would be
presented separately in the appropriate asset and liability sections of the
consolidated balance sheet.

      Intangible assets are capitalized and amortized on a straight-line basis
over their respective expected useful lives, up to a 15-year period.

      Acquired in-process research and development

      Costs to acquire in-process research and development ("IPR&D") projects
and technologies which have no alternative future use at the date of acquisition
are expensed as incurred.

      Derivative Financial Instruments

      The Company addresses certain financial exposures through a controlled
program of risk management that, at times subsequent to June 30, 2003, includes
the use of derivative financial instruments. The Company does not use derivative
financial instruments for trading or speculative purposes. In August 2003, the
Company entered into a Zero Cost Protective Collar arrangement with a financial
institution to reduce the exposure associated with the shares of NPS
Pharmaceuticals, Inc. received in June 2003 as a result of the termination of
the proposed merger between the Company and NPS Pharmaceuticals, Inc. (see Note
14). The contract has been designated as a fair value hedge and accordingly, the
change in fair value of the derivative will be recorded in other comprehensive
income or in the income statement depending on the portion of the derivative
designated as an effective hedge. The Company formally assesses, both at
inception of the hedge and periodically on an ongoing basis, whether the
derivative is highly effective in offsetting changes in the fair value of the
hedged item. If it is determined that a derivative is not highly effective as a
hedge or if a derivative ceases to be a highly effective hedge, the Company
discontinues hedge accounting prospectively.

      Research and Development

      All research and development costs are expensed as incurred. These include
the following types of costs incurred in performing research and development
activities: salaries and benefits, allocated overhead and occupancy costs,
clinical trials and related clinical manufacturing costs, contract services, and
other outside costs.

      Income Taxes

      Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial


                                      F-13
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income or expense in the
period that includes the enactment date of the rate change.

      Foreign Currency Transactions

      Gains and losses from foreign currency transactions, such as those
resulting from the translation and settlement of receivables and payables
denominated in foreign currencies, are included in the consolidated statements
of operations. The Company does not currently use derivative financial
instruments to manage the risks associated with foreign currency fluctuations.
The Company recorded a loss on foreign currency transactions of approximately
$18,000 for the year ended June 30, 2004. Gains and losses from foreign currency
transactions are included as a component of other income (expense).

      Stock-Based Compensation Plans

      The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded on the
date of grant of options to employees and members of the Board of Directors only
if the current market price of the underlying stock exceeded the exercise price.
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), established
accounting for stock-based employee compensation plans. As allowed by SFAS 123,
the Company has elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure requirements of SFAS
123, as amended.

      When the exercise price of employee or director stock options is less than
the fair value of the underlying stock on the grant date, the Company records
deferred compensation for the difference and amortizes this amount to expense
over the vesting period of the options. Options or stock awards issued to
non-employees and consultants are recorded at their fair value as determined in
accordance with SFAS 123 and Emerging Issues Task Force ("EITF") No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, and recognized
over the related vesting period.


                                      F-14
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The following table illustrates the effect on net income and net income
per share as if the compensation cost for the Company's stock option grants had
been determined based on the fair value at the grant dates for awards consistent
with the fair value method of SFAS No. 123 (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
                                                                         Years ended June 30,
                                                                  ----------------------------------
                                                                    2004         2003         2002
                                                                  --------     --------     --------
<S>                                                               <C>          <C>          <C>
Net income applicable to common stockholders:
  As reported                                                     $  2,877     $ 45,726     $ 45,806
  Add stock-based employee compensation
       expense included in reported net income, net of tax (1)         (34)         433          307
  Deduct total stock-based employee
       compensation expense determined under
       fair-value-based method for all awards, net of tax (1)      (11,074)      (8,933)     (22,751)
                                                                  --------     --------     --------
  Pro forma net income (loss)                                     $ (8,231)    $ 37,226     $ 23,362
                                                                  ========     ========     ========

Net income (loss) per common share-basic:
  As reported                                                     $   0.07     $   1.06     $   1.07
  Pro forma                                                       $  (0.19)    $   0.86     $   0.55
Net income (loss) per common share-diluted
  As reported                                                     $   0.07     $   1.05     $   1.04
  Pro forma                                                       $  (0.19)    $   0.85     $   0.53
</TABLE>

      (1) Information for 2004 and 2003 has been adjusted for taxes using
estimated tax rates of 35% and 40%, respectively. Information for 2002 has not
been tax effected as a result of the Company's utilization of net operating loss
carryforwards in that year.

      The pro forma effects on net income applicable to common stockholders and
net income per common share for 2004, 2003 and 2002 may not be representative of
the pro forma effects in future years since compensation cost is allocated on a
straight-line basis over the vesting periods of the grants, which extends beyond
the reported years.


                                      F-15
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The weighted-average fair value per share was $8.10, $12.50 and $29.27 for
stock options accounted for under SFAS No. 123 and granted in 2004, 2003 and
2002, respectively. The fair value of stock options was estimated using the
Black-scholes option-pricing model. The Black-scholes model considers a number
of variables, including the exercise price and the expected life of the option,
the current price of common stock, the expected volatility and the dividend
yield of the underlying common stock, and the risk-free interest rate during the
expected term of the option. The following table summarizes the weighted average
assumptions used:

                                               Years ended June 30,
                                              ----------------------
                                              2004     2003     2002
                                              ----     ----     ----

      Risk-free interest rate                 4.00%    2.97%    4.00%
      Expected stock price volatility           40%      75%      78%
      Expected term until exercise (years)    4.73     4.21     4.23
      Expected dividend yield                    0%       0%       0%

      Cash Flow Information

      Cash payments for interest were approximately $18.0 million, $18.0 million
and $9.3 million for the years ended June 30, 2004, 2003 and 2002, respectively.
There were $3.8 million and $2.1 million of tax payments made for the years
ended June 30, 2004 and June 30, 2003, respectively. There were no income tax
payments made for the year ended June 30, 2002.

      Reclassifications

      Certain amounts previously reported have been reclassified to conform to
the current year's presentation.

(3)   Comprehensive Income

      SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income consists of net income and net
unrealized gains (losses) on securities and is presented in the Consolidated
Statements of Stockholders' Equity.


                                      F-16
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The following table reconciles net income to comprehensive income (loss)
(in thousands):

<TABLE>
<CAPTION>
                                                           Years Ended June 30,
                                                    ---------------------------------
                                                      2004         2003         2002
                                                    --------     --------     --------
<S>                                                 <C>          <C>          <C>
      Net income                                    $  2,877     $ 45,726     $ 45,806
        Other comprehensive income:
        Unrealized gain (loss) on securities
           that arose during the year net of
           tax provision (benefit) of
           ($540,000), $345,000 and
           $658,000 for 2004, 2003 and
           2002, respectively                           (784)       1,007          211
        Unrealized loss on NPS investment
           arising during the period, net of tax      (3,267)          --           --
        Reclassification adjustment for gain
          included in net income, net of tax             664       (2,262)          --
                                                    --------     --------     --------
                                                      (3,387)      (1,255)         211
                                                    --------     --------     --------
      Total comprehensive income (loss)             $   (510)    $ 44,471     $ 46,017
                                                    ========     ========     ========
</TABLE>

(4)   Earnings Per Common Share

      Basic earnings per share is computed by dividing the net income available
to common stockholders adjusted for only cumulative undeclared preferred stock
dividends for the relevant period, by the weighted average number of shares of
Common Stock issued and outstanding during the periods. For purposes of
calculating diluted earnings per share for the years ended June 30, 2004, 2003
and 2002, the denominator includes both the weighted average number of shares of
Common Stock outstanding and the number of dilutive Common Stock equivalents.
The number of dilutive Common Stock equivalents includes the effect of
non-qualified stock options calculated using the treasury stock method and the
number of shares issuable upon conversion of the Series A Preferred Stock that
was outstanding as of June 30, 2003 and 2002. The number of shares issuable upon
conversion of the Company's 4.5% Convertible Subordinated Notes due 2008 (the
"Notes") and the effect of the vesting of certain restricted stock and certain
stock options using the treasury stock method have not been included as the
effect of their inclusion would be antidilutive. As of June 30, 2004, 2003 and
2002, the Company had 9,644,000, 6,514,000 and 6,955,000 dilutive potential
common shares outstanding respectively, that could potentially dilute future
earnings per share calculations.


                                      F-17
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The following table represents the reconciliation of the numerators and
denominators of the basic and diluted EPS computations for net earnings
available for Common Stockholders for the years ended June 30, 2004, 2003 and
2002 (in thousands):

<TABLE>
<CAPTION>
                                                           Years ended June 30,
                                                     --------------------------------
                                                       2004        2003        2002
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
      Net income                                     $  2,877    $ 45,726    $ 45,806
      Less:  preferred stock dividends                     --          11          14
                                                     --------    --------    --------
      Net income available to common stockholders    $  2,877    $ 45,715    $ 45,792
                                                     ========    ========    ========

      Weighted average number of
         common shares issued and
         outstanding - basic                           43,350      43,116      42,726
      Effect of dilutive common stock
      equivalents:
         Conversion of preferred stock                     --          13          16
         Exercise of stock options                        172         486       1,284
                                                     --------    --------    --------
                                                       43,522      43,615      44,026
                                                     ========    ========    ========
</TABLE>

(5)   Business Combination

      (a) Acquisition of ABELCET Product Line

            On November 22, 2002, the Company acquired the North American rights
and operational assets associated with the development, manufacture, sales and
marketing of ABELCET(R) (Amphotericin B Lipid Complex Injection) (the "North
American ABELCET business") from Elan Corporation, plc ("Elan"), for $360.0
million plus acquisition costs of approximately $9.3 million. The acquisition is
being accounted for by the purchase method of accounting in accordance with SFAS
No. 141 "Business Combinations", with the results of operations and cash flows
for the North American ABELCET business included in the Company's consolidated
results from the date of acquisition.

      The total purchase price of the acquisition was (in thousands):

             Cash                                          $360,000
             Acquisition costs, primarily legal,
                 investment banking and accounting fees       9,264
                                                           --------
                                                           $369,264
                                                           ========

      The purchase price was allocated to the tangible and identifiable
intangible assets acquired based on their estimated fair values at the
acquisition date. The excess of the purchase price over the fair value of
identifiable assets and liabilities acquired amounted to $151.0 million and was
allocated to goodwill.


                                      F-18
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The following table summarizes the estimated fair values of the assets
acquired as of the acquisition date (in thousands):

           Inventories                      $  8,572
           Property, plant and equipment      13,707
           Amortizable intangible assets     196,000
           Goodwill                          150,985
                                            --------
                                            $369,264
                                            ========

      Property, plant and equipment and intangible assets were recorded at the
estimated fair value of the assets. Amortizable intangible assets include the
following components as determined by a third party valuation (in thousands):

                                                            Estimated
                                                              lives
                                                           -----------

           Product Patented Technology           $ 64,400    12 years
           Manufacturing Patent                    18,300    12 years
           NDA Approval                            31,100    12 years
           Trade name and other product rights     80,000    15 years
           Manufacturing Contract                   2,200     3 years
                                                 --------
                                                 $196,000
                                                 ========

      Amortization expense for these intangibles and certain other product
acquisition costs (See Note 7) for the next five fiscal years is expected to be
approximately $15.5 million per year. Goodwill will not be amortized but will be
tested for impairment at least annually. For income tax purposes, the entire
amount of goodwill is deductible and is being amortized over a 15 year period.

      (b) Elan/Medeus Manufacturing Agreement

      As a part of the ABELCET acquisition, the Company entered into a long-term
manufacturing and supply agreement with Elan, whereby the Company continues to
manufacture two products, ABELCET and MYOCET. In February 2004, Elan sold its
European Sales and Marketing business to Medeus Pharma Ltd. ("Medeus") and
transferred the manufacturing and supply agreement to Medeus. Under the terms of
the 2002 ABELCET acquisition agreement, Medeus retained the right to market
ABELCET in any markets outside of the U.S., Canada and Japan. ABELCET is
approved for use in approximately 26 countries for primary and/or refractory
invasive fungal infections.

      The manufacturing agreement with Medeus as successor to Elan requires the
Company to supply Medeus with ABELCET and MYOCET through November 21, 2011. For
the period from November 22, 2002 until June 30, 2004, the Company supplied
ABELCET and MYOCET at fixed transfer prices which approximated its manufacturing
cost. From July 1, 2004 to the termination of the agreement, the Company will
supply these products at manufacturing cost plus fifteen percent.

      The agreement also provides that until June 30, 2004, Enzon shall
calculate the actual product manufacturing costs on an annual basis and, to the
extent that this amount is greater than the respective transfer prices, Medeus
shall reimbursed Enzon for such differences. Conversely, if such actual
manufacturing costs are less than the transfer price, Enzon shall reimburse
Medeus for such differences. In


                                      F-19
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

addition, for the periods from closing to June 30, 2003 and the one year period
ended June 30, 2004, respectively, Medeus is responsible for reimbursing Enzon
for Medeus' share of the plant's excess capacity for such periods. This
calculation is based on Medeus' portion of the total products manufactured at
the plant.

(c)   Pro Forma Financial Information

      The pro forma results of operations is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would have
occurred if the transaction had been consummated at the dates indicated, nor is
it necessarily indicative of future operating results of the combined companies
and should not be construed as representative of these amounts for any future
dates or periods.

      The following pro forma results of operations of the Company for the year
ended June 30, 2003 and 2002, respectively, assumes the acquisition of the
ABELCET Business occurred as of July 1, 2002 and 2001, respectively and
assumes the purchase price has been allocated to the assets purchased based on
fair values at the date of acquisition (in thousands, except per share amounts):

                                              Years ended
                                                June 30,
                                       ----------------------
                                         2003         2002
                                       ----------    --------
      Product sales                    $  104,408    $118,672
      Total revenues                      182,808     173,294
      Net income                           45,240      60,416
      Pro forma earnings per share:
      Basic                                 $1.05       $1.41
      Diluted                               $1.04       $1.37

(6)   Inventories

      Inventories consist of the following (in thousands):

                          Years ended June 30,
                         ----------------------
                           2004           2003
                         -------        -------
      Raw materials      $ 3,143        $ 4,349
      Work in process      3,716          3,392
      Finished goods       4,356          4,045
                         -------        -------
                         $11,215        $11,786
                         =======        =======


                                      F-20
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(7)   Intangible Assets

      Intangible assets consist of the following (in thousands):

                                                                     Estimated
                                                                    Useful lives
                                                                    ------------
                                             Years ended June 30,
                                             --------------------
                                               2004        2003
                                             --------    --------
      Product Patented Technology            $ 64,400    $ 64,400     12 years
      Manufacturing Patent                     18,300      18,300     12 years
      NDA Approval                             31,100      31,100     12 years
      Trade name and other product rights      80,000      80,000     15 years
      Manufacturing Contract                    2,200       2,200      3 years
      Patent                                    2,092       2,092     15 years
      Product Acquisition Costs                26,194      26,194  10-14 years
                                             --------    --------
                                              224,286     224,286
      Less:  Accumulated amortization          30,219      12,311
                                             --------    --------
                                             $194,067    $211,975
                                             ========    ========

      Amortization charged to operations relating to intangible assets totaled
$17.9 million, $12.3 million, and $142,000 for the years ended June 30, 2004,
2003 and 2002, respectively.

(8)   Property and equipment

      Property and equipment consist of the following (in thousands):

                                                                 Estimated
                                                                useful lives
                                                                ------------
                                         Years ended June 30,
                                         --------------------
                                           2004         2003
                                         -------      -------

      Land                               $ 1,500      $ 1,500
      Building                             4,800        4,800       7 years
      Leasehold improvements              16,324       13,881    3-15 years
      Equipment                           24,694       21,097     3-7 years
      Furniture and fixtures               2,721        2,564       7 years
      Vehicles                                38           55       3 years
                                         -------      -------
                                          50,077       43,897
      Less:  Accumulated depreciation
       and amortization                   15,218       11,304
                                         -------      -------
                                         $34,859      $32,593
                                         =======      =======

      During the years ended June 30, 2004 and 2003, the Company's fixed asset
disposals were approximately $249,000 and $270,000, respectively which were
fully depreciated.

      Depreciation and amortization charged to operations relating to property
and equipment totaled $4.2 million, $2.4 million and $817,000 for the years
ended June 30, 2004, 2003 and 2002, respectively.


                                      F-21
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(9)   Accrued Expenses

      Accrued expenses consist of (in thousands):

                                      Years ended June 30,
                                     ---------------------
                                       2004         2003
                                     --------     --------

      Accrued wages and vacation     $  5,247     $  4,157
      Accrued Medicaid rebates          2,011        1,904
      Unearned revenue                  1,641          958
      Other                             2,888        3,243
                                     --------     --------
                                     $ 14,001     $ 10,262
                                     ========     ========

(10)  Long-Term Debt

      In June 2001, the Company completed a private placement of $400.0 million
in Convertible Subordinated Notes due July 1, 2008 (the "Notes"). The Company
received net proceeds from this offering of $387.2 million, after deducting
costs associated with the offering. The net amount of the debt issue costs
totaled $7.3 million at June 30, 2004 and are included in other assets in the
accompanying balance sheet. The Notes bear interest at an annual rate of 4.5%.
Accrued interest on the Notes was approximately $9.0 million as of June 30,
2004. The holders may convert all or a portion of the Notes into Common Stock at
any time on or before July 1, 2008. The Notes are convertible into Common Stock
at a conversion price of $70.98 per share, subject to adjustment in certain
events. The Notes are subordinated to all existing and future senior
indebtedness. After July 7, 2004, the Company may redeem any or all of the Notes
at specified redemption prices, plus accrued and unpaid interest to the day
preceding the redemption date. Upon the occurrence of a "fundamental change", as
defined in the indenture governing the Notes, holders of the Notes may require
the Company to redeem the Notes at a price equal to 100 percent of the principal
amount. In August 2001, the Company filed a registration statement which was
declared effective by the U.S. Securities and Exchange Commission covering the
resale of the Notes and the Common Stock issuable upon conversion of the Notes.
The fair value of the 4.5% Notes was approximately $369.0 million and $327.0
million at June 30, 2004 and 2003, respectively.

(11)  Stockholders' Equity

      Shareholder Rights Plan

      During May 2002, the Company adopted a shareholder rights plan ("Rights
Plan"). The Rights Plan involves the distribution of one preferred share
purchase right ("Right") as a dividend on each outstanding share of the
Company's common stock to each holder of record on June 3, 2002. Each right
shall entitle the holder to purchase one-thousandth of a share of Series B
Preferred Stock ("Preferred Shares") of the Company at a price of $190.00 per
one-thousandth of Preferred Share. The Rights are not immediately exercisable
and will become exercisable only upon the occurrence of certain events. If a
person or group acquires, or announces a tender or exchange offer that would
result in the acquisition of 15 percent or more of the Company's common stock
while the stockholder rights plan remains in place, then, unless (1) the rights
are redeemed by the Company for $0.01 per right or (2) the Board of Directors
determines that a tender or exchange offer for all of the outstanding Common
Stock of the Company is in the best interest of the Company and the
stockholders, the rights will be exercisable by all right holders except the
acquiring person or group for one share of the Company or in certain
circumstances, shares of the third party acquirer, each having a value of twice
the Right's then-current exercise price. The Rights


                                      F-22
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

will expire on May 16, 2012.

      Series A Preferred Stock

      During the year ended June 30, 2003, the remaining outstanding 6,000
shares of the Company's Series A Cumulative Convertible Preferred Stock ("Series
A Preferred Stock" or "Series A Preferred Shares") were converted to 13,636
shares of Common Stock. Accrued dividends of $156,000 on the Series A Preferred
Shares that were converted, were settled by cash payments. Additionally, cash
payments totaling $4.00 were made for fractional shares related to the
conversions. During the fiscal year ended June 30, 2003 the remaining 1,000
shares of Series A Preferred Stock were redeemed and settled by a cash payment
of $25,000 and accrued dividends of $26,000. There were no conversions of Series
A Preferred Stock during the year ended June 30, 2002.

      The Company's Series A Preferred Shares were convertible into Common Stock
at a conversion rate of $11 per share. The value of the Series A Preferred
Shares for conversion purposes was $25 per share. Holders of the Series A
Preferred Shares were entitled to an annual dividend of $2 per share, payable
semiannually, but only when and if declared by the Board of Directors, out of
funds legally available. As of June 30, 2002, undeclared accrued dividends in
arrears were $172,000 or $24.54 per share and $158,000 or $22.54 per share,
respectively. Due to the conversion or redemption of all Series A Preferred
shares prior to June 30, 2003 all dividends have been settled as of June 30,
2003.

      Common Stock

      During the year ended June 30, 2004, the Company issued 340,000 shares of
restricted common stock and restricted common stock units to certain members of
management which vest over a five year vesting period. Total compensation cost
of approximately $4.1 million, calculated based on the fair value of the shares
on the issuance date, is being recognized as an expense over the vesting period.
For the year ended June 30, 2004, $504,000 was recorded as compensation expense.
The Company also cancelled 215,000 shares of restricted stock and reversed $1.29
million of compensation expense previously recorded related to such shares as a
result of the May 10, 2004 resignation of the Company's Chief Executive Officer
and the cancellation of his unvested restricted stock. In the quarter ended June
30, 2004, the Company reversed $874,000 of compensation expense which was
previously recognized related to these restricted shares, including $764,000
which was recognized for the nine months ended March 31, 2004.

      During the year ended June 30, 2003, the Company issued 200,000 shares of
restricted common stock to its President and Chief Executive Officer. Total
compensation expense of approximately $3.6 million, calculated based on the fair
value of the shares on the issuance date, was being recognized over the five
year vesting period.

      During the year ended June 30, 2001, the Company issued 25,000 shares of
restricted Common Stock to its President and Chief Executive Officer. Such
shares were issued in conjunction with an employment agreement and vest ratably
over five years. Total compensation expense of approximately $1.5 million was
being recognized over the five year vesting period.

      The board of directors has the authority to issue up to 3.0 million shares
of preferred stock, par value $0.01 per share, and to determine the price and
terms, including preferences and voting rights, of those shares without
stockholder approval.

      Holders of shares of Common Stock are entitled to one vote per share on
matters to be voted upon by the stockholders of the Company.


                                      F-23
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      As of June 30, 2004, the Company has reserved its common shares for
special purposes as detailed below (in thousands):

           Non-Qualified and Incentive Stock Plans             8,248
           Shares issuable upon conversion of Notes            5,635
                                                              ------
                                                              13,883
                                                              ======

(12)  Independent Directors' Stock Plan

      From December 3, 1996 through December 31, 2002, the Company's Independent
Directors' Stock Plan, which provided for compensation in the form of quarterly
grants of Common Stock to non-executive, independent directors serving on the
Company's Board of Directors. Each independent director was granted shares of
Common Stock equivalent to $2,500 per quarter plus $500 per Board of Director's
meeting attended. The number of shares issued was based on the fair market value
of Common Stock on the last trading day of the applicable quarter. In October
2000, the Compensation Committee of the Board of Directors amended the Plan to
provide that the Independent Directors will be entitled to elect to receive up
to 50% of the fees payable in cash with the remainder of the fee to be paid in
Common Stock. During the years ended June 30, 2003, and 2002, the Company issued
2,500, and 1,000 shares of Common Stock, respectively, to independent directors,
pursuant to the Independent Directors' Stock Plan.

      Through December 31, 2002, the Company's Independent Directors received
compensation for serving on the Board of Directors payable in shares of the
Company's common stock or a combination of shares of common stock and cash under
the Company's Independent Directors Stock Plan. In September of 2002, the
Compensation Committee of the Board of Directors decided to terminate the
Independent Directors' Stock Plan as a stand-alone plan and to instead issue
shares of the Company's common stock under the Independent Directors' Stock Plan
pursuant to the 2001 Incentive Stock Plan. During fiscal 2003, each Independent
Director was entitled to compensation of $2,500 per quarter and $500 for each
meeting attended by such Independent Director under the Independent Directors'
Stock Plan. In 2002, in connection with the reduction of shares subject to the
option granted under the regular grant to Independent Directors the Compensation
Committee of the Board of Directors approved a change, effective for the quarter
ended March 31, 2002 and for each quarter thereafter, to the compensation under
the Independent Directors' Stock Plan to include the payment of $500 for
committee meetings attended by the Independent Directors which are held on a day
when no Board of Directors meeting is held. Under the Independent Directors'
Stock Plan the Independent Directors were entitled to elect to receive up to 50%
of the fees payable under the Independent Directors' Stock Plan in cash, with
the remainder of the fees to be paid in shares of the Company's common stock.
Fees payable and shares issuable under the Independent Directors' Stock Plan
were paid annually at the end of the calendar year.

      Effective December 31, 2003, the Compensation Committee of the Board of
Directors approved the termination of the existing compensation program for
directors and implemented a new compensation structure. The new compensation
structure entitles each independent director to an annual cash payment of
$20,000. In addition, annual cash payments of $7,000 for chair of the audit and
finance committee, $3,500 for any other chair on any other committee of the
board and $1,000 for each meeting attended will be made to directors. The
structure also includes an annual option grant of 5,000 shares of common stock
issued on the first trading day of each year at the closing price on that day,


                                      F-24
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

which will vest in one year and restricted stock units with an aggregate value
of $25,000 on the first trading day following June 30 based on the closing price
on the date of grant, which will vest in thirds on each of the first three
anniversaries after the date of grant. During the year ended June 30, 2004, the
Company recorded cash compensation expense of $136,000 for the Independent
Directors.

(13)  Stock Option Plans

      As of June 30, 2004, 8,248,000 shares of Common Stock were reserved for
issuance pursuant to options under two separate plans, the Non-Qualified Stock
Option Plan (the "Stock Option Plan") and the 2001 Incentive Stock Plan (the
"2001 Incentive Stock Plan"), which may be granted to employees, non-employee
directors or consultants to the Company. The exercise price of the options
granted must be at least 100% of the fair market value of the stock at the time
the option is granted. Options may be exercised for a period of up to ten years
from the date they are granted.

      In November 1987, the Company's Board of Directors adopted a Non-Qualified
Stock Option Plan (the "Stock Option Plan"). This plan has 7,900,000 shares of
Common Stock authorized for the issuance of stock options. Some of the options
granted contain accelerated vesting provisions, under which the vesting and
exercisability of such shares will accelerate if the closing price of the
Company's Common Stock exceeds $100 per share for at least twenty consecutive
days as reported by the NASDAQ National Market. The other terms and conditions
of the options generally are to be determined by the Board of Directors, or an
option committee appointed by the Board, at their discretion.

      In October 2001, the Board of Directors adopted, and in December 2001 the
stockholders approved, the 2001 Incentive Stock Plan. The 2001 Incentive Stock
Plan has 6,000,000 authorized shares for the grant of stock options and other
stock-based awards to employees, officers, directors, consultants, and
independent contractors providing services to Enzon and its subsidiaries as
determined by the Board of Directors or by a committee of directors designated
by the Board of Directors to administer the 2001 Incentive Stock Plan.


                                      F-25
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The following is a summary of the activity in the Company's Stock Option
Plans which include the 1987 Non-Qualified Stock Option Plan and the 2001
Incentive Stock Plan (shares in thousands):

<TABLE>
<CAPTION>
                                                                 Weighted
                                                                  Average
                                                                 Exercise         Range of
                                                     Shares        Price           Prices
                                                     ------        -----           ------
<S>                                                  <C>          <C>         <C>
Outstanding at June 30, 2001                          3,284       $24.98      $ 1.88 to $73.22

  Granted at exercise prices which equaled
     the fair market value on the date of grant       1,399       $44.39      $25.10 to $65.86
  Exercised                                          (1,008)      $ 4.13      $ 2.00 to $37.38
  Canceled                                              (31)      $41.56      $22.31 to $70.69
                                                     ------
Outstanding at June 30, 2002                          3,644       $38.07      $ 1.88 to $73.22

  Granted at exercise prices which equaled
     the fair market value on the date of grant       1,133       $19.65      $11.35 to $24.76
  Exercised                                            (305)      $ 4.49      $ 2.03 to $14.13
  Canceled                                             (534)      $40.63      $11.70 to $71.00
                                                     ------
Outstanding at June 30, 2003                          3,938       $35.02      $ 1.88 to $73.22

  Granted at exercise prices which equaled
     the fair market value on the date of grant       2,151       $13.81      $10.66 to $17.72
  Exercised                                             (98)      $ 5.40      $10.72 to $17.17
  Canceled                                           (1,153)      $36.21      $11.37 to $71.00
                                                     ------
Outstanding at June 30, 2004                          4,838       $25.90      $ 1.87 to $71.38
                                                     ======
</TABLE>

      Of the options the Company granted 245,000 options during the fiscal year
ended June 30, 2002, which contained accelerated vesting provisions based on the
achievement of certain milestones.

      As of June 30, 2004, the Stock Option Plans had options outstanding and
exercisable by price range as follows (shares in thousands):

<TABLE>
<CAPTION>
                                             Weighted
                                              Average      Weighted                        Weighted
             Range of                        Remaining      Average                        Average
             Exercise         Options       Contractual    Exercise          Options       Exercise
              Prices        Outstanding         Life         Price         Exercisable      Price
         ---------------    -----------     ------------  ----------       -----------     ---------
<S>                           <C>               <C>          <C>              <C>          <C>
         $ 1.87 - $11.37        686             5.33          $7.14             406          $4.29
         $11.41 - $14.13        325             8.68         $12.50              57         $13.82
         $14.15 - $14.15        785             9.61         $14.15              --             --
         $14.16 - $15.13        599             9.72         $15.09               4         $14.55
         $15.15 - $18.40        505             5.22         $17.53             303         $17.59
         $18.41 - $28.17        589             6.76         $23.14             245         $24.61
         $29.75 - $45.98        544             6.86         $43.51             251         $42.51
         $47.38 - $70.00        774             2.71         $61.83             721         $62.31
         $71.00 - $71.38         31             6.32         $71.24              21         $71.22
                             ------                                          ------
                              4,838             6.71                          2,008         $35.37
                             ======                                          ======
</TABLE>


                                      F-26
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(14)  Merger Termination Agreement

      On February 19, 2003, the Company entered into an agreement and plan of
merger with NPS Pharmaceuticals, Inc. ("NPS"). On June 4, 2003, the merger
agreement was terminated. In accordance with the mutual termination agreement
between the two companies, the Company received 1.5 million shares of NPS common
stock. The termination agreement imposes certain restrictions with respect to
the transferability of the underlying shares including limiting the maximum
number of shares that can be transferred each month after the registration
statement relating to the shares is declared effective to 125,000 shares.
Considering such restrictions, 1.1 million shares were valued at $26.7 million,
which was the fair value of NPS stock on June 4, 2003 and in accordance with
SFAS No. 115 "Accounting for certain Investments in Debt and Equity Securities"
("SFAS 115") and the balance of 375,000 shares were considered as restricted
stock as defined under the scope exception provisions of SFAS 115. The
restricted stock was valued at $7.8 million by applying a 12% discount on the
related fair value based on a valuation performed by an independent third-party
consulting firm. Total consideration received aggregated $34.6 million. The
Company also recorded $7.7 million in costs incurred related to the proposed
merger with NPS (primarily investment banking, legal and accounting fees). The
net gain of approximately $26.9 million was recorded as other income in the
Consolidated Statement of Operations for the year ended June 30, 2003.

      As of June 30, 2004 and 2003, the investment in NPS shares of common stock
was valued at $31.5 million and $35.2 million, respectively, which is included
in investments in equity securities and convertible note on the accompanying
balance sheet, the composition of which was as follows (in thousands):

                                                                 Years Ended
                                                                   June 30,
                                                             -----------------
                                                              2004        2003
                                                             -----------------
     Valued at fair value (including unrealized
     gain (loss) of ($4.9) million and $667, respectively)   $31,500   $27,382
     Valued as restricted stock                                   --     7,837
                                                             -------   --------
                                                             $31,500   $ 35,219
                                                             =======   ========

      In August 2003, the Company entered into a Zero Cost Protective Collar
arrangement with a financial institution to reduce the exposure associated with
the 1.5 million shares of common stock of NPS received as part of the merger
termination agreement with NPS. By entering into this equity collar arrangement
and taking into consideration the underlying put and call option strike prices,
the terms are structured so that the Company's investment in NPS stock, when
combined with the value of the Collar, should secure ultimate cash proceeds in
the range of 85%-108% of the negotiated fair value per share of $23.47
(representing a 4.85% discount off of the closing price of NPS common stock on
the day before the collar was executed). The Collar is considered a derivative
hedging instrument under SFAS No. 133 and as such, the Company periodically
measures its fair value and recognizes the derivative as an asset or a
liability. The change in fair value is recorded in other comprehensive income
(See Note 3) or in the Statement of Operations depending on the portion of the
derivative designated and effective as a hedge. As of June 30, 2004, the market
value of NPS' common stock was $21.00 per share. When the underlying shares
become unrestricted and freely tradable, the Company is required to deliver to
the financial institution as posted collateral, a corresponding number of shares
of NPS common stock. During the year ended June 30, 2004, the Company sold and
re-purchased 1,125,000 shares respectively of common stock of NPS. The
unrealized gain previously included in other comprehensive income prior to the
sale and repurchase with respect to these shares aggregating $1.8 million for
the year ended June 30, 2004, was recognized in the Statements of Operations and
is included in "Other Income". With respect to the remaining 375,000 shares of
NPS common stock as of June 30, 2004, $38,000 has been recorded in comprehensive
income for the year ended June 30, 2004, net of income taxes. The fair value of
the Collar represents a receivable from the counterparty of $1.7 million at June
30, 2004. In addition, the time value component of the Collar represents a gain
of $1.7 million for the year ended June 30, 2004, and was recorded as "Other
Income" in the Statement of Operations.


                                      F-27
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The Collar will mature in four separate three-month intervals from
November 2004 through August 2005, at which time the Company will receive the
proceeds from the sale of the securities. The amount due at each maturity date
will be determined based on the market value of NPS' common stock on such
maturity date. The contract requires the Company to maintain a minimum cash
balance of $30.0 million and additional collateral up to $10.0 million (as
defined) under certain circumstances with the financial institution. The strike
prices of the put and call options are subject to certain adjustments in the
event the Company receives a dividend from NPS.

(15)  Income Taxes

      Under the asset and liability method of Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

      The components of the income tax provision (benefit) are summarized as
follows (in thousands):

                                                Years ended June 30,
                                        -------------------------------------
                                          2004          2003           2002
                                        --------      --------       --------
      Current:
           Federal                      $     --      $     --       $     --
           State                              --         6,589           (857)
                                        --------      --------       --------
      Total current                           --         6,589           (857)
                                        --------      --------       --------

      Deferred:
           Federal                         1,190        (5,454)        (6,132)
           State                             402          (912)        (2,134)
                                        --------      --------       --------
      Total deferred                       1,592        (6,366)        (8,266)
                                        --------      --------       --------
      Income tax provision (benefit)    $  1,592      $    223       ($ 9,123)
                                        ========      ========       ========


                                      F-28
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The following table represents a reconciliation between the reported
income taxes and the income taxes which would be computed by applying the
federal statutory rate (35%) to income before taxes (in thousands):

<TABLE>
<CAPTION>
                                                       Years ended June 30,
                                                ----------------------------------
                                                  2004         2003         2002
                                                --------     --------     --------
<S>                                             <C>          <C>          <C>
Income tax expense
  computed at federal
  statutory rate                                $  1,564     $ 16,082     $ 12,839

Non deductible expenses                              420           --           --

Add (deduct) effect of:
    State income taxes (including sale
    and purchase of state net operating
    loss carryforwards),  net of federal tax        (219)       3,690       (1,931)

Federal tax benefit  through
    utilization of net operating loss
    carryforwards against current
    period income                                     --       (8,349)     (13,116)

Research and development tax credits              (1,400)          --           --

Increase (decrease)  in beginning of year
Valuation allowance - Federal                      1,227      (11,200)      (6,915)
                                                --------     --------     --------
                                                $  1,592     $    223      ($9,123)
                                                ========     ========     ========
</TABLE>

      During 2004, 2003 and 2002, the Company recognized a tax benefit of
$254,000, $474,000 and $857,000 respectively, from the sale of certain state net
operating loss carryforwards.


                                      F-29
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      At June 30, 2004 and 2003, the tax effects of temporary differences that
give rise to the deferred tax assets and deferred tax liabilities are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                              Years ended June 30,
                                                              ---------------------
      Deferred tax assets:                                      2004         2003
                                                              --------     --------
<S>                                                           <C>          <C>
      Inventories                                             $    983     $    335
      Compensation                                                 468          992
      Returns and allowances                                     5,818       3,313
      Research and development credits carryforward             12,467       10,408
      Federal AMT credits                                        1,563        1,447
      Deferred revenue                                             387        1,319
      Capital loss carryforwards                                 1,121           --
      Write down of carrying value of investment                 9,174       11,126
      Federal and state net operating loss carryforwards        52,086       53,698
      Acquired in process research and development               4,846           --
      Unrealized loss on securities                              4,322           --
      Other                                                      1,214        1,164
                                                              --------     --------

      Total gross deferred tax assets                           94,449       83,802

      Less valuation allowance                                 (15,564)     (12,884)
                                                              --------     --------

                                                                78,885       70,918
                                                              --------     --------

      Deferred tax liabilities:
      Goodwill                                                  (5,803)      (2,399)
      Unrealized gain on securities                                 --         (345)
      Book basis in excess of tax basis of acquired assets      (2,447)        (721)
                                                              --------     --------
                                                                (8,250)      (3,465)
                                                              --------     --------
      Net deferred tax assets                                 $ 70,635     $ 67,453
                                                              ========     ========
</TABLE>

      A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. At June 30,
2004, the Company had Federal net operating loss carryforwards of approximately
$126.0 million and combined state net operating loss carryforwards of
approximately $122.0 million that will expire in the years 2005 through 2021.
The Company also has federal research and development tax credit carryforwards
of approximately $10.6 million for tax reporting purposes, which expire in the
years 2005 to 2021. In addition, the Company has $1.8 million of state research
and development tax credit carryforwards, which will expire in the year 2010.
The Company's ability to use the net operating loss and research and development
tax credit carryforwards are subject to certain limitations due to ownership
changes, as defined by rules pursuant to Section 382 of the Internal Revenue
Code of 1986, as amended.

      As of June 30, 2004, management believes that it is more likely than not
that the net deferred tax assets will be realized, including the net operating
losses from operating activities and stock option exercises, based on future
operations. The Company has maintained a valuation allowance of $15.6 million
and $12.9


                                      F-30
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

million at June 30, 2004 and 2003, respectively. The net increase in the
valuation allowance for 2004 was due to the determination that it is more likely
than not that the Company may not utilize certain capital loss carryforwards and
federal research and development credits at June 30, 2004. The Company will
continue to reassess the need for such valuation allowance in accordance with
SFAS 109 based on the future operating performance of the Company.

      The net operating loss carryforward stated above, includes $1.9 million
from the acquisition of Enzon Labs, Inc. the utilization of which is limited to
a maximum of $615,000 per year.

(16)  Significant Agreements

      Schering Agreement

      In November 1990, the Company entered into an agreement with
Schering-Plough. Under this agreement, Schering-Plough agreed to apply Enzon's
PEG technology to develop a modified form of Schering-Plough's INTRON A.
Schering-Plough is responsible for conducting and funding the clinical studies,
obtaining regulatory approval and marketing and manufacturing the product
worldwide on an exclusive basis and the Company receives royalties on worldwide
sales of PEG-INTRON for all indications. The royalty percentage to which the
Company is entitled will be lower in any country where a pegylated
alpha-interferon product is being marketed by a third party in competition with
PEG-INTRON, where such third party is not Hoffmann-La Roche.

      In June 1999, the Company amended its agreement with Schering-Plough,
which resulted in an increase in the effective royalty rate that it receives for
PEG-INTRON sales. In exchange, the Company relinquished its option to retain
exclusive U.S. manufacturing rights for this product. In addition, the Company
granted Schering-Plough a non-exclusive license under some of its PEG patents
relating to branched or U-PEG technology. This license gives Schering-Plough the
ability to sublicense rights under these patents to any party developing a
competing interferon product. During August 2001, Schering-Plough, pursuant to a
cross license agreement entered into as part of the settlement of certain patent
litigation, granted Hoffmann-La Roche a sublicense under the Company's branched
PEG patents to allow Hoffmann-La Roche to make, use, and sell its pegylated
alpha-interferon product, PEGASYS.

      Under this agreement, Schering Plough was obligated to pay and has paid
the Company a total of $9.0 million in milestone payments, none of which are
refundable. These milestone payments were recognized when received, as the
earnings process was complete. Schering-Plough's obligation to pay the Company
royalties on sales of PEG-INTRON terminates, on a country-by-country basis, upon
the later of the date the last patent of the Company to contain a claim covering
PEG-INTRON expires in the country or 15 years after the first commercial sale of
PEG-INTRON in such country.

      Schering-Plough has the right to terminate this agreement at any time if
the Company fails to maintain the requisite liability insurance of $5.0 million.
Either party may terminate the agreement upon a material breach of the agreement
by the other party that is not cured within 60 days of written notice from the
non-breaching party or upon declaration of bankruptcy by the other party.


                                      F-31
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      Aventis Agreement

      During June 2002, the Company amended its license agreement with Aventis
to reacquire rights to market and distribute ONCASPAR in the United States,
Mexico, Canada and the Asia/Pacific region. In return for the marketing and
distribution rights the Company paid Aventis $15.0 million and pays a 25%
royalty on net sales of ONCASPAR through 2014. The $15.0 million payment is
being amortized over its useful life of 14 years. The amortization and the 25%
royalty payment to Aventis are included in cost of sales for the product. Prior
to the amendment, Aventis was responsible for the marketing and distribution of
ONCASPAR. Under the previous agreement Aventis paid the Company a royalty on net
sales of ONCASPAR of 27.5% on annual sales up to $10.0 million and 25% on annual
sales exceeding $10.0 million.

      The amended license agreement prohibits Aventis from making, using or
selling an asparaginase product in the U.S. or a competing PEG-asparaginase
product anywhere in the world until the later of the expiration of the agreement
or, if the agreement is terminated earlier, five years after termination. If the
Company ceases to distribute ONCASPAR, Aventis has the option to distribute the
product in the territories under the original license.

      Under the Company's license agreement with Aventis in effect prior to the
June 2002 amendment discussed above (the "Prior License Agreement"), Enzon
granted an exclusive license to Aventis to sell ONCASPAR in the U.S. Enzon has
received licensing payments totaling $6.0 million and was entitled to royalties
on net sales of ONCASPAR. During July 2000, the Company further amended the
license agreement with Aventis to increase the base royalty payable to the
Company on net sales of ONCASPAR from 23.5% to 27.5% on annual sales up to $10.0
million and 25% on annual sales exceeding $10.0 million. These royalty payments
included Aventis' cost of purchasing ONCASPAR under a separate supply agreement.
The agreement was also extended until 2016. Additionally, the Prior License
Agreement eliminated the super royalty of 43.5% on net sales of ONCASPAR which
exceeded certain agreed-upon amounts. The Prior License Agreement also provided
for a payment of $3.5 million in advance royalties, which was received in
January 1995.

      As part of the June 2002 amendment, the remaining unpaid royalty advance
on the balance sheet of $1.0 million was eliminated. This was offset against the
$15.0 million payment to Aventis and the net $14 million is included in
amortizable intangible assets, net and is being amortized over 14 years, the
estimated remaining life of ONCASPAR.

      During August 2000, the Company made a $1.5 million payment to Aventis
which was accrued at June 30, 2000 to settle a disagreement over the purchase
price of ONCASPAR under the supply agreement and to settle Aventis' claim that
Enzon should be responsible for Aventis' lost profits while ONCASPAR was under
temporary labeling and distribution modifications. In November 1998, the Company
and the FDA agreed to temporary labeling and distribution modifications for
ONCASPAR, as a result of certain previously disclosed manufacturing problems.
These temporary modifications resulted in Enzon, rather than Aventis,
distributing ONCASPAR directly to patients on an as needed basis.

      The settlement also called for a payment of $100,000 beginning in May 2000
and for each month that expired prior to the resumption of normal distribution
and labeling of this product by Aventis. During the quarter ended December 31,
2000, the FDA gave final approval to the Company's manufacturing changes, which
were made to correct these problems, and all previously imposed restrictions on
ONCASPAR were lifted. This obligation was terminated pursuant to the June 2002
amendment to the license agreement. Payments as required were made through June
2002.


                                      F-32
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      MEDAC Agreement

      In January 2003, the Company renewed an exclusive license to Medac GmbH
("Medac"), a private company based in Germany, to sell ONCASPAR and any
PEG-asparaginase product, developed by the Company or Medac, during the term of
the agreement in most of Europe and part of Asia. The Company's supply agreement
with Medac provides for Medac to purchase ONCASPAR from the Company at certain
established prices. Under the license agreement, Medac is also responsible to
pay the Company a royalty on units sold. Under the license agreement, Medac is
responsible for obtaining additional approvals and indications in the licensed
territories, beyond the currently approved hypersensitive indication in Germany.
Under the agreement, Medac is required to meet certain minimum purchase
requirements. The term of the agreement is for five years and will automatically
renew for an additional five years if Medac meets or exceeds certain diligence
requirements and thereafter the agreement will automatically renew for an
additional two years unless either party provides written notice of its intent
to terminate the agreement at least 12 months prior to the scheduled expiration
date. Following the expiration or termination of the agreement, all rights
granted to Medac will revert back to Enzon.

      Nektar Alliance

      In January 2002, the Company entered into a broad strategic alliance with
Nektar Therapeutics that includes several components.

      The companies entered into a product development agreement to jointly
develop three products to be specified over time using Nektar's Enhance(TM)
pulmonary delivery platform and SEDS(TM) supercritical fluids platform. Nektar
will be responsible for formulation development, delivery system supply, and in
some cases, early clinical development. The Company will have responsibility for
most clinical development and commercialization. This agreement terminates in
January 2007 unless terminated earlier by either party upon 90 days notice of a
material breach or 15 days notice of a payment default. Upon termination of the
agreement, the obligations of the parties to conduct development activities will
expire, but such termination shall not affect rights of either party that have
accrued (e.g., with respect to the ownership of intellectual property or the
right to certain payments) prior thereto.

      The two companies will also explore the development of single-chain
antibody (SCA) products for pulmonary administration.

      The Company has entered into a cross-license agreement with Nektar under
which each party has crosslicensed to the other party certain patents. The
Company also granted to Nektar the right to grant sub-licenses under certain of
the Company's PEG patents to third parties. The Company will receive a royalty
or a share of profits on final product sales of any products that use its
patented PEG technology. The Company anticipates that it will receive 0.5% or
less of Hoffmann-LaRoche's sales of PEGASYS, which represents equal profit
sharing with Nektar on this product. The Company retains the right to use all of
its PEG technology and certain of Nektar's PEG technology for its own product
portfolio, as well as those products it develops in co-commercialization
collaborations with third parties. This agreement expires upon the later of the
expiration of the last licensed patent or the date the parties are no longer
required to pay royalties. Either party may terminate the agreement upon a
material breach of the agreement by the other party that is not cured within 90
days of the receipt of written notice from the non-breaching party or upon the
declaration of bankruptcy by the other party.

      The Company purchased $40 million of newly issued Nektar convertible
preferred stock in January 2002. The preferred stock is convertible into Nektar
common stock at a conversion price of $22.79 per share. In the event Nektar's
common stock price three years from the date of issuance of the preferred


                                      F-33
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

stock or earlier in certain circumstances is less than $22.79, the conversion
price will be adjusted down, although in no event will it be less than $18.23
per share. Conversion of the preferred stock into common stock can occur
anywhere from 1 to 4 years following the issuance of the preferred stock or
earlier in certain circumstances. Under the cost method of accounting,
investments are carried at cost and are adjusted only for other-than-temporary
declines in fair value, and additional investments. As a result of a continued
decline in the price of Nektar's common stock, which the Company determined was
other-than-temporary, during December 31, 2002 the Company recorded a write-down
of the carrying value of its investment in Nektar, which resulted in a non-cash
charge of $27.2 million. The adjustment was calculated based on an assessment of
the fair value of the investment. During the year ended June 30, 2004, the
Company converted the preferred stock into common stock and sold approximately
50% of our investment in Nektar which resulted in a net gain on investment of
$11.0 million and cash proceeds of $17.4 million. (See Note 22 for Write-Down of
Investments.)

      The two companies also agreed in January 2002 to a settlement of the
patent infringement suit the Company filed in 1998 against Nektar's subsidiary,
Shearwater Polymers, Inc. Nektar has a license under the contested patents
pursuant to the cross-license agreement. The Company received a one-time payment
of $3.0 million from Nektar to cover expenses incurred in defending its branched
PEG patents.

      Micromet Alliance

      In April 2002, the Company entered into a multi-year strategic
collaboration with Micromet AG ("Micromet"), a private company based in Munich,
Germany, to identify and develop the next generation of antibody-based
therapeutics. In June 2004, the Company amended this agreement and extended this
collaboration until September 2007. During the first phase of the collaboration,
the partnership generated several new SCA compounds against undisclosed targets
in the fields of inflammatory and autoimmune diseases. The Company extended its
collaboration with Micromet to move the first of these newly created SCAs toward
clinical development. Under the terms of the amended agreement, Enzon and
Micromet will continue to share development costs and future revenues for the
joint development project.

      Following the termination or expiration of the agreement, the rights to
antibody-based therapeutics identified or developed by Enzon and Micromet will
be determined in accordance with the United States rules of inventorship. In
addition, Enzon will acquire the rights to any PEGylation inventions. The
agreement can be terminated by either party upon a material breach of the
agreement by the other party. Research and development expenses incurred by the
Company in connection with this collaboration agreement totaled $3.2 million and
$1.7 for the year 2004 and 2003, respectively. There were no research and
development expenses incurred by the Company in connection with this
collaboration for the year ended June 30, 2002.

      In addition to the research and development collaboration, in 2002 the
Company also made an $8.3 million investment into Micromet in the form of a note
of Micromet, which was amended in June 2004. This note bears interest of 3% and
is payable in March 2007. This note is convertible into Micromet Common Stock at
a price of 15.56 euros per share at the election of either party. The carrying
value of the convertible note was written-down to zero in June 2004, due to an
other-than-temporary decline in the fair value of this investment. (See Note 22
for write-down of investments.)

      Enzon and Micromet have entered into a cross-license agreement for each
company's respective SCA intellectual property and jointly market their combined
SCA technology to third parties. Micromet is the exclusive marketing partner and
has instituted a comprehensive licensing program on behalf of the partnership.
Any resulting revenues from the license agreement executed by Micromet on behalf
of the


                                      F-34
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

partnership will be used for Micromet's and Enzon's joint SCA development
activities.

      SkyePharma Agreement

      In January 2003, the Company entered into a strategic alliance with
SkyePharma, plc ("SkyePharma") based on a broad technology access agreement. The
two companies agreed to jointly develop up to three products for future
commercialization. These products are based on SkyePharma's proprietary
platforms in the areas of oral, injectable and topical drug delivery, supported
by technology to enhance drug solubility and certain of the Company's
proprietary PEG modification technology, for which the Company received a $3.5
million technology access fee. This non-refundable upfront license fee, which
was recorded as unearned revenue in accrued expenses, is being ratably
recognized as revenue over the development agreement period of four years.
SkyePharma will receive a $2.0 million milestone payment for each product based
on its own proprietary technology that enters Phase 2 clinical development.
Certain research and development costs related to the technology alliance will
be shared equally based on an agreed upon annual budget, as will future revenues
generated from the commercialization of any jointly-developed products.

      Effective December 31, 2002, the Company also licensed the North American
rights to SkyePharma's DEPOCYT(R), an injectable chemotherapeutic approved for
the treatment of patients with lymphomatous meningitis. Under the terms of the
agreement, Enzon paid a license fee of $12.0 million. SkyePharma manufactures
DEPOCYT and Enzon purchases finished product at 35% of net sales, which
percentage can be reduced should certain defined sales target be exceeded. The
Company recorded the $12 million license fee as an intangible asset, which is
being amortized over a ten year period and charged to cost of sales.

      The Company was required to purchase minimum levels of finished product
for calendar year 2003 (90% of the previous year's sales by SkyePharma) and $5.0
million for each subsequent calendar year through the remaining term of the
agreement. SkyePharma is also entitled to a milestone payment of $5.0 million if
the Company's sales of the product are over a $17.5 million annual run rate for
four consecutive quarters and an additional milestone payment of $5.0 million if
Enzon's sales exceed an annualized run rate of $25.0 million for four
consecutive quarters. The Company is also responsible for a $10.0 million
milestone payment if the product receives approval for neo plastic meningitis
prior to December 31, 2006. This milestone payment is incrementally reduced if
the approval is received subsequent to December 31, 2006 to a minimum payment of
$5.0 million for an approval after December 31, 2007. The Company's license is
for an initial term of ten years and is automatically renewable for successive
two year terms thereafter.

      Either party may terminate the agreement early upon a material breach by
the other party, which breach the other party fails to cure within 60 days after
receiving notice thereof. Further, SkyePharma will be entitled to terminate the
agreement early if the Company fails to satisfy its Minimum Annual Purchases. In
addition, the Company will be entitled to terminate the agreement early if a
court or government agency renders a decision or issues an order that prohibits
the manufacture, use or sale of the product in the U.S. If a therapeutically
equivalent generic product enters the market and DEPOCYT's market share
decreases, the Company will enter into good faith discussions in an attempt to
agree on a reduction in its payment obligations to SkyePharma and a fair
allocation of the economic burdens resulting from the market entry of the
generic product. If the Company is unable to reach an agreement within 30 days,
then either party may terminate the agreement, which termination will be
effective 180 days after giving notice thereof. After termination of the
agreement, the Companies will have no further obligation to each other, except
the fulfillment of obligations that accrued prior thereto (e.g., deliveries,
payments, etc.). In addition, for six months after any such termination, the
Company will have the right to distribute any quantity of product the Company
purchased from SkyePharma


                                      F-35
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

prior to termination.

      Fresenius Agreement

      In June 2003, the Company licensed the North American rights to develop
and commercialize ATG-FRESENIUS S from Fresenius Biotechnology. Under this
agreement, the Company is responsible for obtaining regulatory approval of the
product in the U.S. In September 2004, the Company made a milestone payment to
Fresenius of $1.0 million upon FDA approval of the first IND. The Company is
obligated to make another milestone payment of $1.0 million upon the Company's
submission of a biologics license application with the FDA. Fresenius will be
responsible for manufacturing and supplying the product to the Company and the
Company is required to purchase all of the finished product from Fresenius for
net sales of the product in North America. The Company will purchase finished
product at 40% of net sales, which percentage can be reduced should certain
defined sales targets be exceeded. The Company is required to purchase a minimum
of $2.0 million of product in the first year after commercial introduction and
$5.0 million in the second year, with no minimum purchase requirements
thereafter. Fresenius will supply the product to the Company without charge for
the clinical trials for the first indication. For subsequent trials, the Company
will purchase the clinical supplies from Fresenius.

      Inex Agreement

      In January 2004, the Company entered into a strategic partnership with
Inex Pharmaceuticals Corporation ("Inex") to develop and commercialize Inex's
proprietary oncology product MARQIBO(R), which was formerly referred to as Onco
TCS. In connection with the strategic partnership, the Company and Inex entered
into a Product Supply Agreement, a Development Agreement, and a Co-Promotion
Agreement. The agreements contain cross termination provisions under which
termination of one agreement triggers termination of all the agreements.

      Under the terms of the agreements, the Company received the exclusive
commercialization rights for MARQIBO for all indications in the United States,
Canada, and Mexico.

      Upon execution of the related agreements the Company made a $12.0 million
up-front payment to Inex, which has been determined to be an acquisition of
in-process research and development as the payment was made prior to FDA
approval, and therefore expensed in the Company's Statement of Operations for
the quarter ended March 31, 2004. In addition, the Company will be required to
pay up to $20.0 million upon MARQIBO being approved by the FDA and development
milestones and sales-based bonus payments could total $43.75 million, of which
$10.0 million is payable upon annual sales first reaching $125.0 million, and
$15.0 million is payable upon annual sales first reaching $250.0 million. The
Company will also be required to pay Inex a percentage of commercial sales of
MARQIBO and this percentage will increase as sales reach certain predetermined
thresholds.

      The Company and Inex will share equally the future development costs to
obtain and maintain marketing approvals in North America for MARQIBO, and the
Company will pay all sales and marketing costs and certain other post-approval
clinical development costs typically associated with commercialization
activities. The Company plans to market MARQIBO to the oncology market through
its North American sales force, which currently markets ABELCET(R), ONCASPAR(R),
and DEPOCYT(R). Inex has the option of complementing the Company's sales efforts
by co-promoting MARQIBO through the formation of a dedicated North American
sales and medical science liaison force. The costs of building Inex's
co-promotion force will be shared equally by both companies and the Company will
record all sales in the licensed territories. Inex retains manufacturing rights
and the Company will reimburse Inex for the manufacture and supply of the drug
at manufacturing cost plus five percent.


                                      F-36
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

The agreements will expire on a country by country basis upon the expiration of
the last patent covering the licensed product in each particular country or 15
years after the first commercial sale in such country, whichever is later. The
agreements are also subject to earlier termination under various circumstances.
The Company may terminate the agreements at any time upon 90 days notice, in
connection with which the Company must pay a $2.0 million termination fee. Inex
has completed the submission of its NDA, therefore if Enzon terminates it must
pay the $2.0 million fee. In addition, if at any time the Company determines
that it has no interest in commercializing the product in any country, then Inex
may terminate the agreement with respect to such country. Either party may
terminate the agreements upon a material breach and failure to cure by the other
party. In addition, either party may terminate the agreements upon the other
party's bankruptcy. Generally, the termination of the agreements with respect to
a particular country shall terminate the Company's license with respect to
MARQIBO, and preclude the Company from marketing the product, in that country.
However, if the Company terminates the agreements because of Inex's breach or
bankruptcy, the licenses granted by Inex will continue, Inex will be obligated
to provide the Company a right of reference to Inex's regulatory dossiers and
facilitate a transfer to the Company of the technology necessary to manufacture
the product. In addition, after such termination, Inex will be obligated to
exercise commercially reasonable efforts to ensure that the Company has a
continuous supply of product until the Company, exercising commercially
reasonable efforts, has secured an alternative source of supply.

      Medeus Manufacturing Agreement

      On November 22, 2002, we acquired from Elan Corporation plc ("Elan") the
North American rights and operational assets associated with the development,
manufacture, sales and marketing of ABELCET for $360 million plus acquisition
costs. This transaction is being accounted for as a business combination. As
part of the ABELCET acquisition, the Company entered into a long-term
manufacturing and supply agreement with Elan, under which the Company continues
to manufacture two products, ABELCET and MYOCET. In February 2004, Elan sold its
European sales and marketing business to Medeus Pharma Ltd. ("Medeus") and
transferred the manufacturing and supply agreement to Medeus. Under the terms of
the 2002 ABELCET acquisition agreement, Medeus has the right to market ABELCET
in any markets outside of the U.S., Canada and Japan. ABELCET is approved for
use in approximately 26 countries for primary and/or refractory invasive fungal
infections.

      The agreement with Medeus, as successor to Elan, requires the Company to
supply Medeus with ABELCET and MYOCET through November 21, 2011. For the period
from November 22, 2002 until June 30, 2004, the Company supplied ABELCET and
MYOCET at fixed transfer prices which approximated its manufacturing cost. From
July 1, 2004 to the termination of the agreement, the Company will supply these
products at its manufacturing cost plus fifteen percent.

      The agreement also provides that until June 30, 2004, Enzon will calculate
the actual product manufacturing costs on an annual basis and, to the extent
that this amount is greater than the respective transfer prices, Medeus shall
reimburse Enzon for such differences. Conversely, if such actual manufacturing
costs are less than the transfer price, Enzon shall reimburse Medeus for such
differences.

      During February 2004 Elan Corporation, plc, sold its ABELCET and MYOCET
European business to Medeus Pharma, Ltd. ("Medeus") As part of this transaction
the Company's long-term manufacturing and supply agreement with Elan was
assigned to Medeus. In connection with the closing of this sale the Company and
Elan settled a dispute over the manufacturing cost of products produced for Elan
resulting in the payment and recognition of manufacturing revenue related to
approximately $1.7 million of revenue not previously recognized given the
uncertainty of the contractual amount.

      CEO Separation Agreement

      In connection with Mr. Higgins' departure as the Company's chief executive
officer the Board of Directors appointed a committee of four independent
directors (Dr. Rosina Dixon, Robert LeBuhn, Dr. David Golde and Robert
Parkinson) to review and approve the terms of Mr. Higgins departure. This
committee negotiated and approved a separation payment of $1.25 million, which
was paid to Mr. Higgins upon his departure in May 2004. Concurrent with Mr.
Higgins' departure as chief executive officer in May 2004, the


                                      F-37
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

Company reversed approximately $1.29 million of compensation expense previously
recorded related to restricted stock of the Company that was forfeited by Mr.
Higgins as a result of his departure as the Company's CEO. In the quarter ended
June 30, 2004, the Company reversed $874,000 of compensation expense which was
previously recognized related to these restricted shares, including $764,000
which was recognized for the nine months ended March 31, 2004.

(17)  Recent Accounting Pronouncements

      In December 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 (revised December 2003) ("FIN46-R"), Consolidation of
Variable Interest Entities, which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and accordingly should consolidate the entity.
FIN 46-R replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities ("FIN 46"), which was issued in January 2003. FIN 46-R requires that if
an entity has a controlling financial interest in a variable interest entity,
the assets, liabilities and results of activities of the variable interest
entity should be included in the consolidated financial statements of the
entity. The provisions of FIN 46-R are effective immediately to those entities
that are considered to be special-purpose entities. For all other arrangements,
the FIN 46-R provisions are required to be adopted at the beginning of the first
interim or annual period ending after March 15, 2004. As of June 30, 2004 the
Company is not a party to transactions contemplated under FIN 46-R.

      In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus opinion on EITF 00-21, Revenue Arrangements with Multiple
Deliverables. The consensus provides that revenue arrangements with multiple
deliverables should be divided into separate units of accounting if certain
criteria are met. The consideration for the arrangement should be allocated to
the separate units of accounting based on their relative fair values, with
different provisions if the fair value of all deliverables is not known or if
the fair value is contingent on delivery of specified items or performance
conditions. Applicable revenue recognition criteria should be considered
separately for each separate unit of accounting. EITF 00-21 is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of this standard did not have any impact on our financial
position or results of operations.

      In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 requires that certain financial
instruments, which under previous guidance were accounted for as equity, must
now be accounted for as liabilities. The financial instruments affected include
mandatorily redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock. SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003 and must be applied to the Company's existing financial
instruments effective July 1, 2003, the beginning of the first fiscal period
after June 15, 2003. The Company adopted SFAS No. 150 on July 1, 2003. The
adoption of this statement did not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.

      In November 2003, the Emerging Issues Task Force ("EITF") reached an
interim consensus on Issue No. 03-01, The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments, to require additional
disclosure requirements for securities classified as available-for-sale or
held-to-maturity for fiscal years ending after December 15, 2003. Those
additional disclosures have been incorporated into the notes to consolidated
financial statements. In March 2004, the EITF reached a final


                                      F-38
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

consensus on this Issue, to provide additional guidance, which companies must
follow in determining whether investment securities have an impairment which
should be considered other-than-temporary. The guidance is applicable for
reporting periods after June 15, 2004. The Company does not expect the adoption
under the final consensus to have a significant impact on its financial position
results of operations and cash flows.

(18)  Commitments and Contingencies

      The Company has agreements with certain members of its upper management,
which provide for payments following a termination of employment occurring after
a change in control of the Company. The Company also has an employment agreement
with certain members of upper management which provides for severance payments.

      The Company has been involved in various claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
consolidated financial position, results of operations or liquidity.

(19)  Leases

      The Company has several leases for office, warehouse, production and
research facilities and equipment. The non-cancelable lease-terms for the
operating leases expire at various dates between 2005 and 2021 and each
agreement includes renewal options.

      Future minimum lease payments, for non-cancelable operating leases with
initial or remaining lease terms in excess of one year as of June 30, 2004 are
(in thousands):

               Year ending                              Operating
                 June 30,                                 leases
              -------------                             ---------
                  2005                                    $1,466
                  2006                                     1,445
                  2007                                     1,444
                  2008                                     1,239
                  2009                                       867
              Thereafter                                   9,288
                                                         -------
              Total minimum lease payments               $15,749
                                                         =======

      Rent expense amounted to $1.4 million, $1.3 million and $847,000 for the
years ended June 30, 2004, 2003 and 2002, respectively.

(20)  Retirement Plans

      The Company maintains a defined contribution 401(k) pension plan for
substantially all its employees. The Company currently matches 50% of the
employee's contribution of up to 6% of compensation, as defined. Total Company
contributions for the years ended June 30, 2004, 2003, and 2002 were $627,000,
$375,000, $196,000, respectively.


                                      F-39
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      In September 2003, the Board of Directors adopted the Executive Deferred
Compensation Plan (the "Plan"). The Plan is to aid the Company in attracting and
retaining key employees by providing a non-qualified compensation deferral
vehicle. To date no contributions have been made to this plan.

(21)  Business and Geographical Segments

      The Company is managed and operated as one business segment. The entire
business is comprehensively managed by a single management team that reports to
the Chief Executive Officer. The Company does not operate separate lines of
business or separate business entities with respect to any of its products or
product candidates.

      Accordingly, the Company does not prepare discrete financial information
with respect to separate product areas or by location and does not have
separately reportable segments as defined by SFAS No. 131.

      Revenues consisted of the following (in thousands):

                                                     Years ended  June 30,
                                               --------------------------------
                                                 2004        2003        2002
                                               --------    --------    --------
      Product sales, net
            ADAGEN                             $ 17,113    $ 16,025    $ 13,441
            ONCASPAR                             18,050      12,432       8,742
            DEPOCYT                               5,029       2,458          --
            ABELCET                              67,730      28,349          --
                                               --------    --------    --------
                        Total product sales     107,922      59,264      22,183

            Manufacturing revenue                12,911       8,742          --
           Royalties                             47,707      77,589      53,329
           Contract revenues                      1,031         811         293
                                               --------    --------    --------
                        Total revenues         $169,571    $146,406    $ 75,805
                                               ========    ========    ========

      During the years ended June 30, 2004, 2003 and 2002, the Company had
export sales and royalties recognized on export sales of $44.3 million, $40.2
million and $26.3 million, respectively. Of these amounts, sales and royalties
in Europe and royalties recognized on sales in Europe were $34.7 million, $35.5
and $24.9 million during the years ended June 30, 2004, 2003 and 2002,
respectively.

      Outside the United States, the Company principally sells: ADAGEN(R) in
Europe, ONCASPAR in Germany, DEPOCYT(R) in Canada, and ABELCET in Canada.
Information regarding revenues attributable to the United States and to all
foreign countries collectively is stated below. The geographic classification of
product sales was based upon the location of the customer. The geographic
classification of all other revenues is based upon the domicile of the entity
from which the revenues were earned. Information is as follows (in thousands):

                                    Years ended  June 30,
                              --------------------------------
                                2004        2003        2002
                              --------    --------    --------
      Revenues:
         United States        $125,268    $106,160    $ 49,503
         Foreign countries      44,303      40,246      26,302
                              --------    --------    --------
            Total revenues    $169,571    $146,406    $ 75,805
                              ========    ========    ========

(22)  Write-down of Investments


                                      F-40
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      In April 2002, the Company entered into a multi-year strategic
collaboration with Micromet and in June 2004, the Company amended this agreement
and extended the collaboration until September 2007. In 2002, the Company also
made an $8.3 million investment into Micromet in the form of a convertible note
due to Enzon, which was amended in June 2004. This note bears interest of 3% and
is payable in March 2007. This note is convertible into Micromet Common Stock at
a price of 15.56 euros per share at the election of either party. During the
year ended June 30, 2004, the Company recorded a write-down of the carrying
value of the investment, which resulted in a non-cash charge of $8.3 million.
The write-down of the Company's investment in Micromet was due to an
other-than-temporary decline in the value of this investment.

      In January 2002, the Company entered into a broad strategic alliance with
Nektar Therapeutics to co-develop products utilizing both companies' proprietary
drug delivery platforms. As a part of this agreement, the Company purchased $40
million of newly issued Nektar convertible preferred stock, which is currently
convertible into Nektar common stock at Enzon's option at a conversion price of
$22.79 per share. The investment represented approximately 3% of Nektar's
equivalent common shares outstanding at the time of issuance. Under the cost
method of accounting, non-marketable equity investments are carried at cost and
are adjusted only for other-than-temporary declines in fair value and additional
investments.

      As a result of a continued decline in the price of Nektar's common stock,
which the Company determined was other-than-temporary, during December 31, 2002
the Company recorded a write-down of the carrying value of its investment in
Nektar, which resulted in a non-cash charge of $27.2 million. The adjustment was
calculated based on an assessment of the fair value of the investment which was
determined during the quarter ended December 31, 2002 by multiplying the number
of shares of common stock that would be received based on the conversion rate in
place as of the date of the agreement ($22.79 per share) by the closing price of
Nektar common stock on December 31, 2002, less a 10% discount to reflect the
fact that the shares were not convertible as of December 31, 2002, the valuation
date.

      As of June 30, 2004, the carrying value of the Nektar investment, which is
included in investments in equity securities and convertible note on the
accompanying Consolidated Balance Sheet, was $6.4 million ($7.27 per share). The
closing price of Nektar common stock was $19.96 per share on June 30, 2004.


                                      F-41
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(23)  Quarterly Results of Operations (Unaudited)

      The following table presents summarized unaudited quarterly financial data
(in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                         Three Months Ended
                             ----------------------------------------------------------------
                             September 30,   December 31,      March 31,        June 30,       Fiscal Year
                                 2003            2003            2004             2004             2004
                             -----------------------------------------------------------------------------
<S>                            <C>             <C>             <C>              <C>              <C>
Revenues                       $ 40,644        $ 41,698        $ 44,379         $ 42,850         $169,571
Gross Profit (1)                 15,653          18,074          20,570           19,550           73,847
Tax Provision (Benefit)           1,634           1,180          (5,505)           4,283            1,592
Net income (loss)              $  2,804        $  2,319        $  5,066         $ (7,312)        $  2,877
                               ========        ========        ========         ========         ========
Net income (loss) per
   common share:
     Basic                     $   0.06        $   0.05        $   0.12         $  (0.17)        $   0.07
     Diluted                   $   0.06        $   0.05        $   0.12         $  (0.17)        $   0.07

Weighted average
   number of shares of
   common stock
   outstanding-basic
                                 43,290          43,307          43,368           43,394           43,350
Weighted average
number of shares of
   common stock and
   diluted potential
   common shares                 43,629          43,586          43,817           43,394           43,522
</TABLE>


                                      F-42
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

<TABLE>
<CAPTION>
                                                          Three Months Ended
                             ----------------------------------------------------------------
                             September 30,   December 31,       March 31,       June 30,        Fiscal Year
                                 2002            2002             2003            2003             2003
                             ------------------------------------------------------------------------------
<S>                            <C>             <C>              <C>             <C>              <C>
Revenues                       $ 25,067        $ 31,497         $ 43,163        $ 46,679         $146,406
Gross Profit (1)                  4,144           4,187           15,556          15,598           39,485
Tax Provision (Benefit)             261             245              156            (439)             223
Net income (loss)              $ 12,784        $(15,244)        $  7,634        $ 40,552         $ 45,726
                               ========        ========         ========        ========         ========
Net income (loss) per
   common share:
     Basic                     $   0.30        $  (0.35)        $   0.18        $   0.94         $   1.06
     Diluted                   $   0.29        $  (0.35)        $   0.17        $   0.93         $   1.05

Weighted average
   number of shares of
   common stock                  42,980          43,011           43,192          43,264           43,116
   outstanding-basic

Weighted average
number of shares of
   common stock and
   diluted potential
   common shares                 43,681          43,011           43,634          43,609           43,615
</TABLE>

(1)   Gross profit is calculated as the aggregate of product sales, net and
      manufacturing revenue less cost of sales and manufacturing revenue.


                                      F-43
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                 Schedule II - Valuation and qualifying accounts
                                 (In thousands)

<TABLE>
<CAPTION>


                                                               Additions
                                                      ------------------------------
                                        Balance at    Charged to      Charged to                         Balance
                                       beginning of   costs and     other accounts -   Deductions -     at end of
                                          period       expenses        describe          describe         period

<S>                                       <C>             <C>          <C>               <C>              <C>
Year ended June 30, 2004
      Allowance for chargebacks,
        returns and cash discounts        $8,111          --           $ 53,392(1)       $(51,963)(2)     $9,540

Year ended June 30, 2003
      Allowance for chargebacks,
        returns and cash discounts        $   --          --           $ 18,997(1)       $(10,886)(2)     $8,111
</TABLE>

(1)   Amounts are recognized as a reduction from gross sales.

(2)   Chargebacks, returns and cash discounts processed.


                                      F-44
<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit                                                                               Page
Numbers                            Description                                       Number
-------                            -----------                                       ------
<S>      <C>                                                                          <C>

10.22    Outside Directors' Compensation Arrangement                                   E-2

10.30    Employment Agreement with Kenneth J. Zuerblis dated June 14, 2004, along      E-3
         with a form of Restricted Stock Award Agreement between the Company and
         Mr. Zuerblis executed as of June 14, 2004 and a form of consulting
         Agreement between the Company and Mr. Zuerblis.

10.31    Executive Deferred Compensation Plan                                          E-28

12.1     Computation of Ratio of Earnings to Fixed Charges                             E-41

21.0     Subsidiaries of Registrant                                                    E-42

23.0     Consent of KPMG LLP                                                           E-43

31.1     Certification of Chief Executive Officer pursuant to Section 302 of the
         Sarbanes - Oxley Act of 2002                                                  E-44

31.2     Certification of Chief Financial Officer pursuant to Section 302 of the
         Sarbanes - Oxley Act of 2002                                                  E-45

32.1     Certification of Chief Executive Officer Pursuant to Section 906 of the
         Sarbanes - Oxley Act of 2002                                                  E-46

32.2     Certification of Chief Financial Officer Pursuant to Section 906 of the
         Sarbanes - Oxley Act of 2002                                                  E-47
</TABLE>


                                      E-1